Krugman Failure, Not Market Failure

by Thomas E. Woods, Jr.

Recently by Thomas Woods: Response to the 'Market Failure' Drones

So the New York Times’ Paul Krugman called the housing bubble, or so he tells us. I could have called the housing bubble, too, if like Krugman I advocated the very policies that led to it. Yesterday, for instance, I predicted that the Pepsi I put in the refrigerator would be cold when I took it out that night. I’m pretty good at this.

These days it’s not particularly controversial to argue that artificially low interest rates, fostered by the Federal Reserve System since 2001, gave rise to the housing bubble and set the economy on an unsustainable path. And guess who was clamoring for those low interest rates around 2001?

Here’s Krugman in a German interview:

During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?

Why not indeed? Why not lower the price of milk to $0.01, too? What undesirable consequences could there possibly be?

Here he is in October 2001: "Economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer."

And here’s December 2001: "The good news about the U.S. economy is that it fell into recession, but it didn’t fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed’s dramatic interest rate cuts helped keep housing strong even as business investment plunged."

That, of course, was the problem: by keeping housing "strong" instead of allowing the economy to correct itself, the Fed encouraged people to continue along an unsustainable path, thereby making the eventual and inevitable bust all the more severe when it finally arrived. Oops!

Here’s a whole bunch of Krugman gems, if you have a strong stomach.

Meanwhile, my publisher tells me that the New York Times has refused to review Meltdown, my free-market look at the economic crisis that spent ten weeks on that paper’s bestseller list earlier this year. The paper does want you to read Paul Krugman, but does not want to acquaint you with a radical alternative to the conventional wisdom that sticks a finger in the eyes of the alleged experts in whom we are expected to place our confidence. I’m sure you’re as shocked as I am.

The right wing has its share of problems, too. Richard Posner’s new book A Failure of Capitalism blames "capitalism" for problems even he admits were partly caused by the Fed. But the Fed, you see, is part of the "capitalist structure." Oh.

Then we have Bruce Bartlett’s forthcoming book The New American Economy: The Failure of Reaganomics and a New Way Forward. Bartlett, a former adviser to Ronald Reagan, has apparently summoned his courage to write exactly what the establishment wants to hear. The flap copy tells us:

As a domestic policy advisor to Ronald Reagan, Bruce Bartlett was one of the originators of Reaganomics, the supply-side economic theory that conservatives have clung to for decades. In The New American Economy, Bartlett goes back to the economic roots that made Impostor a bestseller and abandons the conservative dogma in favor of a policy strongly based on what’s worked in the past. Marshalling compelling history and economics, he explains how economic theories that may be perfectly valid at one moment in time under one set of circumstances tend to lose validity over time because they are misapplied under different circumstances. Bartlett makes a compelling, historically-based case for large tax increases, once anathema to him and his economic allies. In The New American Economy, Bartlett seeks to clarify a compelling way forward for the American economy.

Well, that’s just super.

Thomas Sowell has a disappointing book called The Housing Boom and Bust. I like and have profited from Sowell’s work very much, and I used to assign his books to my students. This one is unfortunately if predictably flawed. In keeping with Sowell’s support for the Federal Reserve the book dismisses the suggestion that the Fed deserves much of the blame. To the contrary, Sowell describes former Fed chairman Alan Greenspan as "the best-known public figure to issue warnings on the housing boom." Speaking about the Fed’s very gradual policy of raising interest rates beginning in 2004, Sowell tells us blandly that "unusually low interest rates had been used earlier by the Federal Reserve, in order to maintain credit spending in the economy at large, at a time when the economy seemed about to decline otherwise." Krugman couldn’t have said it better. (Here’s one of my replies to this way of thinking.)

Next week, Dick Morris’ book on the economy will be released. Among other things, Morris is the author of Condi vs. Hillary: The Next Great Presidential Race. I’m not making fun of him because that race didn’t pan out. I’m making fun of him because a normal person does not brim with excitement about a potential contest between two establishment drones.

The book, Catastrophe, promises to be pretty much what you’d expect from a Washington political consultant writing about the economy. To be sure, book descriptions are written by marketing departments and sometimes do not quite convey the author’s intentions the way he himself would. Still, it has to mean something when we read, "At a time when we needed a pragmatic centrist to lead us out of recession, we got a doctrinaire socialist…." Right away, then, the book’s premise is all wrong: we need a "centrist" to "lead us" out of recession? Way to concede the whole argument to the other side, Dick.

Unfortunately, since Morris is a political commentator at FOX News, his book will be vigorously pitched to that network’s viewers. FOX News viewers do read, and unfortunately that means they’ll soon be cracking open a collection of non-rigorous, business-as-usual boilerplate about cutting wasteful government spending. Been there, done that.

Supporters of the free market need the full story of what happened to the economy and a substantial arsenal of arguments they can use against those who tell us the free market has failed and that only more power for our overlords can rescue us. Instead, they’re getting either Beltway talking points or outright attacks on the free market. That is extremely unfortunate, but like the housing bust, it wasn’t hard to predict.

June 19, 2009

Thomas E. Woods, Jr. [visit his website; send him mail] is a senior fellow at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. Read Congressman Ron Paul's foreword to Meltdown.

Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

The Best of Thomas Woods