Conservative Republicans are justified in switching their allegiance to the Austrian economists, because supply-side monetarists have a glaring blind spot when it comes to the Federal Reserve. FULL ARTICLE by Robert P. Murphy
Source link: http://archive.mises.org/14983/the-fed-the-chicago-schools-achilles-heel/
The Fed: The Chicago School’s Achilles Heel
Previous post: DOJ Kidnapping, False Imprisonment Scheme Succeeds
Next post: Socialism and Famine
{ 36 comments }
Interesting article Mr. Murphy, but I wonder what your thoughts are on the concept of Nominal-GDP targeting that some progressives within the monetarist school of thought are now adcocating as a better way to stabalise the money supply? In particular, one thing it has going for it is that it avoids the troubling use of price indicies. Might this become the Fed policy of choice in the future?
I doubt it would change much. Whether nominal or real, GDP measurements are incapable of tracking changes in the capital structure, which is the primary point of this article.
Anyway, the problem isn’t so much that the Fed is using incorrect policies or looking at incorrect signals – just that there is a Fed in the first place.
All you high and mighty Austrians bitch about the Fed and Friedman but if the Fed did what Friedman wanted, stay out of the interest rate business, demand for money would have pushed up interest rates as the housing bubble occurred and greatly reduced its impact on the economy. If congress would have stayed out of the banking community sound lending practices would have been maintained. All economic policies Friedman advocated. If Friedman economic policies were in place there would not have been a housing bubble.
And if there had been no Federal Reserve there would be no housing bubble either. Your point is?
Considering GDP is calculated using government spending, the economic impact in that situatino would be far worse and just as easy to manipulate. I.E. – look, our GDP went up because the Feds borrowed a ton of money and spent it on monuments in the middle of nowhere.
From what I can tell, the primary purpose of the Fed’s money is to hire bureaucrats, who in turn exist to help maintain outrageous housing prices in the greater Washington, D.C. area, and to a lesser extent, in the areas surrounding military bases.
Having a bunch of monuments would be slightly cooler and definitely more entertaining, particularly if the scumbags that call themselves the “government” openly acknowledged their imperial ideology and started constructing enormous statues and edifices, which we could then mock and vandalize.
The equation should read Y = C + (1.05)I + (-0.8)G.
That’s a lot more accurate than Y = C + I + G + NX.
It needs a modifier to account for the raw growth in currency. Additionally, it should also account for production because how can you consume without producing? Further, there needs to be a negative amount added for consumer credit.
Many Austrians support a nominal GDP targeting rule, as opposed to say interest rate targeting, inflation targeting, price level stabilization and so forth. Nominal GDP targeting is not the policy that many Austrians would associate with destabilizing price signals and the capital structure. It’s the second best from actual free banking in terms of supply and demand for money are concerned.
It seems to me that, while NGDP targeting avoids the problem of having to rely on price indices, it retains the problem of how you insert new money into the economy without disrupting prices and, in particular, the price of credit.
But it seems to me that if you are going to have fractional reserve banking with a central bank controling the base money supply, NGDP targeting is probably the best policy to have? The lesser of all the evils…
because supply-side monetarists have a glaring blind spot when it comes to the Federal Reserve.
I, too, admit to having a glaring blind spot when it comes to the Federal Reserve.
I fail to see what it is good for.
Research what happened to England and their love of the gold standard after WWI and before WWII.
I don’t advocate a gold standard mandated from government. I advocate a free market in money. Your argument is a strawman.
Since the topic is the Federal Reserve, can you prove the Federal Reserve prevented the First Great Depression in the US, or the 2008 crisis? There’s at least two Nobel Prizes in it for you if you can.
Research what happened to England and their love of the gold standard after WWI and before WWII.
Perhaps you should research England during the inter-war period. They had no gold standard — they had a gold-exchange standard and a distorted one at that. The English insisted on re-establishing sterling at its pre-war value even though it had been inflating for years.
The result was a vastly over-valued pound that crippled the British export industry. They then did the perfectly natural thing and inflated some more. The Americans — ever mindful of the special relationship — inflated in tandem to spare the Brits the embarrassment of losing more of what little gold they had left.
