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Bernanke, For The Love of Paul
Krugman lies to himself about the next Fed chair.


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Donald L. Luskin

Should we be worried that Paul Krugman — America’s looniest liberal pundit — heartily approves of Ben Bernanke, President Bush’s nominee to succeed Alan Greenspan as Federal Reserve chairman?

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In Krugman’s New York Times column today, he crows that “there’s not a hint in his [Bernanke's] work of support for the right-wing supply-side doctrine.” So how come Arthur Laffer, the celebrated economist who invented right-wing supply-side doctrine, declared in a Wall Street Journal op-ed this week that “Ben Bernanke is the right person at the right time”?

The answer’s simple: Krugman is lying. And this time to himself.

Krugman tries to portray Bernanke as a New Deal liberal by saying, “a few years back Mr. Bernanke called on Japan to show ‘Rooseveltian resolve’ in fighting its long slump.” But take a look at what Bernanke actually said, in a 2000 paper for the Institute for International Economics in which he uses that phrase. He wasn’t talking about Keynesian big-government public spending. Bernanke wrote that Roosevelt’s “most effective actions were the same ones that Japan needs to take — namely, rehabilitation of the banking system and devaluation of the currency.” That’s pretty much exactly what my colleague David Gitlitz — a right-wing supply-side economist — had recommended in a Wall Street Journal op-ed written five years earlier.

Krugman brags that Bernanke “supported a proposal by yours truly that the Bank of Japan try to get Japan’s economy moving by, among other things, announcing its intention to push inflation up to 3 or 4 percent per year.” But take a look at what Bernanke actually said, in a 2003 speech. Krugman left out the part where Bernanke recommended that Japan undertake right-wing supply-side tax cuts. Bernanke said, “Isn’t it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary … nothing would help reduce Japan’s fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.”

And no mention by Krugman of Bernanke’s speech this year, in which he lauded Latin America’s right-wing supply-side policies of “significant privatization” and “the reduction of marginal tax rates.” And utter silence about Bernanke’s 2004 speech, in which he offered a right-wing supply-side interpretation of how Bush’s pro-growth tax cuts “passed in 2001 and 2003 lower the effective cost of investing in new equipment.”

Bernanke made those statements when still a politically independent member of the Federal Reserve Board of Governors. In a speech last month, as the right-wing supply-side head of the White House Council of Economic Advisors, he went even further:

Beginning with the President’s 2001 tax cuts, multiple rounds of tax relief increased disposable income for all taxpayers, supporting consumer confidence and spending while increasing incentives for work and entrepreneurship. Additional tax legislation passed in 2002 and 2003 provided incentives for businesses to expand their capital investments and reduced the cost of capital by lowering tax rates on dividends and capital gains.

Now that Bernanke’s been nominated to be the most powerful economic official in the world, Krugman simply ignores all this. But in a Times column last January, he slimed Bernanke by suggesting that, at the CEA, he would be “expected to prove his loyalty by defending the indefensible and saying things he knows aren’t true.” Right-wing supply-side things, presumably.

According to Krugman, “it might well make Mr. Bernanke damaged goods from the point of view of the markets.” Wrong again. As economist Steve Antler pointed out on his Econopundit blog, the day Bernanke’s nomination was announced by the president, markets soared. Some headlines: “US stocks jump after Bernanke nomination” (Reuters); “Stocks Rise on Bernanke Pick” (Bloomberg); “Wall Street hails Fed’s new chief” (Times Online); “Bernanke Nomination Sparks Wall Street Rally” (Time); and “A Bernanke Bounce?” (Forbes). By the way, on the day in 1987 when Alan Greenspan’s nomination was announced by Ronald Reagan, stock markets fell.

Maybe when Krugman discussed “damaged goods” he was talking about his own experience at the CEA in the 1980s. Economists are still laughing at a 1982 paper he wrote while at the CEA, in which he warned of “The Inflation Time Bomb” — precisely when inflation in the U.S. had peaked.

But Krugman never learns. He concludes his column today by warning that Bernanke will “face a day of reckoning soon after [he] takes office,” when the economic catastrophe Krugman has been incorrectly predicting for years finally materializes. Krugman says he’s confident that Bernanke will cut interest rates to save the world — and Krugman appeals to a mutual fund pop-star to prove it. He writes, “Bill Gross of the giant bond fund Pimco has already predicted that next year Mr. Bernanke will start cutting interest rates.” So what? Last June Gross said the Fed would cut interest rates this year. Fat chance.

So, should we be worried that Krugman loves Bernanke — at least this week? No — no more than we should fret over any of Krugman’s lies.

Well, there is one little thing. Krugman points out correctly that “Mr. Bernanke was chairman of the Princeton economics department before moving to Washington, and he made the job offer that brought me to Princeton.” So maybe we should be more than a little skeptical about Bernanke’s personnel choices.

Or perhaps we should take note that the Times didn’t give Bernanke an opportunity to go on the record about how he feels about having hired Krugman. We’ll use our imagination on that one.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at [email protected].



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