If you had asked me how I would have expected Ron Paul to do in debating Paul Krugman, I would have said that Krugman would score a TKO. He would rack up points in each round and dominate. This isn't because I agree with Krugman. But I do think he's a brilliant economist. Ron Paul, on the other hand, although I think he's a smart man and I think his heart and most of the policies he advocates are in the right place, often speaks way too fast and jumps from point to point without making a coherent case. And his economics are pretty much completely self-taught. (In class on Tuesday, when the debate came up in my 5-minute discussion, I said, in front of an audience of 16 males, "Ron Paul is a gynecologist and he's self-taught." The class roared with laughter. Then I got it.)
But I thought it was close to a draw. You can see the video and a partial transcript (it misses a lot) here. I won't analyze line by line, but I will point out where I thought Ron Paul was good and where I thought he was off, and ditto with Paul Krugman.
Managing an economy
Ron Paul started by saying that he doesn't want the government to manage the economy, whether through central planning or through monetary policy. He said, "This idea that somebody or some group might know what the proper amount of money might be or what the proper rate of interest should be is sort of presumptuous." I agree and I think he was strong here. Interestingly, it took Jon Stewart on The Daily Show to ask Alan Greenspan, when he was pushing his book a few years ago, to ask him, basically, if you don't want government to plan the economy, why do you think government can plan the money supply. Economists who advocate government monetary policy are asked that question all too rarely.
Where I thought he erred is in equating fixing the rate of interest, which he called, correctly, "price fixing," with wage and price controls. But with wage and price controls, you get shortages or surpluses. With government trying to set interest rates, you're likely to get the wrong interest rate, but it will be a market-clearing interest rate because the Fed reserve is entering the market only as a supplier or demander of credit, not as a price fixer in the narrower sense of that term.
Krugman, by the way, could have pointed out that he is not an advocate of wage and price controls (other than the price of unskilled labor and the price of medical care), but he didn't. Maybe Krugman's ""I'm not a defender of the economic policies of the Emperor Diocletion, let's make that clear" was his way of saying that.
Volatility and the Great Depression
Krugman said, "History tells us that in fact a completely unmanaged economy is subject to extreme volatility, subject to extreme downturns. I know this legend that some people like that the Great Depression was somehow caused by the government or the Federal Reserve, but that's not true. The reality is it was a market economy run amok, which happens repeatedly..."
But he seems to have forgotten Christina Romer's work (here, which she summarized in The Concise Encyclopedia of Economics as follows:
In some recent research, I have tried to avoid the problem of inconsistent data by comparing the crude prewar statistics with equally crude postwar statistics. That is, I have compared the existing prewar series with modern data that are constructed using the same assumptions and data fragments that were used to piece together the prewar series. These comparisons show essentially no decline in the severity of cycles between the prewar and postwar eras. They also show little change in the duration and frequency of cycles over time. Thus, much of our apparent success at eliminating the business cycle seems to be a figment of the data.
There's a sense of proportion missing in Ron Paul's comments. Yes, inflation, in a tax system that is unindexed, does reduce the incentive to save. I'm not sure if that's what he was saying. But a 2% inflation rate is a small hit. I know that Ron Paul's favored inflation statistics are from John Williams at Shadowstats. I find Williams not credible. After I briefed Ron Paul and 7 other Congressmen in 2007 on my study, "Do We Need to Go to War for Oil?," I had some one-on-one time with him in which I tried to persuade him that Williams is not credible: I didn't succeed.
Krugman said, "We had policies that fostered a strong middle-class instead of using the worship of the supposedly ideal force of the market." This reflects Krugman's strange view that times were better when a split-level house and a trip to Europe were incredible luxuries. I kid you not, as that 1950s person, Jack Paar, used to say. Here's Krugman in an article in 2002:
Those considered very well off lived in split-levels, had a housecleaner come in once a week and took summer vacations in Europe.
Post-World War II
Ron Paul said, "After World War II, a lot of the debt was liquidated. But guess what else we did? Troops were coming home. 10 million people were coming home. Big government liberals wanted to have job programs. They weren't put into place. We cut spending by some 60%, we slashed taxes. Finally, the Depression ended. So, it was that liquidation of debt that made it available that we could come back to work again."
He did great until the "slashed taxes" part. The post-World War II U.S. economy is Exhibit A against the Keynesian view that you can't cut government by a lot without throwing the economy into recession. I think Ron Paul had my study in mind or studies by Robert Higgs that I drew from in doing mine. But he was wrong on taxes.
The Helicopter Drop
Krugman said, "When Ben Bernanke was talking about the helicopter, he was taking that from Milton Friedman. That was really his idea."
That's true. I wouldn't have expected that to be much of an argument against Ron Paul, though, because Ron Paul was never a Friedmanite in that sense. But then Ron Paul surprised me, in a negative way. He said, "Why did the Federal Reserve bail out the rich and not give the money to the mortgage holders? If you care about poor people...Why didn't you use helicopters and pass it back to the home builders? That would be more fair."
I have stated elsewhere that there's a huge difference between the Fed buying assets and giving money away.
Here's the issue on which I think Ron Paul beat Paul Krugman. Ron Paul started by saying that he doesn't want to end the Fed in the short run but simply wants to subject it to competition. He said, "Just allow me to legalize the currency, get rid of the monopoly, take the taxes off gold and silver and get rid of the sales tax and capital gains tax -- don't hide behind a monopoly. People today if they use gold and silver, you can go to jail."
Here's what monetary economist Lawrence H. White said in testimony about a bill to legalize currency competition:
Section 3 of the Act rules out federal or state taxes on precious-metal coins, whether minted by a foreign government or by a private firm. This section would allow precious-metal coins to compete with the US Treasury's token coins (made of base metals, and denominated in fiat US dollars) without tax disadvantages (sales taxes on acquisition and capital gains taxes on holding, from which Federal Reserve Notes are exempt), and thereby a level playing field for competition among monetary standards.
White's whole testimony is worth reading if you want to know more of the background on currency competition.
Krugman replied, ""That's not my understanding of the law. But do you really think people use dollar bills because the federal government isn't allowing them to use other stuff? That seems like a very strange point of view...You can do barter with all kinds of stuff..."
But Krugman didn't say what his understanding of the law is. It's possible that he doesn't know the law. Notice also that he brings barter into it. That's a reach: there are many possibilities for money that are neither Fed Reserve notes nor barter.
Printing Money and Fraud
Here I think Ron Paul went way overboard and Krugman won. There is nothing fraudulent per se about printing money. There is nothing fraudulent about causing business cycles. It may be bad policy but it's not clearly fraudulent.
Debt to GDP Ratio
Krugman said, "[I]f it takes another 30 points [DRH note: that's almost $5 trillion more of federal debt] to get us out of this depression, I'm willing to accept that. I'm not going to claim there's no risk, but the risk of not doing what it takes to get out of a depression is a clear and present danger. I don't want us to go up to Japanese levels of debt, even though they turn out to be able to carry those levels of debt. But we're not anywhere close to a red line here, is the point. I can't give you a specific number."
How close we are to the red line is a judgment call, of course. But those like me who think Keynesian policy is a bust and the post-World War II U.S. experience can actually teach us something will think that Krugman failed.