The Paul vs. Paul debate

by on May 1, 2012 at 10:43 am in Economics | Permalink

That’s Ron Paul vs. Paul Krugman, the video and transcript is here, here are a few comments under the fold…

1. RP: I don’t understand RP’s claim “I want a natural rate of interest.”  Even gold standards allow for monetary influences (distortions? …depends on your point of view) on interest rates.  RP has not fully absorbed Myrdal (1930) and Sraffa (1932).

2. K’s response to RP: Numerous good points, but Christie Romer (!) has shown that economic volatility was not higher before WWII.  (Somehow that’s one Romer paper which isn’t discussed so much anymore.)  That’s a major hole in K’s argument.  Relative to the evidence, he is overreaching when a more modest point would suffice.

3. RP: The transcript may be garbled here.  In any case, the Fisher effect is imperfect and so inflation does to some extent tax savings, also through interaction effects with the tax system.  That said, I don’t see that two to four percent inflation has unacceptable costs, especially when AD is otherwise weak.  On Diocletian, via Matt, here is a good recent paper.

4. K’s response: Modern liberals have a bad and selective case of 1950s nostalgia.  Krugman is significantly overrating the role of policy here.  More overreaching.  He should stick to analyzing the “no bailout in 2008-2009″ scenario, and how much worse it would have been, including for RP’s preferred ends.  On earlier time periods, he should reread his own writings from around the time of The Age of Diminished Expectations.  There is very little in The Conscience of a Liberal which actually trumps or overturns the earlier book and its focus on productivity rather than politics.

5. RP: I don’t understand his discussion of the liquidation of debt.  Perhaps the transcript is garbled again.  He is correct that the massive spending cuts which followed WWII brought no depression but rather the economy boomed.  Keynesians have a hard time explaining that episode without recourse to Ptolemaic epicycles, etc., or without admitting the importance of real shocks.

6. K’s response: On Friedman, correct and on target.  That said, K’s blogged claim today — that Friedman misrepresented his own views — lacks a quotation or citation altogether; furthermore it is contradicted by this excerpt from Free to Choose, which was Milton at his most popular but still he represented the truth correctly (ignore the heading, which is not from Friedman).  K won’t address the WWII point, although he could if he revisited his earlier writings on changing rates of productivity growth.

7. RP’s response: The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost.  No one has had such a long planning horizon, for one thing.  We don’t see much indexation, for another.

8. RP on the Fed: If we had “real monetary competition,” dollars still would reign supreme.  Who now is opening up U.S. bank accounts in other currencies?  Or using gold indexing?  It is allowed.

9. K’s response: Mostly I agree, though it is odd to think of shadow banking as “currency competition.”  It is more akin to “not explicitly regulated banking, with stochastic under-capitalization, and with bailouts in the background and largely driven by regulatory arbitrage.”  That makes it less of a counter to RP than PK is suggesting.

10. RP: Equating inflation with “fraud” is an excessive moralization of the issue.  The point remains that gentle inflation is usually a good thing, and that the money supply under free banking, or a gold standard, would be excessively pro-cyclical.  The best shot is to hope that a natural monopoly private clearinghouse would institute nominal gdp targeting in terms of levels and perhaps “targeting the forecast” too.

11. The exchange about Bernanke: I don’t know whether Krugman literally has “printing money” in mind, so this is hard to interpret.  They are stuck in the vernacular, when a more precise economic language would allow for more targeted commentary.

12. PK: Demographics, plus government gridlock and lower productivity growth, make a higher debt-gdp ratio more problematic than Krugman admits.

13. RP: Polemics from RP.

14. K’s response. Very short.  But if he likes the market so much, why does he so often seem to be pushing for much higher taxation and higher government revenue?  I understand why he wants single payer, but he also seems to favor direct government provision of health care itself.

15. RP: The discussion of debt doesn’t make sense, though it is correct to argue that eight percent measured unemployment underestimates the depth of our labor market problems.  I fear, though, that he may be holding an exaggerated version of this point.  U6 matters, but it should not be taken as the correct measure of unemployment.

16. RP: Seigniorage isn’t a major source of government revenue, and in general it is worth thinking about why corporate profits are so high and why the stock market, at least in recent times, has done OK.  Is it really all about policy uncertainty?  Lots of polemic here.  Still, RP raises the point that Fed purchases of T-Bills may be helping to keep rates artificially low.  This remains unproven, but it is also unrebutted.

17. RP (again): There is no credible alternative to the dollar as reserve currency today.  On Spain, it is nonetheless a good point that spending cuts in a dysfunctional economy don’t help very much if at all.

More RP: Doesn’t PK get to speak again? Did Austerians suddenly cut the funding for his part of the transcript?  (Had I watched the video, I wouldn’t have had time to write this post.)  In any case, pegging the dollar to gold in an era of commodity price inflation would be a disaster and lead to massive deflationary pressures or more likely a complete abandonment of the gold peg rather quickly.

In sum: There were too many times when RP simply piled polemic points on top of each other and stopped making a sequential argument.  He overrates the costs of inflation, including in the long term, and for a believer in the market finds it remarkably non-robust in response to bad monetary policy.  Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.

JasonL May 1, 2012 at 11:00 am

“There were too many times when RP simply piled polemic points on top of each other and stopped making a sequential argument. He overrates the costs of inflation, including in the long term, and for a believer in the market finds it remarkably non-robust in response to bad monetary policy. Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.”

This is a perfectly useful summary of RP’s entire career. He raises some valid points but then rushes in with polemic and gold buggery in a way that makes his good points seem kooky. He is too afraid of any level of inflation, and too fond of counter historical narratives in lieu of evidence.

On the other side, PK has an expressed commitment to advocate for increased public spending and an expressed distaste for admitting any nuance that complicates that preferred position. His arguments seem weaker than they should because he’s serving an explicitly political role.

Brian May 1, 2012 at 11:24 am

Like.

Even though he speaks in nuggets of libertarian thought, he seems to be an expert in the non-sequitur.

anonymous May 1, 2012 at 11:45 am

“RP simply piled polemic points…” etc.

I would be interested in reading Austrian enthusiasts who watched it respond to Cowen’s claim about RP. My entire perception of every single one of my non-economist Austrian friends (who somehow manage to feel very confident they understand economics without having ever taken a single course in it — why does Austrian economics give lay people such a false sense of confidence?) is that they lack the ability to discern the difference between polemics and reasoned argument when it comes to RP. Probably in all areas of their lives, but they only seem to comment about RP and gold on their Facebook page, so I don’t know.

zzk May 1, 2012 at 11:55 am

I wonder about RP: how much is the apparent non-sequitur and polemics a function of him just being a terrible public speaker (relative to other politicians).

Andrew May 1, 2012 at 12:10 pm

Right. That has me pegged. In all areas of my life I can’t tell the difference between polemic and reasoned arguments.

Is there something you’d like to actually discuss? I’ll discuss almost anything with anyone (kind of like Ron Paul).

Keep in mind, I only have a little while before someone who never makes intelligent comments tells me I comment too much.

Doc Merlin May 1, 2012 at 1:14 pm

I’ve taken a substantial number of courses in economics, and I think that RP is fundamentally right. Furthermore, as RP has pointed out numerous times, it isn’t the signorage that makes the money, its allowing the government to borrow cheaply by lowering the real interest rate on federal borrowing lower than it would otherwise be. (This is one of the reasons that Keynes favored a central bank.)

Tyler seems to doubt this assertion, and I am not sure why he doubts it.

Matt May 1, 2012 at 1:21 pm

Because it is really quite simple. Ron Paul wants me to keep as much of my money as possible, taking only as much as is needed to fulfill the absolutely necessary obligations of government. Paul Krugman wants to take lots of my money and spend it on all kinds of zany schemes. Econ 101 says Ron Paul wins.

Jack Fraser May 1, 2012 at 1:37 pm

Then Econ 102 should have you questioning why on Earth RP would want you to keep your money.

Matt May 1, 2012 at 2:01 pm

I thought they waited for Econ 301 before they started arguing against common sense.

MI Wayans May 1, 2012 at 2:50 pm

There are no obligations of government that are objectively absolute necessities. In general I suspect that Ron Paul and Paul Krugman both want the government to take on those functions where the net social benefit will exceed the cost (although RP would not put it that way). In their beliefs about how much of government spending has net benefits, they occupy different points on a continuous spectrum. This is not a disagreement that can be resolved at the level of bare economic abstraction. The crux is in which projects you identify as “zany schemes”.

JWatts May 1, 2012 at 5:40 pm

“This is not a disagreement that can be resolved at the level of bare economic abstraction. The crux is in which projects you identify as “zany schemes”.”

I agree. We resolve this issue by voting. Usually the consensus is somewhere between Ron Paul and Paul Krugman.

Bender Bending Rodriguez May 1, 2012 at 7:02 pm

gold buggery

I don’t know if this was intentional or not, but if it was, I have to say “Well played, sir. Well played.”

Andrew' May 1, 2012 at 11:04 am

If the entire purpose is “money illusion” why is fraud not exactly correct?

I don’t see seigniorage as a source of government revenue at all, but for banks, corporations, and stocks. That’s why if RP is right about inflation, he’s right about fraud and everyone keeps just assuming we could have 4+X(!) inflation and then it would be just right.

