Why doesn’t the right-wing favor looser monetary policy?

Reading Scott’s post induced me to write down these few points.  I have noticed that right-wing public intellectuals are skeptical of more expansionary monetary policy for a few reasons:

1. There is a widespread belief that inflation helped cause the initial mess (not to mention centuries of other macroeconomic problems, plus the problems from the 1970s, plus the collapse of Zimbabwe), and that therefore inflation cannot be part of a preferred solution.  It feels like a move in the wrong direction, and like an affiliation with ideas that are dangerous.  I recall being fourteen years of age, being lectured about Andrew Dickson White’s work on assignats in Revolutionary France, and being bored because I already had heard the story.

2. There is a widespread belief that we have beat a lot of problems by “getting tough” with them.  Reagan got tough with the Soviet Union, soon enough we need to get tough with government spending, and perhaps therefore we also need to be “tough on inflation.”  The “turning on the spigot” metaphor feels like a move in the wrong direction.  Tough guys turn off spigots.

3. There is a widespread belief that central bank discretion always will be abused (by no means is this view totally implausible).  “Expansionary” monetary policy feels “more discretionary” than does “tight” monetary policy.  Run those two words through your mind: “expansionary,” and “tight.”  Which one sounds and feels more like “discretion”?  To ask such a question is to answer it.

Within these frameworks of beliefs, expansionary monetary policy just doesn’t feel right.  Yet I still agree with the arguments of Scott (and others) that it would have been the right thing to do.

Here is my initial post on the fallacy of mood affiliation.

Comments

The right wing doesn't favor looser monetary policy when there's a Democrat in the White House who would be helped by a better economy. When there's a Republican president, the attitude is a bit different.

People often say this, but I don't read the work of Alesina and others as supporting the claim. Republican Presidents seem to opt for lower rates of inflation.

Inflation was 4% under Reagan and GW Bush, with little if any complaints (and some cheerleading by the right-wing for looser policy). Today the Fed is targeting 2% and the right-wing is pushing for tightening, with warnings that we're in imminent danger of hyper-inflation, cries that low rates are punishing savers, financial repression, etc.

Edit - it was somewhat lower under GWB, but there were pushes for looser policy

I've seen articles to the effect that the actual inflation rate is more like 9% to 11%, which might explain why some people are issuing those warnings.

I am sure you are finding such articles, but that does not mean that their conclusions have anything to do with reality. If inflation was anywhere near 11%, it would be as obvious as if the sun suddenly turned green.

By those alternative inflation measures, inflation under GWB and Reagan were a lot higher too. It doesn't explain the inconsistency.

So let's say the correct measurement of inflation is 10-15% for the past thirty years. The price of housing didn't increase nearly that much, even from 1980 to the peak in 2006. Therefore, housing was a steal in 2006 based on the real price of housing.

The fact that housing prices outside of the bubble has instead increased at about the CPI should show that the CPI is far closer to the real rate of inflation. If everything else got more expensive at the rate shadow stats says, then the substitution effect would have pushed far more money into housing than we have seen the past 30 years.

In 1962 the inflation rate was around ~1. Thereafter, some very bad economic theory lead to Fed to drive inflation above ten-percent in a futile pursuit of full-employment. Any disinflationary process tends to be very painful if it isn't expected well in advance; so the Fed has been gradually working the level inflation back down toward one percent since the early 80s. It is taken 30-years but finally we've healed the wound of those bad policies from the 60s and 70s.

That's why 4% was fine before and not now. So your claim that the 'republicans' are inconsistent is false.

Discussion of hyper-inflation has arisen not because of where inflation is today (low) but from the size of the monetary base, and nature of the Fed's securities holdings. There is some basis for that concern owing to the scale of the experiment and it's unprecedented nature.

I've argued on many blogs, in the WSJ, and in lectures that policy was and is too tight. I favor the Fed doing more, but I also believe that the Fed ought to have implemented negative IOR before adopting QE, and if that had done so there would be little need to consider the risk of a hyper-inflationary exit.

Inflation at under 4% was significantly lower than it had been in the preceding period. Remember, if you will, why Paul Volcker is famous.

Inflation was north of 14% under Carter. Having lowered it to 4% was a great victory, especially considering that there had been about 10 years of failed attempts to lower inflation, all of which seemed to make it worse. (And which mostly pushed unemployment *up*.)

Hasn't the emergence of (low wage) China and India permitted looser, non-inflationary monetary policy over the past two decades? And hasn't that phenomenon run its curse.

Once deleveraging turns around, where will are the liquidity go?

Even over the past three years of low inflation, folks parking their money in 1-year Treasuries have basically forfeited about 6% of their wealth over the past three years, a trend that will continue for at least the next couple years.

