Three Essays

Tim Congdon has the lead essay at Cato Unbound:

The troubles of the American economy today are not due to inherent weaknesses in capitalism, but to bad economic theories and poor economic advice. The Keynesians have had far too much influence since 2008. Their invoking of the liquidity trap notion in Keynes’s General Theory has been trebly unfortunate. It has been unfortunate, first, because they have misunderstood what Keynes himself said, secondly, because what Keynes said was rather foolish, and, finally, because the liquidity trap waffle has given an intellectual rationale for the disastrous budget deficits now being incurred. (And appeals to space aliens when the deficits don’t work does not help business confidence.)

Donald Boudreaux replies and introduces Robert Higgs´ concept of “regime uncertainty”:

Congdon argues that today’s inadequacy of investment is caused by what in fact really is an inadequate supply of money. He insists that the Fed has failed to increase the money supply—specifically, M3—to levels high enough to fuel a significant increase in private investment. Money-supply growth, not fiscal stimulus, is still the key.

Maybe. Monetarism does have a coherent theory to explain this observance: if people’s demand to hold larger money balances rises but is not accommodated by a sufficient fall in the price level (to make any given nominal stock of money larger in real terms), households will increase their money balances by reducing consumer spending and, especially, firms will increase their money balances by reducing investment spending. Investment won’t rise unless and until the higher demand for money is satisfied by an increased supply of money.

There´s no “maybe” about this. In fact it was exactly the absence of compensating money supply to offset the fall in velocity that made aggregate spending tumble and continued monetary disequilibrium has worked to keep the economy down.

Boudreaux´s “maybe” is the conduit to Higgs´ “regime uncertainty”:

Perhaps, however, investors are today standing on the sidelines not because of too little fiscal stimulus or because of too little money creation but because of a problem not curable by mechanistic policy manipulations—namely, regime uncertainty. This uncertainty is the economy-chilling condition described by economist Robert Higgs as “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.” (See also, for example, Higgs’s discussion here.)

I think “regime uncertainty” is a consequence of bad/wrong policies previously undertaken that only “bread” more “bad” policies to correct previous mistakes, generating the undesired “uncertainty”. If monetary equilibrium had been maintained, i.e. if the Fed had labored to keep nominal spending close to the target level, no “regime uncertainty” would have ensued.

Dean Baker´s reply is bland. He´s mostly a Krugman “aide-de-camp” and comes out in his defense with weak and self serving arguments:

The big failing of the Obama administration was not in their stimulus package, but rather in their projections for the economy. Their baseline assumed that unemployment would peak at around 9 percent in the absence of the stimulus. Unemployment had already crossed this level at 9.4 percent in May, just as the first stimulus dollars were going out the door, and we were still losing more than 400,000 jobs a month. The administration had badly underestimated the severity of the downturn. In effect, they had gotten a stimulus package through Congress that was designed to create 3 million jobs in an economy that needed 10–12 million jobs.


3 thoughts on “Three Essays

  1. Regime Uncertainty?

    You mean George Bush Jr, getting the USA into $4 trillion worth of unsustainable and unwinnable wars was okay, but Obama makes businesses crap in their pants?

  2. My god that Dean Baker piece is awful. Targeting “higher inflation” is OK, but targeting M3 is bad because the Fed does not directly control M3. Uh huh. And there are “definitional problems” with M3. Let’s hope there are no “definitional problems” with “inflation” then.

    And then the appeal to sympathy for the struggling families. “I’m right because I care more”!

    So, so, awful.

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