Ron Paul: Hello everybody, and thank you for tuning in to The Liberty Report. Today I’m sending a message to Professor Paul Krugman, and the reason I’m doing this is because he wrote an article recently that got my attention, and in a way he started calling me names, and nobody likes to be called names. He started off with the title that says, “The old man and the CPI”. Nobody likes to be called ‘old’, I certainly wouldn’t like to be told that I have old ideas, and that, to me, is the most important thing. But he starts off with this title, and then actually it gets a lot worse after that. The whole idea that he had was that he had to discredit me one way or the other. One thing he did early in the article, which really surprised me … and Professor, I don’t think you really meant this in a nasty way … but comparing me to Bernard Madoff, I don’t think that’s quite what you wanted to do, because here you are a well known professor, you write for the New York Times, and you in fact won a Nobel Prize. And nobody is going to believe you that there’s a similarity between Ron Paul and Bernard Madoff, but that’s your problem, not mine. But then you go into some other names which really is a bit of a surprise, too, because they just happen to be gentlemanly about talking academically speaking about ideas. You called me crotchety crank, and I don’t believe I am that way, I think most people complement me as not being cranky and having a lot of fun in the world of ideas and presenting the cause of liberty.
But that I can understand and tolerate and maybe you were doing it in jest or whatever, but it did annoy me when you started attacking supporters of mine, you’re really [inaudible] so if you were trying to get me upset, you were getting pretty close to it when you said the supporters were crotchety old white guys feeling cranky. White guys? And when you mentioned white guys, you said you’re going to further explain that, and I thought, “Boy, what’s he going to talk about white guys? Is he talking about racism, what is going on?” He goes on and explains that he condemns the white following because so many of the supporters I have, including myself, don’t believe in forcibly redistributing wealth. We think if people earned wealth, they have a right to keep it, and that’s what made America great.
So, therefore, we’re very much opposed to redistribution of wealth. He interprets the redistribution of wealth as only helping poor people get food stamps, and that we’re opposed to that, so that’s why we’re racist. I wonder what he thinks when a black person earns money and would like to keep it and have low taxes, is he a bad person too? I don’t think so.
He’s arguing that if you argue against welfare, then you’re racist. Professor, if you check the statistics, you will find out that a lot more welfare goes to the wealthy than to the poor. The perfect example was how the Keynesians, your crowd, your MIT people, took care of the recession by printing more money and spending more money and passing it out and bailing out the banks and bailing out the corporations and massively expanding the 1%’s wealth, and at the same time adding to the destruction of the middle class. So this is quite a bit different than what you’re referring to. Self reliance shouldn’t be a bad word, for a person to say, “I want to take care of myself, I want to work, I like to keep what I earn and I’m not going to be dependent on the tax payers”, is not an evil.
Just think if everybody did that, we wouldn’t have the problems that we have today. Because when the mischief makers and the central economic planners and monetary managers, of which you’re one, get involved and think they can run the economy, the results are not pure goal. So I will never question your goals, I’ve worked with a lot of people that believe in what you’re talking about and they’re not bad people, because they want help people, they want to help the poor. The poorer the society gets, the smaller the middle class gets, and their argument is always to spend more money, have more programs, and yet never addressing the subject that printing money doesn’t help. It helps the wealthy, but it doesn’t improve the situation. I think that we should have a better conversation on the economic policies, and you did mention that in your article. My one criticism was that you wanted to downplay the importance of monetary policy, you said, “That’s not that important, it doesn’t cause inflation, it doesn’t cause big government and you don’t give away money and you don’t print money”, and all these sort of things. You explained it as being a “technical tool” in the management of the economy. Well, if that is the case, it is doing a lousy job. I’m going to have some charts up here in a few minutes, some charts to emphasize the point that I’m making that the failure of Keynesian economics is loud and clear.
I believe that is one of the reasons that you have become interested in addressing my issues and what I’m talking about, because it doesn’t make any sense. Why would you bother writing major articles about me and using bad language and call me names? I was in Congress for good many years, and I never passed any legislation, I wasn’t a major advisor. You claim that you’re part of the MIT crowd that can really run the show and that have done such great things. You have the MIT people scattered all about playing a significant role in this, so I don’t think that I deserve that much attention. But, for some reason, you’re giving it to me, so I’m trying to figure out, why would you spend this much time. I know you get paid for it and you have to spruce things up and you have a podium, you have the New York Times, even though the number of people reading the New York Times is going down. But anyway, you are determined to continue in this effort, but I’m just really amazed. In a way, I think it is a complement. Why bother, I don’t even have a post office named after me, and so far, Obama hasn’t called me for advice, and I know you have been called by the President. Besides, you ha Nobel Prize, so everybody must think that you have all the answers.