Republican's generally supporting lower relative to democrats is still compatible with viewing monetary expansion through a political lens. Look at Rick Perry's comments to the effect that monetary expansion would be treasonous. The narrative that most republicans actually keep in their heads is that monetary expansion at a time when democrats are in power is itself a political tool which sacrifices the long term situation or fairness to money holders/lenders/investors for an 'unearned' short term gain. This narrative is obviously less appealing when you actually are held responsible by voters for the current situation. We don't need to resort to the level of conspiracy on this but the incentives are clearly aligned in such a way that hypocrisy on this topic is predictable.

The Austrians claim that trying to print your way out of recession prevents the misallocations that caused the recession from being corrected, by subsidizing them with low interest rates. This is *very* different from Tyler's point 1.

When you have a monetary hammer, everything looks like a nail. In the '90s, Canada pulled themselves out of their structural issues without resorting to printing money; decentralization and significant shrinkage of federal government.

If monetary expansion is a tool, there are others as well. Besides, the glacier of debt approaching the western world will not be 'fixed' by central banks. In this sense, it is the macroeconomists who provide cover for those who believe federal power and redistribution (while the Feds print money) can actually produce prosperity.

This is a road to ruin, not a long term solution.

Likewise, the associated argument that low interest rates will also provide cover, entirely misses the point. Debt rollover will soon consume 20%+ of world GDP. Is this sustainable? Does anyone believe that as the debt rises, the Fed can just print money and buy it in perpetuity? What kind of society are we building here? Because that solution will undoubtedly become one of extreme cronyism, inequality and redistribution. The whole argument becomes ludicrous with misallocation.

Wrong; Canada suffered a significant employment slump across the early 90s that only eventually ended when the Canadian dollar depreciated against the US dollar.

Recall that (1) although the federal government shrunk, in Canada this was achieved by offloading services to the state governments so state spending in total did not shrink as much, and (2) the deficits that had plagued previous governments were resolved in part by raising taxes, including the GST, introduced in 1991. Canadian government spending as a percentage of GDP did not shrink; it merely stopped did being deficit spending.

I don't think "Jim" was referring to the disinflation of the early 1990s (which was very costly measured in sacrifice ratio terms) but rather was referring to the fiscal contraction that began in about 1996. There they got lucky: the tech boom in the US was just starting to get going, providing strong derived demand for Canadian goods. It is true however that a good deal of the Canadian fiscal policy fix was carried out on the backs of the provinces. They're still trying to dig their way out of that one.

The 90's were the tail end of the process. The provinces started reforming their fiscal situation starting in BC in 1983, then Alberta in 1984. In the following years governments that ran deficits lost elections. Provinces experienced the Laffer curve where raising tax rates brought in less revenue. The proverbial brick wall. At the same time the Conservative government in Ottawa was changing many things, including opening trade, reforming the way government was done. Both levels sold assets, got rid of civil servants. As david mentioned, the GST was introduced, replacing a manufacturers sales tax to simplify exporting. The revenue difference wasn't enough to cover the deficit however. Tax bracket thresholds were not indexed to inflation, raising taxes automatically for many people.

Canada saw one of it's first tax revolts, tossing the Conservatives out decisively giving their vote to the party that promised to eliminate the GST. They didn't. The Chretien government wanted to do all the stuff we see today. Infrastructure, lots of spending. The Mexican crisis scared them. Chretien delegated spending control to Martin, who had a senior bureaucrat in Finance who would say famously 'bullshit' whenever some cockamamie scheme was presented as a magic bullet. Spending was cut, the deficit eliminated.

A few details. The unemployment insurance system was changed from an income support system to something very different. Funding for social housing was almost non existent. Health care spending wasn't cut, but not increased to meet demand resulting in serious underfunding of the system. The Military was almost non existent.

The senior bureaucrat I mentioned became the Governor of the Bank of Canada. With inflation tamed the previous decade, there was room for an expansionary monetary policy, and the resulting decrease in the currency helped exports. By the mid 90's the Alberta boom started and a healthy young worker could find a good job by moving there.

There isn't some nice pat story to please either the left or right. A conservative government brought in a value added tax then stopped existing as a political force. It was a Liberal government who cut or stopped increases in social welfare spending. NDP governments campaigned on fiscal conservatism and balanced budgets, a party who may still have 'nationalize the means of production' in their party platform.

Take comfort. It will happen in the US when all other alternatives have been exhausted. You won't be able to do a Japan, you don't have the world buying your Toyotas.

It's the government doing something, which it is, unless they get it exactly right, which they won't. They just don't realize that being too tight was the government doing something as well. "Expansionary" also implies that all the government has to do to fix the silly little market is press the expansion switch. Basically, the government takes a market feature, money, monopolizes it through force (ask the liberty dollar guy) and then makes freedom sound like tyranny.

+1

Addendum: Never the less I think that central banks should attempt to mimic money supply in a non monopoly system, which means monetary expansion in times of high demand for cash.

Some right wingers people seem to prefer that government institutions perform more poorly than they could. I think hat shows little confidence that free people will out performs Governments in most cases even when government is doing about well as it can.

