Ron Paul vs Paul Krugman

[Alkibiades]

I hear you, but all the historical evidence suggests that economic growth under a gold standard was steadier than it was prior to the creation of the Fed. Again, not only economic growth, but politically, the world was more stable. This notion that the money supply has to be constantly ballooned and then crushed and that there is someone who knows how and when to do this is groundless.

I'm not entirely sure I'm reading that underlined sentence correctly. Are you claiming that prior to 1913, the world was more politically stable? I really am not too sure of that. I think the thing that distinguishes the political instability of the 20th century was that it was, ideological, but more importantly, technology really allowed for great violence.

You make a great point. It is extremely difficult to compare one century to another, and as you point out, there were tremendous conflicts prior to central banking and there are a host of factors to consider. Globalization, more generally, from the "Columbian Exchange" on and technological development. It is hard to disentangle all the elements, if it is even possible.

And, it has occurred to me that monetary debasement might ultimately be consequence rather than cause of some larger globalization process. The establishment of the Fed, for example, occurred during a time of great euphoria regarding the possibilities of social engineering and transformation of the human condition.

More to your point, if one were to throw in Kondratieff cycles, one could argue that the more things change, the more they stay the same.

Perhaps I can refine my point, though. That the economic impact on the sociopolitical sphere has been more dramatic since the creation of the Fed, and insofar as central banking has increased economic instability, it has increased sociopolitical instability. Can I argue that World War II should be placed entirely at the door of the Federal Reserve? I don't mean it quite that way. But, the Depression that followed the bubble of the Roaring 20s can primarily be placed at its feet. And, we can at least say that the rise of 1930s totalitarianism and aggression was highly correlated with the collapse of the bubble.

I think, too, that the impact of the Depression on our collective memory is also a kind of evidence that something new has happened. "Depression" is the word we have for economic armageddon, although I believe that it was supposed to be a euphemism at the time it was coined. Prior to that, we had sharp, short-lived panics in the banking system. And, World War II still sets the bar for total war and inhumanity. Was the Holocaust qualitatively worse than other attempts at genocide? It is a hard thing to prove one way or the other, because of the technologies employed. But, I think something can be said for the heightened passion for extermination of nations, ethnicities, and classes during that period.

The best place for my argument to take refuge, I think, is to say that there is simply no evidence for the mainstream position, that central banking increases stability of any meaningful kind. And, secondly, there is good reason to at least suspect that it is heightening instability. When Krugman confronts Paul with empty assertions about the inevitability of his own position apart from its merits and tries to smirk down the other side, I think it is reasonable to question the foundation of his intellectual or moral authority on those kinds of matters. I am sure that Krugman is very good when it is a question of 'assuming X, then Y most follow', but he doesn't appear to have the capacity to question X, and his smirking and sighing and so forth suggest that he is aware of this to some extent. But, like I said before, I am a bit biased already.

[Alkibiades]

A lot to think about and respond to in your posts, but let me just respond while I remember with a quickie. Since the OP referenced Bernanke vs Krugman, it made me think of a blog post by Krugman that I thought you'd find interesting. Bernanke is essentially enacting into policy his view from academia.

http://krugman.blogs.nytimes.com/2011/0 ... s-wonkish/

It was an interesting post. Thanks for sharing it. On this particular question as he presents it, I suppose I'd have to side with Krugman. To counteract debt deflation, a more aggressive ("dovish" doesn't seem like the right word here) tact would be warranted, but I think (without having read much of Krugman) that he underestimates the danger of inflation. Not only the possibility that it could happen, but that it would be containable.

And, from this perspective, a gold standard would almost certainly make things worse. So, maybe the hair-of-the-dog is the best short-term solution. That was the solution when the dot-com bubble burst in '99 or 2000 or whenever. And it was the solution to the Asian Contagion of 1997 or 1998. But, maybe it is time to just time to stop drinking. A diversified, dynamic global economy cannot be managed by academics.

