Are Capital Controls the Bane of Cyprus?

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.

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

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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 may be a significant cost associated with the imposition of capital controls — a cost with which he is surely familiar…

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 — may be inclined to agree with Hayek over Krugman.

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Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C. You can follow Prof. Hanke on Twitter @Steve_Hanke or his website at Cato.

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