Andrew' May 1, 2012 at 11:09 am

And one of us is uninformed about the current thinking on gold. It’s competing currencies not a government price control on gold.

bleh May 1, 2012 at 11:07 am

Why the equivocation between taxation levels and support for market solutions? There seems only a very indirect relationship between the two, though it seems common not to treat it that way.

Crony capitalism and corruption are very common ways in which government subverts market solutions, but they don’t require traditional taxation at all. On the flip side, assuming you respect national defense as a necessary domain of the government, even the most libertarian system might require tax rates over 50% to provide defense alone, in a protracted existential war.

Ryan Cooper May 1, 2012 at 11:10 am

Come on, Tyler, sometimes your penchant for turning things on their head borders on self-parody. I’m all for digging into Krugman’s points, but honestly, Ron Paul is a barmy old codger whose economic ideas are utterly ludicrous. Have you ever tried arguing with a crank? It’s profoundly frustrating. This is like scoring a debate between Niel Degrasse Tyson and Duane Gish.

On the merits, I’m very surprised by the assertion in #2. I thought Krugman was referring to regular financial panics, which were largely quelled in the postwar generation. (Right?) Can you explain this more fully?

Brian May 1, 2012 at 11:27 am

PK also scores pretty highly on any “crank”-o-meter.

CBBB May 1, 2012 at 12:41 pm

Not really

Andrew' May 1, 2012 at 1:06 pm

Sure he does, especially to the extent he criticizes mainstream economics because that is how they define “crank.”

CBBB May 1, 2012 at 1:15 pm

Krugman’s actually pretty mainstream he gets a lot of heavy fire from the actual left in fact for being too mainstream.

Andrew' May 1, 2012 at 2:43 pm

I know man.

He has a reversible jacket that allows him to move between mainstream and hetero whenever it suits him.

CBBB May 1, 2012 at 3:18 pm

Actually I don’t see too much hetro coming out of Krugman he basically sticks with neoclassical analysis. Not that hetrodox is bad – neoclassical economics has largely been a failure.

Andrew' May 1, 2012 at 3:33 pm

The point is that his criticisms of mainstream economics come from his views that are outside mainstream economics.

When he’s criticising someone hetero, he does so from the mainstream.

When he wants his opponent to appear to be a crank, he tries to marginalize their arguments from even further within the mainstream.

Cliff May 1, 2012 at 7:32 pm

“neoclassical economics has largely been a failure”

Says the guy with no expertise, credentials, or evidence. Anyone can play that game. Keynesianism has largely been a failure. CBBB has largely been a failure.

CBBB May 1, 2012 at 8:25 pm

How has it been a success?
Can it make accurate predictions? No
Has following its policy prescriptions really improved economic conditions for most people? That’s highly debatable
Seems to me Neoclassical economics has basically resulted in a bunch of snobby physics drop-outs sitting around writing cheeky little books and articles about how they’re oh-so-much-cleverer-than-thou

Ricardo May 2, 2012 at 4:03 am

Krugman criticizes other mainstream economists not “mainstream economics.” In fact, Krugman’s whole point is that someone who sat down to read Samuelson’s classic econ text in early 2009 — or, for that matter, Greg Mankiw’s chapters on Keynesian economics — would have a better intellectual framework for understanding what is going on than, say, a typical reader of the WSJ op-eds. Mankiw and Samuelson are, of course, capital-E Establishment economists.

kebko May 1, 2012 at 11:30 am

Signs of being a crank:

Division of world between people who agree with you and people who secretly want doom.
Coined terms to refer to your enemies and the people duped by them, which you imagine to be a large number.
Frequent written clearing of throat (ahem, um, etc).
The notion that a single broad point which you make without waiting for a response invariably ends the conversation and “wins”.
An obsession with supposed mistakes made by people you disagree with.

If I were to visit the blog of each of the debaters, which one would I qualify as a crank?

anonymous May 1, 2012 at 11:48 am

That’s not a sign of a crank, because “cranks” are increasing function of age. It’s just plain and simple a sign of a major “jumping to conclusions” reasoning bias. That is, the tendency to form beliefs with insufficient evidence and then holding those beliefs “strongly” even when new information presented should require you update them. Every one of the RP folks should be given a JTC psych eval. I wouldn’t be surprised if half of them are schizophrenic.

UnlearningEcon May 1, 2012 at 11:51 am

Are you aware that you can’t make word definitions up? That’s not how language works:

crank
Noun: 2. An eccentric person, esp. one obsessed by a particular subject or theory.

Krugman is on the verge with his liquidity trap obsession but I’d say RP’s FED-itis wins it.

Andrew' May 1, 2012 at 12:07 pm

Being a crank can’t be about claiming the other side is nuts, because that’s what I want to do right now. Am I doing it right?

Maybe RP’s FED-itis can be viewed as leaving everything else alone because a monopoly on money may be kind of a big deal.

kebko May 1, 2012 at 12:59 pm

Here is a definition, from a real dictionary:

describe (v): to tell or depict in written or spoken words; give an account of:

mpowell May 1, 2012 at 12:28 pm

This is a terrible definition of a crank. You can define a crank however you like, but if it’s a bad definition, it’s not really telling us much. An academic would define a crank as someone who doesn’t engage in or participate in the peer review process for advancing their views through the common literature. This is a good definition for identifying people whose ideas need to be engaged with seriously by other academics, and shifting the defintion appropriately, by the general public. This definition applies in some form to RP, given the support for his economic views in the literature and his insistence on certain obviously wrong claims, like the cost of long term stable inflation. Krug’s views fare a lot better under this kind of analysis.

Andrew' May 1, 2012 at 12:35 pm

You aren’t accepted into the academia club…and this is a ‘good’ definition for using a loaded word like ‘crank’?

This isn’t physics either. This is social science. I’ve never talked to someone (sampling bias noted) who doesn’t have a story about someone trying to shape their views ON THEIR COMMITTEE. Scary thing is I know you are serious.

It may be the best we got, but it sucks. And by this definition, Scott Sumner is NOT a crank, even though he stands opposed to all of economics…and we are about to do what he wants!

mpowell May 1, 2012 at 12:58 pm

The academic review process is regrettably poor and quality control. But I don’t know how you could come up with a better system. The generalized definition of crank is probably more useful: someone who doesn’t seriously engage with valid criticisms of his theories. But this is always a subjective definition. For academics, at least, it is pretty straightforward. That being said, I’m not sure MMT isn’t a little crank-like in the academic world. That doesn’t mean the theory is wrong, though.

Andrew' May 1, 2012 at 2:45 pm

The problem with the definition is when peer review and the academic institutions are used to dampen criticism.

Steve Keen for example agrees that economic has become exactly this kind of “degenerate institution,”

efp May 1, 2012 at 1:05 pm

A crank is someone who is just smart enough to be dumber than if they weren’t smart at all.

GiT May 2, 2012 at 12:28 am

+1

kebko May 1, 2012 at 1:58 pm

I didn’t define crank. I described it. Krugman’s blog makes me sad, because he clearly has a lot to offer, but the style and tone of his blog is shockingly similar to what you might hear from someone clammering on about how the Rothschilds own the Fed or some such. I don’t see how anybody could look at his blog and not be saddened by it.

GiT May 2, 2012 at 12:30 am

If he has a lot to offer, he’s probably not a crank. Since the problem is style and tone, then the appropriate noun would be ‘polemicist’.

Floccina May 3, 2012 at 9:59 am

Well these days if you want to end the war on drugs you are considered a crank, so I earn the monitor.

Jacob Arluck May 1, 2012 at 11:12 am

“for a believer in the market finds it remarkably non-robust in response to bad monetary policy”

He talks about over-regulation plenty too.

Andrew' May 1, 2012 at 11:19 am

I found the banana roofs argument funny at the time too. “If the market is so great, how come it can’t handle anything and everything we throw at it?” That’s basically what the bad guys in Ayn Rand novels always say.

Money is kind of a big deal. That is why I and the government are so interested in it.

Stefan May 1, 2012 at 11:12 am

> Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.

I think this dynamic generally applies when you have a subject-matter expert arguing with a smart and well-practiced ideologue. I’m not offering this up as commentary on the relative merits of either debaters’ positions, by the way (haven’t read the transcript). I just think it’s harder to win a lopsided victory in these situations than one would think. Of course, Krugman is a political editorial columnist, so perhaps he is closer to “smart and well-practiced ideologue” than his Nobel prize would suggest. Ultimately, though, the two are different animals. Ron Paul has built a successful business, career, and political movement as a propagandist (again, no judgment implied), so I would expect him to be quite good at this.

GiT May 2, 2012 at 12:39 am

I was recently at a Bill Maher event in an academic setting. The setting was a lecture hall discussion of the 2012 election in a political science class. I had a visceral sense of him being someone of whom it would not be worthwhile to ask any questions, unless one wanted to prompt a particular (utterly predictable) response. I wager this feeling is typical of dealing with most pundits and propagandists.

Ricardo May 2, 2012 at 5:19 am

This boils down to the fact that Krugman is not a very polished public speaker or debater. Like many academics, he is used to sitting in peace and quiet, reflecting, and then setting views down on paper or on his blog.

