Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17
Why the SNP WILL Destroy Scotland, Exit UK Single Market for EU - IndyRef2 - 19th Mar 17
Crypto Craziness: Bitcoin Plunges on Fork Concerns, Steem Skyrockets and Dash Surges Above $100 - 19th Mar 17
What ‘Ice-Nine’ Means for Your Money - 19th Mar 17
Stock Market 4 Year Cycle - 18th Mar 17
The Only Article You Need to Read to Understand the Trump Phenomenon - 17th Mar 17
Janet Yellen Just Popped the Stock Market Bubble - 17th Mar 17
Financial Crisis, Steve Eisman: Smart, Lucky, Abrasive & Now One Of Them - 17th Mar 17
Gold Cup – Horse Racing’s Greatest Show, Gambling and ‘Going for Gold’ - 17th Mar 17
Trader Education Week - Free Event to Help You Learn to Spot Trading Opportunities - 17th Mar 17
$1.4 Trillion of SPX Notionals Due to Expire - 17th Mar 17
Preserving Order Amid Change in NAFTA, U.S. Sovereignty v. WTO - 17th Mar 17
3 Maps That Explain Why Syria Raqqa Battle Will Drag On - 17th Mar 17
Crude Oil Price Outlook 2017 - Video - 16th Mar 17
Dutch and French Electons - Winners are Losers and Left is Right - 16th Mar 17
The Straddle Trade Stock Market Brief - 16th Mar 17
Gold Up 1.8%, Silver Up 2.6% After Dovish Fed Signals Slow Interest Rate Rises - 16th Mar 17
Stocks Get Close To Record High Again As Fed Hikes Interest Rates - 16th Mar 17
Scotland Second Independence Referendum War - SNP Determined to Destroy the UK - 16th Mar 17
Here’s How Pharma Is Using AI Deep Learning To Cure Aging - 16th Mar 17
Stock Market Chaos in the Chicken Coop - 15th Mar 17
Gold and Silver Price Manipulation: The Biggest Financial Crime In History - 15th Mar 17
“Ryancare” Dead on Arrival: Can We Please Now Try Single Payer? - 15th Mar 17
Fanaticism, Stock Market Crash 2017 or Continuation of Bull Market - 15th Mar 17
Stock Market Most Overvalued On Record — Worse Than 1929? - 15th Mar 17
Desperate Saudi Arabia Turns to Asia for Investment - 15th Mar 17
Startups Will Define the Future of US Employment - 15th Mar 17
Fed Rate Hikes, Fiscal vs. Monetary Policy and Why Again the Case for Gold? - 15th Mar 17
SNP Declare Scotland to Commit Economic Suicide Early 2019, 2nd Independence Referendum - 14th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

Economic Lessons from the Ron Paul vs. Krugman Debate

Politics / US Politics May 07, 2012 - 08:23 AM GMT

By: Casey_Research

Politics Best Financial Markets Analysis ArticleVedran Vuk, Senior Analyst, Casey Research writes: A few days ago, Bloomberg held the debate many readers have been wanting for a long time: Paul Krugman vs. Ron Paul. To be fair, Ron Paul didn't have a slam-dunk debate moment – but neither did Krugman. Still, the fact that a medical doctor from Texas armed with a little Austrian economics and a lot of common sense can stand up to a Nobel-Prize-winning economist is impressive. If the roles were reversed and the conversation was on medicine, Krugman would have likely sounded like a village idiot in the discussion. In case you haven't already seen it, click on the frame below for the video.


What was more amazing than Ron Paul's performance was the number of times Paul Krugman shot himself in the foot. Honestly, Ron Paul didn't need to say much; Krugman's own logic make him look bad enough. Let's look at some of his blunders play-by-play style:

Early on in the debate, Krugman says, "You know you can't leave the government out of monetary policy .... The central bank is always going to be in the business of managing monetary policy. If you think that you can avoid that, you're living in some – you're living in the world as it was 150 years ago."

No matter the topic of the argument, a typical defense is to accuse your opponent of being stuck in past. However, in this case, it doesn't make sense. Consider the timing of the last two biggest US recessions: the Great Depression over 80 years ago and the current recession still in the works. Since the enlightened economic policies over the past century have performed so poorly, is it so bad to look upon other time periods favorably?

Krugman goes on: "And look, history tells us that in fact a completely unmanaged economy is subject to extreme volatility – subject to extreme downturns. I know that there's legends that people, probably like you Congressman, have, that the Great Depression was somehow caused by the government – caused by the Federal Reserve – but it's not true. The reality is that was a market economy run amok. Which happens. It happened repeatedly over the past couple of centuries."

