We Need Ice-Zombie Milton Friedman Now!
As Matthew Yglesias notes, the country could be vastly, vastly improved by importing technologies from Westeros--but not just because of how applying the ice-zombie treatment would reduce Medicare costs.
Paul Krugman:
GOP Intellectual Decline, Monetary Edition: There was a time, not long ago, when Republicans — whatever you might think of their other ideas — were part of the mainstream consensus on monetary policy. Here’s the Economic Report of the President from 2004 (pdf), presumably written by Greg Mankiw: "Aggressive monetary policy can reduce the depth of a recession." But now we have Mitt Romney declaring his intention to replace Ben Bernanke for, um, pursuing aggressive monetary policy to fight a recession (not aggressive enough, but that’s another issue). Romney:
I want to make sure the Federal Reserve focuses on maintaining the monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril. And the GOP platform will reportedly include a call for steps toward a return to the gold standard.
The really strange thing about all this is that this turn toward hard-money mysticism is taking place even as events have demonstrated that the advantages of not being on a gold standard…. Mark Thoma links to an old piece of mine that I think does a pretty good job of laying out that standard case; but we now know that there’s a major additional concern, the ability of the central bank to act as lender of last resort to the government as well as private banks… the contrast between Spain and the UK. Their medium-term fiscal outlooks are comparable…. But borrowing costs have soared in Spain, while falling in Britain:
So the GOP has decided that we must reject the evils of fiat money and go for the gold standard at precisely the moment when events have demonstrated that fiat money is a really useful thing and the loss of flexibility that comes from ending fiat currencies can be utterly disastrous. What’s going on?… [F]iat money is like, oh, Social Security. The problem it creates for conservatives is not that it doesn’t work, but that it does — which is a challenge to their philosophy. And so it must die.
I would note that the rejection of the mainstream consensus on monetary policy goes much further than Paul Ryan and Mitt Romney and those desperately hoping that they will be chosen for high federal office.
For example, sigh, John Cochrane's claim that the Federal Reserve lacks the power to either raise or lower the rate of inflation:
Inflation Should Be Feared: The fact is, the Fed is basically powerless to create more inflation right now--or to do anything about growth…. Which is just as well…. Inflation remains a danger, but not so much because of what the Fed is doing…. [I]f [inflation] happens, it will happen with little warning, the Fed will be powerless to stop it.
Which led to a Smackdown by Robert Waldmann:
Robert Waldmann on John Cochrane: Note also that foreigners dropping US debt would cause high interest rates which would lower demand. Given the ratio of imports to GDP, this effect could dominate.
And with the Federal Funds rate of around zero, the idea that the Fed could do nothing to fight inflation is really utterly totally crazy.
Not to mention that inflation would be an excellent thing (better 5% than 2% and, I think, better 10% than 5% except for the fact that the Fed could and would respond).
What a bozo.
To which I replied:
Ah. So you think I am being too nice to Cochrane? Perhaps I am...
As I understand Cochrane's current model of the economy, he thinks that the price level is equal to the stock of domestically-held government debt times a constant that is itself a function of (a) exogenous future primary surpluses and (b) an exogenous required return on Treasury debt. Inflation is thus created by (i) loss of confidence that the Government will in fact run those future primary surpluses, (ii) a rise in the exogenous required real rate of return on government debt, (iii) a reduction in purchases of debt by foreigners, and (iv) issuing government debt.
Since Cochrane assumes that the Federal Reserve affects none of these four things, the Federal Reserve cannot affect the price level.
No, Cochrane provides us with no reasons to think that this model of extreme fiscal dominance is a good model of the world. Why do you ask?
Yes, anybody who understands the IS-LM model would know that monetary policy affects the required rate of return on government debt. Why do you ask?
Yes, Milton Friedman is rolling over in his grave. Yes, Milton Friedman would say that changes in monetary policy affect (i) expected future primary surpluses, (ii) the required real rate of return on government debt, and (iii) desired debt holdings by foreigners--and hence the Federal Reserve can affect the price level. Why do you ask?
