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For some time now I have been
warning my Austrian readers of the inflationist threat coming, not from the
Keynesian camp, but from otherwise free-market Chicago School economists.
Some of the leaders in this "quasi-monetarist" or "market-monetarist"
school are Scott Sumner,
Bill Woolsey,
David Beckworth, and Lars Christensen. Their basic position is
that we are in a severe economic slump because Ben Bernanke has been too tight
with monetary policy the past three years.
Even though their conclusion
strikes me as absurd, these quasi monetarists are serious thinkers and it
would be a big task to comprehensively critique their position. (I've made
modest efforts here
and here
when they defended QE2.) Yet despite their sophisticated calls for the Fed to
"target NGDP growth," shape expectations, and so forth, in practice
their message is being distilled by the secondhanders
into calls for unadulterated handouts of paper money. As we will see, I don't
have to engage in caricature; pundits like Matt Yglesias
and Martin Wolf are openly calling for helicopter drops of money as a
solution to our economic woes.
This is a very disturbing
development. Just as the interventions (which crippled recovery) of the
Hoover administration in the early 1930s led to a massive increase in
government under the New Deal and the abandonment of the gold standard, so
too have the "stimulus" packages and other failed programs of the
Bush and Obama administrations gotten us to the point where raw money
printing is being seriously discussed as a policy option.
Yglesias and Wolf on the Printing Press
Our first exhibit is from
progressive darling Matt Yglesias, who commented on
the "Occupy
Wall Street" movement by blogging:
My view is that the best demand of
all [would be] "free money for the rest of us." There are a lot of
different specific ways this can be implemented, but the basic shape of
things is that the Powers That Be are great believers in the importance of
the credit channel to economic recovery and thus have been willing to provide
all manner of free money to players in the banking system. Debt cancellation
is a form of free money for the indebted. But why give free money only to
banks? And why give free money only to the indebted? Why not free money
for everyone? "Everyone," of course, includes the indebted. But
it also includes ordinary people who didn't happen to avail themselves of the
credit binge. It's an idea so good that it sounds almost silly.
"Everyone knows" that you can't just hand out free money to
everybody. Except actually you can. Most of the time it wouldn't be advisable
to do this. In the long run money is neutral, and making more money can't
make you more prosperous. But in the short term, free money for everyone
impacts prices. Most of the time it would do so in a dislocating bad way, but
under today's circumstances, it would do so in a useful way. I don't know
what the best way to turn this into a slogan is, but the point is that if the
different institutions that together constitute "the government"
worked together, they could put more dollars into our hands. Creditors won't
like it because doing this will devalue their existing debt claims, but so
what.
To the untrained eye it might seem
as if Yglesias is utterly bereft of economics
training, but actually he is simply giving a pop version of the worldview of
the quasi monetarists. Yglesias's recommendation to
have protestors demand "free money for everyone" is actually
logically consistent with the much more nuanced views touted by the academic
economists I've linked above.
When I saw Yglesias's
post, I was disheartened, but I took comfort in the fact that, after all, he
was just a young guy firing off snappy posts. The "serious" members
of the intelligentsia — guys who were over 50, flew in private jets,
and have never played Grand Theft Auto — surely wouldn't fall
for such raw inflationism, right? Except that distinguished FT
columnist Martin Wolf recently wrote,
It is the policy that dare not
speak its name: the printing press. The time has come to employ this nuclear
option on a grand scale.…
What is to be done? The first task
is to abandon what Adam Posen, an outside member of the monetary policy
committee, calls "policy defeatism."…
It is vital, then, to sustain
demand. With fiscal policy set on kamikaze tightening and conventional
monetary policy almost exhausted, that leaves "quantitative easing".…
Personally, I would favour the "helicopter money", recommended by
that radical economist, Milton Friedman. This would be a quasi-fiscal
operation. Central bank money could pass via the government to the public at
large. Alternatively, the government could fund
itself from the central bank, directly. Better still,
the government could increase its deficits, perhaps by slashing taxes, and
taking needed funds from the central bank. Under any of these alternatives,
the central bank would be behaving like any other bank, creating money in the
act of lending.
In current circumstances, a policy
of direct financing of government by the central bank should recommend itself
to monetarists and Keynesians. The former have to be worried by the fact that
UK broad money (M4) shrank by 1.1 per cent in the year to July 2011. The
latter would have to be pleased that governments could run still bigger
deficits without increasing their debt to the public.
This is where the discussion of
monetary policy has landed: we are now openly discussing having the central
bank print up new money to pay the government's bills, and this is supposed
to be great because it won't cost the taxpayers anything.
This situation is ironic because
for the last three years, analysts have said things like "Investors
right now are content with low yields on long-term bonds, because they trust
the Fed to adhere to its inflation target. But if they ever sensed that the
Fed was beginning to monetize the government's debt — as happened in
Zimbabwe — then all bets are off and we'll see a sharp increase in
inflation expectations and bond yields."
This struck some of us as ludicrous
because by definition QE1 and QE2 were operations in which the Fed
created hundreds of billions out of thin air in order to buy Treasury debt.
At least before, however, the
analysts could be forgiven for not seeing the obvious. After all, Fed
officials did a great job obfuscating what they were doing. They made it
sound as if the government's Treasury were just sitting there, minding its
own business, and the Fed said, "Hey, we need to buy hundreds of
billions of bonds from some organization in order to achieve our
interest-rate objectives. Any ideas?"
Now that Martin Wolf (and a growing
chorus of other inflationists) is openly calling
for central banks to monetize deficits, I wonder if we will at least classify
the operation as monetizing deficits. That would be progress.
Austrian and
Public Choice versus Chicago
Among other lessons, this latest
development illustrates the importance of having different
schools of thought, even among those who are generally free
market. Wolf is being entirely fair when citing Milton Friedman, for it was
Friedman (and coauthor Anna Schwartz) who famously blamed the Great
Depression on tight monetary policy. We can't know what Friedman himself
would say were he alive today, but people like Sumner have made a convincing
case that Friedman would call for more inflation.
On these pages we have argued many
times that artificially low interest rates and monetary inflation misallocate
resources and in fact set the economy up for a further crash; I won't rehash
the argument here. Let me simply reiterate that it's an odd thing to blame
our current woes on "tight" monetary policy, when the monetary base
and the M1 monetary aggregate look like this:
 
I've had such arguments with the
quasi monetarists before, and we always reach a standoff: they focus on
things such as "sticky prices," money demand, and "expected
growth in total income," whereas I focus on the coordinating role of
market prices, and the capital structure.
In light of the calls for
"free money" (for everyone or for governments, respectively) by Yglesias and Wolf, perhaps the public-choice school of
economics will have something to say here. Once we let the inflation genie
out of the bottle — even if it were the "right thing to do"
in these unusual times — can't free-market economists see that it will
never go back?
For example, if the Fed really did
guarantee a basic income to every American — as Yglesias
discussed in an earlier blog
post — wouldn't that policy be as hard to end as Social
Security? If the Fed began making loans directly to small- and medium-sized
enterprises (as Wolf discusses in his piece), wouldn't capital allocation
become irreversibly politicized?
Conclusion
The world has been in a strange
environment in the last three years, in which massive expansions in
central-bank balance sheets haven't led to $10 gasoline and $5 loaves of
bread. Regardless of which school of thought can best explain these events, we
are all going to rue the fact that the grand lesson flowing out of this
episode is that money printing can bring prosperity. Now that this idea has
firmly taken root, it will take a large collapse in consumer purchasing power
to remind everybody why "inflation" used to be a dirty word.
Robert P. Murphy
Article originally published at Mises.org
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