This, however, is a weakness rather than strength when it comes to cable TV appearances or live debates where instant come-backs and 10-second sound-bites matter. By way of comparison, look at someone like Christopher Hitchens who was extremely effective as both a writer and a speaker. Whether he was right on the merits or not, you can watch some of his debates and see how he dominates his opponents through rhetoric and forcefulness.

Since Ron Paul is a professional politician, he undoubtedly has much more experience speaking (not lecturing but speaking persuasively and inspirationally) in front of large crowds and debating than Krugman has. It’s not surprising Krugman couldn’t get a K.O. Against an even more polished speaker, he would be in even bigger trouble. Again, that has little to do with the merits and more simply with the fact that Krugman is not a professional speaker and debater.

UnlearningEcon May 1, 2012 at 11:21 am

Some responses:

‘RP has not fully absorbed Myrdal (1930) and Sraffa (1932).’

Does RP even know who these people are?

‘Modern liberals have a bad and selective case of 1950s nostalgia. Krugman is significantly overrating the role of policy here. More overreaching.’

You have internalised this point based on your own thesis which I find unconvincing. In any case, to suggest that policy had no role in creating the prosperity of the post-WW2 age is to stick your finger sin your ears.

‘Keynesians have a hard time explaining that episode without recourse to Ptolemaic epicycles, etc., or without admitting the importance of real shocks.’

Low long term interest rates! That was the entire reason Keynes supported BW-like institutions, so each country could control its own monetary policy and hence keep them low.

‘That said, K’s blogged claim today — that Friedman misrepresented his own views — lacks a quotation or citation altogether’

Friedman did, indeed call for an end to the fed at the very end of his life (youtube it). This completely undermines his monetary work. He also argued against antitrust and redistribution, despite calling for a blanket NIT and praising antitrust in Capitalism and Freedom.

‘I understand why he wants single payer, but he also seems to favor direct government provision of health care itself.’

Liking the market isn’t the same as thinking it’s a panacea. Government provided healthcare eliminates the need to filter people based on ability to pay and reduces costs. He also had a post recently where he gave numerous other reasons that healthcare is a market failure.

UnlearningEcon May 1, 2012 at 11:33 am

Sorry it wasn’t the *entire* reason Keynes supported BW – there were also international imbalance considerations, as well as political ones.

P.S. Tyler, your comment speed limit thingy is a bit overzealous

kebko May 1, 2012 at 11:36 am

When a service is incentivized by the state to be provided through a 3rd party, and the provider chosen by that 3rd party has to have its level of service and price approved by a state agency, there cannot be even the slightest basis for determining a market failure. Maybe the market would fail here, but we cannot know in today’s environment.

UnlearningEcon May 1, 2012 at 11:45 am

The current US health system is a mess that cannot accurately be described as a ‘market failure’, I agree. But the abstract point remains valid.

Andrew' May 1, 2012 at 1:08 pm

What is your comment on this

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/09/where_are_healt.html

And what about Krugman’s view that we don’t even know where money begins and ends, and yet that means the government MUST manage it.

UnlearningEcon May 1, 2012 at 1:23 pm

The same as the guy who posted the article – it doesn’t seem to much reflect whether a healthcare system is more private or public.

‘And what about Krugman’s view that we don’t even know where money begins and ends, and yet that means the government MUST manage it.’

I’m pretty sure you inserted the link yourself. The reason he gave for management was that unmanaged there are big boom and busts.

The government always manages money – historically, the only reason it’s been used as we know it was because the government demanded it in taxes. So there must be some criteria for what the government accepts as taxes. If this is fiat, there must be limits on who can create it. It’s impossible not to have some sort of ‘monetary policy’.

Andrew' May 1, 2012 at 3:00 pm

I think the two biggest booms and busts have happened since tight management. Even if they aren’t the biggest, or if you think they are biggest because we are so much bigger, it still hasn’t protected from booms and busts.

John Thacker May 1, 2012 at 1:43 pm

‘Modern liberals have a bad and selective case of 1950s nostalgia. Krugman is significantly overrating the role of policy here. More overreaching.’

You have internalised this point based on your own thesis which I find unconvincing. In any case, to suggest that policy had no role in creating the prosperity of the post-WW2 age is to stick your finger sin your ears.

OK, but explain under what model a tax code with high marginal rates but lots of loopholes that brings in the same overall income as a percentage of GDP is good for the economy.

You could make a better (but still bad) case that the low levels of immigration in the 1950s (before the Hart-Celler Act of 1965) reduced inequality (inside the US, while increasing global inequality.) And then there are other things about the 1950s, like segregation, which obviously affected the economy but I would hope you would agree in a bad way.

UnlearningEcon May 3, 2012 at 9:49 pm

‘OK, but explain under what model a tax code with high marginal rates but lots of loopholes that brings in the same overall income as a percentage of GDP is good for the economy.’

Right but the rich now earn a higher income pretax than a % of GDP so that’s not a fair comparison

There are numerous theses linking higher tax rates with growth, but in this case the most convincing is that investment is tax deducted so higher headline rates encourage people to invest it back into their business.

John Thacker May 1, 2012 at 1:45 pm

. In any case, to suggest that policy had no role in creating the prosperity of the post-WW2 age is to stick your finger sin your ears.

Sure, but what’s the theoretical basis to argue that high marginal tax rates with enough loopholes that revenue as a percentage of GDP stayed constant was good for the economy? (I can see a basis for arguing that it would reduce inequality, sure.)

If you don’t have a theory, then you might as well be claiming that segregation or a low rate of immigration created the post-WW2 prosperity.

Barnley May 1, 2012 at 9:42 pm

“Friedman did, indeed call for an end to the fed at the very end of his life (youtube it). This completely undermines his monetary work.”

No it doesn’t. It merely says that given the Fed does exist the best policy course would be X, however, it would be better still for if the Fed did not exist.

UnlearningEcon May 3, 2012 at 9:51 pm

His work didn’t really think that, though, that’s just what he said in public. In academia his line was more in tune with Keynesian principles, but differed only technocratically.

Jack Cavacth May 1, 2012 at 11:22 am

Does Ron Paul support a free banking system, similar to the one in Canada in the 1800′s?

Jonathan M.F. Catalán May 1, 2012 at 11:32 am

Actually, it’d be interesting to know what exactly Ron Paul has in mind. Is something derived from the White/Selgin model of free banking? Or, it is a free banking system that adheres more to a “100-percent reserve” principle? I’d place my bets on that Ron Paul doesn’t really know. He just favors complete deregulation.

Doc Merlin May 1, 2012 at 1:06 pm

Yes actually.
He’s proposed legislation that would legalize alternative currencies, and remove the tax on them.

byomtov May 1, 2012 at 3:29 pm

What tax?

Barnley May 1, 2012 at 9:45 pm

“Section 3 of the Act rules out federal or state taxes on precious-metal coins, whether minted by a foreign government or by a private firm. This section would allow precious-metal coins to compete with the US Treasury’s token coins (made of base metals, and denominated in fiat US dollars) without tax disadvantages (sales taxes on acquisition and capital gains taxes on holding, from which Federal Reserve Notes are exempt), and thereby a level playing field for competition among monetary standards”.

http://www.freebanking.org/2011/09/13/the-free-competition-in-currency-act-of-2011/

chopchop May 4, 2012 at 5:15 pm

Actually, he probably envisions a system depicted by Hayek in some of his later books.

Doc Merlin May 1, 2012 at 1:07 pm

Er, he seems to be of the “let markets decide which money is right” school. Its very similar to the White/Selgin model. He also thinks that gold is superior so it would probably win, but he doesn’t think that government should try to /make/ it win.

Jonathan M.F. Catalán May 1, 2012 at 11:29 am

Krugman is also misleading in his assessment of M. Friedman’s analysis of the Great Depression. Yes, M. Friedman thought that the supply of money should have been more elastic, but it doesn’t mean that it had to be done by a central bank. Nearing the end of his career, M. Friedman was open to a competitive banking system, because he had realized that he Federal Reserve System had done a bad job of committing to the policies he thought were adequate.

Ivan May 1, 2012 at 12:46 pm

Near his death, Friedman also came out in favor of quantatative easing to cure Japan’s woes. He clearly was not on RP’s side in terms of monetary policy.

chuck martel May 1, 2012 at 11:34 am

If government-provided healthcare reduces costs wouldn’t the same logic hold in other arenas, food, for instance? Oh, wait, we got that already.

UnlearningEcon May 1, 2012 at 11:47 am

No, because healthcare isn’t the same as food.

chuck martel May 1, 2012 at 12:03 pm

Contraceptives aren’t the same as heart transplants, either.

Andrew' May 1, 2012 at 12:16 pm

Ha! Healthcare IS food. And yes, it’s the same as food economically. It didn’t become some magical good just because you guys said we had to turn emergency rooms into free clinics.

mpowell May 1, 2012 at 12:35 pm

I am interested in your thesis that all markets have exactly the same fundamental properties and given a few obviously true assumption about market actors, behave in fundamentally the same way. Perhaps you could advance this thesis and completely overturn all of the literature investigating all of the market anomolies observed in the real world.

Andrew' May 1, 2012 at 12:37 pm

That is certainly not my view, and you know that.

My view is that healthcare is not different from food because someone said so.

Andrew' May 1, 2012 at 12:39 pm

I suspect if you looked at contraceptives it would be virtually identical in most aspects to food.