There is also just the conventional conservative narrative: that the stagflation of the 1970s was the result of Keynesian policies run amok and that it was "conservative" thinkers like Friedman and Hayek who turned the tide and convinced the Fed to crack down on inflation while Reagan became President. Reaganites who pine to relive the 1980s find this all very appealing.

Ricardo,

You do not have your history right. The crackdown on monetary expansion came in 1979 while Carter was president after he appointed Volcker as Fed Chairman. Within the Reagan admin there was a huge split and fight over monetary policy, with monetarist Assistant Treasury Secretary Beryl Sprinkel supporting the Volcker policey, while supply siding Assistant Treasury Secretary Paul Craig Roberts opposed it. After the crisis of August, 1982, when Reagan agreed to cancel the next round of tax cuts, Volcker ended the tight monetary policy, and we got "Morning in America" the next year just in time for RR to win reelection in a sweep.

Or were you not alive or conscious at that time, Ricardo?

Partially correct history. Volcker wasn't in until August of 1979, and his rate increases did not peak until 1981, well into the Reagan term. Also: Arthur Burns.

Sorry, Bernard, but you are wrong. Fed funds rate peaked in December, 1980, prior to RR becoming prez, although it just about matched that peak again in June-July 1981, five to six months after RR became prez.

You are right that RR did not shut off the Volcker tight monetary policy, but there was probably more opposition to it in his admi than there was in the Carter admin, even though it contributed mightily to Carter's defeat in the 1980 election.

Barkley, FRB_H15 (monthly series) says otherwise. Please explain:

http://www.federalreserve.gov/releases/h15/data.htm

Re: Carter admin, I again return to Arthur Burns (and Bill Miller), both of whom served under Carter and can hardly be viewed as hawkish, though in fairness the start of the disastrous Burns era begin way back with Nixon.

Barkley, I was giving "the conventional conservative narrative." Since I am not a conservative and do know my history, it is not my view. Rather, these are popular views one finds in conservative circles.

Bernard,

Uh, and what did Burns and Miller have to say? This is very unclear.

Regarding your data series, so there were two days in June and July, 81 that topped the highest one in Dec. 80. However, the data source I saw had Dec. averaging 19-20% with June averaging 18-20%, and indeed Dec. had 18 days above 19% compared to 15 in June. About even.

Barkley, those data-points are months rather than days. There are three that post-date the Dec-1980 point that also top it, and two more that come close. And to be frank, the argument that a hypothetical Carter admin move to get really serious about inflation in December of 1980 or thereabouts has a flavor, to me, of making a claim in favor of the piety of a dying atheist because of a death-bed conversion. Therein is where Burns and Miller enter the picture, since they would tend to indicate that Carter had an Augustian view of the punch-bowl at best; please, Lord, take it away, but just not yet.....

Perhaps you are correct that this is a problem that doesn't fit into standard American ideological frameworks, some right-wingers agree, and the genuinely happen to think, for non-ideological reasons, that loose monetary policy is a bad policy right now.

Or maybe some of these people would be in favor of the current monetary policy if we had a Republican administration.

Though I've seen left wing blogs attack the government (the administration and the central bank) for running a tight monetary policy, and call for them to adopt a loose monetary policy, even in blogs that don't normally indulge in this sort of cognitive dissonance.

Tyler

what most convinced you that monetary policy is as effective as Scott and others believe it is?

what "channel" for monetary policy do think is most important at the moment? Does it make sense to believe in the power of monetary policy even if you cannot come up with a very convincing story about how it works?

This is the wrong way to think about monetary policy. Monetary policy is not like fiscal policy where Bernanke has a limited toolset that will soon run out of annumition. Monetary policy has no bounds to increase NGPD if it really wants to. If a certain tool is less effective, then that is an argument to do more not less monetary policy. The issue is that central banks don't really want to for political reasons.

As far as the specific "channel," monetary policy hasn't come close to exhausting QE, which will happen only when the Fed buys all of US debt along with any agency MBS and GSE debt which already has government backing. Since the assets are risk-free, they will not go up in price because the Fed is buying them. They are only valued with future interest rates taken into consideration.

But won't the money just go into a vault somewhere? A lot of it might, but the market will become more crowded for investments earning risk-free interest. Some might earn zero interest instead of taking risk, but many will either buy stuff with their money or invest in riskier assets.

The Fed could also stop paying interest on excess reserves to banks to not invest money, and even charge a penalty rate.

See, once you start thinking about it, it's silly to say that an organization that prints a currency cannot increase the size and velocity of that currency. The central bank holds all the strings as far as printing currency.

A central bank can't solve the million other ills like the long-term deficit, but a huge, unnecessary employment shock are easily handled by a central bank's powers if it truly wished to get out of the nominal shock.

Matt,

By channel I meant the mechanism via which MP affects outcomes like employment. For example the BoE says QE works via higher asset prices, lower borrowing costs for corporations, etc.

it's not obvious to me that these mechanisms will achieve much of a change in employment.

