A few quick objections to Paul Krugman’s 10.12.2009 NYT column, “Misguided Monetary Mentalities”:
Falling Dollars and Apples
Krugman states, “The truth is that the falling dollar is good news.” I object. A falling dollar is an effect of a natural law – the law of supply and demand. From October 2008 to October 2009, the US monetary base increased about 80%. Of course the purchasing power of the dollar is falling. The dollar supply has increased by 80% in 12 months!
Saying this is good is like saying a falling apple is good. Both are natural phenomena obeying natural laws. For the apple, the law is gravity. For the dollar, the law is supply and demand. A falling apple could be good. It could make a tasty dessert for a family on a picnic. It could also be bad. For example, it could break the silence and spook away a hunter’s prey.
Likewise, a falling dollar could be very good for borrowers as they repay their debt with inflated dollars. For lenders, or owners of dollars, or anyone with a stream of fixed future cash flows, a falling dollar is decidedly bad.
Krugman saying that a falling dollar is good is like Newton saying that a falling apple is good.
Krugman objects to free market advocates’ contention that government should not seek to ‘create’ jobs. I object to his objection.
Any job the government must create is one that the free market would not create on its own. That is, the free market does not value the product of the created job highly enough to pay for it. When the government creates it coercively, they are effectively saying, “We bureaucrats are smarter than the dumb old free market. The free market doesn’t know what’s good for it anyway. This job should exist, so we’ll confiscate some of your money to pay for it.”
For the government, creating jobs is easy. They can just pay people to dig holes and fill them in. Hole digging and filling is an obvious misallocation of resources and no one advocates for it. The artificial work created by the government is not so blatant a misallocation, but it is a misallocation nonetheless.
The Fed’s Inflation Target
Krugman wants the Fed to hold interest rates artificially low because, “the unemployment rate is a horrifying 9.8 percent and still rising, while inflation is running well below the Fed’s long-term target.” I object.
Why does the Fed even have a long term inflation target? Why is it ok for them to reduce our dollar’s purchasing power a little (via inflation), as long as it doesn’t exceed their long term target? Why can’t the free market set its own natural inflation target?
Something We Agree On
I agree with Krugman that a return to the gold standard is a bad idea. Linking our currency to a precious metal artificially restricts the money supply. I’m against that, just as I’m against artificially inflating it. (Sometime when I have more time I’ll write about what I would do instead. It involves repealing legal tender laws and ‘collectable’ taxes. I know you’re on pins and needles.)
My Fundamental Objection
Krugman is quite an accomplished economist. That means he’s a good scientist – good at sorting out cause and effect. But when he interjects his values by advocating for certain effects, he’s no longer speaking as a scientist. He’s just another academic who thinks he knows better than the rest of us how to spend our money.