Paul Krugman has had a constant theme of arguing that the lack of runaway price inflation since the financial crisis has vindicated Keynesian economics and proven Austrian economics utterly wrong. Examples are too numerous to mention, but here is just the latest, with how he began his column last week:

Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types.

Further down the page, he adds:

So all those inflation fears were wrong, and those who fanned those fears proved, in case you were wondering, that their economic doctrine is completely wrong — not that any of them will ever admit such a thing.

His curious association of Ron Paul with Glenn Beck aside, Dr. Paul is, as everyone knows, while not a profession economist, a student of the Austrian school of economics, and had issued warnings for years against the policies that caused the financial crisis. This really bugs Krugman because while Dr. Paul was warning against artificial lowering of interest rates with inflationary monetary policy, which he correctly predicted would create a housing bubble that would precipitate a financial crisis, Krugman was doing just the opposite and advocating that the Federal Reserve stave off recession by inflating to create a housing bubble to replace the dot-com bubble. So Ron Paul was totally right and Paul Krugman completely wrong—not that he will ever admit such a thing.

I address this constant theme of Krugman’s in my book Ron Paul vs. Paul Krugman. Here’s an excerpt from pages 57-60:

As the crisis wore on, Krugman continued to warn against cutting government spending, arguing that more spending was needed for the government to create jobs. 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.

….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 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.

Dr. Mark Thornton makes many of these same points in an interview last month with Tom Woods for Peter Schiff’s radio program, “So Where’s the Inflation?”

And for more, get Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis, available from in paperback for $8.99 or less or Kindle edition for just $4.99.

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