Debunking Murphy’s Contra Krugman: “Ep. 2 Is More Government Debt what the World Needs Now?” (Updated)

I find the libertarian obsession with Paul Krugman to be both boring and bizarre. And now Robert Murphy, along with another Austrian called Tom Woods, has launched a “Contra Krugman” show, dedicated to debunking Krugman’s column regularly.

Their second episode is here:

“Ep. 2 Is More Government Debt What the World Needs Now?”

This is dedicated to debunking Krugman’s column here:

Paul Krugman, “Debt Is Good,” August 21, 2015.

I want to focus on Tom Woods’ serious historical error below, one which seems to be peddled endlessly by libertarians.

Woods states that in the period between 1870 and 1914 the US had an average growth rate of 4%, and this supposedly was

“... highest and longest sustained growth of real output and living standards ever achieved in America either before or since ... .”

And all this occurred at a time when government debt was very low. The only reasonable way to interpret this is that, of the 1870 and 1914 period, this period had:

(1) the highest real GDP growth rate than other comparable periods;

(2) the highest real per capita GDP growth rate than other comparable periods, and

(3) that this was sustained and not punctuated by long periods of serious economic crisis.

This is simply wrong. First of all, there were extended and very serious periods of economic crisis and recession in the 1870s and 1890s, with high unemployment, as well as shocked business expectations (caused by price deflation and sticky wages), profit deflation and debt deflation (see here and here). For example, in the 1870s America was hit by a recession probably from 1873 to 1875 (Davis 2006: 106) and then soaring unemployment and stagnation of industrial production down to 1877 (see also here). Furthermore, the whole deflationary period from 1873 to 1896 seems to have suffered from deficient investment and debt deflationary crisis (see here). So to speak of the growth being “sustained” is a distortion of reality: in truth, it was punctuated by many years of crisis in the 1870s and 1890s.

Secondly, was it really the highest growth rate in US history? This claim about 1870–1914 is wrong and a libertarian myth, the same myth peddled by Peter Schiff here.

If we select those periods of economic and historical significance in US history, including the 1870 to 1913 period (since it doesn’t seem right to include 1914, the first year of the First World War in Europe), and rank them from the highest to the lowest in terms of real GDP growth, we get the following average annual GDP figures:

(1) World War II average annual growth rate: 12.491%
(2) Recovery from Depression: 1934–1940: 6.511%
(3) Roaring ’20s 1922–1929: 4.856%
(4) Average annual real GDP rate 1983–1989 (Reagan boom): 4.282%
(5) Average annual real GDP rate 1950–1973: 4.160%
(6) Average real GNP growth rate, 1870–1913 (Balke and Gordon): 4.06%
(7) Average real GNP growth rate, 1870–1913 (Romer): 4.05%
(8) Average annual real GDP rate 1871–1913 (Maddison): 4.034%
(9) Average annual real GDP rate 1948–1973: 4.000%
(10) Average annual real GDP rate 1873–1896 (Maddison): 3.666%
(11) Average annual real GNP growth rate, 1873–1896 (Balke and Gordon): 3.596%
(12) Average annual real GDP rate 1974–2001: 2.963%.

Of course, it is reasonable to remove World War II from our list, since here real GDP growth mainly represented wartime matériel production.

But even if remove WWII, as we can see, the 1870–1913 or 1871–1913 period was beaten out by (1) the recovery from Depression (1934–1940), (2) roaring ’20s (1922–1929), (3) the Reagan boom (1983–1989), and the golden age of Keynesianism (1950–1973).

But Woods also claims that in the period between 1870 and 1914 the US had historically unprecedented growth in living standards (“before or since”), and the main measure for this is real per capita GDP. Unfortunately, matters are even worse when we look at real per capita GDP. Again, we can take those periods of economic and historical significance in US history, including the 1870 to 1913 period, and rank them from the highest to the lowest, and get the following average annual real per capita GDP figures:

(1) World War II average per capita growth rate: 11.204%
(2) Recovery from Depression, average real per capita GDP growth rate 1934–1940: 5.75%
(3) Average real per capita GDP growth rate, Roaring ’20s 1922–1929: 3.35%
(4) Average real per capita GDP rate 1983–1989 (Reagan boom): 3.338%
(5) Average real per capita GDP growth rate 1950–1973: 2.66%
(6) Average real per capita GDP growth rate 1948–1973: 2.30%
(7) Average real per capita GDP growth rate 1948–2001: 2.168%
(8) Average real per capita GDP growth rate 1974–2001: 1.88%
(9) Average real per capita GDP growth rate 1871–1914: 1.63%
(10) Average real per capita GDP growth rate 1873 to 1896: 1.42%