The result, of course, was disastrous. Don’t blame the gold standard until you’re quite sure what it is.
Quite right.
A good book giving an overview of David Frum’s neo-conservatives worldview is “Bringing America Home” by Tom Pauken. Neo-conservatives do not embrace the concepts of individual and economic liberty.
All authoritarians don’t.
Neo-conservatives do not embrace the concepts of individual and economic liberty.
Is there another kind?
I personally find the neo-conservative movement confusing considering it’s basically the same thing as the original conservative movement when it was first defined in post revolution France. Conservatives then wanted to keep the status quo of big government, low liberty, and constant warfare. I don’t see any difference now. The only change over the years is that liberal has turned from small government, high liberty to basically the same thing as Conservatives, just with using social benefits instead of warfare to gain power. I guess the “neo” badge came to being when Reagan did a good job fooling people into thinking he was different.
Actually neconservatism is a rather different beast:
http://www.vdare.com/macdonald/030918_neoconservatism.htm
Bob,
Good article. One word of caution to readers. Do not mix up supply side economics with supply side monetarists. The supply side economists like Art Laffer, Robert Mundell, and Jude Wanniski were/are not monetarists. Jude wrote often of Mises and of Friedman, using Mises to teach and being critical of Friedman. Those in the Reagan revolution were more supply side Austrians in the Mises mold (not Rothbard).
Sadly there were monetarist in the Reagan administration who out lasted the supply side economists and ultimately had more influence going into the totally monetarist administration of George H. W. Bush.
That said, David Frum is a fool. His idea that Republicans have always been monetarists just goes to show how deluded he really is. I would not take him seriously whether Democrat or Republican.
Frum’s statement, “Even today, probably most business economists — most Republican economists! — reject those ideas,” belies what passes for “economics” these days: partisan defense of the policies espoused by various political groups. Whether it’s Krugman’s flacking for Obama or “Republican economists” extolling whatever policies Republicans have at the moment, the problem is that “economists” aren’t supposed to back political agendas — only ideas.
So, we get MSNBC and Fox News featuring battling “economists” who are as far from scientific method as the politicians they are supposedly explaining… and we let DC’s profligacy continue.There are not only two sides to every story — the Republican Statist Side and the Democratic Statist Side. Still, there may be a meritorious idea in there somewhere, that could be recognized, tested (at least a posteriori, empirically), and examined.
Socialism and statism — whether espoused by “Democratic economists” or “Republican economists,” is of no beneficial use. We might as well give credence to “Democratic geologists” or “Republican metallurgists.”
LOL. Neo-conservative declares Herbert Hoover to be an Austrian, beats him to a pulp based on a selective reading of his biography leading to the implication that he welcomed unemployment and other economic disruptions, drops him into the trash can of history, and walks out of the alley dusting his hands and smirking, “Guess those Austrians are gonna think twice next time before they take ME on!”
I remember reading in Flynn’s “The Roosevelt Myth” that FDR ran on a platform of fiscal responsibility, and rightly pointed out that Hoover had spent more in his two terms than any previous president had. His “New Deal” was, at least during the campaign period, to scale back govt spending. Nobody cares to remember any of that.
Where oh where have the Monetarists gone? Where oh where can they be?
Monetarism is just the “3rd Way” plan for the financial system central planners. These folks come up with an assortment of constraints on the behavior of central planners that if they had been enacted would have prevented the current mess and left us all rich.
What the Monetarists seem to fail to realize is that the US Central Bank, the Fed, is not there to keep prices stable or to keep full employment or any other of those things Congress writes down as its job. It is there to represent their member banks and impose an inflation tax of the populace. As long as the central government gets some of the new money first then the Fed is doing its job. So all of these constraints are just words on paper.
So not only is the job of the central bank, central planning of the financial system, impossible for a myriad of reasons expressed by Mises and Hayek, it is literally not the job of the central bank to provide things like price stability or full employment.
