Romer and Romer on Sanders and monetary offset

Christina and David Romer are both Keynesian economists with impeccable credentials.  Thus I thought you might be interested in their views on monetary offset:

Massive demand-side stimulus in an economy closing in on its productive capacity would have one of two effects. First—and most likely—it would lead the Federal Reserve to raise interest rates, offsetting as well as it could the expansionary effects of the stimulus. Output would rise little, and the main effects would be on interest rates and on the composition of output between the components stimulated by the fiscal expansion and the components restrained by higher interest rates. Second, if the Federal Reserve did not respond, the result would be inflation. And if the stimulus were large enough to try to push the economy 10%, 20%, or more above its productive capacity, the inflation would be substantial.

This is from a report criticizing the Sanders economic plan, which suggested that the US growth rate could be raised to 5.3%/year.  Since October 2009, growth has averaged a bit over 2%, as unemployment has fallen from 10% to 4.9%.  Even progressives like Matt Yglesias admit that Sanders proposals would reduce the labor force participation for many groups:

Friedman assumes there will be no growth-slowing supply-side impacts of any of Sanders’s policies initiatives. You don’t need to be hostile to Sanders’s goals or policies to see that this isn’t the case. For example, if you make Social Security more generous while also giving people free health care and raising taxes, some people are going to retire earlier. This is a feature of Sanders’ agenda (early retirement is nice), not a bug. But by reducing the number of people in the labor force, it will slow the rate of GDP growth.

Sanders’s plan to make college free has the same feature. Reducing the price will increase the number of young people who go to school and decrease the amount of part-time work that college students do.

As an aside, Yglesias is still a bit too soft on Sanders, and way too soft on Trump.

And Sanders also has some interesting views on monetary policy:

Mr Sanders has bold plans for monetary policy and banking, too. He supports a movement headed by Rand Paul, an erstwhile Republican runner, to get politicians more involved in decisions on interest rates, because he thinks Fed policy is too tight. To loosen it, he would bar the Fed from raising rates when unemployment is above 4%.

In other words, hyperinflation!!  Have I changed my mind that Trump is even worse?  No, but this should help you to better understand just how much I despise Trump.

HT:  SG


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47 Responses to “Romer and Romer on Sanders and monetary offset”

  1. Gravatar of Kevin Erdmann Kevin Erdmann
    27. February 2016 at 08:52

    Well, if Sanders understands that monetary policy has been too tight, he’s ahead of 3/4 of the economists and financial analysts I see. Of course, it’s sort of an arbitrary result that somehow popped out of his manual on how to defeat the rampant witchcraft secretly going on in the village. But, it’s something, I guess.

  2. Gravatar of paul henri kadjo paul henri kadjo
    27. February 2016 at 09:34

    Scott you should take a look at this justin wolfers article http://www.nytimes.com/2016/02/27/upshot/uncovering-the-bad-math-or-logic-behind-bernie-sanderss-economic-plan.html

  3. Gravatar of paul henri kadjo paul henri kadjo
    27. February 2016 at 09:39

    It is amazing how political affiliation works.Remember when Mankiw contested the administration growth projections in 2009,Krugman and delong were more interested in being team players and completely ridiculed Mankiw.
    Now they are shocked left wing economists are making wild predictions about growth.

  4. Gravatar of Ray Lopez Ray Lopez
    27. February 2016 at 09:59

    As the three commentators above me note, they are implicitly aghast at Sumner’s logic, “In other words, hyperinflation!!”. Sumner once said if the Fed does not hit an NGDP target, it should just “print more money until it does”. And Sumner claims this is not hyper-inflationary but will increase NGDP! Yet, when presented with the Sanders Philips Curve proposal to print more money, Sumner claims it is hyperinflationary? OK, so Sumner no longer believes in the Philips curve, yet he believes printing money full-stop will increase NGDP by definition? But perhaps employment will stay above 4% yet NGDP targets will be somehow reached? NAIRU is above 4% maybe? Robots replace humans maybe? What? I’d like to know how Sumner’s alternative reality econ universe works (BTW I believe money is neutral, long and short-term, but am curious as to how our host thinks).

  5. Gravatar of E. Harding E. Harding
    27. February 2016 at 10:24

    “No, but this should help you to better understand just how much I despise Trump.”

    -Politics remains not about policy. These are the issues Sumner claims to be most important to him:

    http://www.themoneyillusion.com/?p=30555

    By these standards, Sanders should be Sumner’s favorite candidate (check), but Rubio should be his least favorite (nope), with Trump and Cruz slightly better than Rubio, then Kasich, then Clinton. If we take some of Sumner’s lower-ranking issues, Trump and Cruz move further up the list. Why the discrepancies with Sumner’s actual preferences? Because herd-animal morality is more important to him than any one of his supposed top priorities.

    If Trump did a 180 and decided to support Open Borders (while continuing his popularity), would Sumner come out and support him?

  6. Gravatar of Jason Smith Jason Smith
    27. February 2016 at 11:22

    Scott,

    That is a straw man argument. The monetary offset Romer and Romer mention in that paper occurs after Sanders’ policies (purportedly) send the economy above potential GDP and it is no longer in a liquidity trap. Few mainstream economists question monetary offset under those conditions. At least I can’t think of any … do you have any citations?

  7. Gravatar of Steve F Steve F
    27. February 2016 at 12:19

    I hope this is okay to ask here. I assume it is since it’s related to debates you guys have been having lately.

    E. Harding, I’m a huge Cruz supporter. I think nobody would come close to improving liberty and the economy like he would. I think it’s even likely NGDPLT would become a thing during his terms. Give me your spiel for why you think President Trump would make the country better than it is now.

  8. Gravatar of Peter K. Peter K.
    27. February 2016 at 12:40

    As Erdmanm says, Sanders wrote an op-ed criticizing the Fed as being too tight and overly afraid of inflation.

    Hillary has said nothing apparently agreeing with Obama’s policy and underestimating the importance of monetary policy. Yglesias is right: monetary is very important.

    Trump is insane and has asserted on the campaign trail that Yellen is boosting the economy as a favor to Obama.

    However he’s a crony capitalist so who know, maybe he’d lean on the Fed to boost the economy?

  9. Gravatar of E. Harding E. Harding
    27. February 2016 at 13:14

    “Trump is insane”

    -No, he’s not. An insane man couldn’t get this far. Then again, Rubio.

