Wednesday, April 20, 2005

Mises Blog Diminished My Expectations

The folks at Mises Blog never fail to disappoint me. This week William Anderson advocates defrocking economist Paul Krugman for writing this little gem in his NYT column:

In the 1970's soaring prices of oil and other commodities led to stagflation - a combination of high inflation and high unemployment, which left no good policy options.

According to Anderson, what Krugman is saying here is that "the cause of inflation is the fact that prices rise". How could Krugman use such silly circular logic?

Anderson is using some clever rhetorical spin, but all the spin in the world wont change the fact that Krugman is right. What Krugman is actually saying is that a negative supply shock will reduce output and put upward pressure on prices, which is exactly what we saw with the oil embargos of the 1970's. This isn't circular logic at all, it's basic principles of macroeconomics.

Now, I will admit that Krugman's story of how stagflation started in the 1970's is a bit over simplified, but when your column is confined to a few hundred words you have to sacrifice subtlety to make your point clear.