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Peter Diekmeyer

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The Krugman Con

Originally published at Sprott Money October 28, 2015.

Paul Krugman

Gold's biggest enemy is a brilliant Nobel Prize winning economist, university professor and columnist for the New York Times. Sadly, he is also a con man.

Last week Paul Krugman wrote a column for the New York Times in which he called Republican Paul Ryan, a "con man." The Republican chairman of the House Ways and Means Committee's sins, Krugman, a Nobel prize winning economist and a professor at City University of New York, argues, stem from a lack of detail in his budget plans, regarding proposed spending cuts and closed tax loopholes.

Calling a politician a con man is a bit like telling a pig farmer that he stinks. It's practically part of the job description.

The claim is particularly rich, coming from Krugman, who in recent years has emerged as the de facto leader of a group of mainstream economists, whose advocacy of near unlimited government spending, borrowing and, most recently, money printing, will go down as one of history's greatest cons.

Understanding how, what I call the "Krugman Con," has been unfolding is crucial for precious metals advocates, because one of its core elements was the attempted elimination of the vital role played by gold. Indeed, the gold's recent resurgence on the world stage is an indication that the con, is nearing its closing stages.

Tax and spend. Borrow and spend. Print and spend.

Krugman's sins, which relate to his advocacy of distortions of policies suggested by John Maynard Keynes, are arguably far worse than Ryan's. As a university professor, Krugman has an obligation to be bound by a modicum of intellectual and academic rigor, rigor which is sadly absent in the advice he gives.

In his landmark work "The General Theory of Employment, Interest and Money," Keynes recommended that governments, through their spending, ought to play a stabilizing role in the economy. That's particularly true, wrote Keynes, during recessions, when governments should run deficits to increase demand, but also during good times, when they should run surpluses to pay down debts and cool things off.

However over the years, "Keynesian" academics, as they have become known, led by Krugman, have advocated increased government spending all the time, for almost any justification. Governments of all stripes, - most recently the Abe administration in Japan, - eager for academic cover for policies that justified massive government spending now (to get them elected), followed by tightness later (preferably after they had left power), embraced Krugman, and his acolytes, with open arms.

This process, - which is worth following, for those who want an understanding as to the increased importance of hard assets, - evolved in three stages.

The 1960s and 1970s: Tax and spend

Original Keynesian economics as described by Keynes in "The General Theory..." had some economic merit, if for no other reason than as an untried academic theory, particularly for a western world starving for solutions after the depression of the 1930s. However when put in practice the policies led to non-stop growth in government spending - and to a need, by politicians for academics to justify those spending increases.

However by the mid-to-late 1960s and early 1970s, "tax and spend" governments led by all parties, fattened by program such as Johnson's "Great Society" had reached the limits on what the public was willing to pay in taxes. One important milestone was reached when a healthcare program proposed by US Republican president Richard Nixon, which was remarkably similar in many respects to Obamacare, was stopped dead in its tracks.

The 1980s and 1990s: borrow and spend

Stymied by populations that were taxed to the limit, governments, like any interest group, searched in vain for ways to continue to fatten their paychecks and raise funds to distribute to their backers. The answer came almost by accident during the early 1980s when the Reagan administration, in a failed bid to reduce the size of government, led a massive series of tax cuts, without cutting spending, in fact it ended up increasing it. Governments the world over quickly figured out that they could sell or maintain almost any spending program to the public - as long as they did not raise taxes, but rather borrowed the money instead.

During the 1990s, the Clinton administration, under the guidance of his Deputy Treasury Secretary (and later Treasury Secretary) Larry Summers, and goaded on by Krugman and other Keynesians, brought a new twist to "borrow and spend" policies, by, for the lack of a better term "fudging the books."

The Clinton administration, which began running into limits as to how much the US government could borrow, began simply not recording its liabilities, particularly with respect to public pensions, and healthcare benefits promised to future generations. On paper the Clinton administration thus ran balanced budgets for many of the years it was in office. However in reality, the trillions of dollars in "unfunded liabilities," that it incurred, dwarfed all of the previous administration's deficits.

The 2000s and 2010s: print and spend

Unable to raise taxes further, and tapped out by limits as to their ability to increase net borrowings, governments searched in vain for new solutions. Many give credit (or blame) to the then-Federal Reserve chairman Alan Greenspan, who temporarily solved the problem by bringing interest rates down to near zero in real terms, following the dot.com implosion in the early 1990s. This enabled governments to finance even more debt.

However there is at least a theoretical case to be made that Greenspan, a hard money and gold advocate, had no choice. As Greenspan later explained: political realities had made the growth in the sloppy economic policies advocated by Krugman and others, increasingly unstoppable - even by a Fed chairman.

Ben Bernanke, then a Federal Reserve governor, likely spoke for many on the Federal Open Market Committee, when, in a landmark speech to the National Economists Club in Washington in 2002, he raised the possibility of governments raining money from helicopters on the economy.

While "helicopter money," was justifiably mocked, when Bernanke succeeded Greenspan as Fed chairman, he initiated the latest, and most innovative stage in the Krugman Con. To make up for the fact that people increasingly would not lend to governments, at the derisive interest rates they were paying, Bernanke suggested that governments finance their extra spending, by printing the extra money.

He didn't say it that way of course. Like all of the major steps in the Krugman Con, Bernanke's money printing is known by a technical sounding term that the public doesn't understand, in this case: "debt monetization."

Krugman knows better

It should be noted that when I refer to Krugman as a "Con Man," I am not implying that he is doing anything illegal. Indeed his theories, notably his distortion of Keynesian economics, are followed by most of the mainstream economics profession, who, as the late Murray Rothbard, once noted, are dependent on advocacy of such policies for their jobs.

What makes Krugman a "con," is the fact that he understands what has happened in places where policies similar those he is advocating were zealously implemented (Zimbabwe, pre-revolutionary France and Weimer Germany) and thus he knows better. It's just that his salary, clients and speaking fees, depend on him saying the opposite.

Don't fault him though. The money is good. Next week Krugman will be speaking at an event here in Montreal. The ticket price is $200. That's more than I paid to watch U2.

Not bad for an economist. Or a con man.


The views of the author do not necessarily reflect those of Sprott Money.


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