  10. Gravatar of E. Harding E. Harding
    27. February 2016 at 13:35

    Steve, I think Cruz is clearly the second-best Republican Presidential candidate. If it came down to Hillary v. Cruz, I’d certainly back the latter. But, even if he was electable, I have severe doubts about him. On pure policy:

    1. The VAT -everyone hates the European VATs. And everyone will hate Cruz’s proposed American one. Trump proposes no VAT.

    2. The incoherent foreign policy (not clearly evil, but clearly too Russophobic and Persophobic for my tastes). Take a look at this sentence:

    “And rather than pouring more resources into a dysfunctional Baghdad, we should extend consistent, robust assistance to our regional allies — Israel, Egypt and Jordan — who are on the front lines of this fight.”

    -Israel and Jordan are both backing the Islamic State and the Syrian rebels. Egypt is only intervening against the IS in Libya with airstrikes, and supports the Russian intervention against Turkish belligerence. They don’t want to fight any serious war outside their home turf, and they can’t. Meanwhile, the Baghdad government has been consistently on the frontlines of the fight against the Islamic State ever since late 2013.

    In contrast, the Donald is all too often ridiculously sensible on foreign policy (except on Ukraine, but he hasn’t proposed anything concrete there).

    3. The incoherent monetary policy -supporting a gold standard and NGDP targeting at the same time? Trump has a basic understanding of monetary policy (higher interest rates are contractionary), which is probably superior to whatever Cruz’s advocating.

    I would support Cruz if he was more willing to challenge political correctness, if he had better policy on the above, if he didn’t have Goldman Sachs ties, and didn’t lie so much (e.g., fraudulent Iowa mailers).

  11. Gravatar of Steve F Steve F
    27. February 2016 at 13:57

    E Harding,

    the “Cruz lies” meme is unjustified. The “fraudulent” mailers are common practice among many campaigns and not fraudulent. Distasteful, yes. The other stuff like “stealing votes from Carson” is total hogwash. Cruz did everything above board. Carson showed the world that he lacks integrity by his hypocrisy on the issue. Rubio’s lies about himself and Cruz have been almost deal-breaking for me.

    The VAT is “bad” because taxes are bad. But if you’re gonna be taxed, isn’t a VAT a far better way to do it than income, capital, estate, and all the other forms that Cruz’s plan eliminates or cuts down to size and simplicity?

    I don’t have much to say about Cruz’s foreign policy, and I think it wouldn’t be too much unlike Daddy Bush’s.

    Cruz’s monetary policy only strikes me as incoherent when viewed on the surface. While he has pandered to gold bugs, he has shown a real depth of understanding that no other politicians have. His illustration of the causes of the 08 crisis and Great Recession align with market monetarism more than anybody I’ve seen, and he has used very telling keywords like “rules-based monetary policy” that isn’t even in his opponents vernacular.

    I’d like to hear more about why Trump will have a supposedly positive policy effect. At this point, I’m not changing from Cruz in the primary, but I do not know if I can vote for Trump in the general. There are just so many possible negatives from him. I’d like to see some real substance from his followers.

  12. Gravatar of E. Harding E. Harding
    27. February 2016 at 14:48

    What are the three most important policies you think Cruz does best on, relative to Trump? I already gave you the three most important policies I think Trump does best on, relative to Cruz.

    “While he has pandered to gold bugs, he has shown a real depth of understanding that no other politicians have.”

    -I say it’s taking soundbites from Beckworth. I’ve seen no evidence Cruz has a genuinely good grasp of NGDP targeting or anything like that.

    “But if you’re gonna be taxed, isn’t a VAT a far better way to do it than income, capital, estate, and all the other forms that Cruz’s plan eliminates or cuts down to size and simplicity?”

    -How do you make a VAT progressive? Sumner’s whole point on taxes is that he supports a progressive consumption tax. A payroll tax is the most reliable tax at bringing in revenue; I support the Social Security tax being extended to higher payroll income brackets.

    “Distasteful, yes.”

    -Giant understatement.

  13. Gravatar of ssumner ssumner
    27. February 2016 at 15:05

    Kevin, Yes, “it’s something” but that something is 100 times worse than current policy.

    Paul, Good point.

    Ray, And so you can’t even tell when other people are criticizing me. That clueless, eh?

    E. Harding, Still think that Trump’s “official positions” are what he intends to do? I’d encourage you to stay as far away from con men as possible. You may be a great guy, but you think like a machine. You need to look below the surface. For everything I write, your first question should be “Is Sumner joking?”

    Jason, You said:

    “Check out my new Econlog post, on the Autor, Dorn and Hanson paper. And check out any number of Keynesian bloggers talking about eurozone austerity in 2011 when interest rates were at 1.5%. Including Krugman. And check out EC101 textbooks, how many tell students that the fiscal multiplier is zero when rates are above zero, in other words during my entire life until late 2008?

    Peter, There is a big difference between needed stimulus and hyperinflation. Sanders is proposing hyperinflation.

  14. Gravatar of Steve F Steve F
    27. February 2016 at 15:31

    E. Harding,

    If Cruz is taking soundbites from Beckworth, then that’s one of the best things I could know about him since it strongly suggests he would (or already is) using and agreeing with the economics Beckworth discusses.

    I’m not terribly sure I agree with Scott on progressiveness in tax. The engine of growth and prosperity is at best marginally affected by the poor having a smaller proportion of their capital taxed than the rich. The much bigger issue is just getting taxes low, simple, and voiding of perverse incentives. That said, it’s not that I like Cruz’s VAT thingie, but that his overall plan is much better than any of the other plans.

    My three main Cruz points:

    1. He has proven that against all odds, he will fight for liberty and against the cronyism of government. The main example here is how he fervently ran against the farm subsidies in Iowa. Meanwhile, Trump embraced the subsidies and even called for more. I want a President who rolls into Washington with a truckload of chainsaws and cuts down the monopolist, authoritarian, socialist cartel that the Republican establishment adores so dearly. Cruz is the only candidate remaining that has proven he will do everything he can to do this. Trump is a mixed bag on the issue. He doesn’t have philosophical roots against government or for liberty like Cruz does, and I think a Trump presidency would be a net growth of intervention into private space. Cruz is the only candidate who I think will leave office with a shrunk and weaker Washington monopoly.