[Teddoman]

Well you'd have to follow more Krugman to really get a sense for his arguments on this, and as a casual follower, I'm probably misstating his position, but in broad strokes, he believes the US and Europe are in a Japan style liquidity trap (or at risk of one), the only solution to which is major fiscal spending initiatives. What is currently being done is fiscal austerity, the likely result of which is Japan's multi decade liquidity trap. He is basically saying everyone completely overestimates the inflation danger here. He also argues that if you look at historical debt to GDP ratios after WWII, the US and Europe had much higher debt to GDP levels than now but essentially grew their way out of those debts. So he's not worried about debts; rather he's worried about the liquidity trap.

I have some sympathy with your argument that even the economists don't know what to do. It's a huge one off experiment on the world economy. That said, I think if you really though the implications of no central banking, aren't you really talking about reprivatizing banking entirely? That means no FDIC insurance, no fractional reserve banking. Just private notes issued by private banks. Do we really want to go back to constant runs on the banks? I agree it would eliminate the complications of managing a complex economy, but at what price? The dismantling of modern capital markets, and their function of efficiently creating and allocating capital? It would also mean deleveraging on a scale that would likely mean it would have to be phased in over 50 years, just not to cause an instant global depression.

Did Paul get this idea from the Austrian economists? If so I'm sure they have some coherent arguments for it that would have to be thought through. But it does seem a bit like going from the equivalent of modern industrial agriculture to being hunter gatherers. You reduce complexity, but you also lose all of the benefits of modernity.

[Alkibiades]

I took it that Krugman was more or less arguing in that vein.

I don't wholly agree with you about what an end to central banking would entail. First, I'd have to look into it, but I don't think deposit insurance is necessarily a part of central banking. Whether or not it is good could be open to debate, but it is separable, as far as I understand. I think FDIC was created as a response to the Depression. Nor would it entail an end to fractional reserve banking. That existed before central banks, and central banks were created because of the inherent stability of credit. The difference I think would lie in where the reserve ratios would stand. I think they tend to be around 10% or so, but before the Fed, they were 50% or somewhere in that neighborhood. Considering the multiplier effect banks have, that is a tremendous difference.

Also, I disagree with your characterization of there being a constant run on banks. Bank runs were obviously more frequent, but the financial sector was necessarily smaller and therefore less disruptive. They also bounced back faster. I would agree that if we could expand the relative size of the financial sector without danger of a pullback, central banking might be worth a shot, but credit is founded on faith, and faith cannot be legislated or manufactured or printed. And, not to beat a dead horse when he is down, there is no evidence that academics or businessmen or politicians know how and when to hit the gas and the brakes.

I am skeptical about the claim that we would be entering some kind of economic or technological devolution, either. Tremendous scientific, technological, and economic progress was made prior to the establishment of central banks. Some have argued that the progress of the 19th century, on a relative basis, was greater than that of the 20th century. Again, it is hard to compare. Was the railroad a greater technological leap than was the airplane? Then again, the airplane was invented in a gold standard world.

Just as I am not an economist, I am no scientist either, but I am under the impression that, scientifically, we are largely elaborating on and utilizing the discoveries that were made in the 19th and early 20th centuries. Our accomplishments are technologically impressive but scientifically peripheral (relatively). I am sure someone will call me on that, and I would defer to an expert, but I just see any evidence that growth and progress was ever dependent on central banking.

To be clear, I am not saying that progress occurred because there were no central banks; it is just that there is no reason to assume that growth should be slower without central banks. Or that there will be a decrease in complexity. You say that we would have to dismantle a financial industry that is 'efficiently creating and allocating capital', but that is precisely what is being debated: under a central banking system, what evidence is there that suggests that the financial industry has become more efficient in creating and allocating capital? I concede that it is able to scale up much faster than it had before, but that is precisely what a bubble is. It also disperses much faster than it ever did, the definition of a bust.

An ounce of gold, on a relative basis, is roughly at the same level it was at the height of the Roaring 20s. This does not suggest an efficient allocation of capital. One, I think, would expect that humans producing technology and goods could steadily outperform a yellow lump of metal, but that has not been the case.
http://steadfastfinances.com/blog/wp-co ... -Hedge.jpg

[Teddoman]

I hear you, but all the historical evidence suggests that economic growth under a gold standard was steadier than it was prior to the creation of the Fed. Again, not only economic growth, but politically, the world was more stable. This notion that the money supply has to be constantly ballooned and then crushed and that there is someone who knows how and when to do this is groundless.

