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)...do 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.

Hypothetical Question

Let’s say some country was faced with the choice, hypothetically speaking, of electing as its leader a multi-millionaire businessman warhawk funded primarily by giant government-bailout-backed financial conglomerates that changes positions on issues like he changes clothes, a multimillionaire lawyer responsible for miring the country in more wars than had any other leader in the past century yet had never held a job not funded by taxpayers, or a veteran and formal medical doctor who spent much of his life offering free health care to underprivileged people, had since spent his years standing up to special interests for the good of the people, often against the wishes of his own party, for the cause of peace and liberty on a partial salary, whose record was so impeccably consistent that lobbyists wouldn't even bother visiting his office, who opposed ever tax increase, bailout, and corporate subsidy ever proposed during his tenure, and who refuses to accept a higher salary as leader than that of the average citizen.

Now let’s say that country had been mired in effective recession for the last four years, the foreign debt of its government had surpassed 100% of its annual output in the last year, its central bank had been keeping interest rates at zero for the past four years and promised to continue for the next two—virtually guaranteeing a severe asset market crash in the future, and its legislature had been churning out encyclopedia-sized tomes of oppressive business regulations steadily over the past five years. If this country, teetering on the fence between bankruptcy and hyperinflation. Let’s say this country spent more than the rest of the world combined on military expenses which it directed primarily toward invading unthreatening third-world nations without economic justification or legal due process. If, perhaps, two of this country’s candidates had little to no understanding of even basic economics, and instead trusted the same elitist commentators whose counsel had brought about the current economic state; and one candidate who possessed a thorough understanding of advanced economic concepts, who correctly predicted all of the country’s economic problems years before they occurred, and who had consistently fought against the bad policy that brought them about……

Which do you think they would choose, and which would they label "unelectable"?

by YourLocalSecurity.com

Hypothetical Question

If some country--say the USA--was faced with the choice, hypothetically speaking, of electing as its leader a multi-millionaire businessman warhawk funded primarily by giant government-bailout-backed financial conglomerates that changes positions on issues like he changes clothes, a multimillionaire lawyer responsible for miring the country in more wars than any other leader in the last century yet had never held a job not funded by taxpayers, or a veteran and formal medical doctor who spent much of his life offering free health care to underprivileged people, had since spent his years standing up to special interests for the good of the people, often against the wishes of his own party, for the cause of peace and liberty on a partial salary, whose record was so impeccably consistent that lobbyists wouldn't even bother visiting his office, who opposed ever tax increase, bailout, and corporate subsidy ever proposed during his tenure, and who refuses to accept a higher salary as leader than that of the average citizen.....

Which do you think they would choose, and which would they label "unelectable"?

Outsourcing Destroying Jobs? Not Quite...

One economic misunderstanding that I've heard often, especially lately, expresses concern over foreign outsourcing destroying jobs domestically. The argument goes like this: Foreign workers are willing to work for lower wages due to lower demand in their respective countries (specifically India and East Asia). American companies outsource work, often via the internet, to these foreign workers in order to take advantage of the low wages. The American workers that were formerly performing these duties lose their jobs and can't find anything useful to do, and our money ends up in foreign hands.

This view is somewhat flawed because it fails to account for the economy as a whole; it only focuses on a specific group of people, the American workers whose jobs are being outsourced. As with any economic advancement, this outsourcing trend does harm some people but increases the overall welfare. When the automobile was invented, the horse-drawn carriage manufacturers went out of business. When the light bulb was invented, candle makers saw a drop in demand. You get the idea.

When a company takes advantage of cheaper foreign labor via outsourcing, it is able to produce goods cheaper and more efficiently. This means more wealth for the shareholders of the company, who then proceed to buy more stuff. Let's say, for simplicity's sake, that these shareholders spend all of this newly gained wealth on furniture. Since there is now a greater demand for furniture, more craftsmen are required to build furniture. More clerks are needed to staff furniture stores. More Americans are hired to oversee shipping of imported furniture and sell it domestically. While jobs are lost in those sectors whose work is being outsourced, they are simultaneously being created in other sectors (not just in furniture production, but all over the economy, in a more realistic example).

Now let's simplify things again: Let's say all of the outsourced jobs are in the field of computer programming. Microsoft, Apple, etc. outsource all of their computer programmers to India for better prices on labor. Since these companies have now minimized their costs of production, they lower the prices of their products accordingly in order to remain competitive. This means that every consumer pays less for his computer products, and thus is a little bit wealthier. These consumers won't just hoard this excess wealth; they either spend it or invest it. Investment is used to fund projects, such as new businesses, new buildings, new offices, and new capital infrastructure that support the American economy. Consumer spending creates demand which requires more workers (as per the furniture example above) in whatever industry they decide to spend. If they decide to buy houses, it creates jobs for construction workers. If they decide to buy clothes, it creates jobs for tailors. If they buy more food, it creates jobs for farmers. And so on.