    2. Cruz is the only person I can trust to actually get SCOTUS appointments right. The Republican establishment has demonstrated time and again that they do not care about expending political capital to get a liberty-oriented jurist on the court. This is why so many GOP appointed justices are now considered lefties. Despite whatever the GOP establishment says, they are advocates of central government authority.

    3. I’ll make this one a mix of a bunch of stuff (all the reasons I support Cruz tie into his philosophy and history anyways). His plan to move to a flat tax and school choice and cutting several bureaucracies along with many destructive regulations is the only whose I actually BELIEVE would be followed through on. Rubio has proven that he’s a wolf in sheep’s clothing. He epitomizes almost everything that is wrong with the Republican Party (campaigning on one thing then doing the opposite in office, running into the arms of the Washington cartel bosses and away from grassroots liberty support, blatantly lying about principled liberty proponents in order to further his own agenda, etc.). Trump is the mixed bag where we kinda have no clue what he’ll do, yet we do have reason to think that he favors the standard Washington view that government is never powerful enough.

  15. Gravatar of Gordon Gordon
    27. February 2016 at 15:36

    Bernie says money is too tight. But didn’t he blame Wall St. for the easy credit that caused what he sees as a housing bubble and crisis? He’s against free markets but holds up Denmark as a country to be emulated. He’s angry about crony capitalism but promised Iowa that he would continue the ethanol requirement for gasoline. I don’t think he’s being deceptive. I think he’s not intelligent enough to see the terrible inconsistencies in his viewpoints.

  16. Gravatar of Steve Steve
    27. February 2016 at 17:15

    Why do wealthy CEOs and affluent college professors receive a giant tax deduction on their health care, that is small or unavailable to everyone else?

    Does anyone know that the Cadillac Tax died an ugly death in the Omnibus last December? (ok, technically killing it is now an every two year “fix”)

    Who voted NO on the Omnibus? Ted Cruz, Rand Paul, and Bernie Sanders.

    The go-along-to-get-along Lindy Graham and Mitch McConnell voted YES.

    Rubio skipped the vote to go campaigning.

  17. Gravatar of Steve Steve
    27. February 2016 at 17:34

    Bernie Sanders also voted for Rand Paul’s Audit the Fed bill, despite Democrat plans to block the bill.

    Sanders has different ideas for the Fed…He wants the US President to nominate regional Fed Bank presidents, instead of allowing banks to pick people who will ultimately be their regulators and monetary policy voters. Sure Sanders doesn’t understand monetary policy well, and his 4% unemployment rule is dumb, but don’t cherry pick his bad ideas.

    Romney was a goldbug when he ran for president, and ssumner defended it as a campaign ploy.

    Cruz has made overtures to goldbugs too, so why judge him less favorably than Romney? Cruz is flailing around for a monetary rule that takes power away from the philosopher kings. He is more likely to figure it out than any other candidate.

  18. Gravatar of Steve Steve
    27. February 2016 at 17:45

    By the way, Australia has
    1. $12.35 USD minimum wage
    2. Medicare for All, with private insurance layered on top
    3. Cherry picks immigrants
    4. More accountable central bank

    The people who would do these things in America are called at varying turns radicals, sprendthrift, reckless, irresponsible ignorant, bigoted, and one is called a nazi demagogue.

    The establishment is going all-out to make sure the next president is a stiff.

  19. Gravatar of Ray Lopez Ray Lopez
    27. February 2016 at 18:34

    @Sumner who says: “Ray, And so you can’t even tell when other people are criticizing me. That clueless, eh?” – that only goes to my first sentence, OK, let’s assume you’re right. Now please quit dodging the rest of my post. Please answer, don’t cut and weave like Mayweather vs Pacman, come out and fight like a man.

  20. Gravatar of Ray Lopez Ray Lopez
    27. February 2016 at 19:14

    C. Romer is indeed a good economist, as Sumner says. What Sumner forgets is that she blasted Sumner’s hero Friedman in the work below, pointing out how wrong he was with his simplistic “Monetary History”. Did Sumner repeat Friedman’s mistakes in his latest book?

    NBER Macroeconomics Annual 1989, Volume 4 Volume Author/Editor: Olivier Jean Blanchard and Stanley Fischer, editors Volume Publisher: MIT Press Volume ISBN: 0-262-02296-6 Volume URL: http://www.nber.org/books/blan89-1 Conference Date: March 10-11, 1989 Publication Date: 1989 Chapter Title: Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz Chapter Author: Christina D. Romer, David H. Romer Chapter URL: http://www.nber.org/chapters/c10964

  21. Gravatar of TravisV TravisV
    27. February 2016 at 20:02

    Noah Smith has a new post on new economic schools of thought:

    http://noahpinionblog.blogspot.com/2016/02/occult-mysteries-of-heterodox.html

  22. Gravatar of Christian List Christian List
    27. February 2016 at 20:16

    I found it very *convenient* that the economists published their letter right when Sanders was becoming a small danger for Hillary. All of them have been advisers for Obama and/or Bill Clinton. It’s pretty obvious that Hillary’s campaign team made a few phone calls. Team Hillary and the establishment aren’t taking any chances.

  23. Gravatar of E. Harding E. Harding
    27. February 2016 at 21:20

    “If Cruz is taking soundbites from Beckworth, then that’s one of the best things I could know about him since it strongly suggests he would (or already is) using and agreeing with the economics Beckworth discusses.”

    -Who knows? Yes, he could have much worse advisers, but simply relying on the opinions of some dude you know without really understanding the reasoning behind their formation isn’t exactly impressive.

    “That said, it’s not that I like Cruz’s VAT thingie, but that his overall plan is much better than any of the other plans.”

    -OK. Tax reform is an inherently difficult matter. I just really don’t want the precedent of a VAT being imposed and then capital and income taxes being re-imposed two presidencies later.

    “The main example here is how he fervently ran against the farm subsidies in Iowa.”

    -I was impressed with that too, but pro-Cruz efforts get plenty of funding from oil companies. Will he be as tough on oil company subsidies as he will be on ethanol subsidies, is my big question. Clearly, ethanol subsidies make no sense in this environment; I’m in agreement with you.

    “Cruz is the only person I can trust to actually get SCOTUS appointments right.”

