Channeling Henry Hazlitt to Demolish Krugman, Mankiw and Bernanke

By Joseph Salerno

How many eminent macroeconomists is one clear-thinking and literate economic journalist worth?  Well if the journalist is Carolyn 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.

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