Krugman Should Quit

Krugman Should Quit

Paul Krugman was interviewed on Bloomberg today presenting a very bleak outlook for the US economy, even using the phrase "third depression". That hardly seems like an unreasonable forecast given global financial conditions and the zombie-like state of the US consumer. But his policy advice borders on the insane: Massive fiscal and monetary stimulus. That is, federal deficit spending and monetary stimulus including further "quantitative easing", i.e. money printing. Even more massively than the last all-time-record round. The US, according to Krugman, should have a policy of striving for a 3-4% rate of inflation.

For such scientifically unsound analysis, the man should resign his position as economics professor at Princeton and return his Nobel Prize in economics. Despite such impressive credentials, his understanding of this science is less than the average man on the street.

He is apparently unable or unwilling to examine the cumulative results of such policies. We have been following them for fifty years in the United States, and the United States has gone from the biggest creditor nation in the world to its biggest debtor. And by Krugman’s own lights is now in the early stages of a major depression. In contrast, during times when the United States was not following such a policy, it went from being a few scrappy colonies to the world’s number one economic power. Rather than support his ideas, the actual evidence flatly contradicts them.

Yes, this Keynesian stimulus model is simply scientifically untenable. In 1990, US policymakers responded to a recession with just this kind of program, combining fiscal spending with monetary ease. In 1994, after the Mexican Peso Crisis, the Greenspan Fed famously engineered a "soft landing" with more monetary ease. In the 1997-1998 Asian currency crisis and LTCM near-debacle, the response was yet more monetary ease. The Greenspan Fed even over-liquefied the system in 1999 on the mere fear of the Y2K computer dating crisis that never happened.

Then in 2000 the resulting stock market bubble began to burst. The Greenspan Fed again responded with monetary ease, in concert with fiscal stimulus and the GSEs Fannie and Freddie, fomenting a newer, better bubble in residential real estate. When that bubble burst in 2007, the Bernanke Fed predictably gave us a newer, better monetary stimulus, matched in size and vigor only by accompanying the federal government fiscal stimulus. Indeed, governments and central banks around the world mounted a coordinated intervention without precedent.

In each case, the program "worked" to at least some extent. But in each case the "cure" left the patient even sicker afterward. Each time it was yet more indebted than before. Interest rates, which had been in double digits going into the 1990 recession, fell lower each time, as the flagging demand for credit meant new credit could be created only by making it ever cheaper. And each time, the next crisis was worse than the one before. The last one generated a wave of debt deflation so powerful precipitated a global economic meltdown. Many well-informed observers, including even the President of the United States, have said the world narrowly escaped another Great Depression. And Krugman isn’t even so sure of that.

Yet there he is, advocating we do the same thing all over again, except this time with even greater force. With what end in mind? Considering each prior, lesser effort merely left the economy sicker than before, evidently the idea this time must be killing it altogether. And in what world would the US be better off with 3-4% inflation? We had virtually no net inflation for the entire nineteenth century, when, as noted earlier, the US had the greatest growth by far.

This is the grossest of economic malpractice, and apparently the only thing that spares Krugman from its consequences is that many others think similarly, obviously including guys like Greenspan and Bernanke (just perhaps more moderately). But this Keynesian stimulus idea has so miserably failed the test of actual experience that it just cannot parade around as science any more (assuming it even made it through the seventies that way). It is nothing more than ideology, dogma. Were we to demand evidence that such policies are actually good for the economy and our standard of living, they would never see the light of day. It even defies simple logic: Since we are suffering from too much debt, how would much more debt make us feel better? And since according to Krugman himself we’re headed into a depression so soon after the last round of "stimulus", maybe doing it again wouldn’t be such a great idea? One has to wonder whether guys like Krugman are just so over-indoctrinated via their PhD’s they can no longer apply the simplest tests of reason. The world economy would just be so much better off if they would all quit, spend five minutes studying how it actually works, and come back and admit they were wrong all these years, and advise that economic central planning is as bad for the US as it was for the USSR.

If that’s asking too much of you, Prof, Krugman, perhaps you would consider stopping by Harvard and dropping in on a couple classes from your colleague Niall Ferguson. Prof Ferguson recently wrote a book on the history of money, and judging by his comments on your views, seems to have a pretty good grasp of it.