    -I give all three big Republican candidates a massive ¯\_(ツ)_/¯ on how they will handle SCOTUS appointments. Cruz liked John Roberts at his appointment to Chief Justice. He looked good at the time, but look how he turned out. I’d really like someone who would definitely appoint someone as conservative as Thomas each and every time, but I just don’t see any such candidate out there.

    “His plan to move to a flat tax and school choice and cutting several bureaucracies along with many destructive regulations is the only whose I actually BELIEVE would be followed through on.”

    -That might well be what Cruz proposes as President, but I doubt more than a tenth of it could ever pass Congress.

    Really, I think it’s best to view all this in the third point as signaling. Signaling shouldn’t be viewed as completely fraudulent (it signals actual intent; e.g., Reagan and his appointment of Scalia), but it shouldn’t be viewed as something that could ever actually be fully implemented In Real Life.

    Cruz is better than Rubio, in any case. Rubio is a complete puppet of the establishment. I cannot say that for Cruz, but his wife’s Goldman Sachs employment and his campaign being funded by various lobbyists make me wary. Trump is genuinely independent, but may well use government contracts to enrich himself at public expense.

    Like I said, I prefer Ron Paul to Trump. But Ron Paul was unelectable, and Cruz strikes me as someone at least partially purchasable. Cruz is also unelectable (according to the prediction markets), and Trump’s domineering personality will land more massive blows on Clinton than Cruz’s ever could.

  24. Gravatar of Steve F Steve F
    27. February 2016 at 21:46

    E. Harding,

    “Who knows? Yes, he could have much worse advisers, but simply relying on the opinions of some dude you know without really understanding the reasoning behind their formation isn’t exactly impressive.”

    — It’s a sign of understanding and acknowledgment of expertise. Every day Trump says that he doesn’t understand stuff but would “get the right people” who do understand stuff. Here we have Cruz actually showing that he understands the stuff already because he is listening to the right people already.

    “OK. Tax reform is an inherently difficult matter. I just really don’t want the precedent of a VAT being imposed and then capital and income taxes being re-imposed two presidencies later.”

    — I don’t want that either, but I do not fear that. This blog discusses all the time about moving to a consumption tax instead of income/capital/etc taxes. Here we have a candidate proposing the most reasonable way to do so. Regardless, we should not judge one person’s policy based on how those who disagree will react. Cruz’s tax policy, if implemented, would be an incredible boon.

    “I was impressed with that too, but pro-Cruz efforts get plenty of funding from oil companies. Will he be as tough on oil company subsidies as he will be on ethanol subsidies, is my big question. Clearly, ethanol subsidies make no sense in this environment; I’m in agreement with you.”

    — Cruz’s stance on the farm subsidies informs his stance on oil. He will no more support subsidies for oil than he does for ethanol. It is not Cruz that we need to worry about, for he has shown that he believes in not giving special treatment, but Trump that we need to worry about, because he has shown that he will give special treatment when it is in his political favor.

    “I give all three big Republican candidates a massive ¯\_(ツ)_/¯ on how they will handle SCOTUS appointments. Cruz liked John Roberts at his appointment to Chief Justice. He looked good at the time, but look how he turned out. I’d really like someone who would definitely appoint someone as conservative as Thomas each and every time, but I just don’t see any such candidate out there.”

    — W Bush nominated Roberts, not Cruz. I do not think it is remotely reasonable to think that Cruz would have been wise to voice opinion against his boss’s at that point. He wasn’t even a senator yet. This attack on Cruz is total obfuscation. I recently finished a macroeconomics class where the professor taught us some stuff that I know is not correct because I read this blog, but I didn’t speak up because I was not in a position to do so. Cruz should not be expected to have voiced an openly contrary position to W Bush given his stature at that juncture.

    “That might well be what Cruz proposes as President, but I doubt more than a tenth of it could ever pass Congress.”

    — I think we haven’t seen nothing. Cruz is hated by the Washington cartel far more than Trump for a reason. He’s the one candidate who won’t lay down arms until the job is done and they know it. Cruz is the true anti-establishment pick.

    His wife’s erstwhile employment at Goldman Sachs is a nothing-burger. If that’s a big deal, then Trump’s donations to Hillary, Reid, etc., are substantially worse.

    I was a Ron Paul guy too. I’m a Ted Cruz guy because I think he’s the only liberty candidate.

  25. Gravatar of Benjamin Cole Benjamin Cole
    27. February 2016 at 23:58

    I am Kevin Erdmann on this one. And what makes a 2% ceiling on the PCE price index so superior to a 4% ceiling on unemployment?

    Wouldn’t it be something if a Fed chief said, “Well inflation could come down but you would have to cut structural impediments to get there. We’re doing what we can for the economy and lower inflation rates require congressional action.”

  26. Gravatar of Postkey Postkey
    28. February 2016 at 02:08

    “What else would you expect a scoundrel to say who had secretly secured big sweetheart loans from Goldman and Citibank — by leveraging his retirement accounts –– to fund his 2012 U.S. Senate campaign. Loans which the Calgary Ted conveniently forgot to disclose to the Federal Election Commission. These are the very retirement accounts that he said he and his wife said he cashed in to fund his senate race. In other words, Ted lied. “
    http://stonezone.com/article.php?id=706

