There has been some interesting conversation about sticky prices and wages, and bubbles between George Selgin, Scott Sumner, and some others lately. In particular, Selgin has been critical of Market Monetarism for what he suggests is neglect of the effects of low interest rates on the formation of investment “bubbles”.
I think this criticism is unfounded. It is unfounded because there doesn’t appear to be any empirical link between “easy money” and particular investment bubbles to explain the ‘what’ rather than the ‘how’, at least I have not seen any. It seems plausible that “easy money” might exacerbate the how, but the what, I think, is far more important from the stand point of economic stability. For example, for the claim that the FF rate being set lower than natural interest (unnaturally low interest rates) is responsible for the housing bubble to be credible it needs to demonstrate that the arbitrage has a direct influence on mortgage activity; and I don’t think it is possible. There needs to be some other component to focus investment into a particular sector. Otherwise it would be just as reasonable to assume that “easy money” would stimulate all kinds of investments rather than just a particular one or select few. In reality, I believe bubble theory to be a misplaced criticism of central planning instead.
There are other ways in which the criticism is unfounded. The first is that MM doesn’t particularly identify easy money as low interest rates, and does not advocate what has become a traditional tool of monetary policy, managing the price level via manipulation of interest rates. The suggestion from the MM body of thought is that nominal gross domestic product level targeting (NGDPLT) could replace the traditional monetary tools, thus freeing natural interest from routine manipulation.
While NGDPLT would be an improvement over the routine manipulation of interest by the Fed, the critics have taken a stance that managing NGDP necessarily involves open market purchases to keep it on target which in themselves impact natural interest, and then follow along with the stance that any disturbance of natural interest can cause a bubble. This cannot be a criticism of MM in particular, but rather of managing monetary policy in any way at all. If the Fed never bought another security in its entire existence, we would never have nominal stability. It seems like a bizarre argument to be making without elaborating on how we get to nominal stability in the absence of managing monetary policy; and it puts George in a rather difficult predicament considering his tacit acquiescence to the effect of sticky prices and wages. Any argument that necessitates frequent and unmeasured market price adjustments and the friction it entails especially without explaining the trade off I find to be problematic.
And this brings me to what I assume to be the next logical progression of the argument: The gold standard which seems to be viewed through rose-colored glasses by its advocates. I am sorry to have to lump George in as being one of those people who argue for something by arguing against the alternative so that the framing of the argument is never focused on the object for which they advocate – in this case, it’s drive-by economics. Consequently, whether he is a staunch supporter of gold or not, I think he is actually somewhere in between, he is an accomplice in the shroud of mystery around what gold bugs are saying they want. In reality, I don’t believe most of them understand the trade off because there is never any clear debate about what they want and the details of how life would be different while the arguments are wrapped in libertarian ideology that seems to form a link between gold and freedom; which I find peculiar.
Examination of the history of management of a gold standard produces many elements that conflict with libertarian thought. The first conflict is in the establishment of a standard; there has to be something or someone imposing it. The next problem is managing the balance of payments, which is described in some detail in Capitalism and Freedom, by Milton Friedman, all of which involve government oversight of money down to the last detail; it is the kind of micromanagement of economy that isn’t necessary under a fiat regime with a floating exchange rate. Without it, a gold standard isn’t internationally credible, and with it, it never will be all the while Americans are harassed and harried over money with capital controls as they move around; or even banning of private ownership of gold. It is trading one form of big government for another, more destructive kind in my opinion.
Other problems with the gold argument include lack of specificity about how to stabilize a gold standard. Does it entail government fixing the price of gold? If it does, then it conflicts with arguments against price-fixing, arguments regarding natural interest manipulation, and the argument that gold somehow automatically precludes government from inflating away debt because all that would be required is for government to fix the price at a different level – which it did do. If it doesn’t entail price fixing, then the entire argument for gold falls apart in the face of instability in market prices for gold and the impact it has on overall economic stability.
Gold won’t cap government spending, energetic economic statism, or military adventurism. There are plenty of examples from the 20th century that falsify the claim that it does these things. The Humphrey-Hepburn Act is one example that predates the Fed, along with the establishment of the FDA and other Square Deal programs. Others include the entire New Deal, and in particular, having a gold standard didn’t stop LBJ from enacting the largest redistribution programs in history. And if we are dealing in hypotheticals and non sequiturs like the use of bubble theory to launch a barrage of criticism against MM, one could present an argument that the military interventionism of mid-20th century was really for getting more money for government to spend and stimulating the economy, not connected with actual threats to national security. Gold means people die to support unrelated political whims. From me, this isn’t just hyperbole. It is one reason I am entirely against a Balanced Budget Amendment that includes exceptions for military conflict – and therefore find it unworkable. It seems preferable to acquiesce to spending whims under a fiat regime than it is to sacrifice my son for it while having the spending and debt shoved on me anyway in amplified form with the addition of paying for military action.
And then there are some more basic things about economic life that would change under a gold standard that is neglected by the proponents, and they have to do with the amount of opportunity present in the economy at any given time. Unemployment will be higher and there is an opportunity cost from investments that cannot be made, meaning that overall living standards are reduced.
Really, I think there needs to be more honest and forthright debate about the real and implied meaning of gold, tight money, and liquidationist theories to the state of being that apparently can no longer be taken as settled – because apparently they aren’t.