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.
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?