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.