How to debate Paul Krugman

Ron Paul vs. Paul Krugman debatePaul Krugman is the high priest of Keynesianism and modern interventionism, of economic improvement through inflation and budget deficits. As such he is bête noir among us libertarians and Austrian School economists. What makes him so annoying is his unquestioning, reflexive and almost childlike enthusiasm for state intervention, even in the face of its obvious failure, and his apparent unwillingness to probe any deeper into the real causes of our present economic problems or to show any willingness to investigate the effectiveness or ineffectiveness of his particular medicine. His Keynesian convictions are presented as articles of faith that no intelligent person can seriously question. A Krugmanesque argument is always built on a number of assumptions that are beyond doubt:

1)   Recessions, depressions and crises are the result of the unhampered market. We actually do not have to investigate if markets were really free when recessions occurred or what really were the specific causes of whatever threw the economy off track. When there is a recession, depression or crisis, there must have been too much of an uncontrolled market.

2)   The Great Depression was caused by uncontrolled markets.

3)   Recessions, depressions and crises are practically the result of one problem: a lack of aggregate demand. People, for whatever reason (and who cares about the reason; let’s not get hung up on those details) don’t spend enough. If everybody were to spend more, people would sell more. Problem solved. It is the role of government to get people spending again. This is done by printing money and causing inflation so that people spend the money rather than save it. Or by the government running up deficits and spending it on behalf of the stupid savers.

4)   The Great Depression was solved by the government spending lots of money and the central bank printing lots of money.

5)   This explains ALL economic problems.

6)   If there are recessions, depressions and crises, they can all be solved by printing money and by deficit spending.

7)   If after many rounds of money printing and deficit spending, there is still a recession, then only one conclusion is permissible: There was obviously not enough money printing and deficit spending. We need more of it.

8)   If after another round of money printing and deficit spending we still have a recession, then….well, do you not get it? We obviously have NOT PRINTED ENOUGH MONEY and we are NOT ACCUMULATING ENOUGH DEBT! And, by the way, remember 7) above.

Krugman is practicing Keynesianism as a religion. The 8 commandments above are not to be questioned. Whoever questions them is not worthy of debate. Consequently, Krugman has turned down requests to debate people like Peter Schiff or Bob Murphy. Interestingly, he agreed to debate Ron Paul on TV. The link is here.

I have to say that Ron Paul did not do as well as I had hoped he would. He did not sufficiently attack Krugman in my view, for the failure and ultimately disastrous consequences of his policy prescriptions. Krugman is the one who should be made to explain his policy recommendations and who has to answer the criticism that policies like the ones he is recommending got us into this mess in the first place and that his policy ideas have been implemented for years to no effect, at least no positive effect. Yet, Krugman succeeded in putting Paul on the defensive, something in which he was greatly helped by the following: While Krugman may be the most outstanding, unashamed and fundamentalist of the celebrity Keynesians, the attitudes of the general public, the other journalists and thus most of the TV viewers are predominantly shaped by Keynesianism as well, and this means that Krugman, more than Paul or any ‘Austrian’ debater, can rely on some sense of intellectual sympathy. Maybe the viewers don’t quite share the unquestioning dedication to the Faith, that Krugman epitomizes. Maybe they feel queasy about printing trillions of paper dollars and running trillion-dollar deficits. Of course, a true believer like Krugman will never allow himself such feelings. But in general, the public, too, believes that the free market (and greedy bankers) caused the financial crisis; that we need low interest rates and other government measures to stimulate the economy; and that inflation is really not our main concern. Krugman, I think, cleverly used these attitudes to present himself as the safe and rational choice, and Paul as the weirdo who wants to pour out the state-policy baby with the crisis bath water.

Ron Paul started strongly by pointing out that Krugman’s policy is based on the idea that a bureaucratic elite can set interest rates and decide how much money should be created, and that this involves an arrogant and dangerous pretence of knowledge. Very good point.

Immediately, the apostle Krugman raised his head. “You cannot get the state out of money.” “The Fed has to set interest rates.” “You cannot go back 150 years.”