Emergency care, perhaps not. But then that means you don’t mix emergency care with non-emergency care.

It is you guys claiming that all healthcare is the same. Pot, kettle.

mpowell May 1, 2012 at 12:55 pm

I guess I misunderstood your point. I’d agree that the healthcare market could probably be subdivided into separate markets. Maybe there would even be some benefit to doing so. I haven’t really seen anyone attempt to advocate for this is an a systematic way though. Making a big stink out of contraceptive coverage that comes at incredibly low marginal social cost is a bad example and certainly doesn’t count as a systematic argument.

CBBB May 1, 2012 at 1:01 pm

No it’s not at all the same as food economically, what a ridiculous assertion.

CBBB May 1, 2012 at 1:03 pm

But if you provide non-emergency, preventative care you can save money in the long run. It’s going to be MUCH more expensive if all you do is solve every health problem via emergency care. Sorry don’t try to hide it – it’s simply the conservative hatred of women having sex that sets off this entire contraceptive firestorm.

chuck martel May 1, 2012 at 1:09 pm

We have fire departments that leap into action to hopefully prevent the total destruction of burning buildings and adjoining structures. But we don’t have emergency crews that immediately respond to a leaky roof or a plugged bathroom drain. Are we missing something?

Andrew' May 1, 2012 at 1:21 pm

“it’s simply the conservative hatred of women having sex that sets off this entire contraceptive firestorm.”

Are you guys putting us on? For real?

CBBB May 1, 2012 at 1:32 pm

Yeah, I can’t think of any other explanation – I mean your arguments are so horrible there has to be another motive.
Contraception is the same economically as food? Oh really? When was the last time I needed a prescription to buy an apple? Do medical patent monopolies play a big role in the pricing and availability of food?
Your arguments are clownish. Given the fact that providing preventative care like contraception would lower unwanted pregnancies and lead to lower overall healthcare costs down the line – I can’t see any rational driving force behind this backlash.

MD May 1, 2012 at 1:34 pm

You don’t have emergency crews dealing with prevention. You have building code inspectors. It is assumed to be cheaper to develop and enforce building codes than it is to replace buildings and people destroyed in fires, earthquakes, hurricanes, etc. (It may not be cheaper. I have no idea.)

John Thacker May 1, 2012 at 1:51 pm

Yeah, I can’t think of any other explanation – I mean your arguments are so horrible there has to be another motive. Contraception is the same economically as food? Oh really? When was the last time I needed a prescription to buy an apple?

You damn well shouldn’t need a prescription to get contraception. And that’s something that the FDA could and should change quite easily.

Contraception is cheap, taken regularly, not part of an unusual condition that needs to be diagnosed but rather part of everyday life, has been around for a long time, and is well-understood.

It is much more like food than it’s like the type of healthcare we need insurance for. It’s certainly more like OTC medicine than prescription medicine, in everything other than the law requiring a prescription.

CBBB May 1, 2012 at 2:15 pm

Good, then perhaps there should be a push to make contraception available over the counter. My guess is that it would be those on the right who would be loudest in their denunciation of this policy.

But the idea that “Healthcare IS Food” in general is patently false. You can point to all these government interventions that make health care more expensive but where is the push to reform say patent monopolies or the licensing of doctors?

chuck martel May 1, 2012 at 2:54 pm

OK, MD, when was the last time a government building inspector came over and checked out your roof?

Andrew' May 1, 2012 at 3:01 pm

CBBB,

So, the prescription is what makes contraceptives ECONOMICALLY different from food?

Okay, fine, I’ll play along. Who requires prescriptions for birth control?

Who mandates that it has to be paid for by insurance?

How much more like food would it be ECONOMICALLY without artificial rules?

CBBB May 1, 2012 at 3:20 pm

But like I said Andrew, I just see right-wingers attacking the idea of offering contraceptives as part of an insurance package. I don’t see any major advocacy on doing away with prescriptions and in fact it would certainly be the right who would be most ferociously against offering over-the-country contraceptives.

Kevin May 1, 2012 at 4:39 pm

CBBB said: “You can point to all these government interventions that make health care more expensive but where is the push to reform say patent monopolies or the licensing of doctors?”

The push mostly comes from libertarians.

MD May 1, 2012 at 4:56 pm

@chuck martel

City inspected my apartment building two years ago. Owner had to make some repairs.

chuck martel May 1, 2012 at 9:10 pm

That’s not what we’re talking about, MD. If a leak appears in your roof, there’s no government program that sends a crew over to fix it so your collection of back issues of Pravda doesn’t get wet. You call a roofer. He gets paid by you or your insurance company. Kind of the way medicine used to work.

MD May 2, 2012 at 1:19 am

Actually, both firefighters and inspectors exist to minimize loss, and both are paid by the government. I know, fucking socialists, right?

UnlearningEcon May 1, 2012 at 1:27 pm

Health insurance isn’t the same as selling food. I thought this would be self evident, but libertarians love to nitpick when they can’t engage the argument as a whole.

I expect cries of ‘you said HEALTHCARE, not HEALTH INSURANCE’ which will only prove my point further. In the market healthcare is provided as insurance, that much is obvious from the history of capitalism. Food isn’t.

Andrew' May 1, 2012 at 1:30 pm

No no no. The point is, healthcare isn’t food BECAUSE the government has deemed it thus.

Is health insurance different from car insurance?

YES! Because you don’t use car insurance to pay for oil changes.

Yes, we know what you are saying. You don’t know what we are saying.

CBBB May 1, 2012 at 1:35 pm

Also because in general there are large information asymmetries to health care. I buy an apple or bread, I eat it, done. Yeah sure there’s some issues with ingredients and nutritional value but this is nowhere near the complexity of choosing between medical procedures A, B, C, or D. This is a big issue that just doesn’t come up in food.
Also, there’s a regulated limit on the people who can provide these medical services. Now you can say we should get rid of medical licensing but until I see a major push for this I won’t believe that this option is anything but a cover.

UnlearningEcon May 1, 2012 at 1:42 pm

No, the point the initial poster was making was clearly that if one thing is better provided by government then everything is.

Andrew' May 1, 2012 at 3:11 pm

No, there really aren’t relative to all kinds of markets and you have the directions wrong mostly. You for example have no idea how most food is made. It’s not a problem. And food is vastly more complex than the menu of options for healthcare of which you usually have one or two options including do nothing. What you are probably referring to is probably misplaced emotional gravitas of an acute medical condition versus the thousands of food decisions that put you in the doctor’s office in the first place (genetics is a bitch, but it is not actionable).

As for information asymmetry it’s vastly overblown and almost always described wrong.

1. Doctors know physiology and public health and possess your records. 2. Patients know their individual health status and habits.

Which is the more important for the insurance market? Clearly 2. Patients have the option of not buying. THAT IS WHY THE MANDATE. Now the internet makes 1 even less important. Patients would have more power if it weren’t for artificial rules supporting the supply side, including, yes, licensing. I have no position on medical licensing. The market works around them fairly well. I’m talking about the market as it is, not how it should be. I’m not sure why you bring it up.

TommyVee May 1, 2012 at 3:13 pm

“No, the point the initial poster was making was clearly that if one thing is better provided by government then everything is.”

The above statement is so non-sensical that calling it a “point” is stretching things. So our only choices are to have government do everything, or have government do nothing??? (not on planet Earth).
In the real world, there are some services that government does provide better than markets (streets and roads, water and sewer, law enforcement, education, pollution control, defense, etc.,etc.), which is why every actual functioning country on the planet uses government to provide those public services. But that does not mean that they use the government to provide hamburgers and coffee.
So some natural monopolies and public goods can be provided by government at a lower total societal cost, but others cannot. The evolution of democratic institutions is largely about determining which services are best provided over time by government, and which by the market. But pretending that all services have the same costs and benefits when deciding where the appropriate private/public sector balance simply denies reality.

chuck martel May 1, 2012 at 3:22 pm

“. In the real world, there are some services that government does provide better than markets (streets and roads, water and sewer, law enforcement, education, pollution control, defense, etc.,etc.”
_____________________________________

Prove it.

Steve May 1, 2012 at 3:58 pm

@chuck

Defense seems like the best example that most people agree is best controlled by the government rather than the market. Trying to figure out how you could create a market for “defense”. How do you propose “defense” would be purchased in the market?

CBBB May 1, 2012 at 4:08 pm

The healthcare market AS IT IS is not working for a huge number of people and the costs are skyrocketing. A lot of this is due to severe limitations on the supply of medical professionals (licensing) and patent monopolies on procedures and treatments. You have no really concerns about this it seems.
The idea that making food decisions are just as difficult or more so then health or medical decisions is laughable – so then if everyone can easily understand health decisions why not make everyone a licensed general practitioner? You also naively think doctors make the best decisions for their patients. Doctors have numerous incentives – many of them are wined and dined by pharmaceutical companies in order to sway them to recommended certain, perhaps unnecessary or unsafe procedures. Also a Doctor may have the incentive to always offer the most expensive procedure the patient can afford.

