A few days
ago, Bloomberg held the debate many readers have been wanting
for a long time: Paul Krugman vs. Ron Paul. To be fair, Ron Paul
didn’t have a slam-dunk debate moment – but neither did Krugman.
Still, the fact that a medical doctor from Texas armed with a
little Austrian economics and a lot of common sense can stand
up to a Nobel-Prize-winning economist is impressive. If the roles
were reversed and the conversation was on medicine, Krugman would
have likely sounded like a village idiot in the discussion. In
case you haven’t already seen it, click on the frame below for
the video.

What was
more amazing than Ron Paul’s performance was the number of times
Paul Krugman shot himself in the foot. Honestly, Ron Paul didn’t
need to say much; Krugman’s own logic make him look bad enough.
Let’s look at some of his blunders play-by-play style:

Early on
in the debate, Krugman says, “You know you can’t leave the government
out of monetary policy …. The central bank is always going to
be in the business of managing monetary policy. If you think that
you can avoid that, you’re living in some – you’re living in the
world as it was 150 years ago.”

No matter
the topic of the argument, a typical defense is to accuse your
opponent of being stuck in past. However, in this case, it doesn’t
make sense. Consider the timing of the last two biggest US recessions:
the Great Depression over 80 years ago and the current recession
still in the works. Since the enlightened economic policies over
the past century have performed so poorly, is it so bad to look
upon other time periods favorably?

Krugman goes
on: “And look, history tells us that in fact a completely unmanaged
economy is subject to extreme volatility – subject to extreme
downturns. I know that there’s legends that people, probably like
you Congressman, have, that the Great Depression was somehow caused
by the government  – caused by the Federal Reserve – but
it’s not true. The reality is that was a market economy run amok.
Which happens. It happened repeatedly over the past couple of
centuries.”

Exactly which
periods of “extreme volatility and downturns” are Krugman referring
to? Two come to my mind – again, the Great Depression and the
current crisis. However, neither is consistent with Krugman’s
statement. The Federal Reserve was around for both recessions;
it’s been in business since 1913. Furthermore, researchers including
Dr. Christina Romer (the former head of Obama’s Council of Economic
Advisors) have debunked much of Krugman’s volatility assertions.
For an excellent comparison of the economy’s performance before
and after the creation of the Federal Reserve, see A
Century of Failure by Dr. George Selgin of the University
of Georgia.

Krugman’s
statements get even bolder: “Depressions are a bad thing for capitalism,
and it is the role of government to make sure that they don’t
happen, or if they do happen, that they don’t last too long.”
Sounds good, right? There’s just one problem. The Federal Reserve
failed to prevent the Great Depression, and it failed to avoid
the current crisis as well. Furthermore, the Federal Reserve seems
powerless to shorten the duration of the current recession. If
the government’s role is to prevent recessions, it has a horrible
track record. Krugman is apparently lost in some strange hallucinogenic
trip where the government prevented the crisis, and we swiftly
arose from a brief recession.

Ron Paul
goes at Krugman with a good comeback for the “150 years” statement
by pointing out that the history of inflationary policies extends
thousands of years, back to the Romans. Krugman responds that
this isn’t his policy stance. Well, how is it different? The Federal
Reserve may use fancy phrases such as “quantitative easing,” but
it really comes down to same policy of debasing a currency. The
techniques and methods may have changed, but the general idea
has not.

Rather than
explain his comment on the Roman debasement of the currency, Krugman
clarifies his position by praising the monetary policies of the
1950s post-WW II period. Yes, that was a great period of growth;
but a single decade of success is hardly long enough to be considered
support. Monetary policy shouldn’t be judged by the performance
of one decade, but rather by a century-long track record. Everyone
loves policies when they work; it’s the policy failures which
are the problem. And it’s certainly the case that the US federal
government has been wholly unable to stay with any one monetary
policy for a full century.

Ron Paul’s
retort mentions the spending cuts after WW II. To dodge Paul’s
good response, Krugman changes topics to an unconnected point
about Milton Friedman. Then Ron Paul answers Krugman with his
own unconnected point about competing currencies, to which Krugman
mumbles, “I have no idea what that’s about.”

Next, the
conversation switches to the national debt level. The host points
out that the national debt as a percentage of GDP has reached
near 100% and asks how much further the debt level can be extended.
Krugman admits, “I don’t have a fixed number,” but he suggests
that the debt level should be raised an additional 30 points to
130% of GDP, if that could get us out of the recession. In my
opinion, this comment is the bazooka shot into Krugman’s own foot.
Earlier in the debate, Ron Paul criticized the arbitrariness of
the Federal Reserve’s interest-rate policies. He mocks the Fed
by saying, “The interest rate should be one percent instead of
three percent because we are so smart.”

And here,
Krugman completely verifies the validity of Paul’s criticism.
It’s impossible for central planners to figure out the perfect
interest rate. Similarly, Krugman doesn’t know what the limit
to the debt should be. And I don’t blame him for having a tough
time – who does know the solution to these problems? Maybe our
national debt as a percentage of GDP can reach 200%, 150%, or
maybe it’s approaching Armageddon at 130%. It’s impossible to
say for sure. In the same way, it’s impossible for the Federal
Reserve to set an appropriate interest rate. Is zero too low for
inflation? Is raising it to 4% too high? What are the consequences
to finding some middle ground?

These are
truly unanswerable questions. Without the Fed, the market would
find the interest rate itself. You can fill a whole room with
Nobel-Prize-winning economists, and they still won’t be able to
figure out what the market would do with interest rates. If they
knew, most would be millionaires and running their own hedge funds
– not employees of quasi-governmental agencies and universities.

Unfortunately,
a lack of knowledge doesn’t stop economists from making policy
decisions much like what Krugman advocates. He admits to not knowing
the limit to our national debt, but at the same time advocates
pushing the debt to 130%. What if that’s too high and the result
is the start of a final death spiral for the US economy? “Whoops;
sorry America.”

This is the
general problem with the Fed and all central planners. They try
to guide the economy, but more often than not, they create the
very recessions that the system is supposed to prevent. The Federal
Reserve either leaves rates too low for too long, or it raises
them so high as to create an economic slowdown of its own. The
Federal Reserve isn’t the wonderful safety net economic idealists
imagine. Instead, it’s much closer to driving a car while blindfolded.
Unfortunately, people like Krugman are more than willing to take
the keys knowing full well the dangers of driving blindfolded.
And when these Fed economists inevitably crash into a brick wall,
it is the passenger – the American worker – who gets creamed.

May
7, 2012

Vedran
Vuk [send him mail] has a
BBA in Economics from Loyola University of New Orleans, a MS in
Finance from Johns Hopkins University, and was a 2006 Summer Fellow
at the Mises Institute. He
is an analyst with Casey
Research and regularly contributes to Casey’s
Daily Dispatch.

Copyright
© 2012
Casey and Associates

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