Quote of the Day

From a great Washington Post profile of Stanley Fischer:

Around the same time, Fischer tackled John Maynard Keynes’s “The General Theory of Employment, Interest, and Money.” “I was immensely impressed,” he said, “not because I understood it but by the quality of the English.”

(ht: Greg Mankiw)

Links of Interest

Greg Mankiw links to a new CBO report on taxes, and offers a suggestion.

Offering a much different view of tax policy, Paul Krugman longs for a return to a 91% top marginal rate.

Bernanke on economic recovery and policy.

Calculated Risk on an improving housing market.

Confusions on the “President’s Monetary Policy”

This article by Ed Butowsky is just strange enough to warrant a post.  In fact, it’s so bad I think it might qualify for an article in The Onion.  In short, it claims that (1) the president decides on monetary policy, (2) the president chose monetary policy instead of fiscal policy, (3) the monetary policy he chose did not work, (4) the monetary policy is generating high rates of inflation, and (5) rates of inflation are mismeasured (which is apparently somehow related to the number of people on welfare and the size of the national debt).

From the article:

Faced with very bad economic conditions, the president decided that monetary policy  (printing money and infusing it into the economy ) was a better choice than attempting to fix the economy by fiscal policy (in this case, reducing the tax burden on corporations and individuals).

First (and I really hope Butowsky knows this), the president does not decide when to print money and infuse it into the economy.

Second, unless I’m really confused, we did actually have a fiscal policy response that both reduced the tax burden and increased government spending.  Now, one could argue for or against the merits of the particular fiscal policy that was used, but how can Butowsky possibly claim that the president decided to use monetary policy instead of fiscal policy?  Has he missed the entire debate about the stimulus?

His mistakes continue:

recent M3 data prove that the money supply is growing at a very rapid rate, and this is a leading indicator of inflation.

This is odd since the Fed stopped publishing M3 statistics in 2006.  But, let’s assume that’s a slip, and he actually meant M2.

It is true that the level of M2 rose sharply as the Fed tried to deal with the financial crisis:

But the year-over-year growth rate in M2 has been trending lower – not higher – all year.  Here it is:

And the inflation that is supposedly following from all this?

What about the latest estimates of expected future inflation rates?  The Federal Reserve Bank of Cleveland’s latest estimate of 10-year expected inflation is 1.26 percent.  Not quite Weimar Republic territory.

One could make a case that inflation is a risk (Feldstein here and Taylor here), but Butowsky’s appeal to imaginary trends in “M3″ is not very compelling.

And the rousing conclusion?

I continue to contend that inflationary pressures are great in this country, but the government simply does a terrible job calculating it. We all know the numbers — 47 million people on food stamps, 25 million underemployed, lowest number of people employed since 1980′s, $16 trillion in debt (and we require $1.3 trillion more each year to meet our budget shortfall).

 

However, what is about to make this even worse is that, due to the choice the president made in early 2009 to print money, we are about to see prices soar in this country. Add to this unnecessary and ineffective approach that we might see more destruction of the U.S.  dollar with QE3.

So inflationary pressure is great, yet we don’t measure it in the traditional statistics [oh, and I retract my earlier comment that Butowsky must really know that the president is not in charge of monetary policy].  Okay, how about  the Billion Price Project at MIT?

The economy remains depressed and there is practically no inflationary pressure from labor markets:

As Greg Mankiw explained a year ago:

The slack labor market has kept growth in nominal wages low, and labor represents a large fraction of a typical firm’s costs.  A persistent inflation problem is unlikely to develop until labor costs start rising significantly.  Notice in the graph above that the period of stagflation during the 1970s is well apparent in the nominal wage data.  The same thing is not happening now.  This is one reason I think the Fed is on the right track worrying more about the weak economy than about inflationary threats.

Since he wrote that, the year-over-year growth rate in earnings has fallen from about 2% to nearly 1%.

These facts are not that hard to understand nor are the data difficult to obtain, so I’m left with this question: how on earth does this stuff get published?

Audit the Fed?

Apparently, some are pushing for including Ron Paul’s “audit the Fed” measure in the Republican platform; Bloomberg has the story here.

According to Ron Paul, “It’s good economics and it’s good legislation, but it’s also good politics, because 80 percent of the American people agree with it.”  It may be good politics, but it is not good economics.  Congress has lower public approval ratings than just about any institution in the country, and we want to give them the ability to influence monetary policy?

Paul’s bill, which passed the House in July, would even allow the GAO to audit “deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations.”  And we believe that this will have no ill effects on the Fed’s deliberations or decisions?

Let’s hope Romney listens to his economic adviser, Glenn Hubbard, who opposes the idea.

So does Laurence Meyer:

The motivation for granting independence to central banks is to insulate the conduct of monetary policy from political interference, especially interference motivated by the pressures of elections to deliver short-term gains irrespective of longer-term costs. The intent of this insulation is not to free the central bank to pursue whatever policy it prefers–indeed every country specifies the goals of policy to some degree–but to provide a credible commitment of the government, through its central bank, to achieve those goals, especially price stability.

No big surprise that Bernanke is opposed to Paul’s legislation, but here are his comments:

Bernanke on Auditing the Fed

The New Dark Age?

From Marginal Revolution, which posted the following comment from Sumner’s blog:

It’s incredibly frustrating. The political and policy world falls into two camps:

 

Those who believe no stimulus is necessary, everything is supply-side. Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.

 

It’s like people completely forgot the existence of Milton Friedman, and decided to revert to the stupidest possible version of New Keynesianism, where interest rates are the only lever of monetary policy and the printing press is something that only functions when rates are above zero.

 

I feel like to both the centre left and the right, Milton Friedman is too heretical now — too right-wing for the left obviously and too left-wing for the right. Consequently, everything about monetarism has been stripped out of the public consciousness and we are left with vulgar Keynesianism and vulgar Austrianism.

 

We truly live in a Dark Age of economics.

The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve.There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.

The advantage to efficiency of the decentralization of decisions and of individual responsibility is even greater, perhaps, than the 19th century supposed; and the reaction against the appeal to self-interest may have gone too far.

Fed Vacancies Filled

Finally, some progress on filling Fed vacancies:

The Senate on Thursday confirmed two nominees chosen by President Obama for the Federal Reserve Board of Governors, overcoming Republican objections and bringing the seven-member board to full strength for the first time since 2006, before the economic crisis.