Of course, as I have admitted above, it is reasonable to remove World War II from our list. So we have our revised list as follows:

(1) Recovery from Depression, average real per capita GDP growth rate 1934–1940: 5.75%
(2) Average real per capita GDP growth rate, Roaring ’20s 1922–1929: 3.35%
(3) Average real per capita GDP rate 1983–1989 (Reagan boom): 3.338%
(4) Average real per capita GDP growth rate 1950–1973: 2.66%
(5) Average real per capita GDP growth rate 1948–1973: 2.30%
(6) Average real per capita GDP growth rate 1948–2001: 2.168%
(7) Average real per capita GDP growth rate 1974–2001: 1.88%
(8) Average real per capita GDP growth rate 1871–1914: 1.63%
(9) Average real per capita GDP growth rate 1873 to 1896: 1.42%

As we see here, in terms of average real per capita GDP, the 1871–1914 and 1873–1896 (the great deflation of the 19th century) periods were the worst in our list, and real per capita GDP is a better measure of the per capita wealth in an economy. In contrast, from 1948 to 2001 in a period of 53 years (longer than the 1870 to 1914 period), the real average US per capita GDP growth rate was 2.168%, obviously better than the period that libertarians are obsessed with.

We should also note well that unemployment in the 19th century was much worse than in the modern era after 1945 when modern monetary and fiscal interventions became normal, as we see here.

The US experience is replicated by the history of the rest of the developed world. Let us look at the average OECD real per capita GDP growth rate estimates and data for various periods over the past three centuries:

1700–1820 – 0.2%
1820–1913 – 1.2%
1919–1940 – 1.9%
1950–1973 – 4.9%
1973–1990 – 2.5%
(Davidson 1999: 22).

So much for ignorant libertarian myths about this period.

Yet another rotten foundation of their libertarian guff is the Austrian business cycle theory (ABCT). This is utterly wrong and relies on the untenable Wicksellian natural rate of interest. It is particularly laughable too that Robert Murphy is trotted out as some heroic defender of Austrian economics when in this paper here called “Multiple Interest Rates and Austrian Business Cycle Theory” Murphy admits that Piero Sraffa was right about the untenable nature of Wicksellian natural rate of interest and effectively admits that the classical form of ABCT is profoundly flawed (see
here for more on this).

The ABCT is also discredited by the empirical evidence. The ABCT says that new unsustainable capital projects initiated in the boom are liquidated and that this drives the bust. However, a great deal of the fluctuations in output and employment during recessions are caused by changes in capacity utilisation at mature firms and businesses, often connected with the need to liquidate inventory. This is what often characterises and drives the fall in investment – not liquidation of new projects (on these points, see here, here, here).

Further Links
“Weir on Historical Estimates of US Unemployment,” February 9, 2014.

“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.

“US Industrial Production in the 1890s,” January 2, 2014.

“US Unemployment Graph, 1869–1899,” February 27, 2013.

“Huerta de Soto gets it Wrong on the Gold Standard,” December 20, 2014.

“Libertarian Gold Standard Myths Never Die,” January 13, 2015.

“Real US GDP 1870–2001,” January 13, 2015.

“US Real Per Capita GDP from 1870–2001,” September 24, 2012.

“Another Problem with the Austrian Business Cycle Theory,” September 28, 2014.

“Keynes on Inventories and the Business Cycle,” September 27, 2014.

“Why the Austrian Business Cycle Theory is Wrong (in a Nutshell),” August 3, 2013.

“My Links on the Deflation of 1873 to 1896,” February 24, 2015.

“Robert Murphy defends the ABCT – even though he doesn’t accept the Wicksellian Natural Rate of Interest,” August 26, 2015.

“Debunking Austrian Economics 101 (Updated).”

BIBLIOGRAPHY
Davidson, P. 1999. “Global Employment and Open Economy Macroeconomics,” in J. Deprez and J. T. Harvey (eds), Foundations of International Economics: Post Keynesian Perspectives, Routledge, London and New York. 9–34.

Davis, J. H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.