It’s just that there are a few of us that don’t quite buy into this, because there are some of us that still believe that debt is a problem. But you taught your students that debt isn’t a problem, don’t worry about it. We think spending is a problem and we spend too much money and there’s no money left for the people, and we talk about this seriously. So there are some disagreements there. the one thing that could help if we were serious about communication … and I’ve always been serious about it because there were a lot of good friends in Washington in Congress who called themselves progressives. And we would come out with our agreements and show them where we were in agreement. We can talk to a person like Ralph Nader and others and say we agree on civil liberties and we agree on the foreign policy, but we disagree on some economic issues. But the one thing that we could sit down and talk about, and is why I think some of this stuff sounds like demagoguery when I listen to what you say, is I don’t think you have the vaguest idea about Austrian Economics and the definition of inflation. Because even in your title, you indicate the CPI, sure I talk about the CPI, but I also have an understanding of why the CPI is not sacred.
First, it’s fudged, it gets changed when its going up too fast. We do know that the current CPI, if we use the old standards, should be going up by probably 4% instead of 2%. We could stop for a minute, and what I would like to do is if we ever had a real conversation, I would say, “Professor Krugman, what is your real definition of inflation?” And I think he would reply that inflation is the CPII and there is no inflation, therefore, we who are concerned about the monetary system and too much money being printed you can [inaudible] because the CPI didn’t go up. But there are a couple of things, when you talk to Austrian Economists, when you talk about a free market economy that’s not run by authoritarians and not run by people who think they know all the answers, they would say that we don’t know what the money supply should be and we don’t know what the interest rates should be. But You do, because you’re an authoritarian.
But Austrian Economists define inflation as expanding the money supply, and you can’t deny – and I’ll show a chart here shortly – how the money supply has expanded since 1971 since we severed the last link to gold; it’s been massive. So if we have an understanding, you just can’t demagogue it and call us names. You have to say, “Well, inflation is only counted by the devaluation of the dollar through inflation, and the CPI measures this and we compensate for this by raising the Social Security checks”. Well, I will show you a chart that shows that the real wages don’t actually respond to this. We in the free market camp define inflation as the increase in the supply of money. The CPI can go up, we have no pretence that we know when it’s going to go up. That value, whether it’s interest rates numbers or cost of living, values are determined by the marketplace in a subjecting manner and not by one of your calculations by having a mathematical formula like if the government and the Federal Reserve does ABC, you’re going to have CBF exam results. We don’t believe in that, we believe all that Mickey Mouse with all your very, very complicated mathematical formula.
I think most people are laughing at that, because they’re never right and they never predict anything, even though you’re saying that you have been correct here recently when we came out of the recession of 2008 and 2009. But talk to middle class about it, they’re not out of the recession, they’re in a depression. The real reason why I think you have to downplay what I’ve been talking about, is not so much me, because I’m not eloquent enough or powerful enough to be bothered with. But those who can teach and reveal what free market economists really believe in and how it works, it is better understood today than it has been throughout history. We’re not talking about Adam Smith and other people, we’re not talking about authoritarian economics, that’s what you’re talking about.
Authoritarian economics is where the government runs things, and that’s been around for thousands of years, and we don’t want that. We want the market to work, we want volunteerism, we don’t want people coming down with dictates from the government. one time I asked Chairman Bernanke about the definition of money and if gold was money? He said no, gold was not money, and I would image that you would agree with that. But a Federal Reserve note is money by fiat, by declaration, by mandate, by law, and the government can make paper money per say, and we don’t believe that is the case. Sure, it might work for a while, there’s been a lot of paper money around the world, but you should know monetary history better than this, paper money never lasts. And when I called that up to Chairman Greenspan, he said, “But things are changing, we are better managers now than ever before, and we can do it. We are smarter than ever before, and we can dictate paper to be money and we can say gold is not money”.
