Let's get ready to … watch two geeky guys have a heated policy exchange.
Sparks flew when Paul Krugman and Rep. Ron Paul, R-Texas, faced off on Bloomberg TV's "Street Smart" Monday afternoon.
Paul addressed his reasons for staying in the Republican race, whether he would support Romney as nominee, how U.S. monetary policy is like the Roman Empire and why there should be legal competition to the U.S. dollar (yes, gold and silver).
Krugman, a Nobel Prize-winning economist, Princeton professor and New York Times columnist Krugman fired back on the role U.S. government should play in regulating the market economy, what the economist Milton Friedman really thought about government stimulus and what the right level of debt is for U.S. taxpayers.
Rep. Ron Paul on Professor Paul Krugman's views:
"[Krugman] believes in big government, from what I read and hear, and I believe in very small government. I emphasize personal liberties. I don't like a managed economy, whether it's through central economic planning or monetary policy or even Congress doing it. It's a completely different philosophy that markets are supposed to work, you know, in a natural way.
"I want a natural rate of interest. I don't want the government or Federal Reserve fixing the rate of interest. That's price fixing […]. This idea that somebody or some group might know what the proper amount of money might be or what the proper rate of interest should be is sort of presumptuous. I don't know where they get this knowledge. […] When we talk about electing a president or a Congress to run the economy better, they're missing the whole point. Governments aren't supposed to run the economy. The people are."
Krugman's response to Paul:
"You can't leave the government out of monetary policy. If you think we're going to let it set itself, it doesn't happen. If you think you can avoid the government setting monetary policy, you're living in the world that was 150 years ago. We have an economy in which money is not just green pieces of paper with faces of dead presidents on them. Money is a part of the financial system that includes a variety of assets—we're not quite sure where the line between money and non-money is. It's a continuum.
"History tells us that in fact a completely unmanaged economy is subject to extreme volatility, subject to extreme downturns. I know this legend that some people like that the Great Depression was somehow caused by the government or the Federal Reserve, but that's not true. The reality is it was a market economy run amok, which happens repeatedly. […] I'm a believer in capitalism. I want the market economy to be left as free as it can be, but there are limits. You do need the government to step in to stabilize. Depressions are a bad thing for capitalism and it's the role of the government to make sure they don't happen, or if they do happen, they don't last too long."
Paul on Krugman's idea that inflation is necessary to stimulate the economy:
"You're stealing value from people who save money. If you have a 2% or 10%, the value of the currency is lost. It really destroys an important feature of the economy, and that is savings. Savings tells us something—it tells us if capital is available. This notion that capital can come out of the expansion of money supply is remote.
"Professor Krugman indicates we just want to go back 100 years or so. That's not exactly true. We want to improve on what life was like back then. But he wants to go back 1,000 years or 2,000 years just as the Romans and the Greeks and all other countries debased their currency. They didn't have a computer. This idea that we need a Federal Reserve to run things or a central bank—that is just [out of touch with] modern times.
"What did the Romans do to their currency? The Byzantine Empire had a gold standard for a thousand years and they did quite well and they didn't fight wars. But the Roman empire eventually destroyed their currency. They put in wage and price controls before they diluted the metals. They inflated. They thought wealth could come by fooling the people. [...I]f they had 10 years to send their kid to college, would they put their money in gold coins or a Treasury bill making 1% or 2%? They can't keep up with the inflation or the devaluation of the currency."
Krugman's response:
"I'm not a defender of the economic policies of the Emperor Diocletian, let's make that clear.
"I'm a defender of the economic policies that we followed after World War II that produced the best generation of economic growth this country has experienced. We had a set of policies that provided mild inflation. There was effective government regulation of the financial system so it didn't go wild. […] We had fiscal policy that stimulated the economy when it was needed. We had policies that fostered a strong middle class instead of using the worship of the supposedly ideal force of the market. […] I like the America that my parents prospered in. I think we can restore a lot of that."
Paul's response:
"Just remember that Bernanke apologized to Friedman because the Federal Reserve was responsible for prolonging the agony of the depression. You have to liquidate the debt. After World War II, a lot of the debt was liquidated. But guess what else we did? Troops were coming home. Ten million people were coming home. Big-government liberals wanted to have job programs. They weren't put into place. We cut spending by some 60%, we slashed taxes. Finally, the Depression ended. So, it was that liquidation of debt that made it available that we could come back to work again."
Krugman's response:
"I want to say something about Milton Friedman here because if you actually read what he wrote in his writing for economists, as opposed to some of his loose popular writings, he actually said that the Federal Reserve was responsible for the Great Depression because it didn't do enough. Friedman's complaint was that the Federal Reserve did not print enough money. I know this. When Ben Bernanke was talking about the helicopter, he was taking that from Milton Friedman. That was really his idea. The state of the economic debate in America right now Milton Friedman would count on the far left of monetary policy."
Paul's response to Krugman:
