Krugman the Psychologist

In his July 25th column, Paul Krugman attempts to discredit a view he apparently doesn't understand. This time, he focused on Ron Paul, calling him names, comparing him to Bernie Madoff, and suggesting that he is a white supremacist. He claims that the only reason people would believe Ron's analysis is that they too are crotchety racists. Sadly, this is par for the course for Krugman.

When he's done psychologizing, he does manage a bit of substance in the post. He apparently thinks his criticism is utterly devastating to Ron and to Austrian Business Cycle Theory (ABCT). His claim is that, since the CPI hasn't risen due to loose monetary policy, the ABCT is wrong and so is everyone who espouses it.

ABCT has little to say about consumer prices, but a lot to say about asset prices. Though it certainly doesn't apply in all situations, ABCT can explain the dynamics of asset markets in the face of interventionist monetary policy. The 2008 crisis is a textbook example.

When it comes to consumer price inflation, proponents of ABCT have made different predictions at different times. One example is a bet between David Henderson and Bob Murphy. Mish Shedlock is another example of a proponent of ABCT who thought, at one time or another, that deflation was a bigger risk than inflation.

The massive increase in the monetary base during the 1930s didn't result in significant consumer price inflation until M2 caught up in the 1960s and 1970s. We've just experienced another dramatic increase in the monetary base without an equal run-up in M2. It's possible that, when M2 recovers, we will see significant consumer price inflation. (Hat tip to Julien Noizet for his thoughts on this.)

I'm not here to defend Ron Paul's understanding of business cycles. I'm here to, as I've done twice before (here and here), correct Krugman's simplistic analysis. If Krugman decides to give up name calling and armchair psychology, I hope he decides to read something about ABCT before writing his next post on it.

Source: St. Louis Fed