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Non-Krugmans get no respect – even if they’re right

Ruminations March 9, 2014

-- Non-Krugmans get no respect – even if they’re right
Nobel laureate Paul Krugman writes a weekly column on economics for The New York Times and seems to do his best John Maynard Keynes imitation in seeking to humiliate everyone with whom he disagrees. Not that Krugman doesn’t have a point – he does; he believes that the Federal Reserve can control unemployment and that it wastes time trying to control inflation – but he doesn’t believe that anyone who disagrees with him has a point. Instead of arguing his point, he uses invective to berate his opposition.

In citing the transcript of a 2008 meeting of the Federal Reserve’s recently made public, Krugman says that “Fed officials come across as essentially clueless about the gathering economic storm. But we knew that already.” Well. That’s a snarky opening – the Fed officials are not characterized as intelligent people with whom Krugman disagrees, they’re “clueless.” Krugman goes on, “What’s really striking is the extent to which they were obsessed with the wrong thing. The economy was plunging, yet all many people at the Fed wanted to talk about was inflation….They also failed to understand that printing money in a depressed economy isn’t inflationary. I could have told them that, and in fact I did.” Well shoot! No wonder the Fed was clueless; they didn’t listen to Paul Krugman.

“Printing money in a depressed economy isn’t inflationary?” Of course Krugman was only in his early 20s during the Carter Administration when a depressed economy caused President Jimmy Carter to tell his Fed chief G. William Miller to loosen the monetary floodgates in an effort to revive the economy. The result? More inflation – and a stagnating economy.

But the Fed has tried to increase inflation since 2008. They have set a target of 2 percent per year – not as much as Krugman would like (he prefers 3 percent or 4 percent annually). We have, since 2008, seen the purchase power of a dollar fall a cumulative 11 percent. That isn’t hyperinflation but ain’t bean bag, either.

Don’t take my word for it: As president of the Federal Reserve from 1979 to 1987, Paul Volcker has real world experience in battling inflation. “I don’t get it,” he said, as Ben Bernanke and the Fed set 2 percent annual inflation rate. According to Volcker, we are "telling people in a generation they're going to be losing half their purchasing power."

Economist Martin Feldstein, who served on President Obama’s Economic Recovery Advisory Board, said that, the Fed’s current policy has led to an increase in excess reserves. “When the economy begins to recover, these reserves can be converted into new loans and faster money growth.” And faster money growth means higher -- perhaps much higher -- inflation.

Another Nobel laureate, the late Milton Friedman said that a stable currency is best suited to provide economic growth.

Now Krugman would probably be dismissive of both Friedman and Feldman because they were Republicans (although Friedman said that was just for convenience). “Obsessives” and “sado-monetarists,” he calls them. On the other hand, Volcker (a Democrat) has said that planning for intended inflation is “nonsense.”

Former Fed chief Ben Bernanke was in favor of a little inflation (2 percent) and called the rates Krugman suggested in his New York Times article entitled “Earth to Bernanke,” “reckless.”

It seems that most established economists with skin in the game are concerned about inflation. Those who are uninvolved can speculate to their heart’s content and not have to pay any consequences.

Quote without comment
Former Federal Reserve Chair Paul Volcker writing in an op-ed in The New York Times, September 18, 2011: “My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and ‘reasonable’ 4 percent [inflation] becomes 5, and then 6 and so on.”

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