Monday, March 2, 2015

A Vicious Attack By Paul Krugman on Marty Feldstein

By Robert Wenzel

My favorite Keynesian economist, Marty Feldstein, is out with an important new essay at Project Syndicate. He makes a number of significant points:

 The world's major central banks are currently obsessed with the goal of raising their national inflation rates to their common target of about 2% per year. This is true for the United States, where the annual inflation rate was -0.1% over the past 12 months; for the United Kingdom, where the most recent data show 0.3% price growth; and for the eurozone, where consumer prices fell 0.6%. But is this a real problem?
The sharp decline in energy prices is the primary reason for the recent drop in the inflation rate. In the US, the core inflation rate (which strips out changes in volatile energy and food prices) was 1.6% over the last 12 months. Moreover, the US Federal Reserve, the Bank of England, and the European Central Bank understand that even if energy prices do not rise in the coming year, a stable price level for oil and other forms of energy will cause the inflation rate to rise.
In the US, the inflation rate has also been depressed by the rise in the value of the dollar relative to the euro and other currencies, which has caused import prices to decline. This, too, is a “level effect," implying that the inflation rate will rise once the dollar's exchange rate stops appreciating.
But, despite this understanding, the major central banks continue to maintain extremely low interest rates as a way to increase demand and, with it, the rate of inflation. They are doing this by promising to keep short-term rates low; maintaining large portfolios of private and government bonds; and, in Europe and Japan, continuing to engage in large-scale asset purchases.

With a more aggressive tone, I have pretty much said the same thing in the EPJ Daily Alert:
I continue to hold the view that significant price inflation acceleration is just around the corner. Once the oil price decline stops--and it will stop at some point--the CPI number will climb fairly rapidly, especially becasue the end to the oil collapse will also likely coincide with a rapid decline in the dollar on foreign exchange markets, and becasue continuing climbing consumer confidence is going to cause consumers to spend more--resulting in prices being bid up more.
Feldstein then went on to say:
[L]ow inflation and periods of deflation did not prevent real incomes from rising in Japan. From 1999 to 2013, real per capita GDP rose at an annual rate of about 1% (which reflected a more modest rise of real GDP and an actual decline in population).
Why, then, are so many central bankers so worried about low inflation rates?
One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions. And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts.
None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.
Yes, that last paragraph does sound almost like Austrian School Business Cycle Theory, in its focus on mispricing of assets.  Like I said, Feldstein is my favorite Keynesian economist.

But Krugman will have none of it and goes on a blistering distortion of Feldstein's commentary (While at the same time taking a swipe at goldbugs, anti-fractional reserve people etc,):
Monetary policy attracts crazy people like moths to a flame; goldbugs, 100-percent-reserve-banking types, amateur historians who think they know exactly what happened when Diocletian ruled Rome  ...
The Bank for International Settlements remains tight-money central. But Marty Feldstein is effectively shadowing the BIS position, with added conspiracy theory, and it’s kind of shocking to see...
What really strikes me about Marty’s latest, however, is the muttering that there must be some sinister hidden agenda driving the anxiety of central banks about below-target inflation, given that classic deflationary spirals don’t seem imminent...Feldstein suggests — with not a shred of evidence — that central banks are operating under ulterior motives, notably a desire to help finance budget deficits.
It’s very, very strange, and distressing.
Feldstein, of course, does not weave conspiracy theory, nor does he insist there must be a sinister hidden agenda.  Feldstein lists three possibilities that may be driving central banks to keep interest rates near zero, only the third considers the possibility that central banks may be doing such to finance government budget deficits. And that sounds like a very reasonable piece of conjecture to me. Or does Krugman seriously hold the view that central bank policy is never ever influenced by government leadership?

Since Krugman has brought up economic historians, perhaps he should review the history of the Nixon Administration, when Arthur Burns was chairman of the Fed, to understand how government officials can influence central bankers, if he thinks the idea of government officials influencing central bankers is something of fairy tale theory:

Here's Burton Abrams in The Journal of Economic PerspectivesVolume 20, Number 4—Fall 2006:
The fact that President Nixon pressured Arthur Burns to run an expansionary monetary policy in the run-up to the 1972 election is well-known (for example, Tufte, 1978, pp. 45–50). As another example, John Ehrlichman (1982, pp. 248 – 49) describes a meeting between Nixon and Burns on October 23, 1969, just after Burns’s nomination to the Fed had been announced.
Perhaps, Feldstein does understand history and the nature of central banking better than Krugman.and this is the cause of Krugman's misplaced attack, or a conspiracy theorist might speculate that Krugman is just continuing in his role as a hack for the Obama administration.

I also want to note Krugman offers no comment at all on Feldstein's final paragraph that is so Austrian in discussing the central bank money manipulation and the resulting mispricing of assets that occurs. When Krugman doesn't bark at something, when fashioning a hit piece, you know that he can't even figured out a distorted way of attacking the observation. I'm not surprised.

Robert Wenzel is Editor & Publisher at and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics


  1. "Monetary policy attracts crazy people like moths to a flame; goldbugs, 100-percent-reserve-banking types, amateur historians who think they know exactly what happened when Diocletian ruled Rome"

    For what it's worth, Krugman's point that no one "knows" what was really going on monetarily under Diocletian has already been refuted after him/Ron Paul discussed it briefly back in early 2012 via an excellent follow/write up by Peter Earl:

    I also find it interesting that Krugman himself keeps bringing up Diocletian over and over again, long after the debate/talking point already occurred. It must have really stung him.

    One also naturally has to ask why Krugman stated "I'm not a defender of the economic policies of Diocletian." under the assumption his argument is now that it's unknowable? (which has been refuted; see link)

    1. Thanks Nick, I could not help reminiscing about the debate between Ron Paul and Krugman as I read this article

  2. "Monetary policy attracts crazy people like moths to a flame; goldbugs, 100-percent-reserve-banking types, amateur historians who think they know exactly what happened when Diocletian ruled Rome"

    That is a very anti-intellectual statement on Krugman's part and more of what you would expect from a nonacademic than an esteemed educator. I guess intellectual curiosity is looked down upon in his classroom. That is really sad.

  3. How is Krugman any different than the official cannot-be-mentioned story of the Ukrainian Nazis? Let's presume Krugman is just a lying SOB and he knows it. Occam's Razor.