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http://www.nytimes.com/2014/07/07/opinion/paul-krugman-conservative-delusions-about-inflation.html?_r=0
On Sunday The Times published an article
by the political scientist Brendan Nyhan about a troubling aspect of
the current American scene — the stark partisan divide over issues that
should be simply factual, like whether the planet is warming or
evolution happened. It’s common to attribute such divisions to
ignorance, but as Mr. Nyhan points out, the divide is actually worse
among those who are seemingly better informed about the issues.
The
problem, in other words, isn’t ignorance; it’s wishful thinking.
Confronted with a conflict between evidence and what they want to
believe for political and/or religious reasons, many people reject the
evidence. And knowing more about the issues widens the divide, because
the well informed have a clearer view of which evidence they need to
reject to sustain their belief system.
As
you might guess, after reading Mr. Nyhan I found myself thinking about
the similar state of affairs when it comes to economics, monetary
economics in particular.
Some
background: On the eve of the Great Recession, many conservative
pundits and commentators — and quite a few economists — had a worldview
that combined faith in free markets with disdain for government. Such
people were briefly rocked back on their heels by the revelation that
the “bubbleheads”
who warned about housing were right, and the further revelation that
unregulated financial markets are dangerously unstable. But they quickly
rallied, declaring that the financial crisis was somehow the fault of
liberals — and that the great danger now facing the economy came not
from the crisis but from the efforts of policy makers to limit the
damage.
Above all, there were many dire warnings about the evils of “printing money.” For example, in May 2009 an editorial
in The Wall Street Journal warned that both interest rates and
inflation were set to surge “now that Congress and the Federal Reserve
have flooded the world with dollars.” In 2010 a virtual Who’s Who of
conservative economists and pundits sent an open letter to
Ben Bernanke warning that his policies risked “currency debasement and
inflation.” Prominent politicians like Representative Paul Ryan joined the chorus.
Reality,
however, declined to cooperate. Although the Fed continued on its
expansionary course — its balance sheet has grown to more than $4
trillion, up fivefold since the start of the crisis — inflation stayed
low. For the most part, the funds the Fed injected into the economy
simply piled up either in bank reserves or in cash holdings by
individuals — which was exactly what economists on the other side of the
divide had predicted would happen.
Needless
to say, it’s not the first time a politically appealing economic
doctrine has been proved wrong by events. So those who got it wrong went
back to the drawing board, right? Hahahahaha.
In
fact, hardly any of the people who predicted runaway inflation have
acknowledged that they were wrong, and that the error suggests something
amiss with their approach. Some have offered lame excuses; some, following in the footsteps of climate-change deniers, have gone down the conspiracy-theory
rabbit hole, claiming that we really do have soaring inflation, but the
government is lying about the numbers (and by the way, we’re not
talking about random bloggers or something; we’re talking about famous
Harvard professors). Mainly, though, the currency-debasement crowd just
keeps repeating the same lines, ignoring its utter failure in
prognostication.
You
might wonder why monetary theory gets treated like evolution or climate
change. Isn’t the question of how to manage the money supply a
technical issue, not a matter of theological doctrine?
Well,
it turns out that money is indeed a kind of theological issue. Many on
the right are hostile to any kind of government activism, seeing it as
the thin edge of the wedge — if you concede that the Fed can sometimes
help the economy by creating “fiat money,” the next thing you know
liberals will confiscate your wealth and give it to the 47 percent.
Also, let’s not forget that quite a few influential conservatives,
including Mr. Ryan, draw their inspiration from Ayn Rand novels in which the gold standard takes on essentially sacred status.
And
if you look at the internal dynamics of the Republican Party, it’s
obvious that the currency-debasement, return-to-gold faction has been
gaining strength even as its predictions keep failing.
Can
anything reverse this descent into dogma? A few conservative
intellectuals have been trying to persuade their movement to embrace
monetary activism, but they’re ever more marginalized. And that’s just
what Mr. Nyhan’s article would lead us to expect. When faith — including
faith-based economics — meets evidence, evidence doesn’t stand a
chance.
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