End This Agony, Part II
There are two main explanations for how a smart guy like Krugman (and other sharp guys desiring more inflation, such as Tyler Cowen) can hold the views they do without their heads exploding.
First, if one’s model suggests that the solution to high unemployment and sluggish GDP growth is to boost aggregate demand, and then after these policies have been tried, unemployment is still high and GDP growth is still sluggish, why then, it’s obvious that the budget deficits and rounds of quantitative easing weren’t big enough. If you are certain that something is medicine, and the patient is still sick after a liberal dosage, then clearly the dosage wasn’t liberal enough.
Beyond that, Krugman and other proponents of more intervention do have some of the data on their side, as he explains in a blog post from last week:
The WSJ view was that federal borrowing would crowd out private spending by driving interest rates sky-high, that the bond vigilantes would destroy the economy. Note that when the linked editorial was published, the 10-year rate was at 3.7%, with the Journal in effect predicting that it would go much higher.
My view was that government borrowing in a liquidity trap does not drive up rates, and indeed that rates would stay low as long as the economy stayed depressed.
That’s a pretty clear test; among other things, you would have lost a lot of money if you believed the WSJ view.
Inflation is another issue; the WSJ kept telling readers that a big inflationary surge was coming. Commodity prices have muddied this issue to some extent, but even so actual developments on the inflation front have been a lot closer to what Keynesians were predicting than to the right-wing line.
Note Krugman’s brilliant rhetorical moves: The things that matter are the ones that he correctly predicted and the WSJ did not, namely interest rates and CPI inflation. Soaring commodity prices – which of course are consistent with the Peter Schiff view of the world, and not at all with the Keynesian “it’s all about demand” view – just “muddied this issue to some extent.” But we can just throw that out because we just know, deep down, that the Keynesian models are right and the right-wing models are wrong.
Krugman’s line about losing money by following the WSJ view is something he has been saying for a good year now, but it too isn’t so obvious. The one consistent bit of financial advice that the “paranoid” right-wing Tea Party types have been giving is to buy gold. (I myself was telling my readers to do this from the get-go, when I launched my personal blog in August 2008.) Over the last three years, gold is up more than 90 percent. That’s not too shabby for people who supposedly have been totally wrong about how this crisis would play out.
Note too that Krugman most assuredly did not call the huge appreciation in gold (or other commodities, for that matter). The only explanation I have ever seen him offer is that gold is in a bubble pumped up by Glenn Beck.
To my knowledge, no school of economic thought predicted all of the major trends back in, say, January 2008. The conventional Keynesians employed at the White House and in major forecasting firms were completely wrong about the Obama stimulus package. The “crowding out” Chicago School types were completely wrong about the deficit’s impact on interest rates. People like Peter Schiff (and yours truly) were completely wrong about consumer price inflation in 2009 and 2010. The “quasimonetarists” (who blamed Bernanke for his allegedly tight money policies) and Paul Krugman were completely wrong about gold and silver prices, and arguably about the fragility of the “recovery” in the stock market.
One thing is certain, and here I agree with Krugman when he concludes his article like this: “We already know what isn’t working: the economic policy of the past two years – and the millions of Americans who should have jobs, but don’t.”
Anyone with common sense will admit that the last two years have seen unprecedented budget deficits and monetary expansion. Krugman is correct; that hasn’t been working at all. It’s time to let the free market end this agony and bring us genuine recovery.
Robert P. Murphy