Krugman's Premature Victory Lap
Inflation is the cruelest tax, and it doesn't come just in April. What money the government is kind enough to allow the taxpayer to keep, inflation can destroy. Government creates inflation when the Federal Reserve creates money.
That last statement, however, is subject to debate, as different schools of economics disagree over monetary inflation and price inflation. Kevin Williamson asserts: "Inflation happens when the money supply is increased, regardless of whether it shows up in the Consumer Price Index. CPI jumps are not inflation, they are a reaction to inflation." But for some economists, inflation happens when prices rise. Paul Krugman is one such economist.
In a recent Times column, "G.O.P. Monetary Madness," Mr. Krugman observed that the Fed's tripling of the monetary base since the advent of the financial crisis in 2008 has not resulted in the "devastating inflation" that economists of the Austrian school warned of: "the predicted inflation keeps failing to materialize." (Here's an Austrian definition of inflation.) Krugman sees the failure of price inflation to materialize as a vindication of his sect of economics, Keynesianism, and a as defeat for the Austrians -- up Keynes down von Mises.
Part of Krugman's charm is his certitude; he has complete confidence in himself. But, consider what would happen if the Fed -- perhaps in the name of "social justice" -- created and then doled out a trillion dollars to every American, all 300 million of us. Americans would go on a spending spree the likes of which has never been seen. As folks scrambled to spend their money before it became utterly devoid of value, the demand for goods would go through the roof, and along with demand -- prices.
But Fed head Bernanke wasn't that expansionary; he only created a few trillion, not 300 trillion. I threw up this extreme thought experiment to illustrate that at some point in the creation of money, inflation kicks in. You cannot cover the earth with money and not affect prices.
So why isn't price inflation greater? Part of the reason is that the Fed's new money is not circulating; that is, it's parked in banks and not getting to the people, who might spend it. For months now, the media have talked about how trillions of dollars are sitting on the sidelines. Banks aren't loaning. Businesses aren't retooling. They're all sitting on their money. And they're sitting because of uncertainty; because they fear this government, with its new taxes, new regulations and new mandates.
Another reason that price inflation hasn't ticked up more since the Fed's quantitative easing is because demand is down. Celebrity economists like Krugman have bemoaned the slowdown in demand for years. But if demand were up, there would be an uptick in prices. So, if the American consumer would behave like Krugman wants them to, we would have more price inflation. Price inflation is low because folks are ignoring Krugman.
Krugman has us coming and going: He predicts low price inflation because he knows that in their rational self-interest, Americans will not do as he advised and spend their money. And if the economy continues to founder, it's because Congress didn't do as he advised and spend yet more trillions in stimulus.
In his column, Krugman alleges that presidential candidate Ron Paul is guilty of "ignoring reality, clinging to his ideology [Austrian economics] even as the facts have demonstrated that ideology's wrongness ... his economic doctrine has, in effect, become the official G.O.P. line, despite having been proved utterly wrong by events."
"Proved"? Krugman speaks of his "facts" as though they were the product of a real science. But with economics, science isn't exactly an" exact science." Where was Bernanke when the housing bubble was ballooning up? If economics were a science; The Bernank would have predicted the collapse. Perhaps Krugman defends "helicopter Ben" because they're both from Princeton. Or maybe it's because they both cleave to the same ideology, Keynesianism.
If one wanted to know what Austrian economists think about Krugman's take on inflation, one good place to look is the Ludwig von Mises Institute. In response to Krugman's column, the Institute's Mark Thornton writes:
Third, the impact of monetary inflation on the overall economy takes time. Money that enters an economy moves from one sector to another and eventually throughout most of the economy. Anyone familiar with basic money and banking would know this. Anyone familiar with reading the business sector of the newspaper would know that banks have largely been "sitting on" the Fed's increase in the monetary base and that most of the new money has really not even entered the economy yet.
One of the big differences between the two major factions in America is that conservatives tend to be a lot more cautious than progressives. It often appears that progressives are unconcerned about whether "the system" is upended and America has to start all over again. It's natural to wonder if Krugman takes inflation seriously. We know he doesn't take debt very seriously. Thornton again:
One cannot minimize what he is saying, for it goes to the heart of Krugman's view of economics. In that view, people and their choices are to be manipulated and coerced whenever the government declares it. Now, Krugman seems to believe that only governments can prevent economic disaster. Others, like me, hold that governments generally are the cause of economic disaster, and that certainly holds true in the current crisis.
Krugman's victory lap for Keynesianism is premature. One only has to look at history to know that inflating the money supply can destroy currencies and governments. That the Fed's recent creation of trillions of dollars hasn't yet created painful price inflation is testimony to just how bad the economy is. But wait, the night is young.
Jon N. Hall is a programmer/analyst from Kansas City.