Krugman on price distortions.
I've been saying this for a long time - that we know how prices aggregate decentralized information and our whole concern is that the price signals are distorted.
The lines in here on Austrians are funny and sadly often true. I do think there's a point to not tying them closely to the view that distortions are in the price of labor. Some say that (especially explanations of "what made the Great Depression "great"" that follow Rothbard, etc.. But Austrians really are quite directly concerned with interest rate distortions in a way that the others aren't. In that sense they're a lot like Keynesians.
[Side note to market monetarists - of course if an interest rate is distorted that means that there are distortions in money and credit too... don't take this to imply at all that I am saying that the interest rate channel is the only mechanism through which monetary policy operates]
There is of course a difference - Austrians think interest rates are too low and Keynesians think it's too high [or, to appease market monetarists that see red whenever we talk about interest rates, Austrians think money is too loose and Keynesians think money is too tight].
This is the heart of my argument in my forthcoming Critical Review article, which I think is a pretty damn decent piece of prose.
I had a conversation about this with Jeff Tucker and Troy Camplin the other day on facebook but didn't get a response to my concluding thought (perhaps they'll pick this post up). David Henderson was in the discussion too but I think he was skeptical of a lot of Tucker's claims. In response to their insistence that interest rates were below the market rate, I noted that both stories are plausible. The Fed absolutely could distort interest rates by keeping them too low. And you'd expect to see different things in each case.
If interest rates are too low you'd expect to see eager borrowers outnumber willing savers, and you'd expect a boom (indeed, an unsustainable boom according to Austrians).
If, on the other hand, interest rates were too high you'd expect to see cautious or unwilling borrowers - maybe even people who would have borrowed deciding to sit on cash instead. You would not expect a boom, you'd expect a slump.
Now you can invent stories to account for this (and indeed - the stories have been invented). Maybe Obama is just terrifying the investors that would have otherwise borrowed at these too-low interest rates. Another option is to jump ship and talk about structural problems in the labor market (what Krugman focuses on).
But these don't seem to accomplish the task if we accept how markets usually work. Certainly at first glance the evidence seems to be pointing to the fact that interest rates are too high and money is too tight right now. Any countervailing force to explain that away has to be really huge. It has to (1.) dampen all that unsustainable boom activity that's supposed to happen when the Fed keeps interest rates too low, and (2.) push us deeper into the worst depression in (most of our) memory.
What accomplishes that? Health reform? Please. A minimum wage hike on the eve of the recession?
This is grasping at straws and people need to come clean on that.