Paul Krugman vs Ron Paul

[Ad Orientem]

For your amusement a face to face debate on Bloomberg between these two polar opposites.

http://www.bloomberg.com/video/91689761

My favorite quote:
"For the record I am not advocating or defending the economic policies of the Emperor Diocletian." -Paul Krugman

[murphy_p_t]

money quote, RP: "Inflation is theft."

[lazyboy]

I saw that video. I wish they had Warren Mosler there debating as well.

[jackely]

I haven't watched it and probably won't since I know I wouldn't have enough knowledge to judge who is making the better case about whatever it is they are debating.

What strikes me though is the balls of Ron Paul for taking on a Nobel prize winning economist in a debate about economics. Isn't he just a congressman who used to be a gynecologist?

[murphy_p_t]

jackh...i'd challenge you to listen...and use your built-in BS detector to see if some argument smells funny

[moda0306]

murphy,

While jackh was a little hard on RP, Ron was simply wrong on most of the facts surrounding the depression, WWII, post-WWII, and Friedman...

Friedman was for much more aggressive fed policy during the depression.  RP tried to make the opposite point.  Also, I'll acknowledge that in some ways losing to inflation is theft, but from 1981-2002, almost consistently, savers were subsidized by positive real interest rates on risk-free short-term debt.  So let's not forget that it can go both ways.  Further, Krugman points out that people are more than free to use currencies that are in effect outside the base US dollar.  I think RP's legal tender law complaints are pretty harsh exaggerations. 

Further, WWII, and the MASSIVE deficits that came with it, ended unemployment almost overnight, and with balance sheets repaired, (and probably with people with some productive skills they didn't have before the war), after a post-war mild recession (always seemed to happen back then as economy's adjusted) we were off to the races with a strong, stable economy, not to mention pretty amazingly high tax rates.  This doesn't mean the war was good... the war could have been one big set of stimulus projects instead... simply that the combination of huge deficit spending and teaching people useful skills both yielded much better side effects than Austrians would have us believe. 

Today, we could skip the war par, and start educational programs and stimulus programs that RP says we "can't afford," and avoid all the horrors of war but reap all the benefits of repaired balance sheets and an educated, productive populace, wide roads, fast trains, etc.  We had a pretty strong recovery going from 1933 until 1937, when the gov't started worrying about the deficits & inflation, and then we were right back into the dumps again.  Spending was only slashed after MASSIVE war spending ensued and ended up as savings on Americans' balance sheets.  After that amount of spending, it's completely natural to believe that our balance sheets were in a position to carry an economy for a long time without add'l massive deficits (remember, gov't debt is an asset of theprivate sector).  I don't know what RP's talking about in terms of liquidation of debts.  This is new to me... maybe one of the few areas Austrian's may have a point in the Depression/WWII debate.

I suppose you could say inflation is theft, though not nearly to the degree RP tries to claim, and positive real interest rates for savers is certainly a nice subsidy, the opposite of theft of savers.  But if we're not arguing about theft, but instead ecnomic realities, then RP loses steam real fast.  He comes in with a big, inconsistent moral philosophy that has as many half-truths glued to it as possible to make it sound more like actual analysis... maybe that's a bit harsh, cuz I like the guy, but he reminds me of my stubborn uncle who's wrong about 80% of the facts, but can't let go of the wonders of the 1800's that he never had to live in, and would have had the priviledge of being one of the few people that could vote.

[jackely]

murphy,

While jackh was a little hard on RP, Ron was simply wrong on most of the facts surrounding the depression, WWII, post-WWII, and Friedman...

If you thought I was being hard on RP, you took me the wrong way. I thought it must have taken some incredible balls to openly debate a Nobel Prize winning economist and liberal icon/columnist about economics. What other member of congress would do it?  

[MachineGhost]

I suppose you could say inflation is theft, though not nearly to the degree RP tries to claim, and positive real interest rates for savers is certainly a nice subsidy, the opposite of theft of savers.  But if we're not arguing about theft, but instead ecnomic realities, then RP loses steam real fast.  He comes in with a big, inconsistent moral philosophy that has as many half-truths glued to it as possible to make it sound more like actual analysis... maybe that's a bit harsh, cuz I like the guy, but he reminds me of my stubborn uncle who's wrong about 80% of the facts, but can't let go of the wonders of the 1800's that he never had to live in, and would have had the priviledge of being one of the few people that could vote.

You sure nailed it!

