Krugman vs. Cato on Capital Controls

     We've already had a few good discussions out of this and now Cato is striking out at Krugman for supposedly blessing controls.

     "Nobelist Paul Krugman has a propensity to spin and conceal. This allows for deception – the type of thing that hoodwinks some readers of his New York Times column. While deception doesn’t qualify as lying, it also fails to qualify as truth-telling."

      http://www.cato.org/blog/hayek-v-krugman-cyprus-capital-controls

      It seems a little rich for Cato to be accusing someone of a propensity to spin an conceal or to "fail to qualify as truth-telling." And lo and behold, this doesn't sound like "truth-telling."

      "Prof. Krugman’s New York Times column, “Hot Money Blues” (25 March 2013) is a case in point. Prof. Krugman sprinkles holy water on the capital controls that will be imposed in Cyprus. He further praises to the sky the post-1980 capital controls that were introduced in a number of other countries."

      I don't know that Krugman quite 'praised capital controls to the sky.' He did suggest that they can in certain circumstances in certain countries be necessary. He also points out that during the immediate postwar era through 1979 we didn't have the financial crises that have become commonplace since:

       "In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s."

      "It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus."

      http://www.nytimes.com/2013/03/25/opinion/krugman-hot-money-blues.html?_r=0

      Again, not to belabor it, but there's more than a little irony in Cato accusing Krugman or anyone else of spin or being less than successful in truth telling. They claimed that he praised countries that used controls in the post 1980 period to the sky. In fact he said this:

      "countries that did step in to limit capital flows — like Malaysia, which imposed what amounted to a curfew on capital flight in 1998 — were treated almost as pariahs. Surely they would be punished for defying the gods of the market!" 

      That's it. IN addition they further accuse him here:

       Prof. Krugman then takes a characteristic whack at all those “ideologues” who might dare to question the desirability of capital controls:

But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

       "Fine. But, not once did Prof. Krugman mention that there just might be a significant cost associated with the imposition of capital controls – a cost with which Prof. Krugman is surely familiar."

        Actually he did mention that there can be costs:

         "Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers)."

         Cato then cinches its case by quoting Hayek:      

        Before more politicians fall under the spell of capital controls, they should take note of what another Nobelist, Friedrich Hayek, had to say in his 1944 classic, The Road to Serfdom:

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

        "When it comes to capital controls, I think the Cypriots – even the non-ideologues – might be inclined to agree with Hayek over Krugman."

        Note what Krugman had observed above: that there isn't much that we can really say about capital controls in the evidence. Here we get another theoretical argument from Hayek prior to the age of capital controls. Hayek seems to here be inventing a new explanation for the horrors of WWII: the capital controls made Hitler do it. 

        Again, I've said myself that capital controls are not a panacea. However there are times they may be justified-Cyprus here in 2013 looks like such a case. Krugman is not so much praising controls to the heavens as criticizing the ideology of those like Cato who praise the absence of controls to the heavens.