A few days ago, I saw this really funny “debate” between Ron Paul and Paul Krugman. It wasn’t really a debate because of the time lag between when each would talk and the other could hear it, and because Krugman has no idea what he’s talking about and just makes it up as he goes. Even I could see holes in his arguments.
Vedran Vuk wrote up a good debunking of Krugman’s arguments, and I have a few more to add.
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.”
Either Krugman has been hanging around Joe Biden too long and has completely lost track of time, or he does not know that the Federal Reserve is barely 99 years old. The United States did not have a central bank from 1833 through 1913
And times were good! Without monster central banks controlling the currency and inflation, booms and busts were limited to small geographic regions, and involved very few banks. When banks acted foolishly, they went bankrupt and were replaced by more responsible banks.
But Krugman has to pretend that was not the case, and insists:
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.”
The Oblivious Economist has to pretend like it wasn’t the central bank’s market policies that have caused every nationwide boom and bust since its inception, and has to be both ignorant and dumb to imagine that our completely managed economy hasn’t been subject to extreme volatility.
And since he’s an idiot, he doesn’t have to reconcile the contradictions in his assertions: that the Fed is required in order to eliminate extreme market volatility and to prevent market economies from running amok, while both ignoring that all this has happened on the Fed’s watch — which means it’s a failure — and the Fed’s contributions to every boom and bust since its inception — which also means it is a failure.
I like how Vuk wraps up:
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.