MG

[murphy_p_t]

murphy,

While jackh was a little hard on RP, Ron was simply wrong on most of the facts surrounding the depression, WWII, post-WWII, and Friedman...

Friedman was for much more aggressive fed policy during the depression.  RP tried to make the opposite point.  Also, I'll acknowledge that in some ways losing to inflation is theft, but from 1981-2002, almost consistently, savers were subsidized by positive real interest rates on risk-free short-term debt.  So let's not forget that it can go both ways.  Further, Krugman points out that people are more than free to use currencies that are in effect outside the base US dollar.  I think RP's legal tender law complaints are pretty harsh exaggerations. 

Please explain how receiving a positive interest rate on deposits is a subsidy? "Subsidy" implies that the interest paid is not owed to the saver. It seems to imply that the saver, on a fixed income perhaps, is some kind of moocher...taking something that they haven't earned by lending their $$ to the bank...which is then lent to create productive loans, in the traditional understanding.

Please elaborate on how RPs complaints about legal tender laws are exaggerations considering that if you hold precious metals or foreign currencies, you must pay capital gains taxes, up to 28%...this is a huge "subsidy" to the Federal Reserve...in so far as holding alternate currencies is discouraged through taxation of "gains"

Further, WWII, and the MASSIVE deficits that came with it, ended unemployment almost overnight, and with balance sheets repaired, (and probably with people with some productive skills they didn't have before the war), after a post-war mild recession (always seemed to happen back then as economy's adjusted) we were off to the races with a strong, stable economy, not to mention pretty amazingly high tax rates.  This doesn't mean the war was good... the war could have been one big set of stimulus projects instead... simply that the combination of huge deficit spending and teaching people useful skills both yielded much better side effects than Austrians would have us believe. 

Today, we could skip the war par, and start educational programs and stimulus programs that RP says we "can't afford," and avoid all the horrors of war but reap all the benefits of repaired balance sheets and an educated, productive populace, wide roads, fast trains, etc.  We had a pretty strong recovery going from 1933 until 1937, when the gov't started worrying about the deficits & inflation, and then we were right back into the dumps again.  Spending was only slashed after MASSIVE war spending ensued and ended up as savings on Americans' balance sheets.  After that amount of spending, it's completely natural to believe that our balance sheets were in a position to carry an economy for a long time without add'l massive deficits (remember, gov't debt is an asset of theprivate sector).  I don't know what RP's talking about in terms of liquidation of debts.  This is new to me... maybe one of the few areas Austrian's may have a point in the Depression/WWII debate.

regards the recovery from 33 to 37...how much do you attribute to the currency devaluation / gold confiscation / monetary expansion? Would that expansion have happened w/out Roosevelt extraction of the gold coins of the population?

Regarding your proposed solution, how does it compare to the results of Japan's policy over past 10-20 years? Is there any historical precedent for a recovery in the world in the manner you describe?

I suppose you could say inflation is theft, though not nearly to the degree RP tries to claim, and positive real interest rates for savers is certainly a nice subsidy, the opposite of theft of savers.  But if we're not arguing about theft, but instead ecnomic realities, then RP loses steam real fast.  He comes in with a big, inconsistent moral philosophy that has as many half-truths glued to it as possible to make it sound more like actual analysis... maybe that's a bit harsh, cuz I like the guy, but he reminds me of my stubborn uncle who's wrong about 80% of the facts, but can't let go of the wonders of the 1800's that he never had to live in, and would have had the priviledge of being one of the few people that could vote.

To what degree do you see inflation as not being theft...as distinct from RP indicating he believes it to be theft.
Please explain RPs inconsistency (moral or otherwise), because I have found him to refreshingly consistent in what I have heard him say/write.

[brick-house]

Thanks for posting.  Trish Regan moderating crazy Uncle Ron and nerdy Uncle Paul, pretty entertaining...

God Bless my uncle Ron Paul.  He must be nuts to consistently state that unlimited guns and butter is a bad idea.  

My nerdy uncle Paul Krugman sure is smart.   I was disappointed that he did not use his vast intellect to explain why the Fed holds so much gold and individuals are assessed a 28% capital gain rate on a sale of gold.





 

[moda0306]

murphy,

Regarding "Savings subsidy": In a gold-based money system, a treasury bond has default risk.  That means, really, if one were want to hold their savings in the safest absolute possible manner, one could hold physical gold as money, and accept zero real return at super low risk, though I'd argue maybe the only way to truly be low risk would be to spread it accross a few bank deposit boxes.  So you could even argue there was a slightly negative real rate to the safest form of money available in RP's utopia

One can either accept that slightly negative return on saved, stored gold, or they could loan it to businesses, households, banks, or governments, at interest.  All of those contain default risk, and you'll be rewarded by the market's assessments of those risks.  Fiat money, however, not only has a much lower theft risk as it's stored in 1's and 0's on your computer for free by treasury direct, but bonds issued by gov't denominated in that currency are free of default risk, so it's a mistake to simply look at how a currency has depreciated, and not the risk-free interest you could be paid to hold it.  So if the government is paying positive real interest rates on risk-free debt, it's offering something the private sector can't... real growth without risk (or material risk).  This, by definition, is unnaturally high.  This is a gift to savers, as there would have been no way to achieve this in a private money system.


Regarding Gold confiscation: I don't like the gold standard, but I really don't like direct confiscation either.  I'm not sure how much that helped.  Confiscation and illegalization of gold ownership is definitely way, way beyond what I think is appropriate in terms of monetary management.

Legal tender laws don't outlaw using other currencies as hedges against debasement or indexing contracts to inflation to completely disengage from the effect of a depreciation currency.  I tend to think people want to protect their medium-to-long-term savings from inflation, not the few thousand dollars they keep in their checking accounts for monthly expenses.



Regarding Japan and a historical example of my described recovery, this is a good question.  Their culture and desire to save (save in the private sector) could be throwing my predictions off of what would happen in the US.  Your second question about a historical precent of a depression saved by a massive public works project is even better. I'll get back on that at some later point when I feel like diving into this online.  That said, I see no reason to believe that if 1) we change "war" to "similar sized (actually, it probably could have been quite a bit smaller) but much more peaceful public works project," and 2) we do it in 1931 instead of 1941, that the results would have been earlier and without war.

I'll have to get into what I think of inflation as theft at a later time... it's a bit of a gray area for me when we are so unprecedentedly (is that a word?) free to own foreign bonds, gold, etc in our portfolios at the click of a mouse.  In the 1800's, you could save in gold, US dollars, greenbacks, domestic investment, and not much else in any efficient way.  I just think we are maybe in a bit of one of HB's observed traps if we're convincing ourselves that we can't protect our savings from debasement.

[murphy_p_t]

Moda,
Thoughful replies. I'm not fully on board...but I hadn't considered that view on interest deposits. From your view, it seems all interest paid by private deposit takers, in excess of the rate by government debt, is due to default risk.

Regarding the 33-38 period, without knowing anything else, I would expect that an 80% currency devaluation would be largely responsible for nominal growth, even thought it was not sustainable.

When considering / seeking historical precedent, I would point to the depression of early 1920-21 for consideration. The response to the problem was very different from the central planning prescription. However, the recovery arrived very fast. Why doesn't this period receive more study?

Also, your proposed solution seems to have a lot in common with promised utopian economic policies of communist/socialistic systems. What it seems to have in common is massive central planning. The historical precedents seem to be very poor.

I look forward to hearing back when you have more opportunity to consider these questions.

[moda0306]

Murphy,

Regarding interest rates, yes, I tend to see private interest rates as compensation for default risk on the denominated currency.

Regarding devaluation, I though you meant what real affect on the economy it had.  Here is a link that shows pretty solid real GDP growth.

http://www.measuringworth.com/datasets/usgdp/result.php

I am glad you mentioned 1920... Lone Wolf and I sparred over this recently.  I am tryin to respond via I-phone so this is clumsy, but if you search "1920" or "harding" you'll see my responses.

I really don't think it's a utopia.  There's no free lunch about somebody getting up at 6:00 in the morning to go build a rail line or a bridge and getting paid vs unemployed and getting paid nothing due to one big economic Mexican standoff.  I am actually not as much for huge gov't intervention as i may have let on.  I think govt should push forward future probable infrastructure projects and make sure people can educate themselves.  Beyond that, I think tax cuts are a far better choice than ditch digging make work jobs.  I was simply trying to convert WWII as exactly as possible to a public works program for purposes of ease of debate.

[craigr]

You know we could settle this gold vs. paper money debate instantly. Simply remove the 28% tax and let gold and silver compete against Federal Reserve Notes. If the Krugmans of the world are right then gold will fall flat and they can tap dance on the grave all day long. Sounds pretty easy to me if they are so sure they are right.

As for the WWII was the best thing since sliced bread argument. Honestly, I wish Paul Krugman would just set his own house on fire and then come back and tell us how good it was for the construction industry. I wonder how the average European thought WWII "helped" their economies? They collectively spent a lot of money on that great stimulus package and what did it get them?

All of these budget and monetary analysis arguments Krugman spews completely ignores the tremendously damaging New Deal laws that retarded economic growth during the 1930s. My favorite personal story was a 95 year old grandmother telling me how her farmer uncle would smuggle them excess crops to barter with neigbors. You see, under the New Deal laws he would be punished with fines or possible jail time for producing too much or what was not designated by govt. bureaucratic agencies. So excess he had needed to be given to her family discretely. Other farmers were ordered to turn over perfectly good crops. The Secretary of Agriculture ordered the pointless slaughter of millions of pigs. Etc.

And people wonder why there were soup lines in the 1930s? It's because the government was deliberately causing food shortages to prop up prices. Other industries had similar collectivist controls during parts of the 1930s until overturned and it caused lots of damage. The bad economy had little to do with gold standards. Economists always focus on the wrong things.

[moda0306]

You know we could settle this gold vs. paper money debate instantly. Simply remove the 28% tax and let gold and silver compete against Federal Reserve Notes. If the Krugmans of the world are right then gold will fall flat and they can tap dance on the grave all day long. Sounds pretty easy to me if they are so sure they are right.

Yes.  This would solve the debate.  Just like slashing spending and raising short-term interest rates would solve the debate as to whether Ron Paul is right about what will bring about economic prosperity. Unfortunately for both of us, pointing these things out doesn’t get us anywhere.  

My guess is gold would simply act as an even better hedge against the debasement of one’s savings, but in relatively few cases actually be used as money.  Assuming we continue to get paid in dollars, it’s probably just as easy that we pay for our short-term expenses in dollars.  We can index our longer term contracts to gold or inflation if we want, but the idea that we’ll actually start getting paid in gold or seeing two prices for everything in public seems asinine to me.  Terribly inefficient for only a small amount of benefit.  The main risk of debasement comes in terms of our actual mid-to-long-term savings, not the stuff we keep in our checking account to pay our bills.  In spite of that 28% rate, I’d insist that given the ease of diversifying via the click of a mouse into other currencies, including gold, it’s almost never been a better time to diversify oneself in that way, even for the every-man.  This, of course, is with the caveat that holding wealth overseas has become a considerable headache

As for the WWII was the best thing since sliced bread argument. Honestly, I wish Paul Krugman would just set his own house on fire and then come back and tell us how good it was for the construction industry. I wonder how the average European thought WWII "helped" their economies? They collectively spent a lot of money on that great stimulus package and what did it get them?

Come on, Craig.  I made it perfectly clear, as does PK, that the war itself was incredibly destructive.  You really are knocking down straw men here.  It’s not the war itself, the destructive actions therein, to focus on in terms of actual good that was accomplished.  What was positive was twofold:

1) deficits were huge, and since we know gov't sector financial liabilities are financial assets of the private sector, this repaired balance sheets immensely.

2) Despite all of the bloodshed, people learned valuable skills.  Women & businesses that learned how to build tanks (skills easily converted to general manufacturing), soldiers who learned supply routes, inventory, construction, and engineering.  All of this contributed to the post-war boom.  Instead of looking for jobs, many people were doing what probably could effectively be called destructive-yet-instructive make-work.

Large deficits and a combination of infrastructure projects and skill development & educational programs could easily have been enacted in 1931 instead of 1941, to limited destructive effect.  It would have been similar to WWII, but a decade earlier and without all the destructive side effects.  I have seen zero evidence that price fixing was anything other than a clumsy, immoral, ill-advised policy that didn’t really help anything.  It hardly perpetuated the depression, which was a product of inadequate demand.  Investment will not occur, in aggregate, when factories are running at 60-70% capacity.  It just won’t.  You can thrown all the bones at the supply-side that you want, remove all the regulations and taxes you want, and without aggregate demand by a balance-sheet-strapped public, you will not get much investment.  The equilibrium between supply and demand can take be a pretty brutal, destructive process.  The depression was a demand problem.  Fiddling on the supply side may have been wrong and fruitless, but it did not perpetuate the depression.  Price fixing (more so rationing) went on steroids during the war, and unemployment dropped to near-negative levels almost instantly.  This isn’t the definition of prosperity, by any means, but it at least shows the government CAN do things that give people incomes & allow them to be potentially productive until the private sector supply/demand imbalances are in a position to grow in equilibrium again.  Further, post-war demand was NOT driven by reconstruction of Europe, as some people claim.  It was almost entirely built of the domestic positive feedback loop of investment and demand.

[Lone Wolf]

So if the government is paying positive real interest rates on risk-free debt, it's offering something the private sector can't... real growth without risk (or material risk).  This, by definition, is unnaturally high.  This is a gift to savers, as there would have been no way to achieve this in a private money system.

You've forgotten the time preference of money.  There's no validity to this idea that anything over 0% real is "by definition" a subsidy to savers.

If I lend you money for a month, I don't get to spend that money.  You gain opportunities that I forego.  If I lend it to you for 15 years, I may be giving up that family vacation we never get to take with the kids before they are off the college.  If I lend it to you for 100 years, I will likely be foregoing all opportunities to ever enjoy that money.  Time preference matters.  Look far enough out and it's everything.

As for the WWII was the best thing since sliced bread argument. Honestly, I wish Paul Krugman would just set his own house on fire and then come back and tell us how good it was for the construction industry. I wonder how the average European thought WWII "helped" their economies? They collectively spent a lot of money on that great stimulus package and what did it get them?

All of these budget and monetary analysis arguments Krugman spews completely ignores the tremendously damaging New Deal laws that retarded economic growth during the 1930s. My favorite personal story was a 95 year old grandmother telling me how her farmer uncle would smuggle them excess crops to barter with neigbors. You see, under the New Deal laws he would be punished with fines or possible jail time for producing too much or what was not designated by govt. bureaucratic agencies. So excess he had needed to be given to her family discretely. Other farmers were ordered to turn over perfectly good crops. The Secretary of Agriculture ordered the pointless slaughter of millions of pigs. Etc.

And people wonder why there were soup lines in the 1930s? It's because the government was deliberately causing food shortages to prop up prices. Other industries had similar collectivist controls during parts of the 1930s until overturned and it caused lots of damage. The bad economy had little to do with gold standards. Economists always focus on the wrong things.

Very well said, Craig.  Paul Krugman is a habitual peddler of economic nonsense.

His "argument from authority" gets very tiresome.  He did some very interesting work on trade to earn his Nobel but the stuff that he jawbones nonstop about (macroeconomics) isn't an area that he actually worked on at all.

It's like the Times got a really skilled orthopedic surgeon to write a column on diet advice.  Now America has followed Dr. Krugman's "Stimulus Diet" of Twinkies and fried cheese and wound up a wheezing, barfing mess.  Whose fault is it?  Ours, you see.  Even though we just stuffed our faces with more Twinkies than anyone has ever tried before, Dr. Krugman says we still didn't eat nearly enough Twinkies.  If you low-carbers like Ron Paul weren't there constraining us to a mere 50 twinkies per day things would be going gangbusters right now! 

[moda0306]

LW,

What you describe in terms of saving/borrowing is how the private sector engages each other in terms of financial contracts.  Of course, if you have an asset, of any sort really, but let's say gold for a nice 1800's look at things, and you forego using/spending it, you can loan it to somebody for interest.  But that interest isn't a reward for your time, it's a reward for your risk.  Now today people take "time-value" for granted, because interest rates are so built into what we think of as a natural reward for saving, and to a degree they're right (negative real rates are, in effect, a form of tax).

The time was a given at the point that you decided to save.  You had the gold sitting in your safe right next your your musket and chaps.  We'll call that about as low risk of savings as humanly possible, but, of course, at some level of wealth, the lowest form of risk would have you paying different banks to store some of your gold.  There's no other way around this.  Your foregoing of spending is aiding nobody until you loan them money.  

There is no natural law that says your savings must grow over time.  In fact, there are very few static, safe forms of saving in a free market world, that don't deteriorate over time.  Gold is one of the select few.  Investment in productive activity tends to vastly offset this decay of physical assets, fortunately, giving us opportunities for real gains, but once again we're back to risking your savings again.  You save so you can consume in the future.  That comes first.  The next step would be to decide if you want to lend that savings to someone for a ROI over your principal.  God doesn't just grant you interest on your savings because you're being a good saver and seek to hold it for a long time.  It comes at a price.  The risk of loss on your investment.  The reward for saving risk free is the knowledge that you can consume in the future, which everybody values, regardless of what investment opportunities exist that can deliver real return.