Thus outsourcing does not cause any net loss of jobs in the country, only a realignment of demand for domestic labor. It makes the whole country wealthier, albeit at the expense of a select group of workers who then have to adapt to economic progress by taking up a new career field. Every economic advancement in history has been decried for destroying jobs, but total unemployment has never been permanently reduced, because the market doesn't allow able workers to go unused for long.

I also want to address the issue of money flowing out of the country. This might sound like a bad thing, but it really isn't at all. The main fallacy behind this line of reasoning is the idea that wealth is measured solely in monetary terms. This, unfortunately, is a common understanding, even though in economics, the idea is some 500 years out of date.

Money is not wealth. Wealth is something that does you some good. Food is wealth, because it provides sustenance; televisions are wealth because they provide entertainment; etc. Money is only valuable as a medium of exchange; it carries no inherent value. It is essentially a promise of future wealth. Therefore, if you buy your neighbor's car for a sum of money, he has transferred some of his wealth (the car) to you, in return for the expectation of some future acquisition of wealth (the money). From the very fact that you saw fit to exchange your money for his car demonstrates that the car is more valuable to you than the some of money you used to buy it. Thus you become more wealthy.

This applies on a national scale as well. If Microsoft gives its money to workers in India in exchange for better-value products, it has received a form of wealth (the products created by the Indian workers) in exchange for a promise of future wealth (the money). Thus the actual wealth has flowed into the country, while the promise of future wealth has flowed out. And the scenario doesn't stop there. What do these Indian workers do with all their new American money? They essentially have two choices: either buy American products or invest in American companies, both of which send the money back home. This cycle continues endlessly, with money and wealth constantly changing hands.

And there is always a balance of money to wealth, as can be concluded intuitively. If you have a million dollars, but are living on the street, what will you do? Obviously, you will spend some of that money to buy or rent a place to live. On the other hand, if you have a million-dollar mansion, but no money for food, you will obviously sell the house in return for some food money. The same is true on an aggregate level; every country benefits by maintaining a balance of wealth and liquidity in the form of money. The free market naturally determines this balance, and, as is supported by thousands of years of historical evidence, there is no need to worry about a free-market-determined balance of money and wealth.

"Quantitative Easing": Why It's Not Hard to Understand, and Why You Should Be Angry

I could go into depth explaining the Fed's recent decision to pump $600,000,000,000 of new money into the economy, but instead I'll just share this clever little video that succinctly explains the recent actions of "the Ben Bernank" and the Fed:

Liberal Ideology and Social Freedom

As any of you who have ever taken the World's Smallest Political Quiz are probably well aware, conservatives are often characterized by a large degree of tolerance for economic freedom but not for social freedom, and liberals, conversely, by a large degree of tolerance for social freedom but not economic freedom. While I understand the motivation of the libertarian Advocates for Self Government to appear to give each side a balance of positive and negative feedback, I don't believe this characterization is entirely accurate.

The biggest flaw here (besides the obvious omission of foreign policy beliefs, which are rather difficult to designate anyway), in my opinion, is the notion that modern liberals (not to be confused with classic liberals, or libertarians) favor social freedom. While this does hold true on a few issuse (such as thsoe regarding sexual behaviors), the reality seems to me in most cases to be entirely the opposite. For example, liberals don't support the social freedom to bear arms. They don't support your right to make your own health care decisions. They don't want you to choose where your children are educated. They claim to support your right to free speech, but only so long as you don't engage in politically-incorrect "hate speech", or promote conservative positions in the media, or fund political advertising. They are all for regulating drug use (with the occasional exception of marijuana), including use of alternative (in other words, not manufactured by drug companies) treatments for medical ailments. They want to tell you what car to drive and what light bulbs to use. They want to force you to accept expensive and potentially toxic vaccinations. They want to medicate your water supply. And now they are trying to control what food you eat.

Sure, liberals might stand up for your right to play poker for cash or buy beer on Sunday, but on most social issues, liberals are just as anti-freedom (or more) as conservatives. 

About the Blog

Friedman Shrugged is a blog I've begun writing in order to better organize my political and economic intellectual meanderings. The story behind the name is, of course, that I had to choose something interesting and artsy-sounding in order to best keep up with similar blogs. And, of course, all the normal names were already taken. "Friedman Shrugged" is a combination of references to the late Nobel prize-winning University of Chicago economist Milton Friedman, and to Ayn Rand's famous philosophical magnum opus Atlas Shrugged. The name "Friedman Shrugged" could also be interpreted as a pretentious implication that I know more than the great Uncle Milty. I'll let you decide.