Krugman’s Amazement

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Professor Paul Krugman, speaking on ABC’s “This Week With George Stephanopoulos,” makes his case for risking inflation to defeat 9% unemployment. “You should be willing,” he said, “to take some risks. Compare. You know, people talk, what if we had 4% inflation? We had 4% inflation during Reagan’s second term. I don’t remember that as a time of great dislocation. It was actually a time when a lot of people were feeling good about the economic progress. It’s an amazing thing.”

An amazing thing indeed. Suddenly Professor Krugman has fetched up singing the praises of President Reagan. Only three years ago he was writing that “Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains” and that the 40th president “broke with longstanding rules of fiscal prudence.” Now he’s describing the Gipper’s second term as “actually a time when a lot of people were feeling good about the economic progress.”

We chalk Mr. Krugman’s disorientation up to the hallucinogenic effects of fiat money. One has to remember that when Professor Krugman makes his pitch for the balm of inflation, one isn’t clear what he’s talking about — and neither is he. Is he talking about the consumer price index? Or, if gasoline and food prices are soaring, the index from which food and gasoline prices have been stripped? Or is he talking about a more classical — constitutional — measure of the value of the dollar? Like, say, gold?

Professor Krugman might remember the Reagan years as a time of inflation. But there are those of us who remember it as a time when the value of the dollar moved smartly in the right direction. No doubt there were some ups and downs during the period. But the Reagan years were a period when the value of the dollar soared, from a 562nd of an ounce of gold on the day Reagan acceded to the presidency in January 1981 to a 405th of an ounce of gold on the day in 1989 when he famously flew into the sunset.

What a contrast to the years of President Obama. On the day he took the constitutional oath, the dollar had a value of an 853rd of an ounce of gold. Today one would be lucky to get half that much specie for a dollar, the value of which is now less than a 1,662nd of an ounce of gold. Professor Krugman may be happy enough to see 4% inflation. But what is the world going to think of a dollar that resumes its free fall? What is going to be the meaning of this for an America that has been borrowing money across the globe? And what is this going to mean for American workers, home-makers, and savers? Talk about reckless.

The thing that Reagan and Paul Volcker, the Federal Reserve chairman in power during his era, understood is the interlocking nature of things. Mr. Volcker could conquer inflation and engineer a restoration of value to the dollar because he was working in tandem with a President who was setting the stage for economic growth through cuts in the marginal tax rate and through deregulation. Neither Reagan nor Mr. Volcker could have done it without the other.

If Mr. Krugman finds this amazing, he is not alone. The era of fiat money — monetary affairs conducted without reference to specie, managed with no proper legal definition of a dollar whatsoever — has left not only our Nobel laureates in economics disoriented. It has left our television panelists, our congressional committee chairmen, many of our Federal Reserve governors, completely at sea. What’s amazing is the failure of so many of our greatest minds to get the crisis of the dollar in focus and their default in leaving the task of reform to the next administration.


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