A slightly off-center perspective on monetary problems.
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.
I had a dream where my plumber won the multi-state Megabucks. Sixty million dollars. Afterward everyone began treating him like a genius. He started being invited onto TV shows, where he provided folksy, homespun wisdom about everything from global warming to the current economic crisis. Of course in the real world nobody would be treated like a sage simply because he got lucky and made a lot of money. That’s just the stuff of Hollywood movies. At least I thought so until I saw an article (here) on Yahoo entitled “Buffett says government is doing the right things.” Here is an excerpt:
I woke up today dreading having to write part 2 of my liberalism and utilitarianism post, and then decided to just blow it off. I suppose a blog should be more like jazz improv, rather than the laborious construction of a symphony in parts. So tonight I’ll do shorter pieces on the following 4 questions:
1. Are macroeconomists just a bunch of astrologers?
2. Are Democrats just a bunch of socialists?
3. Do soaps promote liberal values?
4. How many Tyler Cowens are there?
There is a common misconception that zero nominal interest rates make monetary policy ineffective. In fact, the reverse is true. Because Paul Krugman is so respected by left-of-center economists, I had assumed that his “expectations trap” was now the accepted explanation of policy ineffectiveness, and that it was generally understood that Keynes’ original liquidity trap argument was faulty. No doubt most macroeconomists are aware of Krugman’s argument, but as this link shows, much of the debate still revolves around the earlier Keynesian model, as formalized by Hicks (1937.) To be fair to Brad Delong, I am sure that he understands the distinction between liquidity traps and expectations traps. And he is merely trying to refute crude monetarist models that also lack rational expectations. So maybe his exercise is defensible. I am not a monetarist, but I imagine they might favor having the central bank do unconventional QE in that situation, i.e. buy interest-bearing assets. But it is clear from his comment section that many of his readers do actually think that Keynes’ liquidity trap still shows monetary expansion to be ineffective at the zero bound.
[I should first explain the “part 1.” The hope is that you will read this before the political art post which follows. They are separate issues, but the second is easier to understand if you read this first. Mankiw visitors: I do off-topic posts every Sunday, early next week I’ll do a monetary post that gives you an idea of my views on the crisis.]