I'm not entirely sure I'm reading that underlined sentence correctly. Are you claiming that prior to 1913, the world was more politically stable? I really am not too sure of that. I think the thing that distinguishes the political instability of the 20th century was that it was, ideological, but more importantly, technology really allowed for great violence.

Perhaps I can refine my point, though. That the economic impact on the sociopolitical sphere has been more dramatic since the creation of the Fed, and insofar as central banking has increased economic instability, it has increased sociopolitical instability. Can I argue that World War II should be placed entirely at the door of the Federal Reserve? I don't mean it quite that way. But, the Depression that followed the bubble of the Roaring 20s can primarily be placed at its feet. And, we can at least say that the rise of 1930s totalitarianism and aggression was highly correlated with the collapse of the bubble.

My recollection is the US did not leave the gold standard until Nixon. So you pretty much have to show that the post Nixon world order is worse than before Nixon. Although technically there was central banking in the 20s, it did not gain a discretionary role in the money supply creation and contraction the way it does today until after Nixon took the US off of the gold standard.

Check out the gold standard on wikipedia, it appears it was the gold standard itself which forced credit contraction during the depression at a time when a discretionary expansion of the money supply by the central bank could have shortened the depression and made it less severe.

[GuyInTaiwan]

Alibiades: To be honest, I really don't know enough about economic history to comment much on this. I'm fairly sympathetic to your point. I think the ultimate problem in all of this is that governments think they're going to be able to regulate problems out of existence that are driven by the fundamental human trait of irrationality. Whatever they do may improve some things, but will almost certainly have unintended consequences. Perhaps it's a matter of accepting that bad things will come with the good. I don't know. I'm just always wary of people who provide seemingly similar utopian responses to the pro-Fed camp thinking that if only we do/did X (return to some "golden age" prior to the Fed), things will be fine/much better. Maybe, maybe not. As I wrote, I don't know enough about economic history to say.

[Teddoman]

Krugman's latest on the Keynesian view of structural unemployment.
http://www.nytimes.com/2012/05/11/opini ... omics.html

I'm beginning to wonder myself if he might be right. He says on another blog post that apparently 50% of Spanish youth under 25 years old is unemployed. That's an astounding number.

Something to consider is the value set which underlies their economic positions. Ron Paul and the Austrian School are libertarians-- Hayek, Von Mises, etc. And their economics reflects that. Krugman is a good ole fashioned liberal. His economics happens to fit that pretty well too.

Krugman has a Nobel and in his self-described intellectual history, he says he has "switched sides" before. When I don't have all the answers, I am more inclined to believe someone that in my gut I believe is willing to switch sides when the facts demand it. Don't know about the Austrian economists on this front.

[Alkibiades]

My recollection is the US did not leave the gold standard until Nixon. So you pretty much have to show that the post Nixon world order is worse than before Nixon. Although technically there was central banking in the 20s, it did not gain a discretionary role in the money supply creation and contraction the way it does today until after Nixon took the US off of the gold standard.

Check out the gold standard on wikipedia, it appears it was the gold standard itself which forced credit contraction during the depression at a time when a discretionary expansion of the money supply by the central bank could have shortened the depression and made it less severe.

Technically, we didn't go off the gold standard until the "Nixon Shock", but the reason Nixon did it and did it with shock and awe was because Europeans were grumbling about how the US wasn't actually tying the dollar to gold, and they were threatening to cash in their dollar reserves. The thing that probably stopped them was the events of 1968.

Also, it was also a "gold standard" under which you couldn't own gold, until a few years after the Nixon Shock. So, to say that we were "on" the gold standard until Nixon is not quite accurate. The reason we went off of it was because we weren't on it. We had spent atrocious amounts of money on the welfare state and wars. And, the government took sudden action (FDR vs US citizens and then Nixon vs foreign dollar holders) to manage the gold standard. Not because of any flaws in the gold standard, but because gold had this nasty habit of telling the truth.

When you establish a central bank, even under a gold reserve system, you do so to be able to manipulate the money supply, at least certain strata of it. And, financial assets react very differently from consumer goods. It creates this wealth effect, such as in the 1920s and in the 1950s and 1960s and again the 1990s, where financial assets are booming while consumer inflation is low. When those booms peak--and I don't understand why--financial assets flatten or fall and commodities rise dramatically.