I think this is where Ron Paul should have dug in and put Krugman on the defensive:

“Why not? There was no Fed before 1913. That the Fed made things more stable is your assumption. But is it true? People like you and Bernanke tell us that the gold standard was to blame for the Depression. In the run-up to the Depression we had a gold standard but we also had a Fed. How can you say that the gold standard was to blame and the Fed was ultimately the solution?

“Dr. Krugman just said, history told us. That is nonsense. History doesn’t tell us anything. You need theory to interpret history, and your theory is wrong. You assign blame for the depression according to your Keynesian theory. If that theory is wrong – and I think it is completely wrong – your interpretation of history is hopelessly wrong.

“Dr. Krugman, we no longer live in the 1930s. Why is it that you are harking back to those days? Are we still solving the Great Depression?

“Fact is that the monetary and economic institutions of America were shaped by people with your beliefs, Dr. Krugman. We have your system today. We have conducted and are conducting your policies. And, Dr. Krugman, do you really want to tell the American public that these policies and these institutions, such as the Fed, are working?

 “We have no gold standard. Since 1971, the Fed is entirely free to print as much money as it likes. That is your system, isn’t it? That is what you recommend. – You say the Fed needs to keep interest rates low and print money to stimulate growth. That is what the Fed did in 1998 after LTCM and the Russia default, just as you recommended. That is what the Fed did again after the NASDAQ bubble burst and after 9/11 – surely, that was not an Austrian policy but a Keynesian one. It was straight out of your rule book, Dr. Krugman.  You say the uninhibited market is to blame for the financial crisis. I say your policy is to blame. The mortgage bubble was blown by the ‘stimulus’ policy of the Fed – low interest rates and plenty new bank reserves – between 2001 and 2005. That was your recommendation, right? And those of your Keynesian buddies, such as Paul McCulley at Pimco.

“Since 2007, the Fed is conducting your policy. So is the US government. You demanded monetary stimulus and you got it. The Fed created $2 trillion dollars out of thin air. Interest rates have been zero for years. The US government is conducting stimulus policy to the tune of $1trillion-plus every year. Are you telling me, these are not Keynesian policies? What is it, Austrian policy?!

“What you are recommending has in fact been the guiding principle of global economic policy for years.  What you are recommending is a systematic distortion of the market place. It is persistent price distortion. That is why we had an unsustainable housing boom. That is why we had a mortgage boom. That is why we had a financial industry boom. And whenever these artificial booms – that you create with your policy – falter, the American public has to pay the price. And what do you suggest then? More of the same. More cheap credit. More government debt. In the hope that you can generate another artificial boom for which a later generation will again have to pay the price.

“Dr. Krugman, you just answered the question of this journalist about how much more debt we should accumulate, by saying maybe another 30 percent but that nobody can say for sure. I agree that nobody can say how much debt the system can still take. But tell us, why do you think that the next 30 percent of state debt will magically stimulate the economy and that these 30 percent will thus achieve what the previous 30 percent obviously failed to do.

“Dr. Krugman, you have me worried here.  And I think our viewers, too. The only response you have to the abject failure of your policies is that we should do more of them. Whatever Keynesian stimulus is being implemented and whatever money the Fed prints, all you ever say is that it is not enough. We need more. Has it ever occurred to you that maybe the problem is the policy itself? Maybe your medicine is making things worse and not better.

“And something else worries me, Dr. Krugman. When do we ever stop printing money and borrowing? I think that you are stuck in a failed paradigm, a failed economic theory and a failed policy program. This has happened to scientists and politicians before. You cannot admit that failure. When you are confronted with the failure of modern central banking, of Keynesian stimulus and of moderate inflationism, your only answer is that nothing is wrong with any of it, it is just not implemented forcefully enough. Dr. Krugman, you remind me of a doctor, who misdiagnosed the disease and prescribed the wrong medicine and who is now unwilling to look at the situation objectively. All you want to do is increase the dosage.

“If the viewers really want to understand what is going on, they should not buy Krugman’s new book but go to the website of the Mises Institute and look for some excellent Austrian School literature, in particular anything written by Ludwig von Mises himself. But if you don’t have time to do this, maybe you start by reading Paper Money Collapse.

Well, I guess this is how it could have unfolded.

In the meantime, the debasement of paper money continues.





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Brain Sematary
The separation of money and state


  1. Mikhail Istomin says

    More money or less money this does not matter too much. The artificial GDP inflated by credit in the West must drop up to 50%. The only uncertainty is when. The level of life in western countries is unjustifiably high. It must drop together with the GDP. You do not believe me? – O.K we will see. When there is no money for foodstamps it is time for revolution.

    • zappman777 says

      Not true unless you know that debt reduction is impossible without crippling economic activity. You don’t know this, however. It’s simply your experience and your belief. If asset based liquidity can be injected into the economy, debt free, this will satisfy economic stimulus, but without the typical debt burden that you (and others) might assume.

  2. says

    Hi Detlev Schlichter

    I will say that the main reason why Ron Paul did not get so much speaking time was because the host was pro-Keynesian, in addition Ron Paul is polite and let his opponent finish speaking, but Krugmann does not!

    I agree a follow up on the Paul ~ Paul debate is very relevant and your is spot on!

    I should like to highlight this priceless quote: “Dr. Krugman, you remind me of a doctor, who misdiagnosed the disease and prescribed the wrong medicine and who is now unwilling to look at the situation objectively. All you want to do is increase the dosage.”

    /Grosen Friis, Denmark

  3. Huge Fan says

    Hey Detlev,

    Just wanted to say I’ve been following this blog for about 2 months now, and I love it. I’m a High School junior and am taking a college level Economics course next year as it’s what I plan to minor in at college. I am planning to buy your book, but only if you promise to transfer your profit into gold from the inflation ridden medium I am forced to exchange in (kind of serious).

    Out of curiosity and because I highly regard your opinion, what is your stance on IP laws? I am hesitant to call myself a “libertarian” as I remain rooted that IP laws is a natural extension of the right of a human being to the product of his own mind, although the counter arguments on can be quite compelling.

    And my second question is, how would you suggest I go about studying economics next year and through out University? I’m sure it will be largely Keynesian based, so I want to get out of that socially conditioned mold as much as I can. I’ll always continue my independent studies but your input for how to react to heavily biased and Keynesian centered professors would be great.

    • says

      Thank you very much. As to the topic of Intellectual Property I have to admit that this is one area of libertarian theory with which I am not that familiar. I have not yet read the key texts and not really thought about the issue of IP myself. So, I hope you understand if I dodge that question for now. I will say this much at this stage: I have often assumed the label of Misesian. Mises is still the most important intellectual influence on me. Additionally, I have been at times critical in my writings of some of the positions that Murray Rothbard took throughout his exceptionally productive and inspiring career, in particular as they relate to fractional-reserve banking. Maybe this is a good opportunity to stress that I think Rothbard was very much correct to expand the Misesian framework from Classical Liberalism to anarcho-capitalism. I think that a logically consistent application of Misesian theory must lead one to what Hans-Hermann Hoppe labels “private law society”. I think that this was a very important contribution of Rothbard’s. This means that I would find it very difficult to embrace any kind of concept of IP that requires a state as a territorial monopolist of compulsion and coercion. All I have read in economics and social philosophy has led me to the conclusion that a state (if, again, state is defined as a monopolist of legalized violence, as it usually is) is not needed for social cooperation and peace. I don’t expect IP to change that. But that is all I can say at this point.
      Economics is a fantastic science. I love it. Thus, I congratulate you on your decision to study it. But there are dangers. I think you will be exposed to a dose of Keynesianism that is positively mental-health threatening. How to deal with that? – I think you should keep reading the key Austrian texts in private so as to be always aware of the alternative (and, in my view, hugely superior) body of theories, In particular, keep reading some of the important texts on methodology, such as Mises’ Epistemological Problems of Economics, Theory and History, and (one of my favorites) The Ultimate Foundation of Economic Science. And, of course, always maintain your intellectual independence, not only to the Keynesian literature but, on principle, even to the Austrian texts – every science needs independent thinkers, not religious acolytes.Trust your own reason.
      When spending hours, days and weeks going through Keynesian literature, maybe it will help to remember that Boehm-Bawerk and Mises were very familiar with all the socialist literature of their time. They had not only read Marx casually but had studied him, and the German Historical School,too, and that was the only reason they were able to demolish these theories with their own work. Hazlitt was very familiar with Keynes’ work and that enabled him to write “The Failure of the ‘New Economics’”.
      Anyway, best of luck.

  4. Chase Taylor says

    I enjoyed the ‘debate’ as well as your take on it. I was yelling at the TV like it was my favorite team playing. It was nice to hear Peter Schiff’s take and read yours to know that I am on the right track. I wish Krugman would debate a Schiff, Murphy, or Schlichter. Keep up the great work.

    Chase, Northern California

  5. says

    Did you see the segment shortly after where the host interviewed Ron Paul on his own? When the gold standard was brought up she started sniggering, like it was beyond credibility to any rational person to suggest gold has a use in the modern era and that fiscal discipline is desirable.

    Blatant techniques to skew the argument. Very frustrating because these techniques clearly work although less so with each passing day…

    Another thing was saying that the UK’s austerity measures have failed. That is total nonsense. Believe me, our government has talked a good austerity package but have yet to implement any of it. The lay-offs, spending cuts and debt reduction have not started yet. In fact, as hard as this is to believe, so far the government has spent more than the previous one! They’ve raised taxes and borrowed more to do it and the BofE has been incredibly loose with its QE cannon…

    …and we are still in recession. So, far from being an indictment of austerity, it more evidence that Keynesianism is absolute nonsense and has no credibility in the real world.

    How many more decades of proof do we need?

    Paul Krugman is a hack… but we always ignore the people who have genuine credibility and let the demons run amok… if things were different we wouldn’t be in this mess.

    • LittleMissMessy says

      Hi Paul,

      Totally agree with everything you say. Austerity measures – what austerity measures?!

      Re: the host sniggering – no doubt she will eat her words when she realises she should have bought some gold!

  6. John Campbell says

    Detlev, please forgive this lengthy comment.

    We are clearly moving to a crisis or a major turning point in this paper money collapse, but the same old band plays on. Detlev, when the student is ready, the master appears. Your passionate and lucid book has awakened my concerns in all of this and I embrace the libertarian and Austrian perspective as never before.

    Your analysis of the Paul and Paul debate is spot on as a couple of other commenters have said. You lay out Krugman’s assumptions and commandments perfectly. Your arguments are persuasive in an academic or at least in a setting of reasonable and thoughtful debate.

    But we are not in that – we are fighting in the messy arena of ideas and popular culture. We are trying to convince the general population of the dangers and treachery involved in our current financial situation and ultimately, the same in our governments. In this debate, Krugman won handily. He comes from a position of almost overwhelming strength. The media, governments, almost all politicians of all stripes, and academia essentially agree with all of Krugman’s assumptions.

    Krugman only has to argue, as he does, that we must continue on our current path because it has worked so far. He has a low standard of success. For the political class, it is too dangerous to veer toward any idea that is over a hundred years old – never mind that it would rob them of their power. That would be madness, according to Krugman. To the person on the street, Krugman comes across as a reasonable and concerned intellectual. Ron Paul cannot defeat that, no matter what logical argument he makes. Things would be much worse without our interventions, Krugman would say.

    But I am no pessimist. We are not lost. We have truth and reality on our side and ultimately that will prevail. I am hoping for sooner rather than later, however. Abstract arguments cannot be digested by the majority of people who are too busy with their own lives. People are not stupid, although they often hold stupid ideas. Most people don’t have the time or inclination to learn much beyond what they already know. If I had been that smart, I would have been buying gold for the last ten years. Reading you Detlev was my personal tipping point, but I was already near. I consumed Ayn Rand in my teens and twenties and did not stray that far.

    If I was debating Paul Krugman, I would ask him a very simple question – “What happens when the money runs out?” Interestingly, in the interview, the host asks a similar question in a roundabout way. “How much higher could we go into debt”, he asks at the 10:15 point. Krugman stumbles and says that he would go higher, but he is not comfortable with Japanese levels of debt, “but we are not anywhere near a red line here”. Oh? But there is a red line?

    I believe we need to turn this debate into a slugfest, because we are drifting toward a crisis as you are documenting Detlev. Rational arguments, historical perspectives, and logical persuasion all have their place, but first you have to get people’s attention and frame the debate.

    I believe that the simple question, “what happens when the money runs out?” accomplishes that. It is a simple concrete question that anyone can understand and everyone can relate to. Answering it and defending those answers will lead to more complex discussions. What happens? We tax the rich more. We tax the middle class more. We print more money. We borrow more money. We grow the economy etc. Oh really? Well here is why that hasn’t worked, or can’t work, or is almost certain not to work. So back to the central question. “What happens when the money runs out?”

    I would like to see this question posed like “Who is John Galt” in Ayn Rand’s novel, Atlas Shrugged. A rallying cry and a simple but effective interruption to people’s comfortable thought patterns – the ones that allow the Paul Krugmans of the world to lead us to disaster. It is a neutral and non-political question that can lead to profound political and economic questions. It can a be a splinter in the mind that leads to greater thinking and exploring new ideas. First discomfort, but not vague and pointing to a lot of important next questions.

    I would love to see newspaper ads, television spots, and every social media asking this question of our ruling classes. And brilliant people like yourself Detlev, answering the question with hard hitting analysis, intelligent discussion and historical perspective. People are looking for answers, but first you have to get, no, grab their attention.

    I have just secured the domain, and several related. I have no financial interest in making money from this, but I do want to see our globe and people prosper under a true capitalist system. I want to harness the anger and fear that is out there, and I want to put forward the ideas of libertarianism and Austrian economics. I have no idea what could come of this. I am not the person to carry this – I would be happy to give the domain away to someone who can. My day job keeps me busy. I am open to ideas and suggestions. But I believe that we must take our ideas out of the shadows and into the arena where they belong and are sorely needed.

    I apologize again for this long post, but I am becoming impatient. The more I read here, the more I want to do something constructive. Your book, Paper Money Collapse, is my inspiration.

    This approach may not be the best one, but we need something to spark a real debate. Who knows what will set off the avalanche of popular opinion toward real freedom? The sooner, the better.

    • says

      John, first of all, thank you very much for the kind comments on my book and blog. Much appreciated. Thank you, too, for writing such a passionate and uplifting comment. I very much agree with your sentiments. I share your anger and impatience, and what you propose is indeed what is needed. I just can’t help but remain overall fairly pessimistic. The zeitgeist is thoroughly statist and, as you say, most people do not question it. I think it will probably, sadly, take a severe crisis to even begin to change this. But still, I like your ideas and encourage you to pursue them. And reading comments like yours encourage me to continue with what I am doing. So again, thanks.

    • Huge Fan says

      Awesome comment as Detlev pointed out. I would also secure the domain (the acronym) if you haven’t already. I encourage you to get involved with the community of libertarians, Austrians, Ron Paul supporters, et cetra and help out in any way you can with your enthusiasm and ideas. The entire Libertarian sect of ideas revolve around the idea of the individual, not society. So take an active role as an individual to guide our country to where it needs to go.

      The most fundamental part of all this to me, is education. People simply don’t know our ideas and don’t care to. I mention the gold standard in any of my classes and people laugh, it’s almost like an automatic and a socially conditioned reaction to the term. When I enter college in the fall of next year, I will most definitely get involved with Austrian education at the campus level at my University.

  7. robin says

    Detlev! I finished your book last night and it was one of the most enlightening books I’ve read, and I say that even though I have read other books about ABCT. I just love the reasoning and logic, it was beautiful all through. I will surely recommend it to other people.

  8. zappman777 says

    I’m amazed at all these buffoons who claim to have the answer to our problems in the debt currency vs precious metal debate. The debate is in the wrong place. It should revolve around the issue of real-time. Real-time fundamentals and trade values are key to the understanding of a solution. Keep in mind that gold’s real-time trade value did not come to fruition until after the fixed peg ($35/oz)was severed and gold was set free to reflect market fundamentals. Gold has never been a great currency from the standpoint of limited liquidity under the restraint of fixed values. Gresham’s law is/was predicated on gold of fixed value. Now that gold trades in real-time and the dollar is a wonderful real-time measure, we are on the cusp of re-monetization of bullion, as per market fundamentals. Were you looking for a top-down answer ? Don’t hold your breath. It must be market driven, which is exactly why the elite keep beating the marketplace with “the stick” (inflation). It’s their role. Follow “the script.”