I'm happy to accept central banks are not out of ammunition, I don't anything in your reply to convince me that using it would be the saviour of all those millions of unemployed Amricans

I am not a 'public right-wing intellectual', but still...
1) The whole argument about expansionary monetary policy often boils down to 'there's not enough money (or demand, etc.)'. Solution? "Let's print/lend money." Or "Let's create the 'demand'.". Is fixing the inherently complex economic system ultimately really so ... simple? Somehow it feels wrong. This is not the way economic laws work. It seems to break TANSTAAFL rule.

2) The opposite of expansionary policy is not restrictionary policy; it's non-expansionary policy. That's not necesarilly 'being tough'. Keeping your word is sometimes tough; I guess the right wants the government to keep its word (i.e. follow the bakruptcy rules, no-bailout etc.), which is often tough.

3) Agree. Interestingly, if you make a rule 'in distress, the interest rates are automatically lowered', it still feels like 'in case of a problem you will be bailed out'. The rule somehow feels like a blank-checque for discretion, although technically it's a 'rule'.

Is there any reason not to have 0% interest rate forever?

"Is there any reason not to have 0% interest rate forever?"
We really should stop having the Fed price-fix risk (which is what this is).

Real rates are below 0%. Above 0% nominal rates leave room for future rate decreases to adjust inflation and employment levels. Needs to be said in light of your prescription.

The reason to raise an interest rate is 'so that you could decrease it tomorrow'?

Again, is this a reason to have the fed price-fix risk.

sorry, should be "not a reason"

"There is a widespread belief that inflation helped cause the initial mess (not to mention centuries of other macroeconomic problems, plus the problems from the 1970s, plus the collapse of Zimbabwe), and that therefore inflation cannot be part of a preferred solution."

I thought just about everyone agreed that lower interest rates are the way - monetarily - to get out of a recession. Since we are so close to a 0% Fed Funds rate (0.25%) lower rates mean negative interest rates. Inflation provides negative real interest rates so shouldn't inflationary monetary policy be the normal way to fight a recession even for conservative economists?

lff

You thought wrong--the fact that a 0.25% interest isn't creating prosperity is causing a lot of people to rethink what they thought they knew about the Fed.

"Which one sounds and feels more like “discretion”? To ask such a question is to answer it."

You are engaging in linguistic framing, a technique all trial lawyers use to good effect, as most jurors are laypeople and not sophists. Rather than selecting your choice of monetary policy phrases, let's replace one -- and use "Expansionary” and “Restrictive”

That pair makes either Fed decision sound rather discretionary, doesn't it?

And that is because the simple reality is that ANY Fed rate selected by the FOMC is a decision -- its a policy choice (even one driven by the Taylor Rule)

As as a lawyer, the only one's doing the linguistic framing are those against using monetary policy -- based on past rhetoric -- when the facts change or are non-existent.

In defense of Tyler, it was he who claimed that there was right wing framing saying: "Within these frameworks of beliefs, expansionary monetary policy just doesn’t feel right."

The point is that Tyler is describing framing, and you are, and I can't believe this, attacking a challenge to factually incorrect framing, by calling it framing.

Have I framed that correctly.

Probably not. I'm usually playing Bill to Bill playing Barry here. "Expansionary" is a laudable goal, not an action. It's obviously not what they've been doing even though they think it has been.

Bill will always point out right-wing framing, and as a good lawyer he leaves it up to the opposition to stick up for their side.

Expansionary monetary policy is an action, not a goal.

There's nothing inherently laudable about expanding the money supply.

'Expansionary' implies, if unintentionally, expansion of the economy. If we are talking about framing, who could be against that?

My point is they don't even expand the money supply. Their exact action is voting to change the target rate or whatever it is they really do.

Andrew', my point is simply this: no one should lash their steering wheel to the side armrest and drive.

In other words, if you have an ideology that prevents you from ever "feeling right" about expanding the monetary base -- regardless of the facts -- you are probably going to crash half the time.

Noticed how I framed how ideologic blinders can get you off course when facts change.

I always took right-wing to mean conservative and took conservative to mean protecting the current power structure, which generally translates into protecting the asset-holding classes.

Just to add that No. 2 doesn't sound like rigorous reasoning. I think it would be hard to hear that as a primary argument and consider the person an intellectual.

That would be a mistake. Most assets gain real value during inflation as people flee money for the safety of real assets, stocks, commodity futures, etc.

Bonds don't gain value during inflation - or any kind of cash/near cash. To the extent overextended 99%ters have most wealth invested in their home, and many risk-averse 1%ters or 0.1%ters have a lot of truly financial wealth (not stocks), RZ0s restatement of the traditional argument makes a lot of sense. That's what I took the Rick Perry position to reflect, and I've been really surprised at how little discussed this angle has been.

Correct, but the powerful have very easy access to inflation protection.