Exactly which periods of "extreme volatility and downturns" are Krugman referring to? Two come to my mind – again, the Great Depression and the current crisis. However, neither is consistent with Krugman's statement. The Federal Reserve was around for both recessions; it's been in business since 1913. Furthermore, researchers including Dr. Christina Romer (the former head of Obama's Council of Economic Advisors) have debunked much of Krugman's volatility assertions. For an excellent comparison of the economy's performance before and after the creation of the Federal Reserve, see A Century of Failure by Dr. George Selgin of the University of Georgia.

Krugman's statements get even bolder: "Depressions are a bad thing for capitalism, and it is the role of government to make sure that they don't happen, or if they do happen, that they don't last too long." Sounds good, right? There's just one problem. The Federal Reserve failed to prevent the Great Depression, and it failed to avoid the current crisis as well. Furthermore, the Federal Reserve seems powerless to shorten the duration of the current recession. If the government's role is to prevent recessions, it has a horrible track record. Krugman is apparently lost in some strange hallucinogenic trip where the government prevented the crisis, and we swiftly arose from a brief recession.

Ron Paul goes at Krugman with a good comeback for the "150 years" statement by pointing out that the history of inflationary policies extends thousands of years, back to the Romans. Krugman responds that this isn't his policy stance. Well, how is it different? The Federal Reserve may use fancy phrases such as "quantitative easing," but it really comes down to same policy of debasing a currency. The techniques and methods may have changed, but the general idea has not.

Rather than explain his comment on the Roman debasement of the currency, Krugman clarifies his position by praising the monetary policies of the 1950s post-WW II period. Yes, that was a great period of growth; but a single decade of success is hardly long enough to be considered support. Monetary policy shouldn't be judged by the performance of one decade, but rather by a century-long track record. Everyone loves policies when they work; it's the policy failures which are the problem. And it's certainly the case that the US federal government has been wholly unable to stay with any one monetary policy for a full century.

Ron Paul's retort mentions the spending cuts after WW II. To dodge Paul's good response, Krugman changes topics to an unconnected point about Milton Friedman. Then Ron Paul answers Krugman with his own unconnected point about competing currencies, to which Krugman mumbles, "I have no idea what that's about."

Next, the conversation switches to the national debt level. The host points out that the national debt as a percentage of GDP has reached near 100% and asks how much further the debt level can be extended. Krugman admits, "I don't have a fixed number," but he suggests that the debt level should be raised an additional 30 points to 130% of GDP, if that could get us out of the recession. In my opinion, this comment is the bazooka shot into Krugman's own foot. Earlier in the debate, Ron Paul criticized the arbitrariness of the Federal Reserve's interest-rate policies. He mocks the Fed by saying, "The interest rate should be one percent instead of three percent because we are so smart."

And here, Krugman completely verifies the validity of Paul's criticism. It's impossible for central planners to figure out the perfect interest rate. Similarly, Krugman doesn't know what the limit to the debt should be. And I don't blame him for having a tough time – who does know the solution to these problems? Maybe our national debt as a percentage of GDP can reach 200%, 150%, or maybe it's approaching Armageddon at 130%. It's impossible to say for sure. In the same way, it's impossible for the Federal Reserve to set an appropriate interest rate. Is zero too low for inflation? Is raising it to 4% too high? What are the consequences to finding some middle ground?

These are truly unanswerable questions. Without the Fed, the market would find the interest rate itself. You can fill a whole room with Nobel-Prize-winning economists, and they still won't be able to figure out what the market would do with interest rates. If they knew, most would be millionaires and running their own hedge funds – not employees of quasi-governmental agencies and universities.

Unfortunately, a lack of knowledge doesn't stop economists from making policy decisions much like what Krugman advocates. He admits to not knowing the limit to our national debt, but at the same time advocates pushing the debt to 130%. What if that's too high and the result is the start of a final death spiral for the US economy? "Whoops; sorry America."

This is the general problem with the Fed and all central planners. They try to guide the economy, but more often than not, they create the very recessions that the system is supposed to prevent. The Federal Reserve either leaves rates too low for too long, or it raises them so high as to create an economic slowdown of its own. The Federal Reserve isn't the wonderful safety net economic idealists imagine. Instead, it's much closer to driving a car while blindfolded. Unfortunately, people like Krugman are more than willing to take the keys knowing full well the dangers of driving blindfolded. And when these Fed economists inevitably crash into a brick wall, it is the passenger – the American worker – who gets creamed.

[Treating houses as investment vehicles – a strategy pushed by federal government policy – is one part of the complex conditions that have created the current American debt crisis. Start learning about it, so that you can be among those who not just survive, but thrive during the challenging times ahead.]

© 2012 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Daniel Tanure
08 May 12, 08:25
Keynesianism

Hayek coined a phrase that destroys Keynesianism without any other argument: "The pretense of knowledge".


yukkieyip@yahoo.com.hk
14 Jun 12, 01:18
KRUGMAN

i agree with krugman. we need more spending. stop buying gold and silver because its in a bubble.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife