Krugman: Not enough economic destruction

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

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

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

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

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

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

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

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

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

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

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