The Money War

The Conservative and Libertarian movements in the United States today seem to be experiencing something a bit like the Democratic party did in the late 19th Century, when, bafflingly, they went from one election running the sound money Goldbug, small government candidate Grover Cleveland to, a mere four years later, nominating William Jennings Bryan, who advocated for the inflationary insanity of Bimetalism, which was just the beginning of his out and out Socialism. The key word here is seem, because the way I’ve just stated it is a bit of an unjustifiable overstatement. Sure enough, beneath the notice of most of the public I imagine, there is an at times vitriolic dispute over the basic question of whether we should have more or less inflation, and many questions which amount to this exact same question phrased in a different way. Sure, it’s disturbing as hell to me to see guys like James Pethokoukis wage jihad against the gold standard, repeat Hoover’s libel of his own Treasury Secretary, falsely insinuating there is an ounce of daylight between “pre war” and “post war” Austrian thinking, and complaining that inflation isn’t high enough…actually, holy shit does reading the things he writes lately scare the crap out of me. Reading the comment sections (to say nothing of the posts) on blogs of certain Monetarists (who shall remain nameless) is guaranteed to give one a strong sense of dyspepsia. The only thing that makes it better, in a perverse sort of way, is the counterbalancing effect of the Rothbardian Internet Neckbeard Troll. For these guys, banking is fraudulent, an embezzlement scheme masquerading as warehousing. And one strongly suspects that much of the unpleasantness coming from the likes of the inflationist right is, in part, the result of pushing too hard back against these types, albeit on the wrong points. That being said, I think both sides are missing one another’s points to a significant extant. Let me see if I can summarize, in briefest possible terms, what I think the strongest arguments seem to be for “we need more inflation” and “we don’t.”

First, the pro-inflation side: People’s current plans for future economic activity are based on an expectation of a certain level of inflation. To the extent that actual inflation falls short of that, people will make errors in their decisions about allocation of resources: in short, it hurts the economy.

Second, the anti-inflation side: There is no long term benefit to increasing the supply of money above and beyond the quantity demanded. There are, in fact, significant long term costs.

As I see it, there is no obvious inconsistency between these two points. In the short term, demand to hold money may be such that maintaining real growth requires that the Central Bank err, at least temporarily, on the side of inflation-it’s at least possible that we may have little choice, in the short term, to accommodate people’s already formed expectations. But in the long term, economic stability is best fostered by eliminating the authority that is required to so err in the first place. Ceterum censeo Subsidium Foederati esse delendam. Let’s be clear on one thing though: the argument for growing NGDP back to it’s prior long term growth path, is not that Monetary Equilibrium requires this. It’s the view that labor market discoordination is more important at this stage than the coordination of savings and investment. What’s required for the former is keeping long term labor contracts (to a lesser extent, extant long term debt contracts) for fixed nominal wages (fixed nominal interest rates) consistent with market clearing real wage rates (or, in the case of debt contracts, consistent in the sense that, if they’d known how prices were going to behave, people would still have agreed to the debt contracts). What’s required for the latter, on the other hand, is fixed nominal spending-that is all. These two goals cannot be simultaneously achieved, not at the moment. Economics is like that, though: it’s about choosing between options, not having everything you want. Outcomes are scarce, just as resources are (while writing this, I discovered someone (A guy at George Mason who I haven’t heard of before) in fact uses the term “policy possibilities frontier!”). But some scarcities are artificial, and others are natural. It’s my view that the downward rigidity of wages largely reflects the rational belief of typical workers that inflation that has been going on for many decades now almost uninterrupted, and that, essentially, there is no reason to think it won’t continue in perpetuity. This rational belief is essentially equivalent to the the knowledge that one lives under a Central Bank that manages fiat currency. Note that the rate of average nominal hourly earnings growth is almost exactly the same as the rate of price inflation the Fed claims to be aiming for-2%. Of course, the Fed aims for 2% in a particular index, and thus 2% weighted average of a certain subset of prices-the “Personal Consumption Expenditures” index. There are other measures of inflation, for example the index published by MIT’s “billion prices project” which tracks online prices in real time. By that measure, the inflation rate is already above 2%, but then, it’s measuring prices, evidently, that the Fed implicitly wants a greater than 2% inflation rate in. Which should given one pause about the whole idea of targeting a rate of inflation, frankly: the fact that different indices show inflation at different rates means that the phenomenon of price inflation is not something for which an objective measure exists.