Well, you and I talking about this will not solve this, that we cannot do it, because this will take time. The market will prove this. If I’m absolutely wrong in 10, 20, 30 years, everybody will know if I was absolutely wrong. But if it turns out this system has to be revamped and it may be revamped a lot sooner than you’re suspecting, unless you’re worried about it and you’re recovering yourself. The market will tell us, but there could be another reserve currency, there could be another currency come in with [inaudible] backing to it. This is usually they get out of monetary problems, by restoring confidence. But we have a long way to go, because most people are not very confident in the government tell us.
But I want to go into some charts now, because I know professors like charts, and I love charts, even though it’s a moment of history and you can look at history from it, but you can’t predict the future. I want to use the charts in many ways to make my point, the first chart we’re going to look at is the money supply, its M2. Now it’s hard to pick the best measure for monetary supply when there is no definition, nobody knows what the money supply is. One time in the 1970s I think I asked Paul Freeman and Paul Volker this question, I asked, “How can you manage the money supply when you can’t define it?” because he wasn’t able to define it, he didn’t know whether it was M1 or M2, the monetary base, old silver dollars, gold dollars or what? I asked, “How can you manage something you can’t even define?” and that’s a pretty good questions anyway. I picked M2, most people know about M2. What I want to show here is that money has been created in a wholesale manner since 1970 when the link to gold was severed. You may say, “Well, that’s good, that’s why we had such great economic growth since that time”.
But if you see all those grey lines, those are all recessions going on. But you can see a dramatic turn there by 1971, this curve is very, very sharp, and it’s going to continue, it’s not going to decrease. If there was such a thing as deflation, that line would turn down, but it hasn’t. Prices might not be going up as fast in the CPI for certain reasons, but the money supply is going up and we still have a lot of inflation. The other thing about that is that sometimes you can have a lot of prices going up, and they’re never in the CPI, such as rents right now. They exclude rents, and the rents are sky rocketing. Education is skyrocketing, but they say that’s not inflation, that’s something else and it’s the CPI that we have to watch.
Now I want to go on to the next chart, which is a reflection of an increase in the money supply, and this is an index from way back in 1775 – long term history about measuring prices. They started off with 1775, and 1 was the baseline for prices. You see the blips along the way on the bottom of the screen, those are the wars that we fight and different things, but they’re very, very small blips. Then we see when the Federal Reserve came in, back then the dollar was backed by gold at $20/ounce, and we immediately inflated after World War I and World War II. But there was still some linkage to gold, but that was given up in 1971, and look at what happened in 1971. There was a tremendous increase in CPI. And you can say, “No, Ron, that doesn’t work, because the CPI is hardly even moving”. Well, professor you have to realize that the CPI doesn’t tell the whole story, that is used for fiction to try to fool the people. And even you used to fool the markets because everybody is looking at it, so it even affects the markets. Anyway, the money supply is up, the CPI has been up, and now the next chart I want to go to is about where is all this money going. Well, it’s going to help the people, right, because that’s what we want.
Actually, I believe, professor, that you want to help the people, even I want to help the people. I don’t think either one of us deliberately want to impoverish the people. So, taking a look at this chart, we see that total spending since 1971 has gone up by 287%. Well, just think of all those good things we’re getting from the government, we get to spend that money on wars and go around fighting wars. and your argument is that all spending is good for the economy. Sure, go over there and bomb a bunch of people, pay a lot of military personal, build tanks and blow them up, blow up bridges and then rebuild them.
That is where the money goes, it is not going to the people, it’s going to the corporations, the military-industrial complex who do quite well, the bankers do quite well, financial services and the government and the 1% of the people who are in that crowd are doing quite well. But take a look at that bottom line and it’s very, very flat, in all those years it was only up 24% for the Medium Household Income; that’s a lousy job, and the MIT gang has been in charge all this time. But you argued and said, “Yes, but they didn’t do it quite the way I wanted, I would do this a little bit differently”, and this doesn’t mean anything, because they didn’t do it quite right, they didn’t print money quite strongly enough.
Most of the Keynesians now, including yourself, said, “The only thing that we have to do is never give up on inflating the currency”, like they did in the 1930s, because in 1937 when the Fed raised interest rates, they restored the recession and depression. So everybody is terrified of this and this is one of the reasons it’s going to be real tough for the Fed to ever deliberately raise interest rates. But that line tells you what happens, the money goes from the government to the special interests, and what happens to the medium household income? It stays very flat. And guess what happens to the middle class, it continues to expand massively. The middle class is shrinking, and there are a large number of people now that are not employed fully with fulltime employment.
