Scott Sumner’s critique of a paper by Pascal Salin from the IEA was sort of a fun to read. It isn’t every day that Sumner responds directly to a whacky inflation nutter who appears to take anti-inflation rhetoric as gospel and uses it in an attempt to hand market monetarism the intellectual smack-down.
There isn’t much I can add to Sumner’s excellent critique of the more erroneous parts of the paper that mention market monetarism. Though, nothing is more annoying than a paper released with intent to criticize one idea that is full of logical inconsistencies large enough to drive a truck through; and it deserves to be pointed out as the embarrassment that it is. And thanks to meticulous attention to organization detail, the summary consists of lots of bullet points, it will make that easy enough to do.
An expansion of the quantity of money that leads to inflation will reduce the real value of cash balances that people hold. Inflation may also induce people to hold lower cash balances because of the greater risk of holding cash and the potential erosion of the purchasing power of cash. From the micro-economic point of view, therefore, expansion of the money supply and the creation of inflation are damaging.
It’s interesting that he adds a modifier here: an expansion of the money supply that leads to inflation… At least he thought about it enough to realize that not all expansions of the money supply lead to inflation. But there are still a lot of intellectual short cuts taken here because it is not clear to which circumstances he is referring – context matters. It is not as simple as a one to one correlation between expanding the money supply over what is already in existence. And, it’s just as easy to assume that supply shocks cause inflation and reduce the purchasing power of cash balances. Why isn’t he criticizing the Department of Energy for causing inflation in the latter half of the last decade by not ensuring an adequate supply of energy, for example?
When the money supply is expanded, not all individuals are affected in the same way at the same time. The process by which the money supply is expanded and inflation is created distorts economic activity. In particular, by reducing interest rates, expansion of the money supply encourages investment that is not viable in the long term.
His causation is backward, obviously having succumbed to the “low interest rates = easy money” fallacy. The monetary authorities adjust the money supply to hit a target nominal interest rate. Low nominal interest rates are a sign money has been tight.
Even if low interest rates = easy money, it is not even close to something like a helicopter drop. One also has to buy that expansion of the money supply causes inflation on the first order of effect in order to get the feeling of being screwed in the absence of $100-bills raining in one’s front yard; and it is not at all clear to me that it does. Additionally, this would supposedly be an argument against expansion of the money supply in any event, which I am positive Pascal didn’t intend to make since he makes an argument later on for something like a k% rule.
The only difference here is that it seems Pascal might believe he’s arguing for less screwing-over of the little guy with the k% rule than market monetarists with NGDPLT. But market monetarists view the rationale of having too much demand for gas, or all inflation is monetary, as a recipe for an unnecessary disaster in employment because of the interaction between disinflation and sticky wages, which of course screws the little guy out a job and a means of survival, and young people out of ample opportunities in life. Even if the Cantillon effect were real, a simple weighing of the disadvantages between it and not having means of survival inform my choices about which condition I’d rather experience; unless of course I am feeling a bit adventurous and hope to have others victimized by the demand shock instead of myself.
In so far as monetary policy can expand the economy, it can only do so in the short run and by fooling wage-earners into thinking that real wages are higher than they really are.
We go from lightening the nominal debt load to fooling people about real wages. But of course we would never see these two concepts together in the same sentence written by an inflation nutter. Debt is nominal. Contracts of all kinds are nominal. Products improve. Competition lowers prices. People insist other people pay their bills. Nobody cares about a disinflation that amplifies the burden of debt and makes creditors richer in real terms. Pay the bill! If inflation can’t be adequately defined and is continually used in discussions about price phenomena out of context, putting the word “real” in front of the word “wage” is meaningless.
It may be argued that it is necessary to expand the money supply and create inflation because nominal wages are sticky in the short run. However, trying to reduce real wages by creating inflation creates distortions in the economy, will not be successful in the long run and takes attention away from the underlying causes of unemployment and slow growth.
This statement is classical glass-half-empty thinking. But Pascal is in France, and I can’t particularly fault him for pessimism and cynicism given the economic situation there. But, let’s just suppose that sticky wages is the problem that causes a bunch of unemployment. It means that real wages have increased in the short run via nominal means, and expansion of the money supply to remedy this situation is really an attempt to bring them back into equilibrium. Is it really fair to the people who couldn’t find the chair to leave them to their own devices while other people get the benefit of nominal wage arbitrage?
If the causes of slow growth are high levels of taxes and regulation, itis dangerous to use monetary policy to try to resolve these problems.
Right. Every county that has supply side issues (which country doesn’t?) and could benefit from reasonable monetary offset is like or will become Venezuela. Since it isn’t worth describing or quantifying the danger, it’s not worth a serious retort.
The fashionable idea of ‘market monetarism’ would be better described as ‘market Keynesianism’. Rather than trying to offset reductions in growth by tolerating higher inflation, monetary policy should be used to try to keep the growth in the money stock constant, thus allowing the economy to adjust to changes in real conditions.
I suppose all those posts by Sumner, Nunes, and Christensen criticizing the Keynian idea of the liquidity trap, discussing the applicability of MV=PY to the Great Recession, explaining that monetary policy is always effective even at the ZLB, challenging the fiscal policy expansion idea, and pushing monetary offset in the first place makes us Keynesian lite. Really? Then maybe a goat is a unicorn.
I don’t even know what he means by offsetting reduction in growth by tolerating higher inflation. If he said something like we don’t want sacrifice growth for monetary policy induced microscopic inflation and equally low employment, then I’d understand him. And I’m reassured by the fact that higher inflation might be correlated with higher growth from more people working and being productive instead of having them lay to waste. Productive endeavors are always better than welfare and food stamps.
Devaluations and depreciations do not ‘create jobs’ in the long run. They simply distort the economy. Any benefit from a devaluation or depreciation would be offset by higher internal inflation.
More glass-half-empty. Nothing but more inflation happens when there is more money in an economy. No, no, no. Nobody does anything productive with it. They just run up existing asset prices buying things they can never benefit from. Capitalism, that huge market place casino is nothing but a sin and a waste of time because so much money is wasted on bad investments. We should have an investment gestapo, or just not have so much money floating around. We’ll never miss what we’ll never have. He should tell that to Apple and Amazon. Really. As if a run up in asset prices doesn’t have the effect of more assets becoming available. Capitalism is not a zero sum game.
Low growth in Japan over the last two decades has been caused by real factors. There is no obvious relationship between low growth in Japan and the periods of tight monetary policy. Indeed, if anything, higher growth rates seem to follow periods of tight monetary policy.
Oh my. What real factors, exactly, did Japan suffer from? And I suppose the EZ is booming. Perhaps Pascal should school Kuroda in creating inflation. I mean, it should be really easy.