    • ManAboutDallas says

      “Gresham’s law is/was predicated on gold of fixed value.” It STILL is, because gold STILL DOES have a “fixed value”. You’ve fallen into the Relativity Trap; gold’s value stays fixed while everything it’s measured in or measured against is what REALLY changes.

      • Stephen says

        Just to clarify, Gresham’s Law states that a legally overvalued money will drive out a legally undervalued money.

        Also, gold doesn’t have a “fixed value.” Value is subjective and is based on people’s constantly changing evaluations. It’s true that gold has maintained a relatively constant purchasing power over time, but that doesn’t mean that its value is somehow “fixed.”

  9. ManAboutDallas says

    There IS no “debating” with a congential idiot such as Krugman. They drag you down to THEIR level and then beat you with experience.

  10. ManAboutDallas says

    Typo in prior post, a congenITal idiot, not a congenTIal one. I used to suffer from lysdexia, but I’m KO won.

  11. Dani Tofte says

    I’m confused by Paul’s view that the capital gains tax rate should drop from it’s current 15% down to ZERO. I don’t understand the position that income earned through wealth shouldn’t be taxed but income earned through labor should. If anything it seems like it should be the other way around. And I’m speaking as someone who earns income through capital gains.

  12. Jeff says

    I don’t presume to speak for Mr. Paul but I believe the idea is that capital gains arise from savings that are invested for some productive purpose, often generating employment and wealth in the process, and also in the process attracting tax on the earnings of the company in which the funds are invested.

    So the tax has already been paid and taxing the capital gains is not only double taxation but also discourages investment.

    • Dani Tofte says

      Thanks for answering my question, Jeff.

      I’m still trying to connect “capital gains” with “job creators”. Maybe I don’t fully understand the tax code. My understanding is that if I don’t want to pay taxes on profit, I can reinvest it in my business. As I see it, this is a legitimate way to pay zero taxes on “capital gains”, by turning them into “expenses”. If instead this is my take-home pay, how does this create jobs? It seems like a lower tax rate on capital gains, in this respect, actually lessens the incentive to create jobs. If I had to pay a higher tax rate on my income, I might be more likely to “shelter” this income by reinvesting it into my business, which is what might actually create jobs.

      And not all people who earn income though capital gains even create jobs. I don’t. I’m a one-man show. As far as I’m concerned, what I do is legal gambling. I don’t contribute anything to society through my work. I am not a manufacturer or service provider. So why do we think I should pay a lower tax rate on my income than, say, a truck driver? Many of the wealthiest in our country became so as hedge fund managers, not creating anything, just moving money around, hedging their bets, gambling legally; they are not Steve Jobs.

      My in-laws sold their business’s building. They owned it for about 30 years so, as you can imagine, they made a lot of profit because of appreciation. Now, this was a smart investment but I haven’t seen the logic in treating this income differently than if they had earned it through physical labor. In fact, I’m confused as to why they paid less than if they’d worked for it. If anything, it would seem like all the years of hard work they did running their business should have been taxed at the lower rate, not their good luck but their labor.

      We encourage Americans to save with tax-deferments so that they are self-sufficient after retirement. We don’t need to worry about the wealthy–they’ll be fine in retirement–so they don’t need a tax break. I just don’t buy the argument that the wealthy need a tax break because they are job creators. The top 1% own 90% of our wealth. How much more do they need before they’ll create enough jobs? 95%? 99%? 100%?

      I hear lots of worry that we’re becoming too socialist. I worry that we’re becoming an oligarchy.

  13. celerity says

    The only reason Krugman debated Paul was because his publisher asked him to (he’s promoting a book).

    And Paul indeed sounded like a weirdo when he started talking about currency debasement. Anyone can look at PCE or CPI and see inflation has been stable the last decades.

    Funny how people here can’t distinguish the monetary base from the money supply. No wonder people laugh at the ‘Austrian School’. It’s part of the libertarian sub-culture on the internet. A little bit lit creationism of economics.

    • Adriano says

      “Anyone can look at PCE or CPI and see inflation has been stable the last decades”????

      A “stable” inflation does not mean price stability but constantly increasing prices that is a “stable” currency debasement.

      An “stable” inflation of “just” 3% would have meant an increase in the price average in 10 years of about 34%: (1+0.03)^10 = 0.34
      Ergo a monetary savings of $100 would have been “debased” to $66.

