Inflated Claims

Josh Barro is the son of a famous economist. Maybe that’s why the website Business Insider allows him to write about economics. Maybe it’s also why he feels the need to stick up for another famous economist by attacking that individual’s principal detractor. The famous economist himself solemnly promised us that he would not reply – “never” – to my charges that he was wrong about the financial crisis and “derped” about the euro. But blogging is addictive, so this week he was back at it, though – discretion being the better part of valor, or a polite word for cowardice – he thought it better not to name me and, predictably, ducked the questions I raised about his integrity last week. Sadly, the master and his claque have got their messages badly mixed. The master was sticking up for claque members conspicuously unqualified to write about economic questions. Barro, meanwhile, had suddenly discovered that having a graduate degree in economics is important (though not important enough for him to get one).

A PhD won’t give you everything, I freely admit, but it should teach you how to engage in serious debate. Example: If someone goes around telling the world something to the effect of, “I am always right, except maybe twice,” and I point out that he was in fact wrong – and wrong repeatedly – about the two most important economic events of the past decade, then it is not an effective retort to say: “Yeah, but you were once wrong about inflation.” This is not about me. I don’t go around claiming that I am always right.

The second thing a good graduate program should teach you is to avoid the language of the gutter. Phrases like “full of crap” are like boomerangs. They come right back at the person who throws them.

The third thing Barro would learn from further study is simply to do research. If you want to accuse me of being consistently wrong about inflation, you really do need to come up with more than one paragraph in one Newsweek column published more than two years ago. (Memo to Adam Ozimek: this applies to you too.) As it happens, a couple of readers at the time questioned my reference to Shadowstats in that column, and with good reason. A journalist from Harper’s magazine also wrote to me, passing on a highly persuasive rebuttal to John Williams’s allegations from an official at the Bureau of Labor Statistics. After looking into the issue, I wrote that “it might be prudent to hold off reprinting those numbers” (from Shadowstats) and, when it became clear that the journalist intended nevertheless to do so, I advised that Harper’s at least run the Shadowstats and BLS figures side by side. Thereafter, as even a cursory bit of research would have shown Barro, I made no further reference to Shadowstats and significantly altered my view on inflation. For example, in a Financial Times article published in June of last year, I referred to inflation as a “nonthreat”.

I know books are long and very tiring to read, but it would not have been too much to ask of Barro look at my most recent book, The Great Degeneration. I’ll spare him the trouble and offer the relevant passages:

Why did post-1918 Germany go down the road of hyperinflation? Why did post-1929 America go down the road of private default and bankruptcy? Why not the other way round? At the time of writing, it seems less and less likely that any major developed economy will be able to inflate away its liabilities as happened in many cases in the 1920s and 1950s. But why not? Milton Friedman’s famous dictum that inflation is ‘always and everywhere a monetary phenomenon’ leaves unanswered the questions of who creates the excess money and why they do it. In practice, inflation is primarily a political phenomenon.
Its likelihood is a function of factors like the content of elite education; competition (or the lack of it) in an economy; the character of the legal system; levels of violence; and the political decision- making process itself. Only by historical methods can we explain why, over the past thirty years, so many countries created forms of debt that, by design, cannot be inflated away; and why, as a result, the next generation will be saddled for life with liabilities incurred by their parents and grandparents …
If we do not … embark on a wholesale reform of government finance [,] then I am afraid … Western democracies are going to carry on in their current feckless fashion until, one after another, they follow Greece and other Mediterranean economies into the fiscal death spiral that begins with a loss of credibility, continues with a rise in borrowing costs, and ends as governments are forced to impose spending cuts and higher taxes at the worst possible moment. In this scenario, the endgame involves some combination of default and inflation. We all end up as Argentina. There is, it is true, [another] possibility, and that is what we now see in Japan and the United States, maybe also in the United Kingdom. The debt continues to mount up. But deflationary fears, central bank bond purchases and a ‘flight to safety’ from the rest of the world keep government borrowing costs down at unprecedented lows. The trouble with this scenario is that it also implies low to zero growth over decades: a new version of Adam Smith’s stationary state. Only now it is the West that is stationary. (pp. 6, 47)

This was not, however, the first time I had raised the possibility of such a scenario. If, as the Krugmanites insist, I was “derping” about inflation, why did I explicitly set out two scenarios for 2013 in the Harvard Business Review for July-August 2009?

If large deficits push down bond prices, raising long-term interest rates, the Federal Reserve will have no option but to increase purchases of Treasuries. In the process, it could overdo monetary expansion and thereby arouse fears of future inflation, increasing the upward pressure on interest rates…
[But[=3; Perhaps we should revisit 2013 against [a different] background. The outlook for the United States appears less apocalyptic than we first feared. In this asymmetric world, where everywhere else seems more dangerous and unpredictable than America, the consequences of the crisis are less terrible than those of the Great Depression. In this better-case 2013, the recession of 2007–2009 is a receding if still painful memory. We are over the Breakdown. Those who feared that Federal Reserve Chairman Ben Bernanke’s policy of quantitative easing would lead to inflation have been proved wrong: Prices have barely changed since 2009, despite the central bank’s best efforts. Thankfully, there hasn’t been severe deflation either.

I made the same point in another Newsweek article in November 2009:

In the wake of … debt explosions, one of two things can happen: either a default, usually when the debt is in a foreign currency, or a bout of high inflation that catches the creditors out. The history of all the great European empires is replete with such episodes. Indeed, serial default and high inflation have tended to be the surest symptoms of imperial decline.
As the U.S. is unlikely to default on its debt, since it’s all in dollars, the key question, therefore, is whether we are going to see the Fed “printing money”—buying newly minted Treasuries in exchange for even more newly minted greenbacks—followed by the familiar story of rising prices and declining real-debt burdens. It’s a scenario many investors around the world fear. That is why they are selling dollars. That is why they are buying gold.
Yet from where I am sitting, inflation is a pretty remote prospect. With U.S. unemployment above 10 percent, labor unions relatively weak, and huge quantities of unused capacity in global manufacturing, there are none of the pressures that made for stagflation (low growth plus high prices) in the 1970s. Public expectations of inflation are also very stable, as far as can be judged from poll data and the difference between the yields on regular and inflation-protected bonds. … And inflation might continue to surprise us on the downside. After all, consumer price inflation is in negative territory right now.

My expectation then – which I expressed repeatedly in interviews as well as articles – was that bond yields would remain above inflation, keeping real interest rates in positive territory. (Remember, this was before Quantitative Easing 2 and 3.) Sure enough, real interest rates – by Krugman’s own measure – remained positive until 2012. And this was one reason why U.S. growth disappointed in 2010, as I predicted.

“Deflation is a bigger threat than inflation,” I wrote in July 2010, in an article Paul Krugman certainly read because it was addressed to him and other Keynesians. The following April, in my regular Newsweek column, I made it clear that, with worldwide fiscal and monetary tightening, the only inflation worth worrying about was in commodity prices. My only mistake, against this background, was to give credence to Shadowstats in a subsequent column.

In short, the claim by Krugman and others that I repeatedly erred about the risk of inflation is easily exposed as fraudulent. By repeating it, Josh Barro and his fellow “plovers” reveal their own dishonesty. Or is it just laziness?

 

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