I agree - (please note all my qualifiers in what follows - I am guessing here!) - the Koch brothers probably have their assets pretty well protected from inflation. However, the notion that "rich people view inflation as anathema because many of them are what we used to call 'coupon-clippers' living off interest from bonds or similar financial interests" seems to me to potentially describe most of the anti-inflation pressure coming from the right. Many of the 1%, I'm guessing, are, e.g., retired professionals without a financial background, with swiftly declining mental faculties (I think Tyler had a recent paper posted on this, about how few 80-year-olds can tell you a 1/5 share of a $2 million lottery prize) who have a few hundred thousand to a few million in some poorly-hedged portfolio. The last thing they want to do is trust some "professional" (Madoff?) to "redeploy" those assets to cope with changing risks. The notion that we could slip from, say a few years of 5% inflation, designed to alleviate the real estate crisis, to a few decades at 10%, would be terrifying. And (based just on personal observation, granted) those folks' concerns carry a lot of weight on the right. Much more than the underwater unemployed soon-to-be-former-homeowner.

I'm pretty sure conservatives have no desire to protect the current power structure of the Obama White House or the Reid Senate.

What do you mean?

Disregarding nutcases who want to strangle an already weak economy, right wingers DO favor monetary policy (for obvious reasons) over fiscal policy.

Nonsense. Most people who favor tighter money, have reasons for it. You are imputing motives to them that they do not have. Plus, I don't think it would work, excess reserves keep increasing a record rate, and inflation in everything but housing is increasing and accelerating.

what would jimmy carter do?

Wait for Reagan do do the right thing.

I believe you mean Volcker.

Volcker was in place, and started to act until Carter pulled back the reins. Reagan gave Volcker the political coverage to start again. Reagan's 'right thing' was to allow Volcker to act which came from the presidential level - thus Reagan.

+1

Monetary policy is understood in terms of either interest rates or the quantity of money.

Interest rates are lower than normal and the quantity of money is higher than normal.

We have decades of "long and variable lags" arguments.

The "too low" interest rates and "too high" quantity of money is going to result in "too high" inflation once this variation of very long lag kicks in.

At a more sophisticated level, monetary policy is taken to impact inflation and output gaps. Real GDP, employment, or unemployment are more or less equivalent to output gaps.

To the degree anyone advocates higher inflation to close an output gap, which is really the way Tyler is putting it, it sounds a lot like the mistake of the seventies.

Getting people to frame this as the growth path of nominal GDP, is the challenge.

Excellent.

If people are already "getting out of" dollars, such as reserve diversification, and not getting into something I'll call labor utilizing goods, but buying up commodities and pushing prices up, increase in money supply can cause deflation in the labor-utilizing economy by raising real prices???

What scares me about this whole post is how much it relies on "feel". Agreed that economics is not a very exact science but can't we do better than anecdotes and the sound of "tight" versus "expansionary"?

And it seems we are talking about "intellectuals", perhaps even trained economists?

Well Sumner has more precise discussions based on targeting NGDP. But Tyler is exploring the more intuitive reasons why politicians and intellectuals seem to oppose certain policies that are technically consistent with standard theory.

Are these credible reasons or more fallacies? We ought to be correcting any sort of knee jerk, "feel-based" behavior not condoning it.

Even if a more reasoned position leads to the same conclusions, fine, let's use those rather than some quack intuition.

Tough guys turn off spigots? I thought tough guys yell, "Damn the torpedoes! Full speed ahead!"

Cool guys walk away from explosions.

And you can tell how cool they are by the relative mass of the things that get blown around while if anything only their hair blows a little.

In Rammstein videos, anyway.

1 There are structural problems in the economy that papering over will not resolve.

2 Inflating the economy to create the illusion of growth, and a possible increase in employment, is too easy a tool for politicians to game for short term election results and long term pain.

3 Long term energy prices, auto industry collapse, housing price adjustments, public sector union demands, education failures, entitlement reform, regulatory reform, tax reform etc are issues that will affect short and long term potential growth. Inflating the economy only gives the illusion of growth without long term growth in potential GDP.

I propose replacing the word "tight" in "tight policy" with any of the following:

Controlled
Rationed
Restrictive
Fixed

And replacing the "expansionary" in "expansionary policy" with either "Deregulated", "Inexpensive", or "Cost-reducing".

I wonder if these semantic changes will change how the left and the right feel about them?

How is it deregulated to have a government sponsored banking cartel setting prices?

In our current framework Republicans take on the role of Father (disciplinarian) and Democrats take on the role of Mother (nurturer). Policy description and voting affiliation should become obvious after all that. The most successful Democrats are those that can exude strong masculinity as a counterbalance (Obama, JFK, Clinton). And if you recall how Bush won it was on a campaign of "compassionate conservatism", which is just another way of saying he balanced out his tough disciplinarian platform with some nurturing.

Repeat after me, "The sexual market is the base all other markets."

i would have worded it like - "that. The most successful Democrats are those that can exude strong masculinity as a counterbalance (Obama,Carter vs. JFK, Clinton)"

Thank you. This point needs to be made more often, if the political parties are ever going to get out of their stalemate.