  27. Gravatar of Mike Farneth Mike Farneth
    28. February 2016 at 03:12

    In terms of your econlib writeup and free trade…
    1) Yes, I think free trade benefits the world as a whole, but the benefits can be asymmetric.
    2) Just like for food production, there is a national interest in not being too reliant on other countries for the vast majority of your manufacturing. If you look at the chicken tax, for example, you can understand why Europeans would not want to be too heavily dependent on the US for their food supply. If there is a drought in the US, for example, exports will be the first to curtailed. When it comes to getting a printed circuit board made for example, it is difficult to even find a domestic supplier anymore. It turns into a national security concern at some point.
    3) The benefits of free trade are not always cut and dried…For example, the chicken tax reduced US consumers choices in small trucks, but it has also caused the Japanese to setup manufacturing in the US, which has been very good for the US (and Tennessee in particular) and has not reduced competition and probably, since they are non-union, been good for improving the competitiveness of US labor.
    4) As labor is a smaller portion of manufacturing and transportation cost are more, one would expect manufacturing to be brought back to the US, but that has not happened. I suspect that is because we have lost too much of our manufacturing engineering capabilities. Unlike chicken farming, once lost, it is certainly much more difficult to ever bring the expertize back. Many manufacturers are down to just DOD contracts where domestic production is mandated.
    5) TPP, for example would probably hurt Mexico more than anyone, since they currently enjoy more access to US markets than others. I think we gain a lot more from a prosperous Mexico than we get from a prosperous China or southeast asia. FYI Chinese weapons are flooding the third world market, including ISIS. They are good at copying defense products as well… Good for defense engineers, like myself, but it comes at a price. The cost of getting defense goods manufactured in this country is much more expensive due to our eroded manufacturing base. Of course it is very annoying that the Chinese have stolen all of my person data, by hacking into US government computers. And of course, the Chinese government directly supports egregious stealing US IP, like the American Superconductor case….and if you are looking for a reason for the rise of Trump, look no further….
    6) I’m not a protectionist, just saying you also need to take it all into account.

  28. Gravatar of Benjamin Cole Benjamin Cole
    28. February 2016 at 05:44

    Postkey–not sure about everything in that link but I do agree with one aspect: if you are old enough you remember Richard Nixon. Ted Cruz is the Canadian Cubano modern-day version of Nixon.

  29. Gravatar of ssumner ssumner
    28. February 2016 at 06:59

    Steve, You asked:

    “Does anyone know that the Cadillac Tax died an ugly death”

    I blogged on this, and was highly critical.

    And no, Romney did not say he would return the US to the gold standard.

    You said:

    “The people who would do these things in America are called at varying turns radicals, sprendthrift, reckless, irresponsible ignorant, bigoted, and one is called a nazi demagogue.”

    That’s so bizarre I won’t even comment. I have so many “Steve” commenters I can’t keep track which ones are the loony ones.

    Ray, I also “blasted” Friedman in my book on the Great Depression. What do you think about that?

    And fight like a man? You mean like Trump? No, I’d rather fight like a woman.

    Christian, It’s amazing how little you know about economists. I know lots of economists and I assure you that they almost all believe the same things as what those 4 wrote. It has nothing to do with Clinton’s influence, economists tend to hate loony budget plans that promise something for nothing.

    Ben, You said:

    “I am Kevin Erdmann on this one. And what makes a 2% ceiling on the PCE price index so superior to a 4% ceiling on unemployment?”

    Umm, how about because a 4% ceiling on unemployment leads to hyperinflation and a 2% ceiling on the PCE does not?

    Mike, First of all, your comment doesn’t belong in this post. Second, it doesn’t even fit the Econlog post, as it’s unrelated to the subject I was discussing. And third, all of you arguments have been thoroughly refuted by economists, dozens of times. If you read both sides of the debate, then I’m sure you already know that.

  30. Gravatar of Christian List Christian List
    28. February 2016 at 07:30

    @ssumner
    Don’t take me for a total fool please. I know that Sanders’ plan is ludicrous (and believe me I don’t need economists to tell me that). I also know that contentwise their letter is true. It’s not rocket science.

    It’s the timing I was talking about. They went public and were all over the media exactly at the time when Sanders was becoming a bit of a danger for Hillary. Sanders’ plan is out there for months they could have attacked him at day one but they didn’t. They waited for the *right* moment. I think someone must be really naive to think that those economists were not in contact with team Hillary during this whole process.

    It’s the job of Hillary to attack Sanders in this situation not the job of some “experts” that are very closely connected to camp Obama and camp Hillary. But that’s unfortunately not the style of Hillary.

    It’s sad that I have to defend Sanders here. But I just hate it when people play unfair. And Hillary and those economists are playing unfair.

  31. Gravatar of Effem Effem
    28. February 2016 at 08:42

    Sanders+Trump must be a “bubble.” The elites should prick it.

  32. Gravatar of Steve Steve
    28. February 2016 at 08:55

    Christian List,

    You are exactly right. Don’t worry if Scott calls you a loon.

    Obama promised $2500 savings on health, and no mandate. He got plenty of top economists on his team, including Geithner, Summers, and Romer.

    Gruber publicly said that the mandate wasn’t a tax, but privately said he relied on the stupidity of the American voter. Gruber is employed at no-reputation MIT.

    Obamacare increased MTRs by ~25% on a slice of the middle class. Sanders would require a much smaller MTR increase, but it would hit a much broader base of politically enfranchised people. The hypocrisy of pointing to one but not the other is stunning.

    If fact, the only part of the law that ever gets repealed or fixed is the Cadillac Tax, because that is the only part that hurts the movers and shakers of Washington DC. High-minded, indeed!

    Alan Blinder once said the purpose of an economics degree is signalling: proving you are willing to do degrading work in exchange for money.

    Trump’s health plan is the same as Obama’s 2008 plan: Get rid of the mandate, save everyone money, and it will be “so so much better.” But it’s delivered in the tone of a demagogue instead of the tone of a professor I’m told. Bs is bs, it all smells the same to me.

    Christian List is right, you’d have to be a fool not to see it. Romer is coming out delivering a hit on behalf of team Obama/Clinton in the run-up to Super Tuesday. Returning a favor.

  33. Gravatar of Don Geddis Don Geddis
    28. February 2016 at 10:33

    @Ray Lopez: “Sumner once said if the Fed does not hit an NGDP target, it should just “print more money until it does”. And Sumner claims this … will increase NGDP! Yet, when presented with the Sanders Philips Curve proposal to print more money, Sumner claims it is hyperinflationary?

    All the time you waste reading (?) and commenting on this blog, and you still don’t understand even the most basic distinction between nominal quantities and real quantities?

    Hint: NGDP is nominal. (It’s right there, in the name!) Unemployment is real. Central banks with fiat currency have absolute control over any (single) nominal macro quantity … but not over real quantities.

    But perhaps employment will stay above 4% yet NGDP targets will be somehow reached?

    No shit, Sherlock. Obviously, yes.

    The mechanism for money printing to raise NGDP does not require any change in employment.

  34. Gravatar of Christian List Christian List
    28. February 2016 at 11:05

    @Steve

    Thank you for your comment. Obama is the exact example I had in mind, too. I remember quite well when he advertised that under Obamacare everybody will have better healthcare, everybody will have the same price as now or even lower, everybody can keep their plans and to even top all that bull Obamacare will additionally subsidize and insure 10-20 millions people that could not afford healthcare until now. Obamacare was a Swiss army knife, it could do anything.