The government in fact gave people an immensely safer (nominally) product to save in with a fiat currency, because the entire gov't would have to collapse for the dollar to be simple confetti.  Paying people real interest on risk-free debt is, therefore, no other way to look at it, a subsidy to savers.  This is probably how it was possible for gold to collapse in value to near-industrial-use levels during that period.  It's something savers NEVER could have accomplished without government.  In a free market world, foregoing spending only comes with real gains if you bare risk, no matter how long you hold it and how long you'd like to be paid for being a saver.

[moda0306]

LW,

PK did a pretty simple analysis to get to the conclusion that the stimulus was too small.  He was shouting this during the debate, not just after.

http://krugman.blogs.nytimes.com/2010/0 ... too-small/

I'm amazed that a follower of Peter Schiff, with all his ridiculous, arrogant predictions, can call PK's analyses "economic nonsense," when at the very least he raises some quite interesting, if somewhat incomeplete and sarcastic, points, most of which seem like pretty sound analysis... I mean they must be if it takes people accusing him of suggesting that we go re-destroy Europe is one of their best & most common retorts.  His predictions have also been pretty spot on, and most Austrians, unlike Schiff, we're betting against a housing collapse... so he at least got that one right.

Further, the stimulus was made up, almost equally, of three parts:

1) Tax cuts... bonus depreciation, NOL carryback, and other supply-side cuts, as well as payroll tax based cuts (MWP credit)
2) Infrastructure projects... nothing too radical here.  I haven't seen magnet-bullet trains from LA to NY yet.  Not sickbroad overreach of gov't... mostly things people, left and right, agree gov't should do like repair roads & bridges.
3) Aid to state/local governments who are facing huge tax shortfalls and would have to enact huge spending cuts to match.

Now all three of these can be debated, but if 1/3 of it is tax cuts, and another 1/3 of it is replacing gov't spending that would have gone away at other levels of gov't, then I'm not seeing exactly where your "twinkies and fried cheese" analogy holds much water.

[Ad Orientem]

With respect to WWII and the post war prosperity (in the US) I think one needs to keep in mind that you are going to get a huge economic boom anytime you find your country is the only industrialized nation that hasn't been bombed into rubble.  It would not be until the 1960's that Europe and Japan really emerged from the economic destruction of the war.  This meant that pretty much if anyone wanted something manufactured on a large scale they had to come to us.  I am much more inclined to credit this for the prosperity of the 1950's then all of the stimulus and currency debasement.  Let's face it.  We pretty much spent 15 years rebuilding the postwar world.  That's a lot of manufacturing.

The US economy today accounts for perhaps 40% of the world economy.  Anyone wanna hazard a guess at what percentage we were in the post war years?  I haven't seen the figures, but I will take a SWAG (scientific wild ass guess) and say probably near 80%.

[Lone Wolf]

The government in fact gave people an immensely safer (nominally) product to save in with a fiat currency

This is merely a statement of why T-bills pay a lower interest rate than others.  We already learned this.  It's part of the PP's underpinnings.  It does not, however, support your conclusion that governments paying more than 0% real is some kind of "subsidy".

Time preference is always an important factor in how the market rate of interest is determined.  When there's a greater desire to save the interest rate falls.  When there's a greater desire to spend, the interest rate rises.

I believe that you're mistaken to ignore this.

I'm amazed that a follower of Peter Schiff, with all his ridiculous, arrogant predictions, can call PK's analyses "economic nonsense,"when at the very least he raises some quite interesting, if somewhat incomeplete and sarcastic, points, most of which seem like pretty sound analysis... I mean they must be if it takes people accusing him of suggesting that we go re-destroy Europe is one of their best & most common retorts.

What's this "follower" talk?  I don't label people, particularly out of the blue.  Only you Justin Bieber fans do that. 

What makes Krugman's argument about World War II so daft is that he believes spending a bunch of money on things that do not necessarily add value can ever do anything positive.  If it did, we could make ourselves wealthier by selecting an American city, evacuating it, and then carpet-bombing it into oblivion.  Think of the glorious spending such a reconstruction would bring!

The war example just happens to throw his absurd arguments into the sharpest relief.

[moda0306]

With respect to WWII and the post war prosperity (in the US) I think one needs to keep in mind that you are going to get a huge economic boom anytime you find your country is the only industrialized nation that hasn't been bombed into rubble.

Ad,

That might intuitively make sense, and I believed that at one time, but the facts simply don't bare out that conclusion.

http://www.econdataus.com/trade05.html

The trade surplus (Blue line) was never higher than about 4% of GDP after the war, but for the most part, our trade surplus stayed at or below 2% of GDP.

