Archive for August 2011


David Stockman doesn’t know the difference between easy money and tight money

First Rick Perry warns about an easy money policy from the Fed.  Then David Stockman said he agrees with Perry.  But he goes on to show that he doesn’t know the difference between easy money and tight money: 

The Daily Ticker’s guest David Stockman agrees with Obama about Perry’s poor choice of words but also wholeheartedly agrees with Perry’s sentiment. ” I think he was dead on in his thought,” the former director of the Office of Management and Budget in the Reagan administration tells Aaron Task in the accompanying clip. “I think it’s time Republicans woke up to the fact that is the fundamental problem in our economy today.”

Stockman, who has long been a critic of the Fed’s low interest rate policy, says it is “totally wrong.” Stockman says “exceptionally low” interest rates have resulted in excessive speculation on Wall Street “that is utterly destroying our capital markets” and adding to the already unsustainable debt crisis. He goes on to say, “The fact is the Fed is the number one problem holding back this economy, punishing savers, savaging low income people trying to buy food, energy or fuel.”

Of course low interest rates are actually a sign that money has been tight, as Milton Friedman told us in 1997:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

NGDP has risen 4% in 3 years, vs. a normal growth of 15% over three years.  That’s easy money???

Sometimes I wonder if I’m the only person left who still looks at the world the way Milton Friedman did.  I constantly get commenters telling me the housing boom was caused by easy money.  When I ask them what evidence they had that money was easy in the early 2000s, they tell me interest rates were low. 

Interest rates are the price of credit, not an indicator of easy and tight money.  Unless and until we understand that money is tight, we will never be able to develop a sound monetary policy.

BTW: I’m old enough to remember when almost everyone thought money was really tight, but it was actually really easy (1979-81.)  Have you ever noticed that inflation is high during easy money and low during tight money if you use my definition, but not if you use the conventional definition.  I wonder why that might be?

Update:  Just to be clear, Stockman and 6,999,999,990 other people.

Hoover reversed the Depression, until hit by bad luck from Europe

Herbert Hoover succeeded in reversing the Depression during early 1931.  During the first 4 months of 1931, industrial production in the US rose slightly, after plunging sharply throughout 1930.  Then bad luck hit.  The German-Austrian agreement of late March poisoned relations with France.  Then the Austrian bank Kreditanstalt failed in May.  Then German banks came under pressure, then the German currency.  Then the British currency.  The crisis kept moving from one country to another.  People sought gold as a safe haven, and the value (or purchasing power) of gold increased.  More deflation set in.  The severe recession of 1930 turned into the Great Contraction.

Here’s Obama yesterday:

At a town hall meeting on his campaign-style tour of the Midwest, President Obama claimed that his economic program “reversed the recession” until recovery was frustrated by events overseas.

Hoover wasn’t able to print gold, but can be blamed for supporting the Fed’s tight money policies.  Obama can’t print dollars, but can be blamed for not moving aggressively to put people at the Fed who understand the need for more dollars.

Rick Perry is truly evil

Here is The Atlantic:

Republican Presidential nominee Rick Perry spoke in Iowa tonight and had some nasty words for Ben Bernanke. Think Progress first reportedPerry’s unusual words for the head of the Federal Reserve. Perry told supporters at the end of his first full day campaigning in Iowa that he wasn’t a big fan of the head of the Fed, and suggested that Texans would probably beat Bernanke up if he prints anymore money before the next election.

As TP points out, the punishment for treason is capitol punishment. . . .

The new quotable comes right on the back of the new Rick Perry backlash occurring in Iowa. Conservatives forwarded a 14 point memo highlighting the candidate’s problems before a radio interview Monday. Karl Rove warned about his “electability.” New York Times Washington correspondant Binyamin Applebaum tweeted that Perry’s comments were “horrifying,” and asked the question, “This is a major party presidential candidate??

Here’s what he said:

“If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.”

1.   Ben Bernanke is a Republican.

2.  If printing money hurts the economy, why would it help Obama get re-elected?  (I want an explanation that assumes demand-side models are wrong.)

The sensible centrist

I’m for Gary Johnson because I believe the War on Drug Using Americans is the greatest problem facing this country.  But he won’t win.  Of those who might I’m increasingly impressed with Mitt Romney.

1.  Romney doesn’t consider global warming to be a hoax.

2.  He refuses to join the other Republicans in criticizing fiat money and/or calling for tighter money.

3.  He understands that jobs are the big problem.

4.  He has Greg Mankiw advising him.

5.  He recently came out for UI personal accounts, a very Singaporean solution that even Singapore doesn’t have.

Yes, I’m sure you can find a few cases where he throws red meat to the populists, but mostly in areas that won’t tie his hands as President.  I’m not excited about the Mass health care reform, but at least he tried to solve a very real problem—45 million uninsured.  I don’t see many good alternative proposals coming out of the GOP.  And let’s not forget that lots of conservatives supported Romney’s bill, until Obama adopted the same idea.

Matt Yglesais mentioned the personal UI accounts idea, but then went off on a tangent that seemed, in my eyes, slightly misleading.  He cites empirical results that support Romney’s proposal, and yet I’d bet the average reader of Yglesias’s post thinks he’s criticizing it.  See what you think.  The research shows that unemployment insurance has one inefficient effect (discouraging employment due to potential loss of benefits), but perhaps an even bigger beneficial effect (encouraging optimal job search by making workers less liquidity constrained.)  Ronney’s proposal is presumably aimed at getting the best of both worlds.  No disincentive effects from a potential loss of UI benefits, but also a financial cushion to fall back on while you search.

