More Krugman Konfusion

Paul Krugman wrote recently in a post at the NYT:

OK, strictly speaking the time hasn’t run out — we could, I guess, see an explosion of inflation next year. But with commodity prices down, wages going nowhere, and the dollar actually strengthening against other currencies, it’s kind of hard to see where that’s supposed to come from.

Look, the Austrian/Ron Paul types made some very strong predictions about inflation — and rightly, given their model of how the world works. In their version of reality, it really isn’t possible to triple the monetary base without dire effects on the price level. In my version of reality, of course, that’s not only possible but what the model predicts in a liquidity trap.

So since we did indeed triple the monetary base with nothing much happening to inflation, the right lesson to draw is that their model is all wrong.

This is simply wrong. There is no Austrian economist that has contributed to the development of Austrian business cycle theory, who discussed the monetary base as the figure to watch in determining price inflation . In the camp of contributors, I include Ludwig von Mises, Friedrich Hayek and Murray Rothbard.

Indeed, Rothbard even understood the dangers of looking just at the monetary base, before Fed chairman Bernanke started paying interest on reserves. In his book, The Mystery of Banking, Rothbard wrote:

The numerous problems of new bank instruments and how to classify them, as well as the multifarious Ms, have led some economists, including some monetarists, to argue quite sensibly that the Fed should spend its time trying to control its own liabilities rather than worrying so much about the activities of the commercial banks. But again, more difficulties arise. Which of its own actions or liabilities should the Fed try to control? The Friedmanite favorite is the monetary base...Looking at the aggregate figure of the monetary base cloaks significant changes in the banking picture.

If Rothbard was suspicious of the monetary base, as a means for measuring money supply, before the advent of interest being paid on reserves, he most assuredly would be even more suspicious now.

Now, in the post, Krugman references Peter Schiff, but I consider Schiff a popularizer of Austrian theory and not someone who has expanded thinking in the area of business cycle theory. I don't listen or read Schiff that much, perhaps Krugman does, so maybe he has heard Schiff say something about the monetary base. But those that developed Austrian business cycle theory never focused on the monetary base. Indeed, in the quote above, Rothbard disses Friedmanite focus on the monetary base.

In other words, Krugman just doesn't know what the hell he is talking about.

As for the Austrian School view on what causes price inflation, I am writing up a full commentary on that which I will most likely publish on Monday, so I won't get into that here.

ALERT: Krugman in Full Panic

After 19 instances of price inflation all over the place, Paul Krugman has found two charts which he claims demonstrate disinflation in the economy.

The first chart is of "Core" CPI, which excludes food and energy, and which was designed by Richard Nixon  as an index to fool "the people".  You know Krugman is desperate when he relies on a Nixon indicator. This one, though, in due time will also turn positive on inflation.

Chart 2 is where Krugman really displays his desperation and his ignorance of business cycle theory. He shows us a chart of slowing wage increases. But unemployment (and therefore wages) lags a turnaround in the economy. If Krugman understood Austrian business cycle theory, he would understand that the average worker gets screwed during an inflationary period, as the money flows first to the capital goods sector. That is why the stock market turns before wages.

The unemployment lag, and thus the slow recovery in wages, should not be a surprise to Krugman. It is basic. It is certainly (LOL) not an indicator that disinflation is on the way and spreading through the economy.This is what the Conference Board writes:

Below is a list of the seven components of the Composite Index of Lagging Indicators, according to the board's Business Cycle Indicators....Average duration of unemployment - This component represents the average number of weeks an unemployed individual has been out of work. The value of this component is inverted to indicate a lower reading during a recession and a higher reading during an expansion. The measure of duration of unemployment is a lagging indicator...

Even the brokerage firm Charles Schwab understands wages are a lagging indicator:

The employment cost index (ECI) is a wage-inflation indicator produced quarterly by the Bureau of Labor Statistics (BLS) measuring wages, salaries and benefits. It records changes in compensation costs for civilian workers, which include nonfarm private industry, and state and local government employees...

Note: the ECI is a lagging indicator...decreases in the ECI are usually the result of too much economic restraint several months prior...it can take roughly six months for economic growth to begin to increase and another six months for the ECI to begin to rise.

Bottom line: Krugman is a desparate man. For him to pull out a Nixon designed price indicator and a lagging indicator to prove his point, it's clear he is cornered.

Starting with this post, I am adding a new label "Krugman Cornered". I will go back and add other posts to the label that show quotes from Krugman where he is cornered talking either about disinflation or deflation.

This guy needs to be nailed in real time.