Sunday, March 04, 2012

Kelly channels (Ron) Paul, opposes (Paul) Krugman

So today Jack Kelly again turns to economics, telling us that inflation is much higher than the government tells us it is, and is set to explode. In so doing, Kelly is simultaneously channeling Ron Paul (he who said "We are all Austrians now") and dissing Paul Krugman. The Ron Paul thing is a bit surprising, I had the impression Kelly preferred his outlandish theories to have a cynical realpolitik element to them, i.e. Santorum is electable because he is a real conservative, Ron Paul is not because he is bat shit crazy.

(just a brief self=serving tangent) Mind you, just because I am a fan of Krugman, and just because Kelly somewhat limited the craziest of his economic assertions today, I am still convinced Jack Kelly does not know I am alive, much less see that I criticize him for mangling economics. Krugman is apparently a favorite target of conservatives, and of course vice versa.

Kelly starts his column firmly grounded in reality; the price of gas(oline) is going up. But quickly he veers into crazy land, strongly implying we should be comparing the price of oil to gold, not dollars (although you have to use dollars to compare, but then how is the free floating dollar really capturing the value of gold ... my head is starting to hurt). (long sentence alert) Kelly then veers between complaining about Obama's restrictions on oil production (even though oil/gas production is the highest it has ever been, but although Obama takes credit that is probably just result of market forces trumping NIMBY-ism), then giving us a history of our leaving the gold standard and a (n incomplete) description of how inflation works. Kelly uses a libertarian "dog whistle" phrase - ""fiat" currency", which ends up referencing the Austrian school of economics without his actually having to actually say he is using their theories. I think that is a favorite tactic of a particular type of conservative conspiracy theorist who wants to sound both superiorly informed/educated and very in tune with the reality of our economy.

Another bit of a confession, inflation effects and their relationship to/with interest rates can (and do) confuse the ... er, (ahem) heck/excrement out of me. But, with that caveat, when Kelly talks about inflation in terms of the government spending past revenues (the deficit/debt) and also low interest rates (held there somewhat by the Fed; Kelly suggests controlled by the Fed) and "quantitative" easing, he insinuates that Obama/Bernanke want to create inflation and then conceal it from us.

But low interest rates, government spending and increases to the money supply should also cause the economy to take off (according to standard economic theory; see the Reagan economy after stagflation broke), and I don't think anyone would say our current economy is exploding. Which should be where anyone can see Kelly's arguments falling apart. I mean, I guess he is saying we are in a sort of stealth stagflation (to the extent he has thought out what he is saying), that there is both high unemployment and high inflation. But what people forget is that for high inflation to work, a fair number of worker's wages have to increasing with the price increases or the economy just collapses. I remember learning in 1980 that American wages are "sticky downward", that is, once they go up, they won't go back down. Inflation was bad for low wage earners and especially those on fixed pensions (without Cost Of Living Adjustments) and Social Security back before it had automatic COLA's and had to be adjusted by vote of Congress. But particularly union workers (and of course the wealthy) did OK, because they renegotiated their wages upward fairly frequently.

Setting aside what Kelly is theorizing and returning to his column, Kelly tells us the Fed currently says the risk of inflation is low, and the Fed/BLS says right now inflation is low. But the American Institute for Economic Research has a different method of evaluating inflation (using a different "basket" of goods, if you will) and finds that by their measure inflation is actually 8 percent and will increase to as high as 15 percent next year (and overwhelm the Fed'a ability to control it).

Paul Krugman addresses these suggestions about stealth inflation often in his blog (and yes, I am too lazy to find specific posts to that effect since my own post had gone too long already and will go even longer). He even addresses this specific notion that the government is hiding inflation.

Meanwhile, who is the American Institute for Economic Research? Well, apparently they are a think tank created out of MIT after the Great Depression. In a small amount of Google research, they were mostly described as centrist, to the extent anyone noticed them at all. But they are self-described as libertarian. Which makes we wonder, since Ron Paul, the libertarian (and I believe other libertarians), are enamored with Ludwig Von Mises and the whole Austrian School of economics and since that school of economics is obsessed with inflation and the gold standard, it seems possible that the AIER is viewing the world through Austrian school colored glasses. Which (for me) makes their conclusions somewhat suspect. Yeah, that is pretty thin, and maybe Jack Kelly cherry picked quotes from them, but that is where I am with them.

By the way, I am pretty sure that Paul Krugman has mentioned that Ron Paul makes similar predictions that inflation is going to go hyper in six months or so (and has made that six month prediction for years). I have heard Ron Paul use the term "fiat" currency and of course Ron Paul wants to abolish the Fed and return to the gold standard. I have no idea if Kelly is suggesting support for the full Ron Paul platform, or just using Paul-like ideas to try to skewer Obama.

However, I will concede that with rising gas (gasoline and natural gas) prices, it seems like it should be possible to slant inflation as higher than the official Fed position. High gasoline prices were a component of stagflation, although to some extent it was also driven by sucessful wage demands pushed by (then more powerful and larger) unions which extended into the rest of the economy. Kelly ends with his column with a quote from Joseph Svetlic in the ultra conservative American Thinker ""So now we have inflation coupled with low economic growth," he said. "Welcome back, Carter."". There may be some truth to that, but Paul Krugman would disagree with (Kelly's noting of) Svetlic's contention that "Obama-Bernanke policies are precisely the opposite of the Reagan-Volcker policies". There are some differences, but once staglation was broken, Reagan and Congress spent like sailors, while Volker let interest fall much lower than they had been.

Which happens to lead us (well, me) to point out where Kelly is misinterpreting history and economics. He says "President Ronald Reagan and Federal Reserve Board Chairman Paul Volcker ended stagflation by cutting taxes and regulations to stimulate growth in the private sector, slowing the rate of growth of federal spending and tightening monetary policy." Only the tightening of monetary policy was the part that worked. I am not terribly convinced that Reagan cut taxes that early, that he actually even slowed the rate of growth of federal spending (which is Kelly not totally lying in trying to say Reagan cut spending, but still lying in not acknowledging the Reagan explosion in defense spending) or that Reagan even cut that many regulations (maybe some OSHA or drilling in parks regulations, not much more) much less that that doing any of that so positively affected growth. I am fairly convinced Reagan had nothing to do with the Fed raising the prime rate to 21.5%, a policy that is largely considered to have ended the inflation part of stagflation, or even with Volker's loosening the reins by dropping interest rates after having raised them so high.

A bit earlier in the column Kelly quotes the director for education and research at the AIER ""An enormous wall of money has built up in the banking system. If it finds its way into the general economy at pre-recession rates, the United States is in for quite a ride."". Frankly, considering we are in the deepest recession since the Great Depression, seems to me we should hope we should be so lucky as to see explosive growth.

Which maybe should be the question to end my post with; why doesn't Jack Kelly want to see explosive growth when the official unemployment rate has been so high for so long, and there are so many uncounted discouraged workers? Is he so afraid of the economy recovering while Obama is President that he has to raise the specter of the inflation bogeyman?

And of course, why does the Post Gazette continue to allow Jack Kelly to write a column?

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