What the Weimar is Krugman thinking?

Geoffrey Lawrence

Is Paul Krugman insane? Until last week’s column, I gave him the benefit of the doubt, thinking of him as an honest economist who had been misled by the “voodoo” promises of Keynesian economics. But now it’s clear that the transformation into political hack is complete.

Seven years ago, Krugman urged the Fed to create a “housing bubble” through expansive monetary policy. Greenspan obliged. That speculative inflationary bubble collapsed, creating the current crisis.

Now, Krugman is using an estimate of the so-called “Taylor Rule” (a theoretical guide for central banks to set interest rates) to claim that the optimal federal funds rate would be -6.7 percent. That’s a negative sign in front of the 6.7. Negative.

That means the Fed would be printing money so quickly that you would have to pay your local grocer a premium just for him to accept payment in dollars. Prices would change by the hour. It would mean a complete collapse of the currency along the lines of the Weimar Republic. Economic production would cease because there would be no acceptable means of facilitating transactions.

Essentially, Krugman is admitting that the Fed has run itself into a Keynesian “liquidity trap.” This means that the Fed can’t lower interest rates enough to stimulate higher consumer spending – even assuming (erroneously) that to be necessarily a good thing. Of course, the liquidity trap is a function of the Keynesian policies themselves. The liquidity trap and, indeed, the recession itself, were created through overly extensive government manipulation of the economy over the last 15 years. Such phenomena would not exist in a truly free-market economy with a hard currency.

Yet Krugman is now out-stepping even his flawed Keynesian ideology. His application of the Taylor Rule to suggest a -6.7 percent interest rate is even criticized by the rule’s creator. John Taylor, a fellow Keynesian for whom the rule is named, says interest rates are where they should be and that Krugman is misapplying the rule.

At this point, it seems apparent that Krugman is simply interested in providing political cover for policymakers at the Fed and in Washington, D.C., to feed the corporatist state and further subjugate American citizens to the tyranny of an emerging alliance between corrupt Wall Street financiers and their subordinates in government. It should be telling that Keynes told the Nazis that his theories were “much easier adapted to the conditions of a totalitarian state.” As Keynes’ most vocal modern disciple, Krugman’s advice should be taken with a large grain of salt.

It’s no wonder that the title of my latest series of commentaries was “Breeding Pessimism.”

Geoffrey Lawrence

Geoffrey Lawrence

Director of Research

Geoffrey Lawrence is director of research at Nevada Policy.

Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission.  Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association.

From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society.  Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics.  He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation.

Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke.  He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.