Over the last 10 months I have become increasingly aggressive in my criticism of the current state of macroeconomics. I talked about all of the double standards. Fiscal policy is discussed in terms of whether it can create jobs. Monetary policy is discussed in terms of its impact on inflation. Which sounds better, jobs or inflation? Obviously jobs. Yet there is nothing in macro theory that would justify this dichotomy. Indeed, if anything an AD shock driven by government spending would be expected to be more inflationary than equivalent shock created by monetary policy. That’s because the private sector can usually spend money a bit more efficiently than the public sector.
If your intuition still tells you that monetary policy is more of an inflation threat than fiscal policy, you are probably right. But that is because, and only because, you intuition is correctly telling you that monetary policy is a far more powerful tool for boosting NGDP. Which begs the question of why so many economists support fiscal stimulus, and so few criticize the Fed.
That's economist Scott Sumner. Someone who has long argued that our monetary policy response to this crisis isn't what it should be and isn't even what most people (including many economists) think that it is.
The recent debate over more fiscal stimulus has basically swamped any talk of additional monetary moves. While some would argue that there are no monetary moves left available due to incredibly low nominal interest rates, I'm not convinced that that is really the case.
Now the talk is are we repeating the mistakes of 1937 and not stimulating the economy enough. Perhaps it's the monetary policy mistakes of 1937 that we are repeating, and if we are, I'm doubtful those can be offset by further fiscal measures.
5 comments:
Great article Jeremy. I think Sumner is definately on to something here.
I believe Mankiw has been calling for the Fed. raise it's target inflation rate which, I believe, acheive similar results. Why not just openly target higher inflation via monetary policy instead of reducing reserve requirements?
I think that this is a great topic of discussion and something policy makers should be thinking about. Unfortunately, it appears a couple FMOC board members are more interested in leaning towards tighter monetary policy right now which makes any further stimulus via the Fed. virtually impossible.
I can't help but feel like I am in the Twilight Zone. There is that spurious term AD again. What does it even mean? Demand cannot be quantified into any meaningful number or equation.
"Monetary policy is discussed in terms of its impact on inflation."
Que? Clearly he means price inflation, or rising prices - the obvious and necessary outcome of monetary trickery. Why the confusion?
"That’s because the private sector can usually spend money a bit more efficiently than the public sector. "
Usually? In what possible way could total strangers take someone else's money, distribute some to bureaucrats, and then spend it more efficiently than the original owners? The government doesn't know what people demand, people do. I don't know what anyone else demands, and by definition this means I cannot spend their money more efficiently than them. Any claim to the contrary is simply saying "The government can effect its own political ends more efficiently by using other people's money." It cannot take from A for the benefit of everyone.
I agree, monetary policy can boost NGDP, because that 'indicator' is arbitrary and meaningless. The government could print up 40 trillion dollars, spend it all, and with the plants empty and the capital consumed, proclaim the economy grew by X000%. In fact, they have been engaged in this very process for almost 100 years now. GDP has 'grown' over 3% in some periods of the Great Recession, despite no realignment of prices, no change in the structure of production, and certainly no real change in time preference. It's magic!
How much longer are we going to argue that the printing press turns stones into bread? Devaluing the dollar and introducing fake credit does not and cannot create real prosperity. Children often think that they can always get something for nothing, without working. Similarly, the quacks (who, despite being proven wrong empirically and a prioristically for over 100 years) think that we can simply print numbers on cotton and all of a sudden change the behavior of countless individuals and make products and goods appear out of thin air.
The Luddites War on Reality continues unabated. Live from Oceania.
I can't help but feel like I am in the Twilight Zone. There is that spurious term AD again. What does it even mean? Demand cannot be quantified into any meaningful number or equation.
"Monetary policy is discussed in terms of its impact on inflation."
Que? Clearly he means price inflation, or rising prices - the obvious and necessary outcome of monetary trickery. Why the confusion?
"That’s because the private sector can usually spend money a bit more efficiently than the public sector. "
Usually? In what possible way could total strangers take someone else's money, distribute some to bureaucrats, and then spend it more efficiently than the original owners? The government doesn't know what people demand, people do. I don't know what anyone else demands, and by definition this means I cannot spend their money more efficiently than them. Any claim to the contrary is simply saying "The government can effect its own political ends more efficiently by using other people's money." It cannot take from A for the benefit of everyone.
D-
Sumner advocates NGDP targeting, so his argument is consistent with his views, though I realize you don't agree with this.
In terms of government vs. private knowledge of demand, I'm not convinced it's as cut and dry as you make it out to be. Could I, as a private citizen really demand the correct amount of fire protection? Interstate highways? Asteroid protection?
Even if I could, I would need others to cooperate. In other words, you might say there was a coordination problem.
Good question. What is the 'correct' amount? What is the correct amount of fire protection?
Here again we come to a fundamental truism of humanity: the correct amount is subjective to each and every individual. The correct amount is how much he is willing to buy based on his own unique valuations and calculations.
If a man decides he will not purchase enough insurance to cover the full value of his home, it is because he a) has made an error in judgement, b) has consciously valued other expenditures above insurance payments or a host of other calculations.
Could you demand the correct amount of interstate highways? Of course not, you are not the only user. But to say that the correct amount could not be ascertained on the market would be to deny that anything can properly be ascertained on the market, ie)that supply and demand do not exist.
There is no coordination problem. Price coordinates production across time, and price is an objective measurement of the subjective valuations of unique individuals.
The difference, as always and necessarily, is that government, because it is not subject to price, has absolutely no way of determining costs or demand for anything. Its methods can only be arbitrary in the purest sense. The calculation problem destroyed the intellectual backing of socialism in the 20's and a response has not been offered to this day.
le Boetie offers an excellent criticism of the so-called problem of people spending 'too little' on protection (which correlates with the insurance question at hand) in The Private Production of Defense.
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