This post will wander around, but eventually address my heterodox monetary views.
Ryan Avent and Matt Yglesias have some recent posts discussing transformative technologies such as the automobile. At first no one expects them to be transformative, as none of the infrastructure exists to make them much more than a plaything for rich people. For every ten inventors claiming their invention will transform society, perhaps one will actually be successful.
This made me start to think about how ideas that were once viewed as zany gradually become accepted by society. In some cases it might seem obvious—scientific theories are accepted because they are true. (I’d say useful and/or elegant.) What about moral innovations? The first time I heard people discuss gay marriage I was incredulous. Not so much because I thought it was a bad idea (I am a libertarian, after all) but rather because I thought there was no way American society would ever accept such a preposterous idea. I was wrong.
Now we get into murky philosophical waters; moral realism vs. moral relativism. Is moral innovation different from scientific or technical innovation? Is the moral acceptability of gay marriage now true in the way that the theory of evolution is now true? Something accepted by “the smart set?”
The trillion dollar coin is back in the news, with recent posts by Paul Krugman and Matt Yglesias discussing this option. I basically agree with both of them; the debt ceiling itself is such a logical monstrosity that any zany gimmick like the trillion dollar coin is fair game.
But it’s also obvious to me that most people would not agree, especially the VSPs, but also average people. When most people think of coins they think of nickels and dimes, the lowliest part of our vast financial system. There is something slightly absurd about combining the number “$1 trillion” with a coin. Most people don’t understand fiat money, or open market operations, or public debt. But they have a vague idea that the German hyperinflation had something to do with currency notes of “100 billion German marks.” So the trillion dollar coin isn’t going to work. The public would greet the idea about the way that John McEnroe used to greet bad line calls:
You cannot be serious!
And that’s also how most economists would react if they heard my theory that the banking/real estate crisis didn’t cause the Great Recession, it was ultra-tight money by the Fed. Is there any chance I can convince other economists that I am right? Yes there is.
One needs to break the theory down into three components:
1. Money is tight when NGDP growth and inflation fall sharply below target, not when the money supply falls or interest rates rise.
2. Under fiat money the Fed can always boost NGDP if it tries hard enough, even if the economy faces lots of “headwinds.”
3. The recession was mostly caused by a big fall in AD, although real factors such as reallocation out of housing might have played a modest role.
If all three assertions are true, then my zany theory is true. And I think I have a fighting chance to convince economists on all three counts. For the first, I can quote Ben Bernanke. Say what you will about Bernanke, but he is not a zany economist like I am. He’s very serious, very respected. For the second item you use reductio ad absurdum arguments. You cite Zimbabwe, you discuss the expectations channel. You point out that in all of recorded history no fiat money central bank has ever tried to inflate and failed.
The third might be the easiest. Lots of conventional economists think the recession was due to a demand shortfall—many supported fiscal stimulus.
So it’s a long shot, but none of the three components of my argument are completely beyond the pale. It’s just when you put them together, people get all John McEnroe-ish
PS. Actually the stock of lowly coins (during normal times) is about equal to bank reserves, and just as important. The total amount in circulation is roughly $120 per capita. We could completely eliminate paper currency and still have enough transactions media to grease the wheels of commerce—except that people hoard coins.
Seriously. No kidding.
PPS. When people say something is true, they might mean:
1. “It’s generally regarded as true.”
2. “I predict it will be regarded as true in the future.”
3. “It is regarded as true by God.”
But most people seem to define ‘true’ differently. They think it means . . . well I’m not quite sure what they think it means.