I agree with this post. (I know Tyler needs my support; who doesn't?)

Just support Ron Paul's bill to make gold legal tender. Many anti-Fed gold bulls are already talking about NGDP because they expect it will be the final weapon used by the Fed. They think it will result in total currency collapse, but whatever. Essentially you'd be buying them off and if you think their forecast/math is wrong, then it won't even cost you.

Because they've associated dollar "strength" with national strength. I think it was Rubin who first coined the term "strong dollar policy", and the psychological effect has been massive. A strong dollar is considered an end in and of itself.

Like people already mentioned, there is a sense that by pumping money into a problem caused by a bubble is not the right way to solve it. However, I think the main point is the fear of inflation and this is a point that honestly baffles me a bit. Many economists make it sound like we completely mastered the art of controlling inflation but I don't see a complete consensus on what cause the inflation of the 70s. Heck, Krugman says Reagan/Volcker was an overreaction to that!

So yes, I understand that we need a looser money policy but what concerns me is the lack of limits (is the idea to pump money until things improve? don't we have any other measurement that tells us that pumping the money is helping in the first place?) and this magical confidence that inflation can be controlled no matter what party is in command and no matter what else is going on in the economy.

Inflation itself is proof of excess liquidity ie more money in the system than is needed. That is the very definition of inflation.

The fed mandate is for "stable prices" ie zero percent inflation, not "kinda stable"... And with good reason.

Targeting inflation is tantamount to the perpetual erosion of the value of the currency and um, that will not do wonders for society. In fact, it will end society.

And it is.

Do I get points for predicting this exact response in my previous post?

No - a stable dollar should be coveted not a strong one. The strength of the currency (relative to others) depends upon nominal gdp, exports, trade imbalances, indebtedness etc.

Because stealing wealth is wrong, and inflation is stealth theft of wealth.

The Reagan-era fight against inflation is to conservatives what the civil rights movement is to liberals: a shining moment of vindication which we'll seize on any excuse to re-enact, no matter how dissimilar the circumstances.

Tell us, TC, do we "rely" on a market system (at whatever level of "free") for the exchanges of goods and services generally thought of as the "economy" of our social order?

Are prices the principal information system by which that market system functions?

Do monetary considerations, such as what serves as "money;" the perceived quality of what serves as money; the "quantity" of money - affect prices?

If the quantity of money increases and the quality (nature of credits) decreases, does that affect prices - perhaps to the point of distorting the information system of markets.

Do we have a problem with that information system now?

The very basics of economics is at play. Handing one dollar to every other person cuts the purchasing power of the non recipients by one dollar.

Fed "expansionary" policies are simply undermining purchasing power of the masses and that destroys BOTH debt serviceability AND capital formation.

With rates at zero, debts at records and delinquencies flat lining in the double digits, AT WHAT POINT DO YOU ALL BEGIN TO REALIZE THAT LOOSE MONTARY POLICY IS THE PROBLEM AND NOT THE SOLUTION???!!!

You have it exactly backwards; inflation makes debt service easy because prices and wages rise while the debt principal remains fixed. If inflation is steady and expectable, however, this phenomenon is offset by the rate of interest charged on the debt. Volatile and unpredictable inflation/deflation would have the exact effects you're attributing to our current monetary policy.

I think not.

1. If that were the case then hyperinflation would be a good thing - hey - just borrow a zillion bucks and then monetize the difference! Gimme a freakin' break.

2. Any given price is the byproduct of supply and demand in the real world. Inflation MEANS there is excess liquidity already chasing a fixed amount of goods. This destroys purchasing power of dollar holders.

Now - this is the key point - wages DID rise because the real economy did grow for 100 years straight (for the most part) but they did not keep up with inflation. Nor will they in the future.

3. So - essentially we have created a ponzi by which we MUST grow or the whole thing crashes.

What you do not get (and few seemingly do) is that inflation is NOT something that is controllable by the Fed or anyone else. The amount of liquidity SHOULD be dictated at the point of capital formation aka gdp matches money supply growth preserving pricing. The minute you add excess liquidity, inflation - people get poorer and are FORCED into debts and while those debts might be serviceable in the longer run their loss is evident through the MICH HIGHER PRICE they are paying for a house, car, boat etc.

Ever hear of 0% loans? Guess what? They aren't being nice to you. They are simply pushing prices up as high as your wages for the next 5 years can service.

Same with housing.

At some point, the ponzi will break because there aren't enough jobs and real gdp growth to support the ponzi inflation and it will all crash into nothingness.

Short version -

You are destroying purchasing power and replacing it with perpetual indebtedness which can only work so long as we have perpetual job growth because of perpetual inflation.

Ponzi!!!

Buy a textbook.

Think for yourself and throw out yours.

