Tuesday, September 1, 2009


More Free Market Evangelism From Larry Kudlow

Long-time readers know that Larry Kudlow is not on my A-team for free market economics. (It pains me that this is so; I seriously used to love him when he worked for Bear Stearns and I was just getting into this stuff, reading Walter Williams and such.) I went ballistic over his flip-flopping endorsement of TARP, and then I was flabbergasted by his support for "cash for clunkers."

But now he has outdone himself. Bill R. emailed me this piece at NRO, and said that Kudlow mentioned Mises and Hayek. So I said to Bill, "thanks I'll give Kudlow a chance to redeem himself. :)"

Well, did Kudlow restore my faith? You tell me:

While so-called spending-and-deficit stimulus may be an economic depressant, Friedmanite monetary stimulus — which has been substantial — is gradually exerting a powerful impact on economic growth. At the same time, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. That’s setting up a big profits surge, which is the biggest economic stimulus of all.

Consumers also have retrenched, as is appropriate with falling home prices, a rough stock market correction, and a slowdown of incomes. But from the ashes of recession, these corrective forces lead to the next recovery.

In Hayekian and Misesean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And, greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock-market consensus expects.

Note that there are no ellipses in the above block quotation. I wanted you to see it in its full glory. That is in context, my friends.

That is a pretty piece of propaganda. The sad thing is that people who don't know any better can get sucked in by that kind of talk. I guarantee you there are people out there quoting that when discussions about the economy come up.
Hayek and Mises are turning over right now. To think Kudlow would think H and M would condone "easy greasy money" is a travesty.

Kudlow like Greenspan, Bernanke and (gulp) even Krugman, turned in their econ caps and sold themselves as propagandists. Good solid econ foundations are thrown aside to "greasy money."
I think I've come up with a fairly consistent analogy for Kudlow's "crime."
Reposted from my blog:

This is like saying the Yankees are going to start scoring more points by trimming all that dead weight from behind the plate – by getting rid their pitching staff. He’s got some idea of how to win a baseball game, but only pays attention when the Yankees are at bat. In other words, he’s only understanding half of Austrian Business Cycle Theory – the part where easy money creates a boom, but doesn’t see the long term, stable strategy. He’s analyzing a complex situation but only looking as far as his nose – while trying and failing to throw some peanuts towards the ‘free market’ crowd.
Well, while I think it is a disservice to Hayek and Mises to put them in a sentence next to one advocating loose monetary policy, I don't think what Kudlow says is completely incorrect.

Liquidation, if allowed to occur in a market correction, and reinvestment greased by free money from the government, might in fact lead to a v-shaped recovery.

Mises and Hayek (if I could speak for them) might also add that said recovery is completely unsustainable and will just repeat the same mistakes of mal/overinvestment into some alternative asset class.

Look, at the end of the day, I'm not defending Kudlow's understanding of economics. I'm just saying that Kudlow's interpretation of what's going on right now could happen ... it is just that the recovery will not be long lasting.
M4Liberty, you're right, Kudlow could be pulling a Robert Wenzel and say, "I'm not endorsing this, but if Bernanke bumped up M2, it might goose the stock market."

However, in light of everything else that has gone on with Kudlow lately, I think the best interpretation is that he doesn't realize that Hayek and Mises think the boom bust cycle is caused by easy money.

Also, I don't think even Friedman would have endorsed the "monetary stimulus" Kudlow attributed to him (in contrast to Keynesian fiscal stimulus). Friedman thought you should have the money supply grow at a constant, predictable rate. He didn't so much blame the Great Depression on insufficient money pumping, but rather on the Fed's allowing the money supply to collapse.
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