July 2, 2004
From the desk of Jane Galt:Huh?
Some people, it seems, have run out of satisfying things to berate the Bush administration about, so now they are looking for hypothetical horror stories with which to scare themselves and their fellow travelers. Like John Quiggin, positing that the Bush administration is going to try to inflate its way out of the budget deficit:
In keeping with the CT tradition of bringing you tomorrow’s talking points today, I thought I’d look a bit further than the current election campaign and consider the implications of a Bush victory. On past form, there’s no reason to suppose that a second term will lead Bush to abandon his tax cuts, or to propose any significant net reduction in expenditure. At least not when there’s an obvious alternative, that only a few shrill Democrat economists and some incredibly out-of-date Republicans would ever object to. The US government has at its disposal and endless source of costless wealth - the printing press that turns out US dollars. Hence there’s no need to do anything tough like raising taxes or cutting Socil Security benefits. The only problem is that, according to some economists, reliance on the printing press as a source of government finance is likely to cause inflation.
I'm no monetary economist or anything, but last time I checked, the Federal Reserve was in charge of monetary policy, not the executive branch of the Federal government. Yes, treasury runs the printing presses, but with the invention of this thing we call the "bank", actual currency has become a smaller and smaller fraction of total money supply. (And a significant portion of our currency supply -- I've heard estimates as high as one-half -- is held abroad, by foreigners in countries where neither the banking system nor the local currency is a good store of value.) Most of the current US money supply is held in the form of bank deposits. And the growth of bank deposits is controlled, in various ways, by the federal reserve.
I suppose if the presses ran at Weimar Republic levels they might be able to get some inflationary juice, but this would hardly go unnoticed by the financial markets, who would jack up interest rates double-quick, obviating the benefits of eroding the face value of our debt -- hurting the treasury, in fact, since my understanding is that once inflationary expectations are established, debt trades at a higher real interest rate than before. (There's another benefit to the government, which is that inflation acts as a small tax on the primary purchasers of money, but I think the interest rate effect would swamp any benefit from currency sales.)
This is why, despite the fact that we've run deficits nearly continuously since 1960, no government, either Democrat or Republican, has attempted what we might call The Weimar Solution. Nor will the Bush administration, first of all because they can't, and second of all, because even if they could, they wouldn't.
Now, John Quiggin is an economist, and I am not, so maybe he has some other monetary inflation mechanism in mind. But if not--well, my goodness, don't we have enough things to criticise Bush about without making up fairy tales?
Update Several people have suggested that I'm missing a joke. Perhaps so -- if you look up the word gullible in the dictionary, you'll find my picture. Certainly, Mr Quiggin's tone is tongue in cheek. But this isn't the first time I've heard this silliness -- Michael Kinsley makes the same suggestion in today's Washington Post.
Also, I know that the Federal Reserve is not a creature of the constitution, and is thus technically open to congressional action. But this congressional action would be politically impossible, as well as having extremely nasty consequences, including, as I outlined above, spooking the markets and driving up the price of US debt, which would quickly destroy any gains from the original inflation.
Theoretically, George Bush could also appoint a new Fed chief who was amenable to inflationary action. But this would have the same results as congressional action, only quicker. Not gonna happen.
Posted by Jane Galt at July 2, 2004 10:34 AM | TrackBack | Technorati inbound links"The only problem is that, according to some economists, reliance on the printing press as a source of government finance is likely to cause inflation."
Only some economists? LOL
There can never be enough - Bush is EEEEEEEEEEEVIL, remember?
(As an aside, it's not that there aren't enough, it's that they won't use the ones that are actually true, relying instead on ridiculous stuff like this. Is thr a name for this pathology?)
Its not just John Quiggin, Michael Kinsley has an editorial in todays LATimes that says basically that Bush's budget leaves inflation as the only way to get rid of the deficit.
I think it's a joke. Bush appears to be hitting for the cycle in terms of bending over the nation (now inflation is a worry, on top of war, and underemployment?). But given that we've never heard this Admin. admit that its made a mistake (possibly b/c Bush can't think of one at just this minute), I think Quiggin is trying to suss out what the Admin will claim are the benefits of its new inflationary policy of ever expanding deficits.
Wow. Are Republicans so defensive that they have to see a serious critique in every snarky post?
