Last week Bloomberg News hosted this interesting debate between libertarian Rep. Ron Paul of Texas, currently seeking the Republican nomination for President, and liberal Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, on central banking, deficit spending and inflation. You could watch two important public figures, both independent thinkers who are beholden to nobody, debate what they honestly think about an important public issue. That is something I fear will be a rarity in this Presidential election year.
Ron Paul wants to phase out the Federal Reserve System. He correctly pointed out that without the existence of a semi-government agency with authority to buy government bonds and create money, it would be very difficult and maybe impossible for the government to finance either the current endless wars or the welfare state, which he is equally against.
The problem is that without a Federal Reserve, decisions about interest rates and money supply would be made not by an impersonal mechanism, but by powerful individuals such as J. Pierpont Morgan, who would not be accountable to the public. Or you would have a chaotic system, like that which existed in the United States during the decades leading up to the Civil War, when wave of bank failures were frequent, and depositors lost their money. Ron Paul would like to go back to that era or, alternatively, to return to the gold standard. The problem is that impersonal mechanisms are just as fallible as individual people. There is no magic of the market, or magic anything else–just a choice among imperfect systems.
While Ron Paul focused on deficit spending, debt and inflation, Paul Krugman focused on employment and economic growth. I think Krugman had the right priority. The U.S. government dealt with the enormous debt left over from World War Two, not by paying down the debt but by generating strong economic growth so that the debt became proportionately less in relation to the overall economy.
Krugman is a Keynesian, which means that while he favors a balanced budget and tight money in normal times, he thinks that deficit spending and easy money are warranted in a serious recession, as a means of getting money into circulation so that people will start spending and investing again. The problem with that is that it doesn’t seem to be working. I think the reason is that the current recession is more than part of the normal economic cycle. It is a crisis resulting from decades of running the U.S. economy on debt rather than production. When people have more money in their pockets, they don’t necessarily spend it, they use it to pay off their mortgages, installment loans and credit card balances. And the big banks, as Ron Paul said, are content to borrow money from the Federal Reserve at 1 percent interest and lend it back to the government at 3 percent interest. That does nothing to help the real economy.
I don’t believe in spending money for the sake of getting money into circulation, but I think the government should refrain from cutting back on basic services and that this is a good time to invest in infrastructure repairs, scientific research, job training and other measures to maintain our country’s productivity. Ron Paul said, perhaps in jest, that it would have been better for the Federal Reserve to give relief to mortgage-holders (perhaps by refinancing their loans?) than to relieve the banks. Certaintly this would have done more for economic recovery.
Click on Economics Throw-Down! Krugman vs. Ron Paul on Bloomberg TV — Helicopters, Gold and More for highlights.
Click on David Henderson on Paul vs. Paul for a conservative economist’s summary of the debate.
Click on Ron Paul Flunks History for comment on David Frum’s Daily Beast web log.
Click on Ron Paul vs. Paul Krugman: the Bloody Aftermath for discussion of the issues by Reason magazine’s Brian Doherty.
Click on Krugman Says Fed ‘Reckless’ to Allow High Jobless Rate for a Bloomberg News followup to the debate.
Hat tip to Joshua Chacon.