Ferguson versus Krugman

Two prominent public-policy intellectuals are in the midst of a very public dispute over the threat of higher interest rates.

I refer to Paul Krugman, professor of economics at Princeton University -- and the most recent recipient of the Nobel Prize in that field, who believes the present difficulties can and should be addressed through Keynesian fiscal stimulus, and that the present administration is not doing nearly enough of it, and Niall Ferguson, an Oxford-trained historian, author most recently (and pertinently) of THE ASCENT OF MONEY: A FINANCIAL HISTORY OF THE WORLD, who thinks both that higher rates are a grave threat and that President Obama's massive spending plans are compounding it.

The spat began, as near as I can tell, on April 30, when both men appeared as part of a panel discussion of the ongoing financial crisis hosted by PEN, the writers' association.

Ferguson said, "The running of massive fiscal deficits in excess of 12 percent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds," is likely to push interest rates up, although the administration appears to be of the (Keynesian) opinion that such policies will push interest rates down, stimulate borrowing, thereby stimulating the economy.

Krugman defended that Keynesian opinion, and on this point at least the adninistration. Krugman said, "There's a global savings glut ... There is no excess demand to drive up interest rates."

On May 2, in his column in the New York Times, Krugman was much more emphatic at blasting Ferguson. He said that it is "sad" that Ferguson hasn't studied the right textbooks. Indeed, Ferguson's ignorance is so great it is "confirmation that we're living in a Dark Age of macroeconomics." Then he takes us through a condensed lesson on the Keynesian view of how interest rates are formed. Four supply-and-demand charts in the course of a single newspaper column. Surely that counts as what economists and historians both would consider a glut!

The government can and should keep on borrowing the money it needs, however scary the deficit numbers look, because Krugman assures us, this borrowing: [Gives]some of those excess savings a place to go — and in the process expands overall demand, and hence GDP. It does NOT crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap.

Over the days and weeks since Krugman made that confident assertion, market interest rates have headed ... up. The economy does not seem to have escaped from the trap it is in just yet, so why are they heading up? It may be too early to declare victory for Ferguson on this point, but it is understandable that he has already declared victory for himself.

Krugman, after all, isn't the only one in this debate though who can argue from out of the pages of a major newspaper. Ferguson is a contributing editor at the Financial Times. And from that post, he has had this to say.

In the event you are too impatient to read that, I'll give you the final graf here:

In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.

Anarcho-Capitalism

An acquaintance who doesn't cotton to my theorizing about anarcho-capitalism put his objections thus: "How can money arise without a government? You're back to stuff with intrinsic value like precious metals but that puts power into the hands of those with mines or anyone who has enough power to corner the market."

To which I answered thusly.

Money can arise without government because humans are intelligent creatures who can easily recognize the utility of a medium of exchange.

As for going back to precious metals, that's possible. But why are precious metals "precious"? What is their "intrinsic value"? Use in jewelry? That's a big leap.

The value of gold comes from certain physical facts. First, there's only a limited amount of it in the world.

Second, it is a chemical element -- so it is neither created nor destroyed except by very unusual processes (is gold fissionable? -- probably not).

Third, gold is malleable enough so that numbers can be printed on it easily, yet sufficiently solid so that a coin can keep its shape.

There might be a more psychological point here, one that I believe John Maynard Keynes suggested. Perhaps to our symbol-hungry minds, silver reminds us of the moon and yellow/gold reminds us of the sun, and since these two heavenly bodies are of primordial importance, so are the metals.

Government doesn't have to exist in order to inform people of such facts. They operate whether or not they are broadcast, and they keep gold valuable as a medium of exchange.

Of course other media may also come about. I'm told that unopened packs of cigarettes are frequently exchanged under battlefield conditions. The intrinsic value of a cigarette, the pleasure of smoking, may be the original inducement to their value -- just as the decorative use of gold as jewelry might have originally suggested its value as a medium of exchange -- but once they start circulating they can be sought after simply because they ARE such a medium, and continue to circulate for a long time before anyone breaks the seal, reconverting the packet into a consumer good.

But suppose the precious metals were generally accepted as a unit of exchnage. You worry about this because it "puts power into the hands of those with mines...."

So someone will have a mine, even in the absense of government? Are you acknowledging that private property in real estate -- and in the sort of expensive capital tools used to dig and retrieve gold -- would survive anarchy? [This is btw the sort of contention that my acquaintance, earlier in the exchange, had denied]. If not, you are contradicting yourself here. If no one will "have a mine" then no one will have the power you say you're worried about.

"...or has enough power to corner the market."

Precisely what I'm worried about. The Federal Reserve Board has cornered the market in federal reserve notes. Shouldn't we rebel? Or work to undermine the conditions that cause people to think this is "necessary"?