Now I understand at this juncture it’s really about policy preference. If you don’t care that not making it into the Ivy League and Goldman Sachs means you’re going to have to suffer with inadequacy health care then that’s your preference. Some of us are more interested in the welfare of society, but I suppose that’s what comes of having a moral compass.

chuck martel May 1, 2012 at 5:56 pm

Health care has to include more than contraceptives and blood transfusions for car accident victims. How about mental health? If I don’t get out of this neighborhood for a couple of weeks, preferably on a trip to Trinidad or maybe Martinique, I’ll go out of my mind. Where do I apply for airfare and hotel?

The Original D May 1, 2012 at 7:13 pm

Agreed that health insurance should not cover the human equivalent of oil changes.

Disagree that it’s like food. If you’re hungry and broke, you can substitute cheap fast food for Whole Foods. There is no substitute for a heart transplant or chemotherapy.

Peter Surda May 1, 2012 at 11:43 am

Tyler,

currencies other than the national currency are subject to legal restrictions, such as:
- capital gains tax (also, apparently in the US you can’t even write off currency exchange rate losses)
- sales tax (commodity currencies, even though there are rare exceptions)
- various regulations, such as SEC or AML create barriers to entry (affects even big ones like GoldMoney, see http://www.dgcmagazine.com/blog/index.php/2011/12/21/goldmoney-pulls-out-closes-payments-part-of-business/ )
- the existence of FED as a lender of last resort favours dollars for US banks
- and, of course, you must conduct your tax accounting in dollars

It looks like these combined, plus the network effect, means that you Americans are stuck with the dollar until it collapses. Good luck.

Daniel Dostal May 1, 2012 at 6:35 pm

We’re stuck with the dollar? Well that’s a relief.

Peter Surda May 2, 2012 at 7:42 am

You’re stuck with the dollar in the same sense as Eastern Europe during communism was stuck with Trabant, and in the same sense as the old jokes go “The Soviet dwarf is the biggest in the world” or “The Soviet watch is the fastest in the world”. It takes a special kind of mind to see it in a positive light.

8 May 1, 2012 at 11:56 am

Almost everyone discussing the Depression leaves off the fact that after WWII, the industrial base of the world had been carpet bombed and the rest fell under communism or generally socialist anti-colonial movements. America was almost the only industrial game in town. By the time Europe and Japan are back on their feet, the U.S. is hemorrhaging gold, closes the gold window and heads into the 70s. The period of 1945 to 1970 was the best it can ever get. If most of the industrial base of Asia and Europe gets carpet bombed; China, Russia and Europe go back to communism and India to socialism, that creates a world of cheap energy and high demand for U.S. capital goods—how does the U.S. NOT prosper in that environment?

Ron Paul doesn’t explain his thinking, though I did see him do that once with an interview on an NBC Sunday morning show, taking a minute or two to explain how subsidized student loans lead to high tuition costs. Usually, he just says one or two lines blaming the Fed or government, which is why his support never broke out beyond the 15% who already knew what he was talking about.

Andrew' May 1, 2012 at 12:23 pm

One of the reasons that mainstream economists are cranks and that the people they call cranks are necessary to roust them from their naval-gazing mathematical masturbation. Anything with the words “World War” in it is only something to learn to run screaming in the other direct. It’s not evidence for stimulus. It’s nothing useful. Not the least of all because to repeat it today would destroy humanity as we know it.

CBBB May 1, 2012 at 1:13 pm

Except no one is advocating another world war, that’s something you made up in your own – what seems to me increasingly delusional- imagination.

Urso May 1, 2012 at 1:31 pm

No, people just want the same economics effects as we saw post-World War II without having to actually go through the trouble of having another world war. In other words, they want magic.

CBBB May 1, 2012 at 1:37 pm

How is it magic? The logic is spending on production -> employment. What makes “shooting people with bullets and dropping lots of bombs” a necessary part of this?

UnlearningEcon May 1, 2012 at 1:45 pm

Global capitalism?

John Thacker May 1, 2012 at 1:48 pm

How is it magic? The logic is spending on production -> employment.

The post-WWII boom occurred after massively reducing government spending (to a degree that a depression was predicted, but did not occur.) It’s at least partially because of the intense repression created by WWII that there was this huge catchup to potential GDP. But who would argue for repressing things for the better part of a decade so that we could catch up?

Andrew' May 1, 2012 at 1:51 pm

How sure are you of that?

I mean that rhetorically as well as spiritually.

Andrew' May 1, 2012 at 1:54 pm

That question is to CBBB.

You’d better be sure.

http://krugman.blogs.nytimes.com/2011/08/15/oh-what-a-lovely-war/

There was a time when liberals understood that there was a layer of people whose incentives weren’t aligned with the people who get drafted.

Andrew' May 1, 2012 at 1:58 pm

And yes, I understand PK is kidding. He’s a kidder. I’m sure he’s kidding to the same degree he said he was kidding when he called for a housing bubble circa ~2002.

Except, hmmmm. Maybe the housing bubble WAS effective Keynesian stimulus.

But surely that can’t be, and he must have been kidding.

CBBB May 1, 2012 at 2:23 pm

Am I here to address everything Krugman has ever written. Yeah Krugman is kidding about the war but he advocates massive spending to boost the economy – getting people on headlines is pretty lame Andrew.
As far as financial repression being necessary – I don’t see this either. If there had been no rationing then you would have had a consumer boom in the 1940s rather then waiting until the late 40s, early 50s. The idea is that you have the government put money in people’s pockets so they can actually go spend and then businesses have incentive to expand production and make investments and this would generate a virtuous cycle.
This is is really the only serious plan I’ve seen. The other side basically argues “we have to wait it out”. Tyler Cowen’s argument seems to basically be there’s been a Great Stagnation and we have to wait it out until someone invents something cool that can form a new market. I don’t see how there’s a big incentive to go out there and invent and invest when the number of people who can actually buy your product continues to dwindle. We now have growth that overwhelmingly gets transferred to a tiny fraction of the population. All other things will follow once there’s some shared prosperity, but if the bulk of consumers have no money I can’t imagine how you’re going to get anything else off the ground.

Andrew' May 1, 2012 at 3:43 pm

No, my intention wasn’t even to use a Krugman quote. The point was that you said NOONE was arguing for a world war as stimulus, but you know who did just that, in a manner of speaking. And it took me 5 seconds to google for the article.

I never actually said anyone actually wants a world war for stimulus. You made that one up. What I said was that we should not try to learn anything from that except to do absolutely nothing like it ever again.

CBBB May 1, 2012 at 3:59 pm

No….the point was that no one was arguing that we should get INTO a World War in order to stimulate the economy. Or at least I thought that was supposed to be the point

mrwiizrd May 1, 2012 at 1:11 pm

“Almost everyone discussing the Depression leaves off the fact that after WWII, the industrial base of the world had been carpet bombed and the rest fell under communism or generally socialist anti-colonial movements.”

This was my exact thought when Krugman made his point about the 1950′s. To make any broad generalizations about the role of monetary policy in such a dynamic post-war period seems disingenuous at best.

8 May 2, 2012 at 4:08 am

It also goes to Ron Paul’s point about the spending cuts working after the war. The background noise is too high to use this period as some kind of signal for U.S. monetary or fiscal policy. I think the best comparison for the U.S. is post-war Britain, especially in the 1960s and 1970s, if there’s any relevant comparison.

spencer May 1, 2012 at 2:39 pm

I get so tired of people making claims about the 1950s being a period of great prosperity.

Take a look at the data. There were three recessions in the 1950s and the unemployment rate rose from 3% in 1950 to 6% in 1960. The growth of real per capita GDP in the 1950s was the
weakest decade in the post WW II era. The recessions were part of a deliberate policy by the Fed to raise unemployment and tame inflation after WW II and the Korean War.

When ever I see anyone make this claim that the 1950s was great because of a lack of foreign competition I know they have no idea what they are talking about.

Andrew' May 1, 2012 at 3:48 pm

They refer to relative to depression, right?

And who is referring just to the 50s?

I’d guess we are just now exiting the period of competitive advantage.

Andrew' May 1, 2012 at 3:54 pm

Here’s a crank theory for you (and I use the word “theory” loosely), globalization and the emergence of a reserve currency cross-facilitated each other. The nation of the reserve currency had great power and great responsibility. The reserve currency grew and grew until it didn’t.

Andrew' May 1, 2012 at 12:26 pm

It would be interesting to see the capital inflow to the US in the decimated/communist aftermath. I have a hunch…

Peter May 1, 2012 at 12:39 pm

“If you actually read what he wrote for economists, as opposed to his ‘slightly loose’ popular writings.” Krugman speaking on Friedman may be prophetic as to his own legacy.

pyroseed13 May 1, 2012 at 1:23 pm

I’m a libertarian, but I found Krugman more persuasive in this interview, minus his “nostalgianomics.” I never understood how the “gold standard” moves us closer to a free market in currencies, nor is it clear why Fed actions must always be “inflationary.” Isn’t it possible for the Fed to not adequately satisfy the demand for money, as in the Great Depression? Governments don’t always create surpluses when they control the means of production.

Andrew' May 1, 2012 at 1:46 pm

Really? I was apprehensive to watch it, and aside from the tendency to twaddle required by all politicians, I was quite relieved.

