I was getting kind of bored today and I was looking for something to do. Then I saw this post and just had to respond.
It’s one thing to say that Paul and other Austrian leaning types were “predicting” the major collapse for a few decades. I think that’s a fair criticism and Krugman brought that up in this column, but it’s another thing to say that Paul was wrong. The Austrians were right about a lot of things pertaining to this collapse (and every economic downturn since the Great Depression). Keynesians on the other hand have been routinely wrong for the last 80 years.
So let’s tackle what Krugman claims to be “GOP Monetary Madness.”
Mr. Paul identifies himself as a believer in “Austrian” economics — a doctrine that it goes without saying rejects John Maynard Keynes but is almost equally vehement in rejecting the ideas of Milton Friedman. For Austrians see “fiat money,” money that is just printed without being backed by gold, as the root of all economic evil, which means that they fiercely oppose the kind of monetary expansion Friedman claimed could have prevented the Great Depression — and which was actually carried out by Ben Bernanke this time around.
Firstly, Milton Friedman isn’t an Austrian economist, so I’m not quite sure why Krugman feels the need to point out why Friedman and Austrians were sometimes contradictory. Secondly, money supply went through a huge monetary expansion in the years preceding the Great Depression. From Murray Rothbard’s (an actual Austrian economist) America’s Great Depression:
Over the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight-year period. This is an average annual increase of 7.7 percent, a very sizable degree of inflation. Total bank deposits increased by 51.1 percent, savings and loan shares by 224.3 percent, and net life insurance policy reserves by 113.8 percent. The major increases took place in 1922–1923, late 1924, late 1925, and late 1927.
This inflation all occurred during the boom from 1921 to 1929 (I think Rothbard would argue the Roaring Twenties were roaring partly because of this artificial boom in the business cycle and partly the result of Harding’s “hands off” policy on the depression of 1920). So to say that monetary inflation could have prevented the depression (something Austrians most definitely don’t believe) is kind of a moot point when confronted with how massive the inflation really was.
But Krugman’s main argument is that Paul’s policies would result in another Great Depression. It is true that when the market begins to correct itself unemployment will likely rise, along with interest rates. But the recession is supposed to be the correction. The investment mistakes that led to the crash have to be corrected, which means assets need to liquidate allowing for the market to equilibrate. The alternative is Krugman’s dogmatic plan that if we just spend enough money, on anything, we will eventually spur economic growth into existence from the top down.
The point that originally made me want to address this was that Krugman, a Keyensian, was saying an Austrian’s policies would cause the next Great Depression. This is funny to me because it was the Austrians that predicted the Great Depression and it was the Keyensians that were wrong about virtually everything that had to do with the recovery. It was the Keynesians that predicted massive unemployment when WWII ended. It was the Keynesians that championed the New Deal and the National Recovery Act which ultimately exacerbated the depression into greater heights. It was the Keynesians that imposed trade tariffs and urged the Federal Reserve to continue inflating the currency. The regime uncertainty that permeated from Washington then as it does now is something inherent in the Keynesian system from the new regulations and tax hikes. There really is no limit to just how wrong Keynesians can be.
“There was one good thing about Marx; he was no Keynesian.” —Murray Rothbard