This Was Extremely Bad Then. This Is Extremely Bad Now. Hoisted from the Archives

Why would it ever occur to John Taylor to claim that open market operations are like price controls? I cannot imagine the circumstances under which anyone would be tempted to do this: Paul Krugman: More Artificial Unintelligence: "David Beckworth pleads with fellow free-marketeers to stop claiming that low interest rates are 'artificial' and comparing them to price controls...

...He’s completely right about the economics. Monetary policy, in which the central bank buys and sells securities to change the monetary base, is nothing at all like price controls. Furthermore, we have a very clear model that tells us what interest rates would be in the absence of distortions and rigidities, the Wicksellian natural rate—the rate of interest consistent with an economy subject neither to inflationary overheating nor deflationary excess supply. And with inflation consistently below the generally accepted 2 percent target, this model says that the actual interest rate, at zero, is above the natural rate, not below. But the question Beckworth should be asking himself is why almost nobody on the right is willing to think clearly about this issue....

We’re not just talking about... ignoramuses like Rand Paul and George Will... [but] by none other than John Taylor.... monetary experts who have to know better fall meekly in line.... Beckworth is trying to take the monetarist, Milton Friedman position, which is basically one of trusting markets to get it right except when it comes to the business cycle, where it becomes necessary to have expansionary monetary policies in slumps. This is... slightly problematic.... You need some kind of market failure to give monetary policy large real effects, and in that case why imagine that this is the only important failure?... More important... this position turns out to be politically unsustainable. “Government is always the problem, not the solution, except when it comes to monetary policy” just doesn’t cut it for modern conservatives.... During the 1930s people like Hayek were liquidationists... denouncing expansionary monetary policy... as “the creation of artificial demand.” The era of Friedmanism, of free-market views paired with tolerance for monetary stimulus, was a temporary and unsustainable interlude, and no amount of sensible argumentation will bring it back.