    In reality it was ludicrous demagoguery at its very best but I can assure you that there was no similar letter back then. Quite the opposite was true, there was always an “expert” from the establishment at hand that assured you how wonderfully this plan will work out.

    To say Trump or Sanders are demagogues is stating the obvious. It’s like beating a dead horse. I don’t beat dead horses.

  35. Gravatar of Joe Joe
    28. February 2016 at 15:46

    I’m finding myself agreeing with Kevin and Benjamin. I wonder too if that explains the support for Trump/Sanders.

    I think a Sanders (or Trump) presidency would immediately reflate inflation expectations. Sanders is explicit where with Trump, I just feel it in my gut – maybe they both strike me as sufficiently reckless (and then some)?

    Unfortunately the “and then some” scares me. I’d prefer 2% NGDP growth to 1,000% NGDP growth.

    And Trump may be all about hard money now, but he’d do the expedient thing to make people love him. After all, Hitler did reflate the German economy. Not everything he did was evil :-)

    Before anyone takes that the wrong way, everything other than the German reflation under Schacht was evil.

  36. Gravatar of Ray Lopez Ray Lopez
    28. February 2016 at 16:42

    @Don Geddis – “Central banks with fiat currency have absolute control over any (single) nominal macro quantity … but not over real quantities.” – HAHAHA. You are really clueless. Sumner has said that money is neutral long -term (I agree), but NOT short term (I disagree, so, Bozo, we are actually in agreement since you are, cluelessly, admitting that the Fed has no power long or short term). Short term goes to real variables. So my original question remains.

  37. Gravatar of Tom Brown Tom Brown
    28. February 2016 at 17:04

    O/T Scott, perhaps you already heard about this “Intelligence Squared” debate: I heard about it on NPR today. It sounded like something in your wheelhouse:
    http://intelligencesquaredus.org/debates/past-debates/item/1405-central-banks-can-print-prosperity
    I’ve heard some good ones from Intelligence Squared… they actually pick a winner based on which side changed the most minds.

    Next week is a debate on the cultural significance of Ming Dynasty confusionism, with noted historians Gao Qi & Zhu Quan, vs a couple of newcomers to the field: “Shmebulock, Crusher of Pussy,” and Donald Trump. Should be good!

  38. Gravatar of Benjamin Cole Benjamin Cole
    28. February 2016 at 17:57

    Scott Sumner– I suppose you have theoretical grounds for stating that maintaining unemployment under 4% would inevitably lead to hyperinflation. In Thailand the CPI is rising at 0.8% annually, and the unemployment rate is 0.7%. This situation has persisted for years. I give the unemployment figures some credence, as labor shortages appear common.

    The existence of chronic labor shortages appears very salubrious for the population. Despite rancid politics that makes America look like a bunch of sissies, the Thai population appears politically very stable (as opposed to its leadership). In short people are content, as they know they can get a job. By the way there is very little welfare in Thailand.

    I also find unpleasant the idea that the monetary policy of a developed nation assumes that it must keep at least one out of 20 workers unemployed at all times.

    The sensible reaction of a population that is told it must endure high levels of unemployment in order to hit a very low price target, is sensibly, to embrace socialism.

  39. Gravatar of Don Geddis Don Geddis
    28. February 2016 at 20:56

    @Ray Lopez: You’re still greatly confused. Perhaps you’ll make progress another way. These two sentences are very, very different: (1) “The central bank has absolute control over real quantities”, vs. (2) “monetary policy can have some real effects.” Or perhaps this set of claims: (1) “the Fed has no power over real variables” vs. (2) “the Fed has limited power” vs. (3) “the Fed has absolute power”.

    Hint: saying “the Fed does not have absolute power” (over real quantities) is not the same as claiming “money is neutral“. You continue to need assistance with basic reading comprehension and logic; in this case, you have fallen prey to the fallacy of the excluded middle. Please try hiring a nice high school student to help you with your understanding.

  40. Gravatar of Don Geddis Don Geddis
    28. February 2016 at 21:03

    @Benjamin Cole: “I suppose you have theoretical grounds for stating that maintaining unemployment under 4% would inevitably lead to hyperinflation.

    Not theoretical; empirical. In the US, the NAIRU appears (over the last few decades) to have a floor of around 5%. (In most of Europe, it actually seems to be higher.)

    The floor can change, and is affected by supply-side factors and government policies and regulations. But there is no credible proposal for reducing the US’s NAIRU as low as 4%.

  41. Gravatar of TravisV TravisV
    29. February 2016 at 07:42

    On his blog, Arnold Kling recommends this:

    http://johnhcochrane.blogspot.com/2016/02/negative-rates-and-ftpl.html

  42. Gravatar of ssumner ssumner
    29. February 2016 at 13:22

    Christian, They care about the country, and don’t want to see Sanders elected. Is that so hard to understand?

    Steve, You said:

    “Alan Blinder once said the purpose of an economics degree is signalling: proving you are willing to do degrading work in exchange for money.”

    Link? (I doubt that is true.)

    Ben, You said:

    “I also find unpleasant the idea that the monetary policy of a developed nation assumes that it must keep at least one out of 20 workers unemployed at all times.”

    It doesn’t, it quite rightly understands that you cannot target unemployment.

    Thailand has a lower natural rate of unemployment than the US.

    Joe, You said:

    “After all, Hitler did reflate the German economy. Not everything he did was evil”

    Wait, is that supposed to make me more likely to support Trump? Is the view that Hitler was similar and things turned out fine for Germany?

    Travis, I don’t like that post, the entire premise (that central banks are unable to inflate) makes no sense. Why is the Fed raising rates if they aren’t able to inflate?

  43. Gravatar of Ray Lopez Ray Lopez
    1. March 2016 at 06:17

    @Don Geddis – your pathetic attempt to save yourself failed. “Hint: saying “the Fed does not have absolute power” (over real quantities) is not the same as claiming “money is neutral“. – of course not, but if you are claiming money is not neutral, and yet are then claiming the Fed, which has a monopoly on base money creation, has very little if any power, you are logically conceding the point that money is indeed neutral, unless you wish to engage in metaphysics. Think about it, and when you mature enough to write about it, you can email me at: raylopez 88 at gmail dot com. The ‘dot’ Don is “.”, you don’t type it out in your email To: field, OK?

