Hey Paul Krugman: That’s Not Insulin You’re Injecting; It’s Heroin!

In a recent New York Times column, economist Paul Krugman tried to justify central bank interventionist monetary policy by comparing it to giving insulin to a diabetic.

How should we think about these incredibly low interest rates? Recently Narayana Kocherlakota, the former president of the Minneapolis Fed, offered a brilliant analogy. Responding to critics of easy money who denounce low rates as ‘artificial’ – because economies shouldn’t need to keep rates this low – he suggested that we compare low interest rates to the insulin injections that diabetics must take. Such injections aren’t part of a normal lifestyle, and may have bad side effects, but they’re necessary to manage the symptoms of a chronic disease.”

Bob Murphy took apart Krugman’s reasoning in an episode Contra Krugman, utilizing an analogy Peter Schiff often employs. It isn’t insulin central bankers are injecting into the economy. It’s heroin.

He says this is like insulin to treat a diabetic patient. Well, if you’re going to go with that analogy, actually it’s much more accurate to say it’s like giving heroin to an addict. And yes, if you take it away, given that you’ve, over the years, inculcated this habit and this addiction, and then suddenly take it away, for a while it’s going to be agony. And you could argue, ‘Well gee, if you just gave the heroin back to the patient, things would go back to normal, and the patient would be fine.’ And so that’s kind of the way Krugman is…But the point is ultimately to get on a solid footing and to have a healthy economy, you need to take away the heroin…Just by continuing to give ever-larger doses of it, larger injections, that might provide short-term relief, but obviously in the long run, you’re just setting the patient up for an even bigger crash.”

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Tom Woods went on to explain the long-term ramifications of this monetary heroin.

You can try and string the economy along by continuing with more monetary injection and so-on, and it does look like things are going well. But what’s really happening is that real viable firms and industries are forced to compete for resources with firms and industries that can stay afloat only as long as there’s cheap money. And do we really want healthy firms and industries that we would really want in the real economy to be in that kind of situation? So yes, it’s true, when the bubble industry, or the sorts of industries that couldn’t survive otherwise, when they do begin to suffer, you can’t just think well we’re against suffering in the abstract. What we want is resources to go where they need to go in order to satisfy people’s needs, and that’s what begins to happen during the recession period. So yes, nobody likes suffering, but the way you avoid the suffering is you try not to create the circumstances that lead to it in the first place.”

In other words, avoid the heroin!

But as Janus Capital’s Bill Gross pointed out in a recent column, that really isn’t politically expedient. Government and central planners will just keep dosing the addict with heroin – until he eventually dies.

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