Josh Hendrickson does a good job explaining why Romney was right in saying that corporations are composed of people.  Romney’s critics would argue that they are rich people, but that’s not at all clear.  What is clear is that corporations should not pay taxes (on capital income), rich people should pay taxes (on consumption.)

The best argument for Romney?  Look at the other GOP figures considered to be “major candidates.”

BTW, with Perry entering the race there’s a lot of debate about Texas.  Although I don’t like Perry, I do like the Texas model.  I did a post defending Texas a few weeks back; here are a few highlights:

1.  Of the 7 south central states between Georgian and Arizona, 6 are seeing population growth below the national average.  Texas has seen very fast population growth, for quite a long time.

2.  Other south central states like Louisiana, Oklahoma, New Mexico, etc, are energy rich.  Texas grew extremely rapidly when the energy industry was depressed in the 1980s and 1990s.

3.  All seven south central states have very cheap housing prices.

4.  Texas has no state income tax, the other 6 south central states have one.

5.  Lots of poor, middle class, and rich people move to Texas every year.  Revealed preference anyone?

Conclusion:  Paul Krugman is wrong and Tyler Cowen is right.

An idealistic defense of pragmatism

Conservatives often ask me how I can in good conscience defend the Federal Reserve System.  Why don’t I advocate letting markets set interest rates, letting markets set the money supply.  Why not advocate free banking.  Etc., etc.

I would argue that I am doing this, and more.  You just aren’t paying close enough attention.  Milton Friedman wanted to show that tight money caused the Great Depression in order to get better monetary policy.  But an even bigger reason was to show that capitalism worked and that socialism wasn’t needed.

I’m trying to get the Fed to target NGDP so that we can have a more capitalistic economy, without feeling that if we don’t bail out GM, the unemployment rate might rise.  My hope is that if we do this, eventually we’ll see the obvious need for a NGDP futures market.  And that will lead us to see the obvious need to target NGDP futures prices, and let the market determine the money supply and the interest rate.  And then we’ll abolish TBTF, as we’ll no longer fear that big bank failures will lead to recessions.  And then we’ll abolish FDIC.  And then we’ll allow free banking; after all, even if a few wildcat banks fail it won’t affect the macroeconomy.  But it matters how you do this.  Go to wildcat banking without first getting rid of deposit insurance and you end up like Iceland.

If I was a politician I wouldn’t advocate 100% libertarianism, even if I believed in 100% pure libertarianism (which I don’t).  I’d advocate removing the worst abuses of government, the ones that are easiest to see.  I’d doing this knowing that many of the other problems in our society are produced as the side effect of well-meaning regulation (as when FDIC and TBTF led to excessive risk taking.)  Each time we peel back one layer of government, society begins to restructure in a more effective way, and people will start to see how other layers of government are causing problems.  Then they can be peeled back.

A recent Bryan Caplan post triggered this post:

Tyler often insists that, appearances notwithstanding, he’s constantly popularizing free-market ideas.  People just have to read him carefully and in the proper frame of mind.

I habitually insist that this isn’t good enough.  Either you popularize your point bluntly and clearly, or you fail to popularize.

I’d say both Cowen and Caplan are valuable, but in different ways.  Caplan keeps expanding the argument for libertarianism.  Defending the seeming indefensible with surprisingly persuasive arguments.  Cowen’s value is much less obvious, but arguably just as important.  He shows that someone who is extremely bright, seemingly open-minded, and often willing to take on the dogmatic libertarians, can still end up with a preference for small government.  One could argue that the best argument for libertarianism is that someone like Tyler Cowen could be even a moderate libertarian, just as the best argument for progressivism is that someone like Matt Yglesias could be a progressive.  It’s easy for me to dismiss 99.9% of progressives, as I see right through their biases, their lapses in logic, their lack of understanding of economic principles, their shameless misuse of statistics.  It’s not so easy to do that with Matt Yglesias.  I’d guess many progressives feel that way about Tyler Cowen.  If there were no Tyler Cowens we could easily be dismissed as a bunch of moonies.  With him, it’s not so easy.

PS.  It’s possible that Bryan’s post was about style, and this post is about substance.  So I may not actually be addressing the point raised in Bryan’s post.  I’ll let you guys decide.

PPS.  Another way to make this distinction is that in a world full of government intervention, where some policies may be defended on “second best” grounds, there’s a big difference between starting one’s analysis with the premise that libertarianism is TRUE, and that we just need to work out the implications for policy, and starting one’s analysis with no assumptions about libertarianism (or perhaps just a mild preference based on past experience) and then using the tool kit of modern economics in whatever direction it takes us.

PPPS.  I do agree with Bryan on one point.  Tyler is too vague about how the Great Stagnation costs jobs.  I can sort of see how there might be some indirect effects (minimum wages, UI, SSDI, etc), but I think those need to be spelled out much more clearly.  It’s not enough to say we’ve lost jobs in declining industries–we always lose lots of jobs, even in boom years.  I suspect I might even agree with Tyler to some extent, but I also suspect the mechanism isn’t what a lot of readers would assume.

PPPPS.  I agree with Bill Woolsey’s new post–central banking involves much less “central planning” that it might appear.