Economist and New York Times columnist Paul Krugman guest-hosted Bloomberg TV for two hours on Monday, to mark the release of his new book End This Depression Now!. The most enthralling was when Republican presidential candidate Ron Paul joined Krugman to debate monetary policy.
To be sure, this wasn't a fair fight. Krugman is a Nobel laureate in economics while Paul is a gynecologist and lifelong politician. Still, it was embarrassing for Ron Paul, who looked like Pat Robertson debating Richard Dawkins on the basic mechanisms of genetics.
For most of the discussion, Congressman Paul stuck to polemics and political talking points instead of actually engaging in anything that could remotely be considered a coherent thought, let alone an argument.
It's impossible to cover all the myths Ron Paul attempted to perpetuate, but here are a few:
"I want a natural rate of interest." The claim doesn't really make sense, since the term "natural rate of interest" is a piece of economics jargon, which means the expected real return on investments. I assume Ron Paul is using the term to mean he wants the Fed to adopt a "neutral" monetary policy, but no such thing exists, even under a gold standard. The Fed can target interest rates, the growth of the money supply, and inflation or growth expectations. But since these variables all affect each other, the Fed cannot simultaneously remain neutral on all of them.
"Inflation is theft." This claim is only true if you assume people are really stupid and never understand that inflation occurs. But, if this were true, it would destroy the entire rationale for why markets work: Individuals make informed choices under rational expectations about the future. As libertarian economist Tyler Cowen commented, "[F]or a believer in the market, [he] finds it remarkably non-robust in response to bad monetary policy."
The fact that people understand that inflation is going on and take it into account in making their future plans means that it's not really theft. Moreover, individuals are free to invest their money in other currencies, gold, or real assets if they're really afraid of inflation. And, in fact, one of the reasons a little bit of inflation can be a good thing is that it gives people an incentive not to hoard cash, keeping money flowing through the economy as consumption and investment.
"Just remember that Bernanke apologized to Friedman because the Federal Reserve was responsible for prolonging the agony of the depression." This claim is true, but so incredibly misleading that it should be considered a lie. While Ron Paul and those who support his crackpot monetary theory think hyperinflation is right around the corner (and have been telling us that for the last five years or so), Friedman criticized the Fed for not being expansionary enough. Despite the fact that Friedman was a warrior for conservatives and libertarians during his lifetime, his views would align far more closely to Krugman today, who many consider a socialist (though, as far as I know, no one has questioned his citizenship). This illustrates how far off the deep end conservatives have gone.
"[I]f you love big government and think it can last forever, I can understand why you love the Fed. But some of us believe in freedom and markets.” Once again, this is polemic and unsubstantive, but the idea behind it is also flawed. After the Great Depression, many Western democracies lost faith in capitalism and pushed for what could actually be considered socialist societies. John Maynard Keynes, a British economist, offered the "Keynesian compact": Capitalism mostly works well, but benefits from countercyclical fiscal policy — government spending in recession — which smoothes the volatility of the business cycle and curbs the enormous amount of human suffering that comes with recesssions.
Milton Friedman built on this theory (saying in 1965 "We are all Keynesians now"), by arguing that monetary policy was a just as, if not more, effective tool for fighting recessions. Neoliberals and moderates think that markets are the best way to organize an economy, but we view markets as a tool to improve the lot of ordinary and disadvantaged citizens, not as ends in themselves.
There are some distinguished monetary economists, including David Beckworth and Scott Sumner, whose views conservatives would be wise to embrace. But Ron Paul's kooky economic views, which have gained more traction among Republicans like Paul Ryan and Rick Perry, would be disastrous if adopted.