Monday, January 25, 2010

Krugman Agonistes, Part II

The great soul search is over. Paul Krugman has, albeit reluctantly, recommended that Ben Bernanke be reappointed as the chairman of the Federal Reserve System. Now, this hardly is the Great Moment For Which I Have Been Waiting, but I do find his reasoning to be interesting.

On the con side, Krugman states:

  • The Fed did not recognize the Greenspan-Bernanke housing bubble;
  • Bernanke has failed to admit publicly that he blew it on the subprime mortgages;
  • He failed to support the creation of a Consumer Protection Agency (and old Ralph Nader demand in which a government agency full of activists who hate private enterprise will decide pretty much everything economic);
  • He is not aggressively pushing policies that will quickly bring down inflation and create millions of new jobs;
  • He thinks too much like a banker.
On the pro side, he writes:

  • While there are good Keynesian replacements, a confirmation battle would be bruising, so it is better to go with the safe choice;
  • Bernanke has engaged in "unorthodox" but necessary actions to "save the economy from depression;
  • Another appointee might listen to the "inflation hawks" (people who think inflation is bad), which would make things even worse.
Let me translate: Bernanke has "fought" this recession by using the Fed's unlimited pocketbook to buy trillions of dollars of worthless assets and help banks and other entities artificially balance their ledgers, and he should be rewarded for it. Second, any worries about inflation are overblown and the real enemy is deflation and unemployment.

As much as anything, Krugman's words today expose the Keynesian mentality as well as anything I have read. To a Keynesian, there is the Eternal Struggle Between Inflation and Unemployment because, after all, a market economy is prone to internal destruction because ultimately, consumers cannot spend enough money on their own to keep the economic perpetual motion machine running.

In this view, all assets, factors of production, and capital are homogeneous entities that pretty much respond equally to new money being thrown into the pot. New money, or should I say, newly-created (printed) money always greases the wheels of the machinery and leads to more economic activity, and more activity will lower unemployment.

As you know, I have a totally different view of things, and from the Austrian perspective, inflation does not grease the wheels of commerce over time, but rather destroys them, because assets and the like are NOT homogeneous. They are heterogeneous, and their values reflect the valuation that consumers give them through their own choices.

Lest anyone think that "aggressive" policies of money creation will bring back an economy, read this superb piece by Doug French, given in Houston last Saturday in which he takes a look at the experience in Japan. (The Japanese central bank followed Krugman's advice, so if you want to see Krugmanism in action, read Doug's account.)

As for me, I don't want to see Bernanke reappointed. I want to see the Fed closed down. Get rid of this engine of inflation and economic destruction. Now.


Jonathan Finegold Catalán said...

Prof. Anderson,

I fear that our criticism of Paul Krugman may be falling on deaf ears. Whilte I don't doubt that we slowly chip away at his reputation, there are simply so many Americans ignorant of basic economic theory (well, I don't know if it's basic, but it sure seems basic).

If you read the comments for his entry on Paul Volcker, one of them says:

(I was so dumbfounded I even posted it on my blog: )

"We have a desperate need for inflation. Why does no one know this? We have been creating more and more poor people every year. Poor people do not buy cars, TVs, homes or college educations for their children. Note Bob Herbert’s column in Suday’s Times. Ninety one million Americans make less than twenty two thousand dollars a year. Since 2000, we have added five million people to the number of poor."

To me, that is simply ridiculous. What seems even more ridiculous is that they censored my comment (which was a criticism of Krugman's use of "liquidity trap", given that he also suggests that quantitative easing can help the economy), but they let that one through.

William L. Anderson said...

A "desperate need for inflation"? That is unbelievable, but that is the message of Keynesianism. Irwin Schiff once wrote that the only arrow in the Keynesian quiver is inflation, and I would have to agree.