This means 98%+ of the demand for US net production was as a result of domestic demand for almost all of the post-war period.  We didn't need Europe to be in reconstruction, by any stretch of the facts. We simply had a nice stockpile of financial assets as a result of all the years of deficit spending, and lots of skills built up from after the war.

[moda0306]

LW,

In modern banking, we've become so accustomed to earning interest on our FDIC insured savings accounts that an additional will to save, unless the banking system collapses, will almost surely show up as an increase in loanable funds... thus savings appears to have this natural attachment to interest and the loanable funds market.  What this really is is not only an increase in savings, but an increase in supply of people willing to loan their funds to others at risk.  These are two different things, though in modern banking it gets so clouded up.

This is artificial, however, or at the very least it's a product of a society so heavily accustomed to saving within the fractional reserve banking system.  However, in a free market, (and, according to HB, even with the FDIC), there is a risk to saving in a bank.  This risk is that they'll default on their deposit liability to you.  By saving at a bank, you're not just deciding to save, you're deciding to loan money out to businesses and individuals as your bank sees fit, hoping they're making good financial decisions.  They reward you for that risk by paying you interest.  You could just as easily pull your cash/gold out of the bank and store it at home, or keep it in a safe deposit box, and run less risk, but not receive interest, and not be a part of the supply of loanable funds.

So while you're right about the nature of the market, it's built on an uber-trusted fractional-reserve banking system that hides the fact that in reality, saving doesn't reward you with interest... only loaning to others does, and only as a compensation for the default risk.

Sorry for accusing you of being a "follower."  But regarding WWII, Krugman, and moreso myself, have repeatedly tried to focus on the good things that came out of WWII that would absolutely have NOT necessarily had to been a result of war, and could have been done much earlier.  1) The deficits that put financial assets on household balance-sheets, and 2) the skills obtained that could be put to productive use once the war ended.  I don't know how this could be made any more clear.  War destroys wealth... destroying wealth is bad.  We didn't need make-work jobs destroying cities, nor did our economy benfit all that much from building them back up again (see previous post).  This isn't about destroying wealth being a good thing.  This is about deficits at the appropriate time & size, as well as educating our population, being good things.

[Gumby]

You know we could settle this gold vs. paper money debate instantly. Simply remove the 28% tax and let gold and silver compete against Federal Reserve Notes.

It's kind of a silly comparison. Most of the private sector, from a Macro perspective, uses private bank credit for their money. So, for most people to own gold would mean that they were just paying their debts in money that doesn't depreciate.

Paper money already competed against gold during the 1800s. Fiat Greenbacks — first issued by President Lincoln — were extremely popular in the mid-west while they were in circulation. Many farmers were vehemently opposed to a gold standard at the time. Creditors preferred deflationary gold and debtors preferred their inflationary fiat and "free silver." If you owed debts to a bank, you actually wanted some level of controlled inflation — which made your debts easier to pay off over time. Bankers in the large cities were obviously opposed to fiat money, since loans would be paid back with depreciated money.

So, it really depends on who you ask. Since our debt-based and credit-based monetary system requires most of the private sector to live off of private credit (from banks, etc), most debtors really don't care if their money depreciates over time as long as they have a steady, inflation-adjusted, revenue stream to pay of their debts with.

[craigr]

You know we could settle this gold vs. paper money debate instantly. Simply remove the 28% tax and let gold and silver compete against Federal Reserve Notes. If the Krugmans of the world are right then gold will fall flat and they can tap dance on the grave all day long. Sounds pretty easy to me if they are so sure they are right.

Yes.  This would solve the debate.  Just like slashing spending and raising short-term interest rates would solve the debate as to whether Ron Paul is right about what will bring about economic prosperity. Unfortunately for both of us, pointing these things out doesn’t get us anywhere.  

The difference being that removing the gold/silver taxes and treating it like money does not involve anything more than a simple IRS rule change. No budgets are cut, etc. So it is simple to do but won't be done. Probably because the outcome would be predictably bad for the Federal Reserve and would put pressure on them and elected officials to behave as there would be an alternative currency keeping their spending in check.

... but the idea that we’ll actually start getting paid in gold or seeing two prices for everything in public seems asinine to me.  Terribly inefficient for only a small amount of benefit.

Great. Well we can then quickly put the idea to rest of gold/silver money as people can finally show the government that they prefer the stability and sound management of the US dollar once the taxes are removed.