I just reread that portion. Chapter 4 of the book “The Roosevelt Myth” by John T Flynn is entitled “The New New Deal”, and describes how Roosevelt’s New Deal, before being elected, was one of ending deficits and shrinking government, to combat – in his words – “the greatest spender in history, [Herbert Hoover].” History books don’t seem to notice any of that when they talk about Hoover being a small government man.
Flynn goes on to explain that, once in office, Roosevelt completely changed his course, and his 100 days was of course a period of intensifying Hoover’s policies.
It is entertaining to read about a theoretical battle between the Austrians and the Chicago school for the hearts and minds of conservative politicians. For my part, I only hope that enough of them even understand the basic precepts of either one to get a good conversation and reconstruction going on Capitol Hill.
Like Horst, I don’t like the idea of a gold “standard” or an anything “standard” if it is not the choice of the free market. I am certain that Mises felt that way, but I also think Friedman did too. The main difference that I perceive between the two is that Friedman had the hope at least that the Federal Reserve could act as a stabilizing force in just the same way that gold theoretically acts as a stabilizer because of its limited supply.
The monetarists are fundamentally wrong in part because they theorize that the ideal Federal Reserve could be as objective and reliable as, say, the Bureau of Weights and Measures. Their general objective for a stable currency is not wrong, and this objective is shared by gold standard and free market standard people as well. The other main flaw of monetarists is that they want to try to manipulate economic activity through the use of fluctuating interest rates.
Some Austrians, on the other hand, speak of bubbles and corrections as though they are “bad things” or “good things”, like there is some sort of ethical flavor to the generally useless exercise of measuring national or worldwide aggregates of jobs and purchases and loans and such.
If we are going to have relatively stable economic conditions, it is useful to have a currency that is not constantly being manipulated by printing presses, interest rates, favored-party lending, open market operations, or taking it on or off some politically established metal. Any long term contract, denominated in dollars as most are, is disrupted by fluctuations in the quantity and cost of dollars. Any long term project such as plant construction or multi-year service agreements cannot be efficiently planned if the cost of money is changed every few months.
The one recurring theme that troubles me about some of the people who call themselves Austrians is the idea that there is something good about economic “corrections”. This is based, I suppose, on the idea that before a “bubble” the transactions were in the “right” amount at the “right” price, and we should now return to those good old days. If the car has been speeding, the answer is to take the foot off the accelerator, not jam on the brakes (or as in the current situation, jam on both the brakes and the accelerator at the same time). The current situation is tantamount to an old fashioned “run” on the banks, but worldwide and led by people who should be calming forces rather than panic forces. The chief culprits in this country are the FDIC and the Federal Reserve.
My hope is that the government will ultimately be urged to stop altogether its efforts to stimulate or steer or slow down the economy. If the Austrians and the Chicagoans can ever find common ground, maybe this could happen.
Re: Austrians’ view of “corrections” and slamming on the brakes instead of coasting to a stop.
The correction is the inevitable and necessary outcome of the evil of the bubble. The bubble caused malinvestment, which must be liquidated. The correction does this job. Without a bubble there would be no need of a correction. As for slamming on the brakes, this is not an accurate description of the correction. The longer the bubble lasts, even in a less vigorous form, the more malinvestment we get that must eventually be liquidated, meaning a more serious correction. This is basic Mises business cycle theory.
Additionally, there is no such thing as coasting to a stop. This is an artefact of the fascination of mainstream economics with aggregates. What looks like a slow coasting to the large scale aggregates is really just a series of break slammings. It’s like how you can’t just slowly coast your way into unemployment, the malinvestment doesn’t just slowly coast its way to liquidation. It’s a binary concept. Attempting to coast to a stop, ie trying to spread out the liquidation of malinvestments, just makes the problem worse than if everything was liquidated all at once as now the malinvestments that are delayed in liquidation have more time to fester and grow worse.
Additionally, I said nothing about coasting to a “stop”, unless you mean by that a stopping of the inflationary expansion, which most certainly can and should be done, and a coasting from there. The economy will not “stop” (and here is where the accelerator analogy is flawed), but will eventually seek and find a momentum of its own. The main brake slamming I am talking about is the FDIC and its ridiculous and irresponsible actions.