I'm a professional investor. I get paid only to be right. To that end, I've undertaken years of study and observation. And I'm very capable of thinking for myself. I'm not always right, but to assume that some folksy "common sense" replaces years of concerted effort requires what seems to me like an unimaginable amount of hubris. The result, judging by your posts, is an incoherent philosophy paired with unshakable certainty. That is a bad combination for someone who gets paid only to be right. I think I'll stick with my way.

Why do you assume that wages will rise?

The majority of new money does NOT trickle down - it goes to the wealth holders so inevitably, wages WILL trail inflation and that is game over over time.

Read Lakoff. Conservatives struggle with complex causality, but they're big on personal virtue. Tight money is virtuous, especially if you're in a position that someone else suffers for it.

Forget tight or loose- how about "appropriate" money supply targeting?

What would THAT be?

I know - match money supply to gdp and VOILA - we have an economy with STABLE money, 0% inflation, no need for deficits, almost no possibility for deflation of any serious extent and reward both economic activity AND savings.

The ONLY LOSS is the ability for the top to absorb exponentially greater amounts of energy from the bottom AND the ability for politicians to spend more than is taken in in taxes.

Bullshit--everyone does. Just look at the ADA legislation, EPA laws, or outlawing of short term loaning (aka "predatory lending") laws. They all accomplish the opposite of what was intended.

The ADA accomplished the opposite of what was intended?

ADA:
http://graphics8.nytimes.com//images/blogs/freakonomics/pdf/FreakPDF1.pdf

More generally:
http://marginalrevolution.com/marginalrevolution/2008/01/the-law-of-unin.html

You could add more affordable health care, more affordable college, more affordable housing, etc.

The people who would suffer the most from inflation in this environment are low-wage workers whose nominal wages would stay flat (because they lack the barganing power to obtain COLAs) while their purchasing power is eroded. The top percentiles are in a much better position to hedge.

If you want to argue against inflation on grounds of helping the poor, by all means do.

Liberals love complex causality since it provides opaque cover for fairy tale economics.

Everyone favors inflation when it is their "assets" being inflated on a relative basis. As for why I don't favor expansionary monetary policy, I recognize that the power to pursue such a policy corrupts absolutely. Why do you suppose the policy isn't pursued by cutting everyone an equal check on a per capita basis at the same moment in time?

Their "feeling" is correct. If you have money, work hard, or save (something conservatives fancy themselves doing), you shouldn't want the government making this harder by, taxes or money printing. This intuition is absolutely correct.

There are plenty of ways "getting tough" leads to bad results (drug war, terrorism), but this is not one of them.

I think just aesthetically and stylistically, the idea that the central bank can take any course of action to manage and correct human behavior is going to offend libertarians and conservatives. The counter idea, that the central bank should follow basically the same course at all times and allow people and markets to rise and fall as they will, is stylistically superior. Your small government types are skeptical of the idea that huge groups of people should or can be managed to some optimal group outcome by enlightened planners, which is stylistically how macroeconomics presents itself.

For the same reason, Democrats and lefties generally will prefer the opposite. They stylistically prefer a solution wherein enlightened people can act for the good of the whole, where the smartest people can overcome ignorance and uncoordinated individual actions through sheer force of intelligence. They don't like the idea of simply letting people thrive or suffer as markets rise or fall, and they put a great deal of faith in the idea that people can be managed or controlled to an optimal solution. Letting people lose money, companies go bankrupt, or economies go into recession to them seems stylistically horrible - the equivalent of hoarding extra blankets while people freeze outside.

So we start from a view point - that central direction of the economy is either mostly ineffective or mostly necessary - and then start digesting whatever evidence will confirm or deny those positions.

From your "stylistic viewpoint"; isn't not having a central bank at all an even better solution?

very well put

The wealthy and elderly live on investment returns to a much higher degree than the young (who borrow money to go to school, buy a house, etc). Thus, they are more likely to oppose inflation.

Who are more likely to vote for conservatives in elections?

It is not surprising that conservative politicians and the people they appoint to government jobs are opposed to inflation.

Those receiving interest rely upon others working at a loss. The elderly have already taken everything out of the system and any interest going forward is pricing in default ie they won't get those rates - no one will.

+1
I would add below.

Demographics play a large role in determining time horizon and liquidity of investment assets. If I am older, particularly at retirement age or closing in on it, I have a shorter the time horizon of the investment and higher demand for liquid instruments. The higher the inflation the more I pay for that liquidity.

Many right-wing commentators are more economically sophisticated than their counterparts on the left (that is, they take economics more seriously as a source of insight, think more about incentives, etc). They are closer to the economics mainstream. And in this case, the mainstream, as Scott points out again and again, does not favor looser monetary policy.

A few points.

Monetary policy implies that a small group of wizards are smart enough to control the economy. I posit that the Fed is one of the last vestiges of the 20th century impulse towards central control. (the EU and Euro is another). Reading Sumner is interesting, neat ideas. But how pray tell do these wizards manage to fine tune when the data they have is 6 months old and the effects of what they do will show up in 18-24 months?