      That may be true on “average” according to the CPI, but I reckon any household would cry out that prices have at least doubled in the last ten years that corrensponds to a “real” inflation of at least 4%: 1.5^(1/10)=1.041.

      “No wonder people laugh at the ‘Austrian School’”
      Simply because people ignore reality…

      • Jamie says

        You have conveniently ignored the fact that monetary savings earn interest, and therefore would not have been debased.

        Besides, even if prices have doubled in 10 years, so what? Living standards are what matters and those have increased on average over the past 10 years in real terms.

  14. says

    Notice Krugman et al’s argument requires no proof? Just ‘print more money’ is always the answer. It reminds me of that scene in Terminator 2 where Sarah Conor is being discussed by the psychiatrist and he makes observation that her ‘fantasy’ of some ‘robotic killing machine from the future that absolutely won’t stop and requires no proof as it never appears and left no evidence.
    What will Krugman et al say when the Terminator of Hyperinflation, Economic ruin and never ending war steps out of the lift…?

  15. Toby says


    You mustn’t be reading much of what Krugman actually writes, his texts are about as filled with data and evidence that supports his views as anyone. I admit not having read much of what you write, so I cannot know whether you can match his evidence-based focus.

    I’m curious as to what you believe was the role of securitization, collateralized debt, and credit default swaps was in the creation of the 2008 recession?

    I realize that you probably have little good to say about conventional wisdom in this subject, but it’s pretty commonly accepted that these vehicles, rather than old-fashioned banking, caused the housing bubble. I don’t know why these vehicles would not have been created even in an environment with higher interest rates, and these vehicles were not regulated the way that the most of the financial industry was. I strongly reject the idea that low interest rates alone caused this recession.

    I would also like to know what you believe was the reason why the Great Depression ended, if not large amounts of government spending through the war?

    You must also realize that all responses to recessions will be effective only in its scale compared to the recession. It’s pretty clear that the economy responded positively to the stimulus packages, just look at unemployment claims from week to week, and consider when the stimulus was implemented. Is it really so odd to believe that a larger stimulus would have a stronger effect? That’s also why, when you say that the previous 30% of debt so obviously failed, you have to prove, that it really did fail.

    It’s also misleading to assume that just because the stimulus measures were inadequately sized, Krugman and supporters believe that the government is taking an Austrian approach. The theories are bipolar, the policies follow a continuum. This also means that your analysis that the government has rules as Krugman has proposed is clearly misplaced. Luckily, government realized that Keynesianism had something to offer, otherwise our economic situation would likely have been worse still.

    • says

      Toby, I fear that you raise too many points for me to cover satisfactorily in a reply in the comments section. I will give a few short answers here but for more detail and depth I have to refer you to my book – Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown.
      Don’t be fooled by the data. There is a lot of data out there, and it is almost always the case that both sides to any debate on economics can point to specific data points that can be interpreted to support their argument. Krugman does it, and so do his opponents. Krugman will say the economy (if measured by his favorite macro-data series, such as GDP, which, frankly, is highly suspicious) would have performed worse if not aided by the stimulus. You make a similar point later in your comment. Fact is, we cannot prove that that is the case. There are so many factors driving something as complex as GDP that we cannot isolate any individual factor. The economy is no laboratory. But you know what? I do not even disagree. I, too, think that GDP in recent years would have been lower without the stimulus (and just like Krugman I cannot prove it, it is a hunch) but I still think the stimulus is bad policy (reasons below). And now I can easily turn the data against Krugman: since the crisis started, the US government has continuously run 8-10% deficits to achieve 2% growth at most. How long are we supposed to continue such a policy? It is clearly not sustainable, and it has not led to self-sustained growth. And there is no economic theory in the world that can reasonable suggest that a 12% or 15% deficit would suddenly kick-start a sustained and lasting recovery.

      But we can go around the data as much as we like. It will never get us any further to the truth. Fact is this: The phenomena we are looking at here are so complex that we cannot look at some data and derive a theory from it. You have to have a theory first before you can even hope to make sense of the data – and this is what every economist does, including Krugman. He has a theory and then he looks at the data through that theory. By picking and arranging his data series, by including some data and ignoring others, the social scientist constantly makes decisions that are guided by the theory that he has BEFORE he even looks at the data. He can only hope that the data does not contradict his theory.

