Even people who are sympathetic to my policy views often have trouble swallowing my thesis that the Fed caused the crash of 2008.  In my previous post (which you should read first) I argued that people make unjustified distinctions between “active” and “passive” monetary policy stances.  The argument is often that the Fed did not “do anything” that might have caused the crash of 2008.  Here I will reprise and extend an argument I used in response to Josh over in Nick’s blog.

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A few months back I argued that “if policy A would have prevented event B, then not doing policy A caused event B.”  This is what happens when you try to talk about concepts like “causation” without having studied philosophy.  I still haven’t studied philosophy, but at least I have thought about the issue a bit more.

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I received a question from someone about whether my 5% NGDP rule would be a good policy for a country like Estonia or Latvia.  Before answering that question, I’d like to talk a bit about why these small countries matter.  I will focus on Estonia, the most interesting case.  Why is a tiny Eastern European country with 1.4 million people important?  Because it might be the only country in the world with the three characteristics that I have argued favor economic success:

1.  Free markets

2.  Low tax rates

3.  Liberal culture

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The following quotation discusses one of the more perplexing aspects of quantum mechanics:

In 1935, several years after quantum mechanics had been developed, Einstein, Podolsky, and Rosen published a paper which showed that under certain circumstances quantum mechanics predicted a breakdown of locality. Specifically they showed that according to the theory I could put a particle in a measuring device at one location and, simply by doing that, instantly influence another particle arbitrarily far away. They refused to believe that this effect, which Einstein later called “spooky action at a distance,”1 could really happen, and thus viewed it as evidence that quantum mechanics was incomplete.

I don’t plan to explain this phenomenon (and please don’t write in with an “explanation,” as you’ll only convince me that you don’t understand it.)  But regardless of whether there is action at a distance in particles, I am convinced that the concept does not apply to economics.  To be more specific, I don’t believe in “inflationary time bombs” hidden in money supply increases.  And I don’t believe in “long and variable lags” from monetary policy shocks.

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While researching the Taylor Rule, I came across an old Paul Krugman post that responded to a Nick Rowe essay.

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