Something both the left and right and economists of both stripes missed is that capitalism isn't something to smooth out, or the efficient market. It is simply a system that encourages failure. Monetary policy is geared to avoid failure, to prevent the structural adjustments, the 'oops, that was a very bad idea' lessons that come along once in a while. If the money supply can be maintained perfectly there won't be failure. Utter balderdash.

Monetary policy is like industrial policy, social policy. One more iteration in the attempt to impose a reality upon a recalcitrant world.

I hope we survive this one.

Tyler may have first been bored by the assignat story at 14, but I was first bored by it at 12, nyah nyah nyah. OTOH, I never got to be a state chess champion, boo hoo hoo, :-).

Three paragraphs on why the right doesn't want to print money, and all you can come up with is that "it just doesn't feel right to them -- they want to be tough guys" ??

I hope to God you are never left alone with children and have any kind of educational authority.

print/don't print is a false paradigm....just like the NYT/Fox news false paradigm of bomb Iran with drones or nuke Iran....just like the Republican/Democrat flase paradigm.

The real question is: Does giving money printing rights to one secretive goup of central planners help our civilization? do they really print up a free lunch for all of us?

Or is a smokescreen so that those with the power to print money can create some extra benefits for themselves?

Being a student of human nature and the universe I'll answer no free lunch...we are getting screwed by central bankers and those who have influence over them.

I think the right doesn't favor easy money at the moment for the simple reason that the right thinks policy is already pretty easy. Being conservative means exercising restraint, staying close to the status quo on the grounds that unintended consequences are just around the corner if policy becomes adventurous. Indeed, to the extent that easy money feeding the housing bubble is an explanation for the financial crisis, the conservative predisposition is reinforced by experience.

Now that's a philosophically conservative position. A more realpolitik conservative might argue that if policymakers want stimulus and don't care much where it comes from, then monetary stimulus would be preferred to fiscal stimulus because of the enormous difficulty in shrinking government once it has grown. Defeating an incipient inflation looks like a better option than taming Leviathan.

I'm always amused when leftists talk amongst themselves to figure out what conservatives think. My favorite is near the top of the thread, where someone said something to the effect that it's part of a masochistic plot to destroy the economy. Or when people say it's because conservatives like to see people suffer.

It's as though you think conservatives all agree with the left on what's best for everyone, but refuse to go along out of pure malice.

Tyler gets it mostly right. I really think the only concern is inflation, to be honest. A lot of conservatives Krugman's age remember the 70s, and unlike Krugman, they didn't spend it in graduate school.

Conservatives do like to see people suffer... the consequences of 'their actions.'

A moralism of 'Personal Responsibility' requires suffering consequences and is often accompanied by a strong distaste for any who do not suffer when their choices suggest that they should.

It's not a caricature, it's simply true.

The interest in suffering may not be 'malicious,' but it is 'moralistic' and 'sanctimonious.'

But the interest in 'not suffering' on the left could be construed as 'paternalistic' and 'infantilizing.'

Of course, not every conservative operates from such a moral standpoint - but it is pretty typical.

There's no reason to shirk at the allegation.

Personal responsibility is good, yes? So suffering the consequences of one's errors is good. So suffering is good. So it's good to see people suffer. They are a lesson to themselves and to others. Own it.

Is this what you're saying?

...a woman asks Francisco d'Anconia what lies in store for the future of the world. "Just whatever it deserves, madam," he answers. "Oh how awful!" she replies.

if so, this doesn't mean that conservatives like to see people suffer, just that they recognize, at some times, for some people, there will be suffering. C'est la vie.

But the conservative view is more than just the fact that people suffer, and this is unavoidable.

Such suffering is productive, and a necessary part of learning, development, and progress. Creative destruction is all well and good, but destruction hurts.

But there is also, probably, a schadenfreude aspect to the sight of people receiving their just deserts - the slothful, the indolent, the criminal, the violent being punished and suffering for their sins has a certain festivity to it, for some (many?).

That, however, is a different sort of justification.

To distill it down into three separate propositions

1. People will suffer, no matter what we do. (Man is fallen, we are cursed to sin!)
2. Good things come from having suffered.
3. It is just and good to for some to suffer for what they've done.

Contrast with a caricature of a sort of utopian left position

1. People need not sufffer
2. We can have progress without having suffered for it
3. Nothing justifies the infliction of suffering - there is no justice in retribution.

I like the quote. Thanks for that.

Nice post. The Theo-Monetarists and Econo-Shmans dominate the American Right when it comes to economics. Sometimes they are correct---after all, cutting federal budgets is good, and so was tight money in the Volcker area.

But now the righties are wrongy. But faith trumps reason (and the left's faith in deficits too).

Go to Market Monetarism. Really we could print money to the moon right now, here, in Europe and Japan.

A long run of moderate inflation and global robust growth would be great.

Comments for this post are closed