Krugman clearly hasn’t thought about the things Ron has. Krugman thinks Ron is talking about bartering. This is breathtakingly uninformed. Krugman doesn’t see the need to be informed because that is a “crank” subject. In case he didn’t note the meta trend, he’s now debating the crank. Spoiler alert, this is going to leave the crank realm soon. Even Tyler sees this I suspect. And I say “even” not because he’s incapable of equanimity, but because of my suspicion of the apprehension he has towards Ron.

Care to speculate how Romney might fare versus Krugman or Obama versus Tyler?

chuck martel May 1, 2012 at 2:49 pm

A free market in currencies based on gold, silver, beer or golf balls would likely be more widely accepted than one based on a non-promise to pay anything.

Becky Hargrove May 1, 2012 at 1:28 pm

Loved the crank discussion. I admit it, I’m a crank! A lot of us these days don’t have much choice.

RPLong May 1, 2012 at 1:33 pm

TC, this post is ridiculous and unfair. If you (or many of your readers) demanded half as much economic coherence from any pundit on TV other than Ron Paul, then this world would be a much different, and much better, place.

We get a Paul vs. Paul transcript because neither the media nor the blogosphere will give us a Boettke vs. DeLong transcript or a Boudreaux vs. Krugman transcript. Admit it: You would love to read and review such a transcript. But it will never happen.

The only lesson we can take from this is that the state of economic debate in the country is deeply unfair. Congressman versus Nobel laureate. What a joke.

Andrew' May 1, 2012 at 2:13 pm

I’d vote for John Hussman, Peter Thiel, or TC versus Obama, but we don’t want to see a sitting president’s brain explode “Scanner’s-style” on national television.

Note to the Secret Service, that is me NOT wanting harm done to the president. Ass you were.

RPLong May 1, 2012 at 2:21 pm

+1 on all accounts

CBBB May 1, 2012 at 2:31 pm

Well that’s not saying much – even I would probably prefer a Tyler Cowen of Peter Thiel presidency to Obama.

byomtov May 1, 2012 at 6:03 pm

No. You can take from it what some of us already knew: that taking Ron Paul’s economic views seriously is a huge mistake.

John David Galt May 1, 2012 at 1:46 pm

The attributions in this article seem to have each debater criticizing his own statements. Perhaps they should be reviewed?

GiT May 2, 2012 at 12:47 am

The only thing in need of review is your literacy.

You are not looking at attributions. You are looking at Cowen’s comments on each phrase of the debate. Each ‘attribution’ [sic] is TC’s commentary on the debater’s performance.

Komrade Krugman May 1, 2012 at 1:51 pm

Tyler- With respect to # 4 and your point: 4. K’s response: Modern liberals have a bad and selective case of 1950s nostalgia. Krugman is significantly overrating the role of policy here. More overreaching. He should stick to analyzing the “no bailout in 2008-2009″ scenario, and how much worse it would have been, including for RP’s preferred ends.

Of course it would have been worse but as RP and others have made the point several times over, the depression of 1920-21 allowed the market to adjust and the recovery to begin. Yes, it was extraorinarily painful and similarly it would have been enormously painful had there been no bailouts in 2008-09 but a pain deferred does not mean we have successfully avoided the calamity.

Those ‘toxic’ “assets” still sit on the Fed’s balance sheet, Should we just forget about them or hope and pray that someday somehow they will return to par? Putting that aside, what about the wholly unjustified premise of private gains and socialized losses? The banking cartel should have went down but instead they profited as they reckless bets were paying off and they stuck the tab to the taxpayer and ultimately the credibility of the dollar when the odds turned on them.

I am not sure how you can endorse the specific way the bailouts were handled and again, this story is not over until the ‘assets’ on the Fed’s balance sheet are liquidated.

PS – Krugman’s point that the dollar has not gone down compared to the other currencies is selection bias don’t you think? Every central bank is expanded their monetary base in a race to the bottom so I find PK’s point laughable.

will May 1, 2012 at 2:05 pm

Monetary base has expanded, but inflation is tightly controlled. What is your response to that?

Given that the economy is growing if inflation should start to rise, the Fed will raise interest on reserves while auctioning off the “toxic” assets.

Daniel Dostal May 1, 2012 at 6:53 pm

The importance of American finance changed drastically from the 20-21 recession to the 08-09 recession. I am not surprised that a hands-off approach would work pre-Depression, but in the current world much more collateral damage would have occurred. I am intensely curious to know how the recession would have played out and if a depression would have been a good thing in a hands-off scenario. But I’m quite confident that direct comparisons to old busts do not adequately inform us.

Komrade Krugman May 1, 2012 at 2:11 pm

I disagree that inflation is ‘tightly controlled’ and you do not need a growing economy for inflation to rise.

pyroseed13 May 1, 2012 at 3:21 pm

Komrade, I agree that Tyler’s defense of the bailouts should leave us feeling uneasy. However, I’m skeptical of two points in your post. One concerns that nature of the 1920-1921 recession. That recession was about as deep as the Great Depression, so at first glance it is impressive how quickly the economy rebounded. But it simply isn’t true that the economy recovered without any intervention. We faced high inflation after WW1, and interest rates were raised to combat it, creating the recession. Interest were gradually lowered and the economy began to recover. So at best that recession provides strong evidence against fiscal stimulus, but not monetary stimulus.

Krugman’s point that the U.S. dollar has not depreciated relative to other currencies is a valid point. If people felt that that the U.S. dollar was truly in danger, they would seek safer investments in other currencies, which could even include gold and silver. All economic indicators seem to suggest that the market is not expecting hyperinflation.

Bender Bending Rodriguez May 1, 2012 at 7:22 pm

If people felt that that the U.S. dollar was truly in danger, they would seek safer investments in other currencies, which could even include gold and silver.

45 seconds after asking my Google-box, I’ve found that the price of gold has increased 50% since 2008. I need to get back to work, but I’m pretty sure that there are a number of other commodities like
oil, silver, corn, etc. have increased significantly too.

George Selgin May 1, 2012 at 3:09 pm

A nice review and fair points, Tyler. A couple of remarks:

“I don’t understand RP’s claim “I want a natural rate of interest.” Even gold standards allow for monetary influences (distortions? …depends on your point of view) on interest rates. RP has not fully absorbed Myrdal (1930) and Sraffa (1932).”

I doubt that Paul would claim that the gold standard entirely eliminated departures of actual from natural interest rates; presumably he just believes that it was better than the fiat dollar on that score. I’d be more inclined to fault him for sometimes suggesting that the natural rate is easily identified, which is of course far from the truth.

“Christie Romer (!) has shown that economic volatility was not higher before WWII. (Somehow that’s one Romer paper which isn’t discussed so much anymore.) That’s a major hole in K’s argument.”

Actually, Romer’s estimates show a very slight reduction in volatility since WWII compared to before WWI. (All GNP estimates show that post-WWI as a whole was worse than pre-WWI.)

“The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost. No one has had such a long planning horizon, for one thing.”

This is rather misleading. Before 1913 99-year corporate bonds were relatively common. They aren’t any longer, but planning horizons have shortened considerably since 1913 in large part because the price level has become far less predictable over longer horizons than it used to be. This seems to me reason enough to regret the decline of the dollar’s purchasing power, or rather the increased price-level uncertainty that has gone hand-in-hand with that decline.

Steve May 1, 2012 at 4:21 pm

“They aren’t any longer, but planning horizons have shortened considerably since 1913 in large part because the price level has become far less predictable over longer horizons than it used to be.”

Technological changes may be a large reason planning periods are shorter.

Ricardo May 2, 2012 at 4:48 am

Following on Steve’s point, how many major corporations survive for 99 years without ever missing an interest payment? Moreover, are there any legal barriers to a corporation selling 99-year bonds indexed for inflation? If not, it seems to me the realization that even the largest and seemingly most stable companies are at high risk of failure (without government favors, that is) is more important than inflation here.

Finally, the U.S. government sells long-term inflation-protected securities and the premium on these is currently not very high. The example of 99-year bonds is an appeal to market wisdom but this has to be reconciled with the actual market for inflation-protected securities and the observation that these securities do not sell at a premium that would suggest a serious risk of runaway inflation.

Joseph Ward May 1, 2012 at 3:16 pm

Regarding the pre-WWII business cycle volatility.

I would cite a different (and more recent) Christie Romer paper in which she provides evidence that the post-WWII US macroeconomy has had significantly less volatility in terms of recessions. She cites that recessions are less frequent since then, but when they do happen they are more prolonged. This seems to be part of the trade-off of discretionary monetary policy. Here’s the paper for your review, it was written in the 1990′s, but the interim seems only to confirm her conclusions.

http://elsa.berkeley.edu/~cromer/JEP_Spring99.pdf

Joseph Ward May 1, 2012 at 4:20 pm

There are also probably other coincidental reasons that there could have been the same or even less unemployment volatility before discretionary monetary policy began. The biggest reason would be that more individuals were less specialized. Highly educated and specialized individuals are more disadvantaged by stuctural shifts in the economy out of their speciality. There are other reasons such as unemployment insurance that tends to prolong unemployment spells, but has little to do with discretionary monetary policy (if a contributing factor to lengthening employment troughs to peaks).

TommyVee May 1, 2012 at 3:24 pm

How are Americans “stuck with the dollar until it collapses”??

As a US citizen I have plenty of global investments, both direct foreign stock/bond ownership, foreign real estate, ADRs, etc. Using the web, moving assets out of dollar denomination is trivial. So I do not feel “stuck” in the least.