No, Tim, that's not what he's saying; he's saying that the government will run the printing presses. And his readers appear to be taking it seriously. Because the Fed controls the money supply, and inflation, as Milton Friedman is fond of saying, is "always and everywhere a monetary phenomenon", deficits aren't inflationary unless the printing press is used to pay for them; that's why they, in theory, raise real interest rates.
Now, it's possible that it's a joke; I am, of course, unusually thick about such things. But if so, it's a joke that seems to be rather too sophisticated for CT's readership, given the comments.
"Underemployment", Tim? (Right. Anytime anyone isn't happy with his job, when it's not the job he wants, that's "underemployment". Sure, he has a job. But it's not the Job He Wants. So it's "under"employment for him. Odd that this stick only comes out when the guy you dislike is in the White House, huh? Odd that there aren't any good numbers on it either, huh?)
Interesting. Is there anything Bush can do right? I imagine that if he pushed for "full employment" to lower the already low unemployment rate, you'd cheer the resulting inflationary effects?
Of course you would, right?
Right?
(According to BLS, the current unemployment rate is 5.6%. "Many economists" think that the structural non-inflationary limit on unemployment is around 5%, and for most of the boom of the late 90s, the unemployment rate was just under 5%. In 1994-96, it was right around what it is now. But I guess "underemployment", being thoroughly self-defined and non-documented, is a much better attack tool, isn't it?)
Sounds plausible to me. Given the way inflation transfers wealth from holders of long-term bonds to homeowners with fixed-rate mortgages, and given Bush's famous hatred of the investing class, the wonder is that he hasn't done all this already.
But Jane, you are being reasonable in a world in which Reason is no longer a part of public discourse. It is no longer the basis of any kind of reality but simply a tool to be used to manipulate discourse to achieve a desired effect.
Of course Quiggin knows what he's doing and saying and he knows that it has no basis in truth. That forces you to look at/for what his real motive is, rather than the clearly implied motive. Unfortunately, we can never know the hidden or true motive and the more we speculate the more the perpetrator claims deniability and paints any accusers as those having the false motives.
I would say that all public political discourse takes place at this level in the 21st century. All political parties use this technique. That's why debate is currently much less civil. Some genuine people attempting to have real communication can always be manipulated by people operating at a meta-level above the actual discusion. Because the manipulators never present a solid target for the thoughts of those disagreeing with them the poor victims end up lashing out in anger as the only recourse.
Jane:
1. I admit that I didn't really read the CT post before I posted, but I'm pretty sure its a joke. (I never read any CT post carefully before my fourth cup of coffee. There's a bigger than expected chance that it will be something that screws with my sense of The Ultimate Nature of Reality, and caffine keeps the bad waking dreams away. Damn CT'ers).
2. Why can't you ever just accept my assertions as a "from God's lips to your ears" sort of truth? Wouldn't that be a more efficient way of advancing the discussion on most of these threads?
(That too is a joke. Repetition yields recognition).
3. I wouldn't put too much faith in their commenters as an indicator of jokiness - a lot of them thought the Berlin - diploma mill story was legit (I bought it, I just didn't comment. Damn CT'ers).
4. You want proof that its a joke. G'ddmn it. See #2 above. Oh hell, let's look at what little ev. I can marshall.
(a) I think he's Australian. In my experience, if an Australian says anything to you, there's a 50/50 chance its a mild joke at your expense.
(b) I skimmed his post right after seeing the Kinsley column. Almost all Kinsley columns are cheeky, and Quiggin's post following it seemed to suggest he was building on that cheekiness. We really do live in a pretty small e-world.
(c) There are all those tongue-in-cheek phrases: "shrill Democrats," "first line of defense," "price appreciation," inflation as part of the "American patriotic tradition." All of these plus the gentle tone of the post suggests joke to me.
I think the confusion about how much of a joke it's supposed to be is understandable, b/c I think the confusion is encoded into the post. (You're not going to like this explanation, but...). I suspect that some Dems make crazy policy jokes about the Bush Admin. to their friends as a lark, and then watch in horror as the Admin actually adopts that rationale. So there is a certain wariness in joke posts like this. This last bit isn't snark - I really think this is what's confusing your sense of humor.
"Michael Kinsley has an editorial in todays LATimes that says basically that Bush's budget leaves inflation as the only way to get rid of the deficit."