A central bank + restrictions on gold ownership + unilateral authority to renege on promises just doesn't add up to a gold standard. This is something that the Austrians were writing about a long time ago. A gold peg--which is what we actually had--is not a gold standard. I am not sure they put in these terms, but I think they argued that there had to be absolute convertibility, which we didn't have.

[Alkibiades]

Alibiades: To be honest, I really don't know enough about economic history to comment much on this. I'm fairly sympathetic to your point. I think the ultimate problem in all of this is that governments think they're going to be able to regulate problems out of existence that are driven by the fundamental human trait of irrationality. Whatever they do may improve some things, but will almost certainly have unintended consequences. Perhaps it's a matter of accepting that bad things will come with the good. I don't know. I'm just always wary of people who provide seemingly similar utopian responses to the pro-Fed camp thinking that if only we do/did X (return to some "golden age" prior to the Fed), things will be fine/much better. Maybe, maybe not. As I wrote, I don't know enough about economic history to say.

I hardly think it will be a golden age. It is just my hunch, but I suspect that a transition back to a gold standard would be socially traumatic. If the welfare/warfare state is founded on fiat currency, we have all become very accustomed to it. We expect the gov't to defend us from illness, poverty, bullying, terrorists, and our own stupidity.

We had a gold standard before based on its functionality. It is central banking that promised to eliminate booms and busts. Again, though, these have only been amplified. My argument is that assertions about central banks and economic management making things more stable is a groundless assertion. What fact supports this? There are far fewer bank runs. That is the only one. Instead, we have runs on whole currencies.

But, let's look at the future. Is there anything like a fiscal golden age on the horizon? How on earth did we acquire these immense liabilities? Never mind golden ages. How about an age without debt burdens approaching multiples of GDP? Or an age without zero percent financing on homes? Or an age where asset prices that move multiple standard deviations?

What is really shocking is that we are constantly told that we are living in a golden age of managed money now and that if we did away with it, we would end up in the regressive and backward 19th century. Well, it certainly looks backwards to us, because it was the past. But, it was actually strikingly progressive and liberal. I have no desire to go back to the 19th century at all, but am I to believe that if the Fed no longer sets interest rates, we will have to do away with oil and iPads and start using coal and telegraphs again?

What is utopian is treating something as unstable and potent as credit as if it were as plentiful and benign as water.

The ultimate point is not that we should go back to a gold standard. It is that neither government nor academia have the ability to set the monetary standard, because there is no scientific measure for these things. We have no knowledge. And no evidence that the actions that have been taken have produced the promised results. My personal opinion is that gold still serves a shadow monetary function and is still the best suited instrument for a monetary standard, but I am glad I don't have the power to have to make that kind of decision.

[Alkibiades]

Krugman's latest on the Keynesian view of structural unemployment.
http://www.nytimes.com/2012/05/11/opini ... omics.html

I'm beginning to wonder myself if he might be right. He says on another blog post that apparently 50% of Spanish youth under 25 years old is unemployed. That's an astounding number.

Something to consider is the value set which underlies their economic positions. Ron Paul and the Austrian School are libertarians-- Hayek, Von Mises, etc. And their economics reflects that. Krugman is a good ole fashioned liberal. His economics happens to fit that pretty well too.

Krugman has a Nobel and in his self-described intellectual history, he says he has "switched sides" before. When I don't have all the answers, I am more inclined to believe someone that in my gut I believe is willing to switch sides when the facts demand it. Don't know about the Austrian economists on this front.

I took a brief look at his Wikipedia biography. I didn't notice any significant changes in position, so I'm not sure which sides he switched from.

Also, not to put to fine a point on it, it seems somewhat gratuitous to assume that people change their positions--especially public figures--because facts demand it. Or to assume that one's opponents are too blinded to be able to change theirs. There are ex-Austrians and ex-Keynesians and ex-Marxists and ex-Christians and ex-everything. Without knowing their reasons, I can't imagine how a change in position alone is evidence of trustworthiness. Greenspan, for example, went from being an Ayn Rand acolyte to policy maker for no apparent reason, except that he enjoyed politics.

It's no secret about Spanish youth unemployment. I don't know how that would make Krugman's position in any way more correct.