While I acknowledge that Mises uses the term “malinvestment”, this is one of the terms that I would like to talk him out of (in some fantasy conversation, of course). It is a judgmental term that is out of keeping with the rest of his brilliant analyses.
Can an inflating economy cause investments that are unsustainable because they overestimate future demand? Of course. The simple truth is that overestimation of future demand can happen even in a non-inflating economy, and the only difference is that the tendency is magnified in an inflating economy, and steered toward investments that are “first recipients” of newly created money and credit.
Even if you believe that what you (and Mises) call “malinvestments” need to be “corrected” after a “bubble”, how and who decides what was the appropriate pre-bubble level. You may think that there is some mathematical model that describes how this “ought” to work in a free market, but sadly the corrections are generated and orchestrated by the same people who orchestrated the credit expansion and, guess what, they play favorites.
While I acknowledge that Mises uses the term “malinvestment”, this is one of the terms that I would like to talk him out of (in some fantasy conversation, of course). It is a judgmental term that is out of keeping with the rest of his brilliant analyses.Can an inflating economy cause investments that are unsustainable because they overestimate future demand? Of course. The simple truth is that overestimation of future demand can happen even in a non-inflating economy, and the only difference is that the tendency is magnified in an inflating economy, and steered toward investments that are “first recipients” of newly created money and credit.Even if you believe that what you (and Mises) call “malinvestments” need to be “corrected” after a “bubble”, how and who decides what was the appropriate pre-bubble level. You may think that there is some mathematical model that describes how this “ought” to work in a free market, but sadly the corrections are generated and orchestrated by the same people who orchestrated the credit expansion and, guess what, they play favorites.
‘This is the point at which modern Keynesians — a category that includes David Frum himself, whether or not he chooses to use the label — stop quoting from Hoover’s memoirs. “Aha!” they say, “Hoover sat back and did nothing, and that’s why the 1929 crash turned into the Great Depression. Quick, let’s spend some more borrowed money!”‘
But Bob, Frum pointedly DOES NOT go on to say what you say here. That’s why he used the word “wanted to,” right? He didn’t say “Hoover sat back and did nothing,” he says “Some of Hoover’s advisors WANTED TO sit back and do nothing.” You only use the words when you mean to imply they didn’t get their way. (“Well, I WANTED to go to the game Saturday, but…”)
Now, Ohhh Henry’s remark is even more egregiously false — Frum never even says that Hoover’s advisors were Austrians, only that they had similar policy advice, but he very opintedly says this of the advisors, and not of Hoover, so how Ohhh Henry arrives at his gross misreading of Frum is beyond me.
Bob linked to a previous article of his, http://mises.org/daily/4211, where he quotes Frum as saying (regarding the Gold Standard and the Great Depression):
“…But why did decision-makers make so many bad decisions? The short answer is that they were trapped. Almost all of the right decisions would have ballooned the U.S. federal budget deficit…Threatened with the exhaustion of its gold supply, the government felt it had no choice: It had to close the budget deficit. So, in the throes of a severe downturn, the U.S. government did exactly the opposite of what economists would otherwise advise: It cut spending and raised taxes — capsizing the economy even deeper into depression.”
So, while Frum is not explicitly saying they did nothing, he is saying they did the wrong thing by cutting spending. The “right” decision, according to Frum’s narrative, was to increase spending, no?
In addition to dangerous sanguineness about CPI, the Monetarists’ other structural challenge is their acceptance of the Positivist framework for economic analysis. Human action cannot be captured in an equation or a dataset, even an equation as awe inspiring as P = C + I + G + X or a dataset as large as quarterly GDP surveys. We do not need data to know that men pursue their own interests and are often willing to cut corners to get what they want. Surely the interests of government fiduciaries skewed decisions made during the government-enabled real estate boom, but we lack an appropriate dataset or equation to produce an article up to the standards of the ruling economic academy.
Hey, whatever happened to that troll “Lord Keynes”?
Comments on this entry are closed.