I am sure my readers would wrinkle their eyebrows upon utterance of the name Brad DeLong. After all, this is a guy who regularly calls all Republicans hacks and does not shy away from throwing his opponents under the ad hominem bus. But that does not mean you ought not read some of the things he writes about. He did, after all, get where he is for a reason. For example, when I do a series of lectures on living standards in my intro econ class, one of the tools I use is one I first saw in a Brad DeLong paper that talks about a better way to think about how “prices” for goods change over time. It is a very simple and clever and powerful approach.
I have even enjoyed and benefited from reading his thoughts on health reform utopia. While I disagree with the fundamental preference at the bottom for single payer, there’s not a lot there to object to.
So I encourage you to read his post today on fiscal policy versus monetary policy. Notice he is using well established theory and laying out suppositions for you to challenge if you want to dispute what he is thinking about. What is most valuable in his argument is that it makes it pretty clear that there is a blurrier line between “fiscal policy” and “monetary policy” than our textbooks would lead you to believe. The most valuable part of the piece to me is where Professor DeLong starts sounding like … an … Austrian:
In addition, there are the behavioral-finance fears: a market in which interest rates are very low is a market in which many financial institutions will make inappropriate judgments about long-run risk and return, as they find themselves driven by institutional and other imperatives to “reach for yield”. [7] A low cost of funds makes mark-to-model accounting easier to sustain. When the cost of funds is substantial, maintaining positive cash flow requires much more frequent testing of models by marking-to-market. And an entire financial industry engaged in unchecked mark-to-model accounting is dangerous.
It is important to get the overall level of production right–to match total spending to potential output. It is also presumably important to direct spending toward high-value commodities. It is important to get the balance between private and public purchases right. And it is important to get the balance between short-duration and long-duration assets right.
Yup.
Who in his right mind would lend money at three percent for thirty years when the prospect for higher inflation and interest rates in the near future is so likely?
On the other hand, borrowing money long term at three percent seems to be irresistible. I guess banks are so hamstrung by Dodd-Frank, the only people they can lend to are people who don’t need to borrow it.
Does someone have a reliable link for money supply and Fed activity data? And for lending by the Fed to central banks in Europe?
Here are the Money Stock Measures as reported by the Fed: http://www.federalreserve.gov/releases/h6/current/default.htm
And here is the Fed’s Balance Sheet, which has information of course on lending activities to Europe (you have to read the footnotes): http://www.federalreserve.gov/releases/h41/Current/
This is a debate about how the wise men deal with government overspending, and without casting aspersions on computer science, or the science of economics, IMHO it is inside baseball. It presupposes the idea that the nerds, under the direction of the President of the United States, manipulating the levers of power, can masterfully guide the ship of state from the perilous shoals. This a conceit accepted by presidents of both parties, that federal policy choices can tame the business cycle, which often is exaggerated by all the fine-tuning and regulation. For all the criticism of Tim Geithner, is there another wiser guy out there who might be better at manipulating the economy by, say, increasing or decreasing the average maturity of the government’s debt? What magic wand has Tim, or the experts at the IMF, to wave over Greece, Italy, or all of Europe, or us, when the bills have to be paid?
The present solution to the problem has been to print well over a trillion dollars, plus to add off-balance-sheet future obligations of hundreds of billions per year. (All discussion of budgets is framed in ten-year numbers, so to keep things straight, one has to move a decimal point, the same sort of thing analogous to speed in moving the walnut in a shell game.) This will lead to another great inflation, which will rob people of their property.
…what Harry said.
“It is important to get the overall level of production right–to match total spending to potential output. It is also presumably important to direct spending toward high-value commodities. It is important to get the balance between private and public purchases right. And it is important to get the balance between short-duration and long-duration assets right.”
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Yeah, so who actually is in charge of this spending, directing and balancing? Isn’t that pretty much central planning in high heels and fish net stockings? If it doesn’t work, and my money morphs into engraved toilet tissue, what happens to the spender, director and balancer?
All this fiat money stuff is tricky. I used to think the “market basket of goods” was as good a standard as any, and I never objected to getting paid in dollars, since I knew what a dollar would buy. But as we ponder diving off the cliff into the monetary unknown, I think it might be a good idea to invest in another couple cartons of Marlboros.
Why is Bernancke so cheerful? Zero Fed Funds rates until after the election scares the yips out of me.
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