  44. Gravatar of Gary Anderson Gary Anderson
    1. March 2016 at 09:16

    From Ray: “As the three commentators above me note, they are implicitly aghast at Sumner’s logic, “In other words, hyperinflation!!”. Sumner once said if the Fed does not hit an NGDP target, it should just “print more money until it does”. And Sumner claims this is not hyper-inflationary but will increase NGDP! Yet, when presented with the Sanders Philips Curve proposal to print more money, Sumner claims it is hyperinflationary? OK, so Sumner no longer believes in the Philips curve, yet he believes printing money full-stop will increase NGDP by definition?…”

    Hence the need for autonomous driven economists. And Ray, someone tell me why the FRED chart says we are lending like crazy, and yet there is no inflation. The banks don’t need to lend excess reserves. They are lending the kitchen sink: https://research.stlouisfed.org/fred2/graph/?g=3xG8

  45. Gravatar of Don Geddis Don Geddis
    2. March 2016 at 14:29

    @Ray Lopez: “ if you are claiming money is not neutral, and yet are then claiming the Fed, which has a monopoly on base money creation, has very little if any power, you are logically conceding the point that money is indeed neutral

    Nope, that is not at all true. Your grasp of logic is horrible. You really need to get that high school kid to tutor you in comprehension.

    P.S. the connection between the nominal economy and the real economy is complex, not simple. “Very little power” isn’t a useful phrase to describe the complex interaction. Your attempted description is neither true nor false; it’s mostly just irrelevant.

  46. Gravatar of flow5 flow5
    5. March 2016 at 10:15

    Epitomized by the coterie of canonists in their respective field, e.g., Greenspan “The Map and the Territory”, Blinder “After the Music Stopped”, and Bernanke “Courage to Act”: asset bubbles have fragmented properties, characteristically idiosyncratic, but simultaneously indistinguishable from Professor Irving Fisher’s general price-level – core CPI.

    Somehow asset bubbles are un-differentiable – until some imperceptible Wile E. Coyote moment, as popularized by the economic “time bombs”, of Nassim Nicholas Taleb’s, as portrayed by: “Black Swans“ (“problems of randomness, probability, and uncertainty”). But nope, I predicted and denigrated this theory of May 6th’s “flash crash”, i.e., 6 months in advance and within 1 day.

    Alan Blinder: “After the Music Stopped”
    1) Bubble bursting is like that. At some unpredictable moment, investors start “looking down”…, realizing that the sky-high prices they believed would never end are not supported by the fundamental – and start selling. It is abundantly clear that the crash must come eventually. Fundamentals win out in the end. But why it happens just when it does is always a mystery.
    2) No one will ever know…why the stock market crashed in October 1987, rather than September, or November.
    Alan Greenspan: “The Map and the Territory”
    3) The wholly unprecedented stock price crash on 10/19/87…there was no simple probability distribution from which that event could be inferred
    4) with rare exceptions it has proven impossible to identify the point at which a bubble will burst, but its emergence and development are visible in credit spreads
    Ben S. Bernanke: “The Courage to Act”
    5) First, identifying a bubble is difficult until it actually pops.
    6) A lack of transparency caused a loss of confidence.
    Janet Yellen’s speech: “A Minsky Melt Down”
    7) “Minsky understood this dynamic He spoke of the paradox of deleveraging, in which precaustions that may be smart for individuals and firms – and indeed essential to return the economy to normal state – nevertheless magnify the distress fot eh economy as a whole”
    Joseph E. Stiglitz “Free Fall”
    8) Bubbles are, however, usually more than just an economic phenomenon. They are a social phenomenon.
    9) 2) Futures prices are unpredictable.
    Paul Krugman “End This Depression Now”
    10) What actually happened, of course, was the Fed did everything Friedman said it should have done in the 1930’s – and so the economy seems trapped in a syndrome that, where not nearly as bad as the GD 1.0, bears a clear family resemblance.

    Still in the crucible of scrutiny, the blood begins to boil, especially as the soldiers in white lab coats fasten the strait jacket of conventional wisdom and plunge the long hypodermic needle of “1984 dystopian”,viz., catatonia, into your backside, i.e., until strapped down and paralyzed in the blind alley of their litany, nothings’ recognizable.

    Nay, 1.8 million years ago, my ancestors were nomadic hunters and the DNA’s still intact to “backtrack” and see “footprints in the sand”; (NN’s “elephant tracks”), i.e., the trail of economic transactions (money for whatever reason, actually exchanging hands).

    No sandbagging. The impacted indoctrination long since entombed in the Fed’s 300 Ph.Ds. exposes, intuitively a priori (and a fortiori), the convoluted maze of fabled psychosis.
    Straight from the Fed’s musty catacombs, seemingly hauntingly possessed by the “seductive Victorian gestalt of Keynesian exegesis”, an unfettered e-mail revealed (before Obama’s administration censored them):

    Sent: Thu 11/16/06 9:55 AM
    “Spencer, this is an interesting idea. Since no one in the Fed tracks reserves”
    Richard G Anderson
    Federal Reserve Bank of St Louis

    How so you ask? – because the Fed began to encrypt their data; and not as the average weighted reserve ratio against deposit liabilities remains constant, but for legal reserves (fractional), ceased to be “binding” (because increasing levels of vault cash (larger ATM networks – as applied vault cash was allowed to count beginning in 1959), retail deposit sweep programs, fewer applicable deposit classifications (including the “low-reserve tranche” & “exemption amounts”), & lower reserve ratios, combined to remove most reserve, & reserve ratio, restrictions since c. 199

    And Donald Kohn, Vice Chairman of the Board of Governors of the Federal Reserve System and a 40 year tenured economist:

    “I know of no model that shows a transmission from bank reserves to inflation”

    David Stockman espouses the conventional wisdom: “The Great Deformation”, or as Joseph E. Stglitz said: “lemmings will follow each other over a cliff”.