And I think discussion about the “dollar collapse” is hyperbolic paranoia. The dollar is the world’s reserve currency and the currency of the world’s wealthiest economy. Currency fluctuations are always with us, but preparing for the dollar’s collapse makes about as much sense as preparing for WWIII (both are catastrophic low-probability events, difficult and expensive to prepare for, so non-paranoid people deploy their assets in more productive venues than apocalypse prep).

Peter Surda May 3, 2012 at 12:18 pm

Tommy,

those investments are not media of exchange. You cannot use them for payment. While some of them might be quite liquid, you could encounter problems converting them into a usable medium of exchange should there be a problem with the dollar. For example, if the banking system stops working in your favour (e.g. collapses, bank “holidays” are declared etc), the “moving assets” part suddenly becomes problematic. In other words, while your wealth might be protected, your liquidity is still at risk.

The fact that dollar is world’s reserve currency does not make it less likely to collapse, it just makes the collateral damage of collapse worse.

Even if your risk assessment was accurate, it’s kind of like saying that because there’s low risk that, say, Coca Cola became poisonous, that laws penalising the use of other beverages would be ok.

Tom May 1, 2012 at 3:47 pm

The dollar as a reserve currency will gradually be reduced in power as China, especially, makes deals with others in a combination of Chinese Yuan (or Renmimbi — China hasn’t seemed to yet choose which one currency they want) – Japanese Yen, or Korean Won, or Russian Rubles.
Iran is selling oil to India in Rupees.

No one currency will replace the US — but contracts will be less dependent on US$ denominations, and thus will have higher transaction cost currency risk.

Ricardo May 2, 2012 at 8:32 am

Iran’s decision is almost certainly related to international sanctions rather than a bet on the rupee. Indian rupees are subject to strict foreign exchange controls and are not liquid outside of India. That means those rupees can be held in Indian banks (UCO bank in Calcutta, according to news reports) which are mostly out of the reach of U.S. and E.U. financial sanctions. The only thing Iran can do with those rupees, though, is buy goods and services from Indians within India.

Yancey Ward May 1, 2012 at 4:00 pm

Who now is opening up U.S. bank accounts in other currencies? Or using gold indexing? It is allowed.

Well, not exactly, at least not a true competition, Tyler. You can certainly do these things, but you will pay taxes on any dollar gains at reconversion.

Steve May 1, 2012 at 4:25 pm

Is there a way to make money without paying taxes? You pay taxes when you cash in any investment (even interest from banks on regular old US dollars). I am not sure how taxes is an argument against investing in other currencies.

Yancey Ward May 1, 2012 at 4:43 pm

It isn’t a true competition of currencies if you tax the better performing ones.

byomtov May 1, 2012 at 6:46 pm

You’re not taxing the currency. You’re taxing the profit you make when you sell it for more dollars than you paid for it. Just like we tax profits on other transactions.

If the alternative currency is so wonderful why are you trading in and out of dollars anyway?

Matthew C. May 2, 2012 at 5:21 pm

You’re taxing the inflationary “gains” caused by the destruction of dollar purchasing power versus a non-inflationary currency.

I don’t think there is any doubt which currency is superior. Would you rather have a $20 paper note printed in 1925 or a $20 St. Gaudens gold coin from 1925?

byomtov May 2, 2012 at 5:36 pm

I personally would rather have the gold coin, I guess, even though I’dm not familiar with the specific item you mention, but what that has to do with one currency being “superior” to another I don’t know.

Matthew C. May 2, 2012 at 5:54 pm

Bernard,

“Superior” connotates which is superior from the standpoint of an owner, holder or user of the product. Not which is superior for the central planners who wish to confiscate our purchasing power and run our lives.

You are quite right to choose the gold coin which has over $1600 worth of gold in it at today’s market. You’d be lucky if you had gotten $80 in interest over the 90 years by putting that $20 fiat in savings accounts at banks, for a total of $100 today.

The fact that gold maintains its purchasing power over time, and fiat money does not (even with interest), indicates quite clearly that fiat money is a terrible vehicle for savings.

Which is why everyone today with two nickels to rub is a stock market / commodity market / real estate speculator. Because they don’t want their purchasing power raped by Ben Bernanke.

But Ben is losing the war. China, Russia, India and the other central banks (and individual citizens) are bidding the hell out of gold and exchanging their Bernanke Bucks for anything whatsoever real and tangible. We’re in the endgame for the acceptability of the dollar as an international store of value. And when the run starts, expect to see oil double in price overnight and gold to go askless.

An interested observer May 1, 2012 at 4:24 pm

I always love the appeal to authority establishment types who cite Krugman’s Nobel Prize award as if it makes him some sort of an expert on the issue at hand. Of course, they typically leave off the minor point that his award had zero to do with monetary history and monetary econ, which is what this whole debate centers around!

Krugman looked very bad in this exchange — especially after his attempt at saying paul would take us back 150 years was swatted down hard with the response that Krugman is supporting the exact policies from over one thousand years ago. The stuttering and stammering from krugman without claiming specifically why that was wrong, in addition to running to his blog to attempt to spin that issue, was all that needed to be said about why krugman should stick to writing a blog that his own former editor said is used distort the truth for his own political purposes.

What I also found funny was Krugman now claiming that the 08 collapse was a total market failure, while in the past he explicitly blamed the Fed’s policies for creating a Housing Bubble. I guess now the Fed is part of an “unregulated market,” right?

Here is what Krugman said before debating Paul and suddenly deciding that “market failure” is what caused the crisis:

“As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.”

http://krugman.blogs.nytimes.com/2006/10/30/credit-where-credit-is-due/

I also rather enjoyed Krugman’s claim that post WWII America is the type of economy that he wanted again, while at the same time arguing against large cuts to government spending and against any sort of currency link to gold. No logical holes in that argument considering we were on the gold standard then and we drastically cut spending after WWII, right? Or his claim that the government is required to help get out of depressions, yet he ignored what happened with the 1920/21 depression that took place prior to Open Market Operations even existing for the Fed, and nothing being done by the government in response. Yet the depression was over in around a year — how is that even possible in Krugman’s world?

The last thing I laughed hard over was the claim that people can simply engage in barter now instead of embracing Hayek’s idea for competing currencies! That might have been the funniest line of all from Krugman. A supposed professional economist making an argument that a child would make? Priceless!

CBBB May 1, 2012 at 4:35 pm

How is it a depression if it was over in a year?

Matthew C. May 2, 2012 at 5:25 pm

All you need to know about the superiority of gold as a currency to hold purchasing power over the US dollar is to compare the purchasing power of a $20 bill from 1925 to a $20 gold coin from 1925. The former is worth $20, the latter over $1600.

Looking at this, it is clear that inflation is stupendous theft and fiat money is a fraud.

Matthew C. May 2, 2012 at 5:31 pm

You can also compare to the $1 peace dollar from 1925 — worth $23.67 in silver content alone. Or the 1964 Roosevelt Dime — $2.21. You could buy a gallon of gas for two dimes in 1964 — and you can still buy a gallon of gas with those same two dimes today.

Fiat money is theft and fraud against the public in the interest of the banking and political classes and their mouthpieces in academia.

Steve May 1, 2012 at 4:37 pm

You pulled something that Krugman wrote in 2006 to explain the 2008 crisis. You mention the 1920/21 depression that he has addressed several times on his blog. You make fun of an economist not being able to speak as well as a politician. Let’s just say you haven’t changed my opinion of Krugman.

Steve May 1, 2012 at 4:38 pm

This was supposed to be in response to An interested observer.

An Interested Observer May 1, 2012 at 4:48 pm

Nothing is going to change your view of Krugman — and i noticed you ignored several other points in your response — so I might as well show you an example of the sort of thing that his former editor at the NY Times slammed him for doing:

http://www.bloomberg.com/video/91694137/

At 19:40 in this video, Krugman states that it is a “big lie” that the fed created the Housing Bubble.

However, he wrote this on his blog in 09:

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/

“What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”

An Interested Observer May 1, 2012 at 4:57 pm

Look at my 4:48 post and you will see why his outgoing editor at the NY times wrote this about him:

http://www.nytimes.com/2005/05/22/weekinreview/22okrent.html

“Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.”

So in other words, he is basically an Ann Coulter type — albeit a Coulter who received a Nobel Prize in econ in a field completely different from what he writes about in virtually every column.

Steve May 1, 2012 at 7:12 pm

“Nothing is going to change your view of Krugman”

I’ll agree it would be hard to change my mind but it is not impossible. Obviously when someone’s politics aligns with your own then it’s hard not to be biased on their economics as well.

I pretty much agree with the editor but not with the Ann Coulter comparison. He does not defend his critics, at all. I recently started reading this blog to get some differing viewpoints. Definitely enjoying it.

An Interested Observer May 1, 2012 at 10:01 pm

http://www.bloomberg.com/video/91694137/
Not sure if I have seen Ann Coulter make a Mitt Romney/Obama style flip flop on an issue like this though, as much of an attention whore as she is! Just out of curiosity, what do you think of this as a follower of Krugman?

http://www.bloomberg.com/video/91694137/

At 19:40 in this video, Krugman states that it is a “big lie” that the fed created the Housing Bubble.

