Are all economists stupid?

Paul Krugman has (surprise!) another partisan rant in the NY Times claiming that the GOP is the root of all evil.  In this new variant of the same article he publishes almost every week, he is picking on Paul Ryan and Rand Paul and the hearings they have been holding on US Monetary Policy.

But if we can get past all the partisan crap, this piece illustrates a profound disconnect between the economics profession and the political right.  Politicians will from time to time rant about how we are no longer on a gold standard, but serious economists never do.  I don’t follow the macro literature very closely, but I’ve never seen it.  In my days at Chicago, the free market capital of academic economics, I never remember a single lecture or class discussion on the gold standard.  The godfather of monetarists, Milton Friedman, didn’t advocate a return to the gold standard.  There is a whole lot of debate on monetary policy to be sure, but it isn’t about gold.  In fact, a good rule of thumb is that if someone is seriously advocating a gold standard, they probably have little professional training in economics and can be safely ignored.  I mean, there are enough serious debates and uncertainties in economics to spend time listening to non-serious people.

This is not to say that we shouldn’t keep our eyes open for inflationary pressures on the horizon, but Krugman is also right that inflation isn’t what we should be worried about right now.  If the economy ever heats up (or even warms up), the Fed will need to start drawing money out of the economy, just as they pumped it in during the financial crisis.  This need not be rapid, but it does need to happen.  Will the Fed have the political will to fight off inflation?   That remains to be seen.  But that question doesn’t have anything to do with the gold standard.

Ironically, the same people heaving gold bricks around Capitol Hill are the ones who really pose the greatest inflationary threat.  The value of US currency has been maintained for so long not because it was backed by hard metals but because people believe the US will pay its obligations because it always has.  Attempts to avoid raising the debt ceiling in the coming months could create a significant crack in that confidence.   Actions by other governments, such as China, influence the value of the dollar, but the only ones who can really undermine the confidence in the dollar is the US government itself.  Sadly, there are a few legislators who don’t realize that if they really care about the credibility of our currency, they need to stop behaving like they are speaking to political rallies and start behaving like the realize that they are the government now.

Addendum: This morning, NPR’s Morning Edition did a story on James Grant, a guy who writes a successful newsletter called, Grant’s Interest Rate Observer.”  He’s a strong advocate of the gold standard.  But at least he is somewhat self-aware.  He was quoted as saying, “The argument I’m making is in fact the wingnut argument,” he said. “Every self-respecting tenured faculty member in economics this country, almost without exception, would laugh it out of court.”  I don’t think a gold standard or other commodity standard is actually a wingnut argument, just that it is an argument very disconnected from what almost all macroeconomists think.  As he notes, there are a few exceptions, but it isn’t an issue most are concerned about.

16 thoughts on “Are all economists stupid?

  1. I am gold standard skeptic, but there are a good number of free market economists who favor commodity money–a gold standard.

    Other than that, I think that if the economy starts to warm up (and it appears to be doing so now,) the Fed probably will need to rapidly reduce the quantity of base money (the money it directly creates.) Rapidly and massively. The broader versions of the quantity of money (including bank created deposits that household and firms use) don’t need to drop as much, but I’m not sure that slow is better than rapid. Unfortunately, the feed back on what is happening is much slower.

    1. If there are a “good number,” perhaps you could tell me who they are and in which peer-reviewed economics journals they have published these views.

      1. Gold is shorthand for a commodity base, which a small but highly insightful band of economists do give careful consideration. Here are two of them and a jstore citation:

        How Would the Invisible Hand Handle Money?Author(s): George A. Selgin and Lawrence H. White Source: Journal of Economic Literature, Vol. 32, No. 4 (Dec., 1994), pp. 1718-1749

  2. As the contrarian noted in Forbes:

    “It is a long standing proposition of many, supported on both theoretical and historical grounds, that one of the surest roads to hyperinflation is one grounded in a government whose answer to every economic and social problem is to borrow and spend the problem away, supported by central bank able, willing and ready to finance the effort. That support is of course to simply print the money through which to buy the debt so issued by the government – what is euphemistically called monetizing the debt – thereby exploding the supply of money and eventually trashing its value.

    We here at THE CONTRARIAN TAKE wholeheartedly agree with this proposition.”

    http://blogs.forbes.com/michaelpollaro/2011/02/08/america-poised-for-a-hyperinflationary-event/

    1. To my knowledge Michael Pollaro (the author of the quote you cite), has no publications in any economics journal (at least he doesn’t appear in JSTOR).

      My point being that there you could find lots of people in the blogosphere who talk as if they were economists and who are all worked up about the gold standard, but it hard to find any actual experts in the field (as indicated by publishing records in academic, peer-reviewed journals) who are making these claims. That is the disconnect I’m talking about.