    1) …so the change of causation was long and opaque
    2) The killer was that the Federal Reserve couldn’t control Friedman’s single variable, which is to say, the “money supply” as measured by the sum of demand deposits and currency (M1)
    3) During nearly two decades at the helm, William McChesney Martin learned that the only thing the Fed could roughly gauge as the level of bank reserves in the System. Beyond that there simply weren’t any fixed arithmetic ratios, starting with the money multiplier – the latter measure the ratio between bank reserves, which are potential money and bank deposits which are actual money.
    4) …a regulatory change in the early 1990’s which allowed banks to offer “sweep” accounts; i.e., checking accounts by day which turned into savings accounts overnight. Accordingly, Professor Friedman’s M1 could no longer be measure accurately”

    1) Stockman doesn’t understand that the money multiplier is required reserves,

    See: http://bit.ly/yUdRIZ

    Quantitative Easing and Money Growth:
    Potential for Higher Inflation?
    Daniel L. Thornton

    2) and that: “money” should be defined exclusively in terms of its means-of-payment attributes. The present array of interest-bearing checking accounts has confused the distinction between means-of-payment accounts (the primary money supply) and saving-investment accounts and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings. This dilemma is resolved when the transactions velocity of demand deposits is taken into account; i.e., deposit classifications are analyzed in terms of monetary flows (MVt). Obviously, no money supply figure standing alone is adequate as a “guide post” to monetary policy.

    EXAMPLE 1:
    Black Monday Oct 19 1987.

    On Sept. 4 the Fed raised (1) the discount rate 1/2 percent to 6, & (2) the federal funds rate 1/2 percent to 7.25 (up from 5.875 percent in Jan). On Sept. 30 fed funds spiked at 8.38; fell to 7.30 by Oct. 7; then rose to a peak of 7.61 Oct 19 (Black Monday).

    At the same time, (Sept. & Oct 87), the decline in the proxy for R-gDp (its rate of change) plummeted (the sharpest decline in the statistical release ever up to that point). Then the quantity of legal reserves bottomed in the bi-weekly period ending 10/21/87. This was the trigger.

    At the time, the 30 year conventional mortgage yielded 11.26 percent, up from 8.49 percent in Jan. 87, & Moody’s 30 year AAA corporate bonds yielded 11.06 percent on 10/19/87, up from 9.37 in Jan. 87.

    The preceding tight monetary policy & the sharp reduction in legal reserves, had forced all interest rates up in the short run (at the same time as inflation & R-gDp were decelerating).

    And the banks scrambled for reserves at the end of their maintenance period – to (& bank squaring day), support their loans-deposits (contemporaneous reserve requirements were in effect exacerbating the shortfall & response time). Apparently a significant number of banks, or large banks with large reserve deficiencies, tried to settle their obligations at the last moment. And the NY “trading desk” failed to accommodate the liquidity needs in the money market (until too late, which ex-post, encrypts the data).

    Black Monday’s trigger was obscured because the decline in monetary flows (MVt) which overlapped Qtr3’s & Qtr4’s GDP (quarterly reports are used by the Bureau of Economic Analysis to measure gross domestic product – not monthly).

    The Fed quickly reversed their policy when the markets panicked, i.e., they brought the volume legal reserves back into alignment.

    Example 2:

    I.e., as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated, his first “contractionary” money policy for 29 consecutive months (coinciding both with the end of the housing bubble, & the peak in the S&P/Case-Shiller 20-City Composite Home Price Index© in 2006-07-01 @ 206.52), or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression).

    Note: A “contractionary” money policy is defined as one where the rate-of-change (roc’s) in monetary flows (our means-of-payment money times its transactions rate of turnover) is less than 2% above the rate-of-change in the real output of goods & services (for this entire 2 year period roc’s in M*Vt were NEGATIVE (less than zero!).

    Money market & bank liquidity continued to evaporate despite the FOMC’s 7 reductions in the target FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed on July 16, 2007, & immediately thereafter filed for bankruptcy protection on July 31, 2007, the FED maintained its “tight” money policy [i.e., credit easing (reconstituting the mix of assets), not quantitative easing (injecting new money & reserves)].

    The FOMC’s “tight” money policy was due to flawed Keynesian dogma (using interest rate manipulation as a monetary transmission mechanism), rather than by using open market operations of the buying type to expand legal reserves & the money stock.

    On January 10, 2008 Federal Reserve Chairman Ben Bernanke pontificated: “The Federal Reserve is not forecasting a recession”. Bernanke subsequently initiated the economy’s coup de grâce during July 2008 (his second ultra-contractionary money policy).

    I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers later filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market), on September 15, 2008. The next day AIG’s stock dropped 60%.

    Note aside: the 2 year rate-of-change (roc) in MVt (which the FED can control – i.e., the roc in nominal-gDp), peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). N-gDp fell to 6% in the 3rd qtr of 2008 (another 25%). N-gDp then plummeted to a -2% in the 2nd qtr of 2009 (another – 133%).

    By withdrawing liquidity from the financial markets, risk aversion was amplified, haircuts were increased, additional and/or a higher quality of collateral was required, liquidity mis-matches were multiplied, funding sources dried up, long-term illiquid assets went on fire-sale, deposit runs developed, withdrawal restrictions were imposed, forced liquidations lowered asset values, counterparties’ credit default risks were magnified– all of which contributed a general crisis of confidence & frozen financial markets (regulatory malfeasance, avoidance, or circumvention were subordinate factors).

    Be forewarned, the most powerful and well-funded oligarch in our midst is the American Bankers Association, ABA. Be careful, as in counter espionage, of “double-edge swords”. “Big Brother” has you on his WWW radar. No solecism here, rather truly shades of “Soylent Green”. The ABA and its collaborators, that is its lobbyists, virtually control the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs, and they collectively are effectively public enemy #1.

    Note: “Like many large trade associations, ABA’s principal activities include lobbying, professional development for member institutions, maintenance of best practices and industry standards (for example, routing transit numbers), consumer education, and distribution of products and services.[1] ABA is considered the largest financial trade group in the United States.” – Wikipedia

    The great German poet & playwright Bertolt Brecht puts it in perspective: “it’s easier to rob by setting up a bank than by holding up (one).”

  47. Gravatar of flow5 flow5
    5. March 2016 at 10:17

    Pièce de résistance? Enigma resolved.

    John Maynard Keynes’s Liquidity Preference Curve is a False Doctrine

    The money stock can never be managed by any attempt to control the cost of credit.

    The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves

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