Baum v. Krugman, Mankiw, Bernanke and Company

How many eminent macroeconomists is one clear-thinking and literate economic journalist worth?  Well if the journalist is Caroline Baum of  Bloomberg.com, the answer is at least  five.  In a column this week, Ms. Baum, channeling Henry Hazlitt, demolishes the argument put forth by  the IMF’s Olivier Blanchard,  Ivy League Professors Ken Rogoff, Greg Mankiw, and Paul Krugman and Fed Chairman Bernanke that an acceleration of the inflation rate is the panacea for the still ailing U.S. economy.   The gist of the argument of these luminaries of modern macroeconomics is that an increase in the inflation rate, say to 3 to 4 percent,  will stimulate the economy in two ways.  First, higher inflation will “help the process of deleveraging” by eroding the real value of debt, thereby reducing the  burden of debt payments and encouraging spending. And second, an increase in the inflation rate will arouse expectations of future depreciation of the dollar and thus panic businesses and households into spending their hoarded cash.  This argument is rooted in what might be called the “spending illusion,” the simplistic and deeply fallacious doctrine that the spending of money drives the economy.  This doctrine originated in the writings of John Law, the notorious early eightenth century gambler, financial schemer–and central banker.  Law’s doctrine inspired the monetary cranks of the nineteenth century as well as the founders of modern macroeconomics in the twentieth century, Irving Fisher and John Maynard Keynes.  It remains deeply entrenched in the macroeconomic thought of the twenty-first century.

But Baum will have none of it.  As she pointedly comments:

There is something fundamentally wrong when government prescribes the same policies that got us into this mess as the solution. The U.S. lives beyond its means. The federal government is running a trillion-dollar deficit for the fourth consecutive year, compounding its inability to make good on promises it has made to future retirees. Consumers binged on credit because home ownership was touted as a reliable piggy bank. All the postmortems on the financial crisis emphasized the need to save more, consume less. . . .  If we need to save more, both individually and as a nation, the Fed shouldn’t encourage us to spend, spend, spend. And some economists want to introduce higher inflation into this toxic mix?

You would think that the increasingly evident failure of China’s inflationary monetary policy would give our own inflationists pause.  China’s plan to promote consumption spending involved the building of spectacular new cities and shopping malls  based on the belief that  ”if you build them, they will come–and spend.”  An arresting visual representation of this enormous malinvestment of capital and profligate waste  of resources is captured in these eerie photos of completely empty Chinese shopping malls.

Comments

    • Perhaps I’m missing something Tom but he doesn’t seem to demonstrate that Law inspired Keynes or Fisher. He just tries to lump them in with Law. That doesn’t seem like the same thing to me.

      People like you and DiLorenzo get lumped in with racists a lot for your views on secession – inappropriately, in my mind. Certainly you wouldn’t agree that shared views on secession with the claim that you were inspired by racist views or previous racists secessionists, would you? I would have thought you’d be more in tune to that distinction, given your experience with that.

      I’m a young scholar, but I feel pretty familiar with Keynes. This claim doesn’t pass the smell test for me.

      • *wouldn’t agree that shared views on secession IMPLIES that you were inspired by racist views or previous racist secessionists.

      • I think Daniel is right here to complain although I don’t think his counter example is really analog. Law wasn’t an evil person who wanted to do any harm intentionally.

        I think Daniel is right not because I think it is unlikely that Law influenced others like Keynes, but it is very clear that nearly nobody would dare to state that even a small part of his theories are based on Law. You could discredit yourself too easily, Law is a hot potato nobody wants to affiliate with. Even if it is likely that he really influenced Keynes, then it should be stated as a mere possibility e.g. due to similarities in the policies they both recommended but not as a fact if there is none. (If there comes a fact for this later I apologize!)

        @ Daniel,

        Maybe you could take up the issue sometime in the future and contrast Law’s and Keynes’ economics with each other?

  1. Could you clarify/cite the sense in which John Law inspired Fisher and Keynes? I’m not sure that’s true at all, but if it is I’d be interested in knowing more about it.

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