Monday, April 30, 2012

Thoughts on the Paul/Paul Debate

Early today Bloomberg TV hosted a short debate between Ron Paul and economist/political pundit Paul Krugman. The two essentially debated the economic practicality of economic liberty versus central monetary planning. I'm sure every free market economist is doing the same thing, but I'd like to take the opportunity to consider some of Krugman's statements that Ron Paul did not get the chance to properly address.

Krugman: "You can't leave the government out of monetary policy. If you try to think we're just going to let it set itself, it doesn't happen."

Anyone who has taken a couple introductory economics courses can tell you this is simply not the case. Historical examples abound of the free market creating its own currencies and setting its own interest rates. It is only natural for a group of diverse producers in an economy to find one or a few commodities on which to agree as a medium of exchange. And it is only natural for them to borrow at interest rates that satisfy both borrower and lender. Krugman is apparently a pretty poor speaker, and my guess is that he actually meant to say something along the lines of "the government manages monetary policy more effectively than does the free market", a point which we will explore later on.

"Money is the result of a financial system that includes a variety of assets. We're not even sure where the line between money and non-money is. It's kind of a continuum."

Agreed. Ironically though, this is a pretty good reinforcement of what Ron Paul is trying to say: that monetary policy should be left up to individual decisions rather than some central planner. Why would we trust monetary policy to a bureaucracy that can't even define what money is? Money is difficult to define in part because different individuals use different assets as money. What if the residents of one city began exchanging shares of Bloomberg stock for goods and services rather than exchanging dollars? Bloomberg stock shares would then be defined as money for one town, but not for the rest of the country--something that a single, centralized monetary simply cannot account for.

"In fact, history tells us that a completely unmanaged economy is subject to extreme volatility, is subject to extreme downturns."

As opposed to the history of managed economies? This is completely absurd! What did the economies of post-WWI Germany, early 2000's Argentina, late 2000's Zimbabwe, and the Great Depression-era US have in common? They were all managed by central monetary authorities...and they all experienced enormous financial crises. In December of 2008, Zimbabwe faced inflation of 6.5 x 10108 percent. I can confidently guarantee Mr. Krugman that no unmanaged economy has ever seen anything near that destructive an inflation rate.

"I know there's this legend that people like, probably you, Congressman, that the Great Depression was somehow caused by the government or caused by the Federal Reserve, but it's not true. The reality is that was a market economy run amock."

First: this is a rather ridiculous comparison, since the finance industry has changed drastically since the Great Depression. Asset trades occur lightning-fast, as does transmission of information. Financial and economic understanding is far more advanced (though perhaps often ignored). So to imply that similar monetary conditions to those that caused the Great Depression would have an impact of precisely comparable magnitude today is rather disingenuous. And secondly, the claim is blatantly false. As Ron Paul brings up later on, the (uber-interventionist) Fed chairman openly admitted that the Fed did, in fact, cause the Great Depression. More on this later....

"Depressions are a bad thing for capitalism, and it's the role of the government to make sure that they don't happen, or to make sure that if they do happen they don't last too long."

I'm glad he clarified, because I was given to believe that depressions were a good thing...Anyway, I certainly don't remember our Constitution ever assigning such a role to our government. The truth is, the government cannot prevent depressions; it can only cause them. Of course, history has repeatedly demonstrated this to be the case; and--of course--the US's worst depression happened on the Fed's watch, and didn't clear up quickly.

"I am a defender of the economic policies that we followed after WWII that produced the best generation of economic growth that this country has ever experienced."

That's an awfully subjective statement. The whole period from around 1965 to around 1982 was terrible economically, with high inflation and recurring recessions. The two big market crashes of the last fifteen years haven't been pleasant either (though, in Krugman's defense, he does proceed to blame outside factors for this period, which is a topic for another time).

"(Economist Milton) Friedman's complaint (with which current Fed chairman Bernanke agreed) was that the Federal Reserve did not print enough money."

This is a classic half-truth. The condensed version of Friedman's critique of Fed actions during the Great Depression was that it went suddenly from printing a lot of money and keeping interest rates low to dramatically slowing the rate of money printing and consequently letting interest rates rise. If you ignore the first part of his analysis, perhaps Krugman is correct. But the clear emphasis in Friedman's work is the sudden and unpredictable change in the Fed's monetary policy, not that the Fed was simply "not printing enough money."

"That's not what I've heard (in response to Ron Paul's claim that using competing currencies is against the law) you really think that people only use dollar bills because the Federal government doesn't allow them to use other stuff? You can do barter, you can trade all kinds of stuff."

Back to Econ 101. Barter, by definition, is not money. Legal tender laws place stiff penalties on use of any other currency. I remember a few years ago a company began selling gold coins (with Ron Paul's face on some), and the feds raided their facilities and confiscated their entire supply of gold. Yes, Mr. Krugman, issuing a competing currency is illegal. And even if competing currencies were legal, they would be effectively shut out, as Ron Paul points out, by taxes on commodities and capital gains.

"My proposal is to destroy the economy (by cutting government spending) so that we can't in fact afford to carry the debt we already have, that's not a helpful policy."

Is there some evidence that cutting government spending would "destroy the economy"? History tells us the opposite, as do basic economic theory and common sense.

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