      Note also in the quote above the authors interesting appeal to the “many” who support his views but none are actually identified.

  3. In the 5000 year history of money, paper money(fiat currency) has NEVER worked. In the end it loses all its value and bankrupts a nation and its economy,there are NO exceptions. The only honest money,history has shown, is gold and silver. Since the inception of America’s Federal Reserve central banking system(it is neither federal or a reserve) the U.S. dollar has lost 98% of its purchasing power. This loss of purchasing power penalizes savers,investors and the frugal and rewards speculators and especially the Political Class. In the end,”you can’t have honest government with dishonest money.” America is not a “special case.” What will happen to the American economy and nation has repeated it self through 5000 years of history. America is doomed. All the fancy Keynesian/Socialist talk about managing the Economy and massaging the money supply is gibberish.

  4. I’m certainly not an economist by any means; but paying particular attention to the economic debate(s) over the last few years, I think there’s an explanation for all the gold talk (and that talk has certainly been taking place). I think, at it’s heart, the resurgence of the topic has been caused by a certain rising prominence of the influence of the Austrian school of economics following the beginning of the recession. I can’t squarely lay it at the feet of Peter Schiff, the LVMI, or any other specific Austrian outlet to the mainstream – but their doom and gloom monetary story has become more convincing than in the past; as other economic stories have become somewhat less convincing.

    Of course, there are a lot of caveats here. The Austrian school predicts calamity almost constantly. So when calamity hits, it’s obviously not an open and shut case that they were right theoretically in any capacity – but it certainly diminishes more established economic schools of thought who seemed fairly blindsided by what unfolded. Also, it’s true that many Austrians push for gold or gold-backed currency but not all of them. Some are crazier than others. Some have more nuanced views. What most of them do have in common, however, is the view that unstable policy structurally effects economic outcomes and causes disturbances and even bubbles.

    Pointing to monetary policy as an actual cause of bubbles is more controversial. But criticizing monetary policy as a way out of recessions has been steadily becoming less controversial. Many economists (like Arnold Kling) are starting to consider the heterogeneous nature of capital structure as a good reason to doubt that trying to manipulate economic velocity or aggregates is a long-term solution to our economic woes.

    Obviously, the traditionally libertarian Chicago school of economics doesn’t fall in line with this. But that stands in contrast to this other more Austro-libertarian school of thought – who would actually peg Keynesians and Monetarists in the same basic school of thought regarding monetary policy (you can follow some of Robert Murphy’s blog/dialogs on that to get a basic run-down).

    In any case, I think it’s the rise in prominence of the Austrian school as of late that’s been bringing talk of monetary policy back to the table. Sure, there are plenty of libertarian or conservative politicians who trumpet the gold-backed dollar without knowing a stitch of economics. On the other hand, there’s a whole school of economics (one that attracts many libertarians) that doesn’t think it’s that silly – or at least not as silly as the monetary prescriptions of the Monetarists or Keynesians for long-term economic growth.

    1. This is a very thoughtful reply. I do wonder what the evidence is, however, for the proposition that the Austrian school has risen in prominence of late (outside of their own minds, of course). What would be the evidence for that, other than the fact that GMU requires all of its faculty to be bloggers?

      I’m not arguing here for a loose monetary policy or for an activist Fed that tries to aggresively smooth out the business cycle. I’m more in favor of a Friedman rule or some other fixed rule that gives us monetary stability and allows cyclical variation in output, but still allows us flexibility to deal with crises.

      Many economic historians who study the Great Depression actually attribute the gold standard as one of the central causes of the Depression and that we didn’t begin to climb out of the Depression until FDR suspended the gold standard in 1933. The goldbugs in the blogosphere typically don’t mention that.

      1. Yes, there are certainly strong arguments regarding what effect a gold standard (or the absence thereof) has had on the economy at various points in history. Again, I’m not an economist, and I know from my own experience that macro-level economic conclusions are highly spurious – if for no other reason than the sheer number of incentives, inputs, and institutions in a complex economy. That being said, I wouldn’t ever stick my neck out in saying Keynes was certainly wrong on this or Friedman on that. But I think it’s worth noting that all ideas (moreso those in the realm of natural science as opposed to the social variety) are those of outliers at some point. So I don’t particularly subscribe to the idea of panning ideas that are under-represented in professional journals (that applies doubly to questions of social science).

        On the other hand, I probably should have been more precise in my framing of Austrian prominence as of late. I should more specifically say “relative” prominence – relative to the pull they seemed to have previous to the recession in any capacity. That’s not to say that they represent a sizable portion of economic thought; they certainly don’t. But certainly influences from the Ron Paul side of Republicanism or Libertarianism has pulled relatively more people over towards this camp in recent years.

