Tuesday, May 01, 2012

Krugman's "Inflation Fairy"

I never went to college, lived my whole life with merely a high school education. If that was good enough for me, then by God that should be good enough for kids today, so we should drop all of this nonsense about student loans and the cost of higher education. Let them get jobs after high school.

Of course that position is utterly absurd, and I assure you I do not hold it.

I used it to illustrate the folly of Paul Krugman’s position in the debate he had with Ron Paul the other day, in which he said that, “I like the economic policies we had after World War Two.” They worked then, he goes on to say, and they will work now. Then he goes on to advocate for the Fed to create inflation, which he believes will drive down unemployment.

Ron Paul, on the other hand, believes that inflation will destroy savings, including the retirement savings of people whose savings have already been devastated by the economic collapse of 2008. It also worsens the living standard for people on fixed incomes and low income wage earners. Dean Baker, who is something of a Paul Krugman clone, maintains that “wages increase with inflation,” but I don’t know where he gets that idea from. My experience after some fifty years of working for wages is that incremental wage increases never keep pace with inflation.

Krugman, meanwhile, is living is some sort of delusional world where economic theory is completely independent of conditions on the ground. Levels of global competition have no effect on economic policy; internals of income levels and structure are irrelevant; and the balance between production and consumption or between capital and debt do not affect the theory under which the economy should function. The differences in all of those areas between the post war years and now are as between night and day, and yet Krugman thinks our economic policies should be the same.

Krugman mocks the “confidence fairy” who is going to hire new employees because Republicans are back in control, and the “bond vigilantes” who are going to drive the federal borrowing rates up because they fear the massive federal debt, but he adores the “inflation fairy” which is the people who are going to buy things like crazy because they hear the word “inflation” and want to get stuff now before the price goes up.

He fails to think about that “cart and horse” thing. Too many people are currently unemployed, underemployed and/or deeply in debt to be going on a spending spree to become the “inflation fairies” that he thinks are going to cause the surge in consumer spending that is going to restart the economy. He is trying to create a spending spree by diluting purchasing power; a self licking ice cream cone that is merely going to melt.

1 comment:

bruce said...

While we're at it, maybe we should just go back on the gold standard? And inflation doesn't make the debt just go away anyway. And if everyone rushes out and buys something, what about afterwards? IS that sustainable? I very much doubt it.

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