Friday, February 15, 2013

Paul Krugman: Murray Rothbard Was the Only Economist Who Understood What Went on During the Reagan Era

Well, he doesn't say that in those exact words, but in a post today, Krugman makes this point:
So, as you can see, during the 70s we had deficit spending that ran up the national debt, until Ronald Reagan was elected in 1980 and restored fiscal soundness. Oh, wait; it’s actually the opposite.

Here's Rothbard on Reagan:
Every ideological revolution has to worry about selling out upon achieving Power, on surrendering principle to the lure of pragmatism, respectability, Establishment acclaim and the mushhead "vital centre" of the country's polity. All Reaganites liked to refer to their accession to power as a "revolution." But in order for such a revolution to succeed in its goals it must be tough and vigilant, it must have indoctrinated its members – its "cadres" – in resisting the blandishments of the pragmatic. The Reagan Revolution, in contrast, sold out before it even began[...]  For a year or two, it was hardly possible to watch news on TV without watching some bozo wailing about how he and the rest of the world were about to come to an end because the federal Scrooge had cut his budget or his grant. Conservatives bought this myth because they wanted to see Reagan accomplish what he had said he would; liberals were happy to adopt it so that they could wail about how Reagan was causing untold misery and starvation by his drastic cuts. Actually, the budget was never cut; it has always skyrocketed under Reagan.

Here's Krugman on another point, in the same post, that Rothbard understood early on:
 The 70s were important for economics. They did kill the notion of a stable Phillips curve that doesn’t depend on expected inflation, and convinced Keynesian as well as non-Keynesian economists that there is a minimum level of unemployment that can’t be reduced with demand-side policies.

Here's Rothbard at the time:
Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the government to stop its inflationary creation of new money. 
The tradeoff doctrine is based on the alleged "Phillips curve," a curve invented many years ago by the British economist A.W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemployment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic establishment.
By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, inflation was only about one to two percent per year, and unemployment hovered around three or four percent, whereas later unemployment ranged between eight and 11%, and inflation between five and 13 %. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation- unemployment tradeoff.


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