But, having said that there might be a basis for thinking there may be continued, short term grounds for more inflation, I’m still inclined to think otherwise. But, you may ask, isn’t it true that unemployment is still higher than a frictional, natural level? Isn’t it true that the official unemployment rate actually understates this? And, couldn’t a little bit of inflation help that? I’d answer maybe, yes, and no to those questions. For the second question: it’s true that since 2008, whereas the working age population (16-64) increased by 3.4%, the labor force grew a mere 0.8%-effectively, more people retired early, remained in school, left the work force for the welfare rolls, and so forth, than the actual increase in people below the retirement age and above the age of 16. An aging population cannot explain that. If the labor force had grown as it had between 2000 and 2008 after 2008, but as many people were working today as are, the unemployment rate would be 11.3%, not 5.9%-not much of an improvement over an adjusted peak of 12.8% versus an unadjusted peak of 10.0%, and worse than any official rate since the great depression. So aren’t we clearly somewhere on the short run Phillips curve where a higher rate of inflation could, at least temporarily, decrease the unemployment rate? Well, that depends on whether the issue of the remaining unemployment is one of labor demand or labor supply. And I don’t think that that extra 5.4% can be considered a demand problem per se (there are problems that primarily impact labor demand, but they don’t really relate to insufficient spending: for example, strictly speaking, labor is demanded in hours, not persons, and Obamacare has disincentivized hiring people for full time work. Of course, that doesn’t actually impact the unemployment rate, adjusted or not.) rather, the problem, for people who have given up on finding work entirely, seems more likely to be for one, that even if they would be willing to work for lower wages, they lack the skills that employers now want-during the boom, people were drawn into certain industries, and became specialized to those particular lines of work, and now the composition of labor demand has shifted, employers now want workers with different sets of skills…but the skill sets of people have a significant inertia to them. In short, the problem is not that there is insufficient labor demand period, but rather that the kinds of labor demanded don’t match the kinds of labor that could presently be supplied. Another labor supply end issue is the fact that, labor being onerous, increased government benefits, including extended unemployment insurance, among other things, raise the level of compensation that would be necessary to make labor more attractive than leisure for many individuals. If one has to choose between working for a check, or a check of equal or greater value without having to do any work, there are people, I think it should be obvious, who would choose the latter. Saying this usually elicits cries of outrage at the mere suggestion that anyone, anyone prefers leisure to labor, no matter how unpleasant the labor and how unsatisfying the compensation is. But if you’ve ever met anyone who has complained about their job, I suggest you shut up: that’s who I’m talking about. If that person is at all sincere in being dissatisfied with the amount of work they do and how much they are compensated for it, then all it would take to get them to quit would be to offer them a more favorable trade off between effort and reward-which, if the effort on on offer is zero, merely requires you to find the minimum compensation for doing nothing they would accept to quit. If they’re sincere in not liking their job, the level of compensation they would accept to quit will be less than what they presently receive. To say that some people will take various forms of welfare instead of working is not even to say that much, because benefits may potentially exceed, for some individuals, what they could get for the labor they are able to offer. I can’t believe I have to defend such an obvious notion, but people have a knee jerk reaction to this issue. Okay, but coming back to the question, to which I answered maybe, isn’t the (portion of remaining unemployment that is not a structural supply issue) above the long run rate of frictional unemployment? My answer is “maybe” because it’s hard to say what that level actually is, and whether it has perhaps shifted higher as a result of the poor performance of the economy. This is important because one could hypothetically move on the short run Phillips curve to a lower level of unemployment, without merely causing a shift to a higher short run Phillips Curve, if one managed to hit the long run Phillips curve. Remember that the lesson of the 1970’s was that the long run Phillips curve is a vertical or nearly vertical positively sloped curve-there was no permanent tradeoff between the rate of inflation and the rate of unemployment. The average (official) unemployment rate in the last 20 years has been about 6%. If that represents where the long run Phillips curve currently lies, we are already as low as we can go-lower, in fact-in terms of unemployment, without simply causing the Phillips curve to begin to shift upwards. And this is why I’m inclined to answer in the negative to the question, “couldn’t a little bit of inflation help with the unemployment situation?” In fact, in some work I will probably elaborate on further later, I find that in the history of the United States, the period of the best economic performance, in terms of growth, estimate unemployment, and price stability, was during the “classical gold standard”-during which, in fact, there was in fact very little long term change in the price level, and alternately a low deflation rate and a low inflation rate in the first and second halves of the period, respectively. The average employment rate I estimate over the entire period? 3.3%. That’s better than we see during peaks of housing bubbles these days. This was the Long Boom-except that’s not quite right, as that implies this was an inherently unsustainable level of growth. The point is that at one point in our history, we were able to do a lot better than presently with, first of all, better policy on the supply side (no income tax, among other things), a small, limited Federal Government, and monetary policy effectively set automatically by the Gold Standard. Which brings me back to what I was talking about at the start of this post: In the late 19th century, the Democrat party went from supporting all of those things, to opposing all of them, in the span of one Presidency. And most especially, they came to oppose the monetary policy that insured the stability of the economy of the time-in spite, I would add, of destabilizing banking regulations being responsible for most of the actual problems, what little there actually were.

So is the Republican Party in danger of undergoing a similar transformation? Hardly, I think. Oh, to be sure, I worry about the inflationists, especially in the long run. And sure, you could say, the Republicans today are not exactly as pro Laissez Faire as their rhetoric might lead you to sometimes believe. But what else is new? Remember that a couple of generations ago, Newt Gingrich was considered radically right wing, just because he was not content to wake up in the morning and repeat the Bob Michel mantra “You’re going to be a loser” in front of the mirror. A few generations ago, Nixon and Ford attempted to fight inflation by “breaking the thermometer”-instituting wage and price controls! The Mitch McConnells and John Boehners of the modern day are a far cry from that. But that’s no reason to be complacent. There are also the Jeb Bushes, the Mitt Romneys, and the Crass Crustys out there. And I begin to understand what Hayek meant by rejecting the label “conservative” (in favor of “Old Whig“) and seeing “conservatives” as averse to change, when I think of the Paul Ryans of the world, who don’t want to dismantle the welfare state, regardless of what the left says, but to preserve it from itself. I’m not a conservative of that sort, either. This, I must say, is why I am 100% behind Rand Paul as my #1 choice for the Republican Presidential nominee. If any of the Republicans would be open to a principled case for monetary Laissez Faire, it’s unlikely to be anyone else.

EDIT: I was quite remiss in failing to point out, having started a post about Monetary Policy discussing the battle over that issue in the late 19th Century, and in particular William Jennings Bryan’s role in that battle, to neglect to mention his role in the creation of the Federal Reserve. Please forgive this, I think, or hope, uncharacteristic oversight.


1 Comment

Filed under Conservatism, Economics, Republicans

One response to “The Money War

  1. Pingback: Estimating The State of Labor Markets (Unemployment Statistics vs. Economic Realities) | Time to Choose Again

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