Paul Krugman tries to argue that just because people like Ron Paul predicted the financial crisis doesn’t mean Austrian economics is valid. He doesn’t use those words, but we do indeed know who he’s talking about when he writes:
[I]f your approach (say) predicted the housing crash but then also predicted runaway inflation from Fed expansion — I assume everyone knows who we’re talking about — it’s not a good approach…. [W]hat about me personally? I don’t have a turban and crystal ball hidden in a back room, and I’ve made some pretty wrong predictions in my time. The thing, however, is that all of these bad predictions involved stepping outside the models I understood.
So, in other words, Krugman is arguing that Keynesian economics itself offers a perfect model for making accurate economic predictions. The only reason he was ever wrong in his predictions was because he foolishly strayed from his Keynesian ways.
The Austrians, on the other hand, Krugman would have his readers believe, just got lucky. Sure, their economic theories allowed them to accurately predict the housing bubble and its bust, but their theories also predicted runaway inflation that hasn’t occurred, so their whole school of thought is still invalid!
This is Krugman’s go-to “gotcha” argument, which I addressed in this post, where I shared an excerpt from my book Ron Paul vs. Paul Krugman directly addressing this constant mantra of Krugman’s. To briefly review some of the fallacies of Krugman’s argument here:
- Austrians define “inflation” as an increase in the money supply, not as an increase in consumer prices according to the government’s index (CPI).
- The CPI is not an accurate measure of real price inflation.
- The Fed is paying banks to keep excess reserves.
- The U.S., with the dollar as the world’s reserve currency, is able to export its price inflation as other nations follow suit and also devalue their own currencies.
- A general increase in prices across a basket of consumer goods (i.e., what CPI measures) is only one possible consequence of monetary inflation. Another is price inflation in asset prices, e.g., a bubble in stocks or the housing sector.
Now, the many problems with Krugman’s strawman argument aside, let’s turn to his own record and apply his standard.
When the dot-com bubble approached its peak, Krugman expressed his skepticism that there was a stock bubble and assured readers that the dive in stock prices was the signal of a “merely terrific” rather than “incredible” economy and that it had no place to go but up, writing even as the NASDAQ began to plummet that “the U.S. economy has cheerfully broken all the old limits” with “almost every fresh economic statistic” being “a cause for celebration”, that “growth will have to slow” but would continue, he was straying from Keynesian economics?
When following the bursting of the dot-com bubble, Krugman dismissed concerns of a recession, writing, “But even if we do have a recession, so what?” because a “brief recession” would be no big deal, since it would not “reflect any fundamental problems in the economy”, he was not getting that from Keynesian theories?
When the Fed responded to that bust by inflating to doing what Krugman was calling for and lowering interest rates and Krugman assured that the Fed’s actions would do the trick with comments such as “Another few shots in the arm like that and talk of recession might well evaporate” and “The Fed can easily and quickly cut interest rates as much as necessary, as long as zero is low enough”, he was leaving the safety of the trunk of the Keynesian tree and going out on a limb?
When the Fed’s rate cuts didn’t work and Krugman’s answer was to call for even more monetary inflation and cuts in long-term as well as short-term interest rates, in order to spur investment in “things like housing”, which is “highly sensitive to interest rates”; when he complained that he was “a little depressed” because “long-term rates haven’t fallen enough to produce a boom” in the housing sector; when he expressed the hope that if the Fed “keeps on cutting rates”, it would “finally accomplish something”, that “the odds are still that rate cuts will eventually work”, it was only because he had dared to explore outside of the womb of Keynesianism?
When Krugman continued to assure that the Fed’s inflationary policy to lower interest rates in order to “promote spending on housing” was “the main answer”, only to then bemoan how the Fed’s repeated rate cuts had “yet to see any results”; and when he therefore concluded that the solution was to cut rates even more in order to “conjure up another dramatic boom” and argued that what the Fed needed to do was “to create a housing bubble to replace the NASDAQ bubble”, we can understand that John Maynard Kenyes himself would have frowned this monetary policy prescription of Krugman’s?
Gosh, given how often Krugman seems to have, by the logic of his own argument, strayed from his economic theories, it seems unfair to trash the good name of John Maynard by even calling Krugman a Keynesian.