Krugman’s Conspiracy Theory

By Robert Romano

The world is plotting against Paul Krugman’s economic central planning scheme. At least, that’s what we’re supposed to believe, based on his recent contribution to the national political dialogue, “Axis of Depression.”
In this piece, Krugman has a theory about recent Republican criticism of the Federal Reserve’s planned purchase of $600 billion of U.S. treasuries: Republicans know Fed Chair Ben Bernanke’s policies will work to improve the economy, and so they oppose them because if they are not implemented they will win elections.

Krugman quotes Stan Collender, who says, “with Republican policy makers seeing economic hardship as the path to election glory… [they will be] opposed to any actions taken by the Federal Reserve that would make the economy better.”

Krugman writes, “Republicans want the economy to stay weak as long as there’s a Democrat in the White House”, adding, “In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.”
Although Krugman acknowledges that “some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction,” they only operate on the periphery in his fantasyland. The real motive is “self-interest” in the case of Republicans, who want a weak economy to bolster electoral returns. And also in the cases of Germany and China, both Fed critics who, Krugman maintains, want to keep running trade surpluses.

There’s a few problems with this line of analysis. Namely, all of Krugman’s boogeymen have perfectly valid reasons to oppose the Fed’s monetary expansions.

Take China. Because it keeps the yuan on a fixed exchange rate to the dollar, the Fed’s dollar depreciation merely has the effect of simultaneously devaluing the yuan. If cheap currencies are the route to cheap exports, then the U.S. action might actually help boost Chinese exports. So, it’s not the balance of trade that might motivate a Chinese protest of the Fed’s money-printing.

Perhaps China is being sincere about its objections to the Fed’s purchases of U.S. national debt. Its credit rating agency, Dagong, recently downgraded U.S. debt, writing that the $600 billion of Fed treasuries purchases “entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment.” So, they’re actually worried about all the cash they have lent us being repaid with monopoly money.

For Germany’s part, its Finance Minister Wolfgang Schaeuble actually said, “With all due respect, U.S. policy is clueless… [The problem] is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market and now to say let's pump more into the market is not going to solve their problems.” Okay, so they think more paper and ink simply won’t work to create “a stronger pace of economic recovery,” as the Fed claims.

Then there’s the Republicans. In order for Krugman to be correct, conservatives would have to have a secret conspiracy to wreck the U.S. economy all to undermine Barack Obama, and land whoever the GOP nominee is in 2012 into the White House. The means? Stop the Federal Reserve from implementing its money-printing “stimulus”.

Only, Republicans are in no position to stop the Fed or Bernanke from doing anything. Nor have they prevented the Fed from taking a single action since the central bank began blowing up the housing bubble in 1990’s and 2000’s. Back then, the king could do no wrong. Alan Greenspan was a monetary wizard, an alchemist who could sprinkle his magical fairy dollar dust into the economy, and poof! Prosperity would ensue.

At least, inflation ensued.
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