Krugman: More Economic Destruction Needed To Revive Economy

The Daily Capitalist views economist Paul Krugman as the epitome of Keynesian economics. That is, as an adherent of a fundamentalist economic philosophy that is invalid, proven to be invalid time and time again, and which has never served to create prosperity. Rather it does the opposite by destroying capital, by centralizing economic decisions with the State, and by relying on a belief in mystical human behaviors.

With that in mind, the Daily Capitalist welcomes Professor William L. Anderson as our newest columnist. Bill is an Austrian School economist and teaches at Frostburg State University in Maryland. He also writes the wonderful blog, Krugman-in-Wonderland which critiques Professor Krugman’s columns in the NY Times. Krugman is a rich source of material because is he always wrong and often outrageously so. You will greatly enjoy Bill’s articles. — JH


There are times when Paul Krugman is merely outrageous, and then there are times when he really lets himself go, and a recent column reflects the latter. In one fell swoop, Krugman exposes his ignorance on money, on investment, and on economics itself.

I’ll go further. Krugman is not advocating a real economic recovery; instead, he is demanding that the Federal Reserve System and Ben Bernanke take the kind of action that will be utterly destructive and thus guarantee that in order to have a real economic recovery, people in the United States are going to have to suffer the kind of pain that would not have been necessary had we done the right thing four years ago and, for that matter, 11 years ago.

The theme of Krugman’s column is explained by his title, “Not enough inflation.” In other words, we don’t need less destruction of the dollar; we need more, and make no mistake about it, inflation is the destruction of the value of money.

As Steve Horowitz pointed out in my recent post, Keynesians like Krugman cannot differentiate between factors of production and consumer goods, nor can they differentiate among capital and other factors. For that matter, Krugman cannot even explain what real investment is. Take the following from his column:

How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery. (Emphasis mine)

This simply is an outrage; no other word will do. What Krugman is saying is that inflation would create incentives to invest, which is something that no real economist would say. As Robert Higgs has noted here, and here, the economy is lacking the kind of long-term investment that is needed for real recovery, and inflation will NOT bring that about.

In fact, inflation would have the opposite effect, as it would create even more regime uncertainty and would force people to put it into things where the value of money can be sheltered, and that would NOT be the kind of long-term investment that requires both confidence and low interest rates and, yes, low or no inflation. As one can see in this column, such investment is not even on Krugman’s radar screen; after all, to a Keynesian, the real value of investment is the short-term spending that takes place and little or nothing else.

Once again, we also see the “Goldstein” analogy that Krugman is fond of giving. Yeah, if it were not for those evil right-wingers, we would have lots of inflation and lots of prosperity. What Krugman does not say is that the kinds of “investments” promoted by inflation are not sustainable because they are malinvestments. That is the hard truth, even if Krugman denies it.

One of Krugman’s constant revisionist themes is that the 1970s were a golden age of investment and economic growth. He can throw all the charts he wants, but we had two serious recessions, double-digit inflation, price controls, and a lot of economic chaos. Yes, since Krugman and I were in college at the same time, both of us remember what it was like, and people were not spinning the happy tales that Krugman wants us to believe.

If Krugman is successful in encouraging Ben Bernanke to unleash the wolves of inflation, the result is not going to be one with a happy ending. The economy still will be moribund, there will be lots of unemployment, and people will have to deal with higher real prices, which means they will become poorer with no hope in sight. True, Krugman believes that somehow the Fed can “manage” inflation rates of 4-6 percent quite easily, but as F.A. Hayek once noted, inflation creates a “tiger by the tail” situation, and it does not take long for the situation to get out of hand.

And when and if it does, then look for Krugman and his acolytes to call for price controls, capital controls, and all other modes of coercion, as though the state can coerce an economy into prosperity. Don’t kid yourselves about what Krugman is demanding; he is calling for economic destruction in the name of promoting economic recovery. We cannot have both.

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6 comments to Krugman: More Economic Destruction Needed To Revive Economy

  • Jesse_Fan

    Krugman is not always in Wonderland ;)

    For instance, here’s an excellent write-up by Krugman on the anti-correlation between gold and real interest rates.

    Either way, I think Ben Bernanke is actually powerless in creating more inflation, because he controls only the supply side of the currency. The demand side is firmly in control of the receiver.

    Fiscal policy can have an effect on inflation, but there is a big danger in little inflation. The government has a major spending problem and not a revenue problem.

    And the real problem for the US is not in the monetary plane of the bond market, but the physical goods and services plane of trade deficit. More government spending through monetization will lead to widening trade deficit because of a one-sided heavily consuming economy.

    • Yikes, Jesse, I have obviously failed in my attempt to teach people what money is. Money “printing” is inflation. “Price inflation” is just one effect of “inflation.” There are others, the main one being the destruction of capital through malinvestment. Only Ben B. creates inflation. Fiscal policy cannot create inflation (other than the fact that the Fed prints money to fund deficits). Also the trade deficit has no impact on inflation and causes no harm to us other than the fact that we are exporting inflation to China. The trade deficit is just an accounting measure that really means nothing. “We” are not having a trade deficit, but rather “I” choose to buy cheaper Chinese goods that are, in effect, subsidized by the Chinese government as a result of dollar/RMB parity. The cheap dollar is another result of inflation and while it helps exporters, it hurts U.S. consumers. I would say that it is price inflation that fosters consumption and discourages savings. More government spending will just reallocate resources to programs that the market has rejected, will result in massive waste, and will result in (a) more taxes, and/or (b) more capital destruction and price inflation. One more thing. Supply of money usually creates its own demand, all things being equal. There is too much here for me to discuss, but what has the trade deficit got to do with it?