Even though the unemployment statistic is low, there is a lot of unemployment that is not full time, and this is one of the reasons the middle class is so upset. The other reason they are upset is because they are broke and they have inflation to deal with and they can’t pay their bills. If there was no inflation and the income was even going up modestly, they would be happy. But it hasn’t adjusted, the people who are getting Social Security are not happy. But the Keynesian answer is to send them a bigger check, it will help solve the problem. Well, I don’t believe it’s true, and I want to go to the last charge, which has to do with the stagnant real wages. Here we have bigger paychecks, you see the line at the bottom went up tenfold from 1964, and you say, “Oh yes, we’re making more money, we’re not making $20/hour, but what about the standard of living, has this helped the middle class? No, it’s destroying the middle class.
And look at the line across the top, that’s real dollars, and that’s not too hard to calculate. From 1914 to 2014 the line is almost flat, and that’s over a long period of time, and there should be no question about why people are unhappy in this country. Also, one tool that you would use often, Professor, is to say, “Well, it’s all the Republicans fault. The Republicans did this and they didn’t do this”. Well, that is not the answer, because obviously when you throw at me as an accusation, sure I was in the Republican Party, but I probably voted against the Republicans 95% of the time because they were voting just like the Democrats and they were run by Keynesian economists. But there were people who believed in this nonsense, but I voted against them all the time. So to say that it’s a Republican function and not recognize that the important issue is what is the economic philosophy … and you brag about the economic philosophy from the MIT gang and how important they were.
What are their answers for this, where is the middle class? If you say, “Well, we didn’t get to do it the way we wanted to do it”, well you had a lot of years to try, you’ve been trying since the depression and every year you’re expanding it and it’s not working. So I think that the writing is on the wall, the authoritarian approach is anti-liberty, that’s my biggest beef, because that’s not what I want. I want volunteerism. The one thing that we would have to come to understand by those who would be running the government, is that the deep flaw in Keynesian economics is that you can’t make these predictions. There’s no way you know what the money supply should be, there’s no way that you should know what the interest rates should be. It’s distortion, free market interest rates are so vital and crucial.
You can’t deal with this unless you talk about not the CPI, but you need to talk about the mal-investment, you need to talk about the bond bubble. If you want to see and inflation bubble, go look at the bond bubble and see what’s going on there. The credit in a system like this is a false solution because it’s going to cause people to make mistakes, and you can’t know when it’s right. The big difference between us what you as a professor teach and what the Keynesians teach, is that you believe you can know. We are more humble as Austrians and free market people. We claim we don’t know what the people want, we claim we don’t know what the money supply should be, we know that the interest rates should be determined by the market. The first step on the road to more knowledge, I think, is the first admission to what we don’t know. Austrian economists are quite capable of admitting what they don’t know, but what they do know so far has panned out to be correct.
And right now, there’s more need than ever to have free market economics and understanding that what we have had doesn’t work, and a day will come, and the opportunity is there. because this system is failing, and I think that is the main reason you are so concerned about any message getting out. I believe, very soon, we will have a ramification of all that is happening, there will be a chance to make a decision, but the biggest thing that we should be worried about is the welfare of the middle class and economic interventionism, inflationism, debt, and wars. That is the cause of our problems and all the answers can be found in a clear understanding of what liberty is all about, why we need property rights, and why we should continue to keep this principle that self-reliance shouldn’t be punished, it should be rewarded. You shouldn’t punish people for saving money, and yet Federal Reserve officials have told me quite frequently that the people are saying they don’t get any interest anymore, but that’s part of our planning, we can’t do much about that. Well, in a free market, it wouldn’t be like that.
Let’s hope that there would be some reconciliation some day on the acknowledge of the failure of the system that we have, and not blame Republican free marketers for this problem, that’s just doesn’t hold water because the Republicans are just as Keynesians as the Democrats.
Anyway, I think you for all the attention you have given me, Professor Krugman, I’ve gotten a lot of comments. I was surprised even when New York Times wrote some favorable comments in there. So I don’t know, you probably have to try again and explain all these problems that are panning out and why the middle class is suffering and what you’re going to do about it with more economic planning.
Anyway, I want to thank everybody for tuning in today to The Liberty Report, and please come back soon.
This video was published by the Ron Paul Institute.