A Favorite Strawman Argument of Paul Krugman’s to Advocate Fed Inflation

by May 5, 2012Liberty & Economy0 comments

Paul Krugman is fond of arguing that opponents of the inflationary Federal Reserve monetary policy he advocates are wrong because we haven't had runaway inflation yet.

Paul Krugman is fond of arguing that opponents of the inflationary Federal Reserve monetary policy he advocates are wrong because we haven’t had runaway inflation yet. Here he is in his latest column for the New York Times:

For example, conservative goldbugs have been predicting vast inflation and soaring interest rates for three years, and have been wrong every step of the way.

He goes on to argue effectively that the “facts and evidence” tell us how good for us monetary inflation is. I address this strawman fallacy of Krugman’s in my book Ron Paul vs. Paul Krugman. Here’s an excerpt:

In August 2011, he wrote, “To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away.” Krugman, of course, excluded himself. He was always right. Part of the problem, in his view, was that “Consumers, still burdened by the debt that they ran up during the housing bubble, aren’t ready to spend.” How to solve that? Inflation! Encouraging more debt! He criticized the Fed for being “more concerned with hypothetical inflation than with real unemployment, partly because it let itself be intimidated by the Ron Paul types.” So in Krugman’s new calculus, the Fed bore no blame for creating a housing bubble with artificially low interest rates or for being “intimidated” into implementing that policy by Paul Krugman types. Better to blame the “Ron Paul types” whose warnings were ignored and whose policy prescriptions were never implemented.

His continued advocacy for still further inflation included the argument that a weaker dollar would boost exports. He remarked that “sensible policy makers have long known that sometimes a weaker currency means a stronger economy.” So if you, dear mortal reader, were of the opinion that a strong currency was the mark of a healthy economy, you are fooling yourself with nonsense the more intelligent and enlightened minds of the world know to be a delusion.

Krugman again had the audacity to aim criticism at Ron Paul in December 2011:

Unfortunately, Mr. Paul has maintained his consistency by ignoring reality, clinging to his ideology even as the facts have demonstrated that ideology’s wrongness….

Mr. Paul identifies himself as a believer in “Austrian” economics—a doctrine that it goes without saying rejects John Maynard Keynes…. For Austrians see “fiat money,” money that is just printed without being backed by gold, as the root of all economic evil, which means that they fiercely oppose the kind of monetary expansion … carried out by Ben Bernanke this time around….

Austrians, and for that matter many right-leaning economists, were sure about what would happen as a result: There would be devastating inflation….

So here we are, three years later. How’s it going? Inflation has fluctuated, but, at the end of the day, consumer prices have risen just 4.5 percent, meaning an average annual inflation rate of only 1.5 percent. Who could have predicted that printing so much money would cause so little inflation? Well, I could. And did. And so did others who understood the Keynesian economics Mr. Paul reviles. But Mr. Paul’s supporters continue to claim, somehow, that he has been right about everything…. Now, it’s still very unlikely that Ron Paul will become president. But, as I said, his economic doctrine has, in effect, become the official G.O.P. line, despite having been proved utterly wrong by events. And what will happen if that doctrine actually ends up being put into action? Great Depression, here we come.

The suggestion that Ron Paul had “been proved utterly wrong by events” would seem to be a case of classic psychological projection, and indicative of an extreme self-delusion. It’s enough to note that Krugman here employs numerous fallacies. If Ron Paul had been wrong about the effects of inflation, it would not follow that therefore the Austrian school had “been proved utterly wrong”. That is, if it had been proven wrong on one point, that wouldn’t mean it had been wrong on everything else. In addition to being a non sequitur, this argument was also a red herring. Krugman was transparently attempting to divert attention away from the fact that the “Austrians” had correctly predicted the housing bubble and its disastrous economic consequences. It was also a strawman, for simple fact of the matter that Ron Paul hadn’t warned of “devastating inflation” with inflation defined as a rise in prices in consumer goods. Krugman was thus guilty either of ignorance or dishonesty.

While Krugman characterized Ron Paul as having warned of “devastating inflation” and pointed to an annual inflation rate of “only 1.5 percent” as proof that Ron Paul was wrong, in fact the latest CPI figure available to him at the time was a 3.4 percent increase over 12 months, more than double what Krugman asserted to be the annual inflation rate.

More importantly, one must recall that Ron Paul had explicitly rejected Krugman’s own definition of inflation as a rise in prices of consumer goods. He rather defined inflation as an increase in the money supply, pointing out that rising prices was a consequence of inflation. Krugman acknowledged in the same article that “there has, indeed, been a huge expansion of the monetary base”, thus admitting that there had indeed been “huge” inflation as “Austrians” defined it!

Furthermore, Ron Paul had argued that the government’s Consumer Price Index (CPI) was not an accurate measure of rising prices. For example, the current methodology of calculating the CPI understates by half what it would be using pre-1990 methodology. As John Williams of ShadowStats.com has explained, the CPI used to be “measured using the costs of a fixed basket of goods”, but later changes in methodology were based on the argument

that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

Krugman must also certainly have been aware that U.S. banks were keeping excess reserves rather than fully loaning up to the minimal fractional-reserve requirement. Surely he was aware that the Fed was paying banks interest on their excess reserves, thus effectively paying them not to lend money. This policy was thus preventing the banks from further inflating the money supply through the magic of fractional-reserve banking, which had also reduced the effects of the Fed’s expansion of the monetary base on consumer goods prices.

Additionally, Ron Paul had explained that rising prices for consumer goods was only one of many possible consequence of inflation. It is useful to recall his statement that “those who claim” that “we have no inflation to fear” “define inflation as rising consumer and producer prices”, but “the free market definition of inflation is the increase in the supply of money and credit”, which “can cause great harm without significantly affecting government price indices. The excess credit may well go into stock market and real estate speculation” (February 14, 2001). We may also recall his remark that “significant price increases need not exist for monetary inflation to place a hardship on the economy” (September 6, 2001).

Ron Paul had elucidated how inflation did not necessarily result in a uniform rise in prices throughout the economy, but could result in rising costs in one sector over another, such as in capital rather than consumer goods. It encouraged spending rather than saving. It lowered interest rates and sent wrong signals to entrepreneurs and investors about the pool of capital available for longer-term projects. It helped the rich who receive the money first and are able to spend it before prices rise, while harming members of the poor and middle class who had tried to save. It weakened the dollar, which would ultimately result in foreign investors losing confidence and ceasing to purchase U.S. debt, which would push interest rates upward and cause the government to be unable to finance its interest-bearing debt obligations. In addition, the U.S., as the issuer of the world’s reserve currency, benefited from being able to export its inflation, with other nations racing to debase their currencies to keep their exports competitive.

In sum, Krugman’s argument that inflation remained “The Phantom Menace”, as he had earlier called it, and that Austrian economics had somehow been debunked based on a single government statistic falls flat on its face, illustrating a rather pathetic insistence that he had been right and Ron Paul wrong.

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About Jeremy R. Hammond

About Jeremy R. Hammond

I am an independent journalist, political analyst, publisher and editor of Foreign Policy Journal, book author, and writing coach.

My writings empower readers with the knowledge they need to see through state propaganda intended to manufacture their consent for criminal government policies.

By recognizing when we are being lied to and why, we can fight effectively for liberty, peace, and justice, in order to create a better world for ourselves, our children, and future generations of humanity.

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