      • Jesse_Fan

        /* Only Ben B. creates inflation.*/

        Seriously, Ben B. increases the money supply but he can’t increase the velocity. Velocity of money is firmly in control of demand’s side. Money supply was increased seriously in 2008-09, did we have massive inflation because of it?

        /* Also the trade deficit has no impact on inflation and causes no harm to us other than the fact that we are exporting inflation to China. The trade deficit is just an accounting measure that really means nothing. */

        Can’t believe you would say that, given your Austrian background. Trade deficit means we are getting stuff for free. You should realize that for the past 2 years, Chinese Treasury holdings have remained flat. US has maintained its “lifestyle” through outright debt monetization, also known as QE.

        /* Supply of money usually creates its own demand, all things being equal*/

        Yes, but what about velocity?

        Here’s some food for thought (since you think Trade deficit is simply an “accounting entity” LOL):
        http://fofoa.blogspot.com/2011/11/moneyness.html

  • Hans

    Why do we waste bits and bites on a man who is more times in space than in reality…Thank goodness he is not a doctor as most of his patients would be dead…

    He either lies or distorts the truth…

    Hear is an example of his intelligence:

    “I’m referring to Paul Krugman’s claim that Hoover’s administration was one of governmental “austerity.” The facts, well known to economists who aren’t propagandists for the constantly expanding state, are that Hoover was the original “big government conservative,” as Don Boudreaux’s letter below shows.

    Editor, The New York Times
    620 Eighth Avenue
    New York, NY 10018

    Dear Editor:

    Describing “austerity policies” as “the insistence that governments should slash spending even in the face of high unemployment” in the hope that such spending cuts will restore business confidence, Paul Krugman remarks: “If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did” (“Pain Without Gain,” Feb. 20).

    Easily accessed evidence prove Mr. Krugman wrong.
    Here, for example, is economist Steven Horwitz: “the real size of government spending in 1933 was almost double that of 1929. The budget deficits of 1931 and 1932 represented 52.5 percent and 43.3 percent of total federalexpenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large.” Also contrary to Mr. Krugman’s claim, Hoover proudly trumpeted hisadministration’s high-spending and interventionist policies. On the campaign trail in 1932 Hoover bragged that “We might have done nothing. That would havebeen utter ruin. Instead, we met the situation with proposals to private business and the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.”

    Mr. Krugman’s unfamiliarity with history is disturbing.”

    Sincerely,
    Donald J. Boudreaux
    Professor of Economics
    George Mason University

  • Krugman is a Big Fat Idiot. There I said it.

  • Jesse,

    I agree that price inflation hasn’t runaway because of the lack of demand formoney, yet. These are things I have discussed many times here. OTOH, QE does appear to be a unique way to squeeze money into the economy and is responsible for what we do see in price inflation., and, I believe, the financial markets boomlet. The reason we aren’t seeing more price inflation is because we are still having asset devaluation as a result of massive malinvestment, and thus, a lack of demand for credit. It takes credit creation to really get things going. Not that the Fed couldn’t do it if they wished. But, you can’t have inflation without the Fed.

    I wish you would explain to me how a balance of trade deficit is destructive to the U.S.

    Yes, you are correct, we are getting something for “free” because the Fed issues what is, in essence, new counterfeit money. But that is not limited to our trade partners, it happens here in that the prime dealers who first spend the new money get something for nothing. It’s not a trade issue, but rather an inflation issue. (Again, in Austrian terms, inflation is the issuance of fiat money. Price increases are just one effect.) Like here, the effect of buying Chinese goods with counterfeit money is to divert their real savings (wealth) to us . The only way to stop that is for the Chinese to let the RMB float and then a parity of exchange would be established. Our dollar would buy less goods.

    The other thing to remember is that all countries issue counterfeit money. They are all getting something for free, at least for the first recipients of the fiat money. Eventually price inflation screws the last ones in line. Trade has nothing to do with it.

    I hope you are not mixing up trade deficits with balance of payment deficits. They are connected of course. But the important thing to remember is that they (national accounts) don’t mean much. Those dollars held abroad are either used to finance foreign trade between countries (reserve currency) or they eventually find their way back home in the form of investment in Treasurys (keeping interest rates low; thank you China) or our financial markets or businesses. All good for us. China, for example, is subsidizing our consumption of cheaper goods with a fixed exchange rate. Thanks again, China. Consumers benefit.

    Who cares about trade deficits? I am sure there is a huge trade deficit in my little town with producers from elsewhere. Personally I spend more than I produce. I suppose eventually I will go broke, but as long as I keep producing and stay out of debt, I’ll be OK. I believe it was Ricardo who pointed out that during times of prosperity, “countries” ran trade deficits. Again, the problem is not so much the deficit but rather the issuance of fiat money. Under a gold standard, such deficits eventually work themselves out as foreign goods become more expensive than domestic goods.

    I don’t want to turn this into another article. But to the extent that I have read FOFOA, I see way too many words and less content. Some things are entirely correct, but he confuses his theories. I haven’t read that piece for quite a while, but, he doesn’t understand trade and I question his understanding of money (it’s a medium of exchange. Period.).

    Jesse, I appreciate you interest and your comments, but I urge you to study monetary theory from the Austrians. I think it would help your understanding.