Besides, why not let a business put two prices up if that's what customers want? I'd love to see two prices. It would finally get into people's heads that the silver/gold can be stable over time when they see the relatively same prices each year for goods they buy and the dollar prices next to it rising.

Lastly, with gold/silver able to compete with the dollar it would do something very poweful aside from the above: It would put controls in place on the dollar. With people free to swap into the competitor with no penalties at any time they wanted, there would be powerful controls in place on how the dollar was managed. That to me is the most important part of this.

As for the WWII was the best thing since sliced bread argument. Honestly, I wish Paul Krugman would just set his own house on fire and then come back and tell us how good it was for the construction industry. I wonder how the average European thought WWII "helped" their economies? They collectively spent a lot of money on that great stimulus package and what did it get them?

Come on, Craig.  I made it perfectly clear, as does PK, that the war itself was incredibly destructive.  You really are knocking down straw men here.  It’s not the war itself, the destructive actions therein, to focus on in terms of actual good that was accomplished.  What was positive was twofold:

1) deficits were huge, and since we know gov't sector financial liabilities are financial assets of the private sector, this repaired balance sheets immensely.

2) Despite all of the bloodshed, people learned valuable skills.  Women & businesses that learned how to build tanks (skills easily converted to general manufacturing), soldiers who learned supply routes, inventory, construction, and engineering.  All of this contributed to the post-war boom.  Instead of looking for jobs, many people were doing what probably could effectively be called destructive-yet-instructive make-work.

If it was New York being razed to the ground we wouldn't be having this talk. I doubt there is a respected German economist going around saying the bombing of Berlin was a net plus for German economics for instance.

I'll throw out an alternative theory on post WWII boom: Roosevelt's administration left office and no standing industrialized country was around to compete.

Point 1) Is that we could finally undo a lot of his policies from the New Deal and allow free markets to work again. This also included removal of all the price and other controls from WWII war efforts.

Point 2) Is that it's easy to declare yourself #1 in everything when your leading competitors have just spent many years beating the snot out of each other and setting each other's property, infrastructure, etc. on fire.

Again economists look at this issue in pure economic terms of twiddling debt on a balance sheet. But they just don't get it that in the real world most people of the time were probably more concerned about having their cities bombed, family members killed, etc. than what the debt to GDP ratio was.

Overall I don't have much to debate here that hasn't been said before. Except that Paul Krugman, as usual, misses the point entirely. He believes that monetary policy is what "fixed" the US economy instead of the fact that Europe was leveled in many places, we firebombed a lot of Japan's industrial capacity into submission, and nuked two of their cities. And he's so arrogant to think it's Keynesian policies that saved the planet.

[moda0306]

Craig,

I, like you, would like to see either gold taxes eliminated or significantly reduced, or at least have cap gains indexed to inflation.  Further, I'm not entirely sure business can't put a "gold price" of everything up, currently, though they might not feel motivated until the restrictions on gold transfers (by taxing gains) are eliminated.  I just don't think that using gold as actual common money accomplishes much, as inflation is so much more of an assault on our amassed savings, not our daily/monthly living checking account balances.  I still think it'd be easier, even in a high inflation world with punitively negative interest rates, to simply use the dollar and save in gold.  I'm a PP guy... don't think I don't appreciate the role of gold.  Further, I think with the ability for rates to go positive and negative, and gold to be extremely volatile in the face of that fact, it would be too volatile to effectively be thought of as everyday money.  This is just my prediction based on how I'd run a business, save and spend, and I think I take more effor to include gold in my savings plan than most.

Regarding WWII, Europe's destruction had little to do with our economic growth post WWII.  The trade numbers bare that out almost conclusively.  Almost 100% of our demand came domestically... people were simply spending money they didn't have before we ran ginormo-deficits.  As for removing price-fixing, I highly doubt that is the foundation of what gave us prosperity, but I'm at least open to the idea that it was pretty damaging to our economy, and would be interested in hearing that argument fleshed out, but I still think it was simply a demand problem, and our country was just in an economic Mexican standoff, as can happen in any monetized economy that can't run on bartering and stay prosperous.

PK, I believe, thinks fiscal policy, not monetary policy, was what really brought us out of the depression.  It put financial assets on our balance sheets in the middle of a balance sheet recession.  As a side-benefit, I can't imagine the skills learned by people in relation to the war effort didn't help somewhat, too.

We're not trying to rewrite this as a justification for going to war and rationing any more than people that defend the South's federalist ideals are trying to defend slavery... it's just pointing out what we believe to be a lesson in between all the bad stuff going on around the country/world.