  5. Let me get this right. If the US doesn’t raise the debt limit and issue billions and trillions of more debt, it will harm the confidence people have in us and specifically the dollar? Has the world gone mad? Does the credibility of our currency really depend on raising the debt limit and adding trillions of more debt? Or would the Chinese and others have more confidence in the U.S. if we were to say no to more borrowing and meet the obligations to our debtors through spending reduction and/or tax increases?

      1. Sven,

        There is a very interesting article from Robert Samuelson on Reagan and Volcker which is worth reading, and appears to argue exactly that point.

        http://www.washingtonpost.com/wp-dyn/content/article/2011/02/10/AR2011021004577.html

        “One reason Reagan receives so little credit for its collapse is that Paul Volcker’s Federal Reserve did the hard labor. Through sky-high interest rates, Volcker engineered a savage recession. Housing and auto sales collapsed. Unemployment rose to 10.8 percent. Reagan’s role was to provide the political support that allowed Volcker to maintain the squeeze long enough to purge inflationary psychology. Companies and workers had to learn that outsize price and wage increases would result in bankruptcy and unemployment. If the Fed had relaxed prematurely, inflation would almost certainly have revived and exceeded its previous peaks.”

  6. SVEN….I don’t know if you ever studied American history,but we never got out of the Depression until WW2 when we shipped 16 million working age men into the armed forces. In fact,we really never got out of the Depression until 1946, after FDR was dead along with his “New Deal”economics. To say that the Gold Standard was one of the causes of the Depression is a total falsehood. The Gold Standard did prevent reckless government spending and this is why FDR wanted to get rid of it. It is because he wanted to deficit spend his way out of the economic quagmire .Instead of solving the problem FDR only created a lot of debt and prolonged the economic hard times. History shows that we were deeper in depression in 1938 then we were in 1933,despite the massive intervention of the Federal Government. The Gold Standard served the American Economy for over 130 years. In that time America grew into the most powerful economy in history and with little or no inflation. The Gold Standard serves and disciplines productive nations. The paper money fiat system serves the parasite classes in America;Big government,government employees,welfare parasites and government connected businesses. I say go with Gold.

  7. Here are a few In addition to my survey article that Hans kindly cited:

    Bordo Michael D. and Kydland Finn E., “The Gold Standard As a Rule: An Essay in Exploration,” Explorations in Economic History Volume 32, Issue 4, October 1995, Pages 423-464.

    Michael D. Bordo and Hugh Rockoff, “The Gold Standard as a “Good Housekeeping Seal of Approval,”
    The Journal of Economic History(1996), 56: 389-428

    Kydland, Finn E., and Mark A.Wynne (2002), “Alternative Monetary Constitutions and the Quest for Price Stability,” Federal Reserve Bank of Dallas Economic and Financial Policy Review, Vol. 1, No. 1,
    http://www.dallasfedreview.org/pdfs/v01_n01_a01.pdf

    Rolnick, Arthur J., and Warren E.Weber (1997), “Money, Inflation and Output Under Fiat and Commodity Standards,” Journal of Political Economy 105 (December): 1308–21.

    By the way, Robert Whaples surveyed economists on a number of policy questions. Only 3% favored a gold standard. I’m one of them, but few economists think that far outside the status quo. Do more than 3% of GOP Congressmen favor the gold standard?

    I don’t understand your critique of the gold bugs for being an inflation threat. “The value of US currency has been maintained for so long not because it was backed by hard metals but because people believe the US will pay its obligations because it always has.” You didn’t learn THAT at the University of Chicago. Friedman taught MV=Py: The value of US currency is maintained (P kept steady) by keeping steady the ratio of nominal money M to real demand to hold it (y/V). It has nothing to do with paying obligations: US dollars can’t be redeemed any longer. The value of Treasury bonds does depend on confidence in repayment, but that’s completely distinct from monetary policy.

  8. A good op-ed today in Bloomberg Government by Dan Mitchell about the “overblown” concern about a failure to raise the debt ceiling. As Mitchell points out, the federal government is due to collect $2.1 trillion in taxes. Interest on the debt is estimated at $200 billion. So, bondholders will be paid even if Congress chooses fiscal responsibility rather than continued borrowing. This is about the only weapon fiscal hawks in Congress have to force spending cuts.

    http://www.cato.org/pub_display.php?pub_id=12801

    1. I’m concerned less with the ability to cover obligations on short term bonds than on the psychological impacts that exceeding the debt ceiling would have. The question is not can we cover obligations in the future. It is whether we will cover them, and people are becoming more and more nervous about that.

      And the obligations of the government include more than bond payments. They included things like contracts.

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