      I think Krugman is wrong about his THEORY. That is the point. How he analyses these phenomena, how he explains them and what he suggests should be done does NOT make economic sense. His theoretical tool-kit is highly suspicious. The THEORIES on which his writing is based are flawed, and I believe everybody can see this once they start analyzing them thoroughly. His ideas may be superficially appealing at first but they do not hold water. I would strongly suggest you start investigating Krugman’s view of how an economy works, what makes it not be in crisis most of the time, and what does cause the occasional recession, and following from there, what does this mean for policy? I can obviously not lay this argument out here in its entirety (again, please check Paper Money Collapse, in particular chapter 9) but I consider his theory (Keynesianism) faulty, flawed and unconvincing. There are much better theories around – and, in fact, have been around for some time. The so-called Austrian Theory of the Business Cycle, which is an improvement but still essentially based upon the earlier Monetary Theory of the Business Cycle, is a superior explanation for crises. And none of the data – to bring that back in – contradicts it, including the historical case of the Great Depression. There is no conflict between data and theory and that is all we can hope for.

      The reason complex economies run smoothly most of the time is because the actions of widely dispersed decision-makers with diverse objectives and plans are co-ordinated through market prices that guide resource allocation and the direction of economic activity. Sure, people constantly make mistakes. Companies fail all the time, even in ‘good times’. Some because they take on too much risk, others because they are too cautious and are pushed aside by competitors. But importantly, these are isolated events that do not derail the economy overall. By contrast, recessions are ‘clusters of errors’. Suddenly, a lot of people have made mistakes and, importantly, the SAME mistake. The cause of crises is always a major economic dislocation. Recently, this was a housing bubble and excess financial leverage. So the question for the economist is this: How can so many people have erred in the same way for such a long time to allow for the accumulation of such massive imbalances? (Btw, financial innovation and other forms of innovation occur all the time. They do not cause crises. Credit default swaps just help isolate and transfer certain risks among market participants. They may have somewhat contributed to excess leverage, they were certainly not the prime causes of the financial crisis. In and of themselves, they cannot explain the massive ‘cluster of errors’.) Of course, there is only one explanation: the pricing system has failed. The prices that normally co-ordinate activity have now misled people. And here the Monetary/Austrian cycle theory comes in. The most powerful explanation for any business cycle (and certainly for this one) is the credit boom followed by the credit bust. A money-induced boom artificially depresses interest rates (which are among the most important prices in a modern economy) and this encourages excessive risk taking (credit default swaps or no credit default swaps, they are just tools) throughout the financial industry and related industries (real estate).

      What are the implications for policy? – Do not artificially lower interest rates to create credit booms! Once you had a boom, the bust will follow and you will then have no choice but to allow the recession to unfold and (painfully) cleanse the economy of the dislocations and allow the economy to get back in balance.
      What does Krugman suggest? – Well, he was vocal in encouraging monetary stimulus in 1998 (after Russia defaulted) and in 2002 after Enron and WorldCom, two crises that were themselves results of previous credit booms. That is precisely what the Fed did and this did lead to short-term recovery but crucially it also provided the essential fuel for the housing boom that set us up for an even bigger crisis: the 2007/2008 debacle (Lehman). And now he says we should do it again! Krugman focuses on the symptoms of the crisis (lack of “aggregate demand”, financial stress) and looks to alleviate them with new government interventions. His ‘medicine’ does not SOLVE the crisis, however, because it does not address the causes. In fact, this policy will move us further away from a stable, well-functioning economy.

  16. Chad says

    Right. And if you ever get cancer, and the doctor recommends chemotherapy, just debate him by asking, like a child, “but how can poisoning my body be good for it?” The doctor will, of course, appeal to his credentials, and make up fancy medical mumbo-jumbo, but if you just keep asking him simple, logical, childlike questions, he will realize that he is wrong, and that it is best for your body to take care of the cancer by itself.


  1. [...] Schlicter’s response goes into extensive detail and runs as an eleven paragraph long direct response to Krugman’s performance in the Paul vs. Paul debate, I strongly encourage all who are interested to read it at Schlicter’s Paper Money Collapse blog, here. [...]

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