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Krugman attacks Ron Paul, Austrian Economics

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12/16/2011

Paul Krugman is at it again. This time attacking Ron Paul and his Austrian economics (probably a very good sign). He claims that Ron is only consistent because he ignores reality. In fact, “reality” has only demonstrated the correctness of Ron’s views.

His first attack is on the idea that paper money is the root of all economic policy evil. Well lets do some history and ask the Romans, the French, the the British, the Germans, the South Americans, and any number of other people to consult their history and get back to us on that issue. The great economist Joseph Schumpeter wrote that even if one did not believe in the merits of the gold standard and was an advocate of big government that you would still want to have a gold standard in order to protect against the kind of economic mess that we find ourselves in today.

Krugman’s next line of attack–his evidence against Austrian economics–is that the monetary base has exploded/increased and the Consumer Price Index has risen very little. This is the type of “evidence” that one should only expect from your barber and a Nobel Prize winning mainstream macroeconomist.

First of all, the Consumer Price Index is meant to be a very inexact measure of the impact of monetary inflation on the purchasing power of consumers–and only that. Even here most economists question the validity and precision of the CPI. It was not intended to measure the entire impact of inflation on the economy, except by the “naive” quantity theorist.

Second, monetary inflation can impact various sectors of the economy and does so in an uneven fashion. One need only recall the housing bubble when home prices soared to record, unsustainable levels while the CPI remained “under control.” The CPI only measures “owner equivalent rents.” There all sorts of goods that have prices that can be impacted by inflation that are not included in the CPI, from famous art work, professional sports salaries, farm land prices, to goods exchanged in the underground and black market economies.

Third, the impact of monetary inflation on the overall economy takes time. Money that enters an economy moves from one sector to another and eventually throughout most of the economy. Anyone familiar with basic money and banking would know this. Anyone familiar with reading the business sector of the newspaper would know that banks have largely been “sitting on” the Fed’s increase in the monetary base and that most of the new money has really not even entered the economy yet.

There are many other reasons why Krugman’s “evidence” is nothing more than evidence of his own ignorance of basic economics. However, one important additional point needs to be made. The idea that increases in the supply of money (i.e. monetary inflation) leads to increases in prices (i.e. price inflation) is a theoretical statement and economists of all sorts express such statements in terms of ceteris paribus, or all other things held equal. Well, things are not exactly equal these days, are they Paul?

In fact, when an economy goes into a depression prices are suppose to fall. Prices, wages, rents, leases, and stocks are all suppose to go down so that resources can be reallocated to profitable uses. We saw this in a minor way with “cash for clunkers” and the “first time home buyers tax credits.” Falling prices increased sales for cars and homes. Falling prices are a key component of economic recovery. However, my point here is that prices would have been lower than they currently are were it not for monetary inflation from the Fed.

Had we not followed the advice of Krugman, Bernanke, Geithner, Summers, Paulson, Goldman Saks, etc. this economic crisis would have been over a long time ago. Instead we are forced to follow the madness of Paul Krugman and Ben Bernanke.

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