However, he wrote this on his blog in 09:

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/

“What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”

Do you not question some of the other things the man says when stuff like this is pointed out?

Steve May 2, 2012 at 12:08 am

I think you are reading Krugman saying “the Fed wanted the housing bubble” the same way some people read Krugman saying “World War II was great for the economy”. I don’t think he is really saying the Fed wanted a bubble the same way I don’t think he is saying that he thinks war is great. Why would the Fed want a housing bubble? I assume the Fed was thinking the lower rates would boost the housing industry but I think he is exaggerating when he says bubble. Also note that interest rates are lower now than they were during the bubble period. It seems more likely it is not the interest rate itself that matters but how willing the banks are to lend. I find it hard to blame anyone other than the banks for the crisis. How hard is it to make money on a home loan? Even if the borrower can’t pay the bank gets the house back. It is supposed to be a guaranteed win for the bank. Yet somehow they royally messed it up.

An Interested Observer May 2, 2012 at 2:22 pm

You are getting into the economics of the issue while I am pointing out that Krugman claimed that the Fed created the Housing Bubble in an 09 column, while the other day he claimed it was a “big lie” that the Fed created the Housing Bubble.

He is completely changing his story now. So was he simply wrong in 09, or is he just lying now? It can’t really be any other answer. BTW, this isn’t exactly the first time he has done something like this and vindicated his former editor at the NY Times.

What is your response to him completely changing his story? Do you not question his honesty, along with how he always brings up himself or allows others to without correcting them, that his nobel prize had zero to do with macro econ and monetary econ? Sorry, but if this guy were a neo-con Republican on foxnews, you would be screaming about his contradictions and obvious lying.

CC May 1, 2012 at 5:29 pm

I really wish the media would stop treating Ron Paul like he has anything useful to say. I don’t think much of austrians, but I feel sorry for them to have this idiot running around pretending to speak for them.

will May 1, 2012 at 5:32 pm

That may be an unfair standard. How does Ron Paul compare among politicians?

CC May 1, 2012 at 5:53 pm

It’s not unfair because Ron Paul presents himself as some kind of economic guru.

TGGP May 1, 2012 at 5:39 pm

I recall a previous time when Tyler was accused of misrepresenting Friedman on the Fed/Depression. And then it was David Henderson who cited Free to Choose (the book). And if you go to Google Books and search for the page Henderson is quoting, you will see that Friedman explicitly states that the Depression would not have happened if we had stuck with the (admittedly flawed) pre-Fed system.

Jacqueline May 1, 2012 at 5:49 pm
Costard May 1, 2012 at 6:51 pm

“The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost. No one has had such a long planning horizon, for one thing. We don’t see much indexation, for another.”

This is a rather casual conclusion. What about second-order effects? Sustained 2-4% inflation leaves the central bank room for adjustment and allows for a less volatile economy over the medium-term (decadal), however it also leads to the accumulation of debt and rising trends in leverage, an increasing dependence upon low rates and anti-cyclical policy, and generally a system less robust in the event of a crisis. 20 years of modest inflation and low volatility brought us to 2003, when a rate of interest barely able to sustain CPI nevertheless proved hyper-inflationary in capital assets. Which then brings us to the crisis, the “recovery” and, looking forward, a future in which it probably will not be hard to find the costs of inflationary policy.

“the money supply under free banking, or a gold standard, would be excessively pro-cyclical”

And yet inflation-adjusted data show that real business cycles were no worse under the gold standard than they are today. Perhaps we’re talking about a nominal solution to a nominal problem?

http://www.realclearmarkets.com/articles/rcm-graph_1022.gif

Only in 1980-present has the ideal of mild, sustained inflation been achieved, and this has coincided with a decline in trend. Hardly encouraging. And again, the relative smoothness in GDP has not prevented a great deal of volatility in asset classes, and does not seem to have softened the effects of the business cycle such as unemployment. Indeed the only palpable benefit of anti-cyclical policy seems to be:

http://www.fnarena.com/images/provider/dynamic/US_Debt_to_GDP_1932.jpg

Apologies for the provenance of the graphs. They convey the point and the data is easily verified.

Matthew M. May 1, 2012 at 9:49 pm

“Equating inflation with “fraud” is an excessive moralization of the issue.”

Wow. Let’s see if the tune changes, if I sneak up and take a few bills out of your wallet.

Whatever happened to Tyler Cowen? This guy might as well be Paul Krugman Jr.

Steve May 2, 2012 at 12:18 am

Would you prefer deflation? We don’t have to increase the monetary supply. Instead of getting raises each year we could get decreases and the smaller the decrease the happier you would be.

Matthew M. May 2, 2012 at 3:12 pm

I’d actually just prefer sound money, as Ron Paul and the Austrians advocate. Allow people to use whatever they want for money, and keep the state out of it. Historically, gold has been one of the best choices, but I’m open to anything better, too.

Under such a system, raises would mainly come in the form of falling prices as productivity improved. I don’t think people would complain about products getting cheaper (think TVs and cell phones).

will May 2, 2012 at 5:39 pm

no sticky wages? I certainly don’t mind low levels of inflation if it greases the wheel of the economy. Anyone with savings will at least have some positive nominal return. What evidence is there that inflation has been very harmful?

Steve Z. May 7, 2012 at 3:51 pm

“no sticky wages? I certainly don’t mind low levels of inflation if it greases the wheel of the economy. Anyone with savings will at least have some positive nominal return. What evidence is there that inflation has been very harmful?”

For starters increase in prices of basic necessities such as gas, foods, and clothing or rather less purchasing power of your dollar over the years. In reality, wages have not really been keeping up.

Marc May 2, 2012 at 6:37 am

Here is Robert Wenzel responding to Tyler’s nonexistent critique:

http://www.economicpolicyjournal.com/2012/05/tyler-cowens-vicious-attack-on-ron-paul.html

Jim May 2, 2012 at 2:33 pm

The decline in the value of the dollar since 1913, or whenever, has not been a major economic cost.

This is the crux of the argument. One either believes this statement or not. I agree with RP; inflation is a terribly regressive tax with hugely structural redistribution upward effects. Plot oil prices against a 1913 dollar. Heck, plot them against a 1970 dollar.

will May 2, 2012 at 5:35 pm

The price of oil rises as supply shrinks and we find new productive uses for oil. Why should the dollar be pegged to oil?

Who is hurt most when there are productive projects but insufficient funding? I think it’s intuitive that it would be the marginal laborer.

Matthew C. May 2, 2012 at 5:42 pm

Absolutely.

Inflation and TBTF are the biggest causes of the fact that the 1% is doing so well, and the bottom 80% has been treading water (or worse) since 1973.

It also allows the government to tell grand lies — for example about “2% economic growth”. Yeah, but they claimed a 1% deflator, while the heavily-massaged CPI is hotter than 3% and real goods prices are seeing 8-15% increases. So — we actually have no growth or even economic contraction — can’t have that, especially in an election year, can we? But numbers that can’t be manipulated and aren’t calculated in inflationary dollars, like the employment rate, shipping tonnage, energy usage, and the like tell the real story. We are in a depression and have been since 2008.

We would NOT have the kinds of continuous bubbles in stocks, real estate, college prices, athletes and entertainers salaries, art and the like if we used precious metals as money, which is natural free market money and would undoubtedly take over again in the absence of government interference.

Yogesh May 2, 2012 at 3:27 pm

I can’t believe nobody brought this up. Which one is the Alien and which the Predator? Both bleed acid btw.

Floccina May 3, 2012 at 9:32 am

I would much rather have seen PK debate George Selgin. As you said at the end PK is Nobel prize economist and RP is a Gynecologist and further more RP says that he will allow free banking and let the people decide what they want to be money. He just thinks that they will want gold backed money so we can discount the harm due to a hard Gold standard?

Krugman's Meltdown May 3, 2012 at 1:08 pm

Selgin is a specialist in monetary econ, while Krugman’s nobel prize had zero to do with that subject, so that would hardly be fair for Krugman. Now if Paul and Selgin were debating geography econ or whatever it was that Krugman won his Nobel prize in, then Krugman would actually have an advantage. When it comes to monetary econ, krugman is not exactly convincing. The fact that he blatantly contradicted himself by claiming the Fed didn’t cause the Housing Bubble after saying on his blog multiple times it did shows he should probably avoid live tv debates in the future, too. Then again, citing David Frum and later changing it to a web intern at the New Republic in his columns isn’t exactly a good case for his writing, either.

Krugman's Meltdown May 3, 2012 at 1:04 pm

Krugman is basically having a meltdown now with multiple entries about this debate on his blog. He typed out in baby talk, and now he is citing a WEB INTERN at the New Republic in an attempt to discredit Ron Paul’s arguments after first claiming it was David Frum. LOL

I can’t recall someone reacting like this to a tv debate lasting a few minutes before. If anyone wants to know who really “won the debate,” then look no further than Krugman’s post debate antics on his blog and compare it to how all Paul had to do was post the video on his campaign site.

The Hat of the Three-Toed Man-Baby May 6, 2012 at 12:36 pm

Two nitwits debating economics is not interesting — Krugman stopped doing relevant work years ago, and Ron Paul is just an ill-informed lunatic. Ignore both and you’ll be better off, which is exactly what Bernanke is doing.

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