Gotta Get that Money
I’m sorry to keep picking on Paul Krugman, but until he starts reasoning in a way worthy of his Nobel prize in Economics (which, incidentally, was awarded based on his work developing economic models that support free trade, so he really has no great expertise on domestic issues, which is unfortunately where most of his NY Times commentary has been focused), someone’s got to keep him honest.
Today, Krugman actually makes a couple of coherent arguments before he screws up. In particular, he acknowledges that a weakening dollar could actually be good for the U.S. because it can boost U.S. exports. He is also right that returning the gold standard would be madness and that the Fed is generally a good thing, which is regrettably something even some within our own party have not yet realized (I’m looking at you, Ron Paul).
However, he wipes out when talking about the sources of criticism of recent weakening in the dollar:
But if you get your opinions from, say, The Wall Street Journal’s editorial page, you’re told that the falling dollar is a terrible thing, a sign that the world is losing faith in America (and especially, of course, in President Obama). Something, you believe, must be done to stop the dollar’s slide. And in practice the dollar’s decline has become a stick with which conservative members of Congress beat the Federal Reserve, pressuring the Fed to scale back its efforts to support the economy.
I think that the same Republicans Krugman frequently enjoys bashing as lovers of big business can understand as well as anyone else that exports are an important potential source of growth in the U.S. economy, so the criticism of the weakening dollar probably isn’t coming from a “loss of faith” in America per se, and most Republicans would agree. So Republicans and others concerned about the international implications of the financial crisis and the government’s response don’t harbor fears borne from some antiquated idea of national power measured by strength of currency.
The problem is, though, a loss of faith in the credit-worthiness of the U.S. government, and that is where Krugman misses a real and significant economic threat. The only way the U.S. has been able to continue to finance massive current account deficits (not to mention budget deficits for the purpose of stimulus spending, which Krugman adores) is continued investor appetite abroad for U.S. Treasuries. A weakening dollar and the potential inflation it might portend would make borrowing more expensive for the U.S., which would presumably worry a fan of big spending. That’s not to say that the Fed should start tightening rates immediately; they probably shouldn’t. But it also means Krugman and his liberal ilk cannot afford to be so nonchalant about the threat of inflation and/or weakening faith in T-bills. Fortunately, this is a danger that FOMC members Plosser, Lacker, Richard Fisher, and Kevin Warsh all seem to understand.
Krugman, however, is content to play his usual role as the winner in a boxing match with a straw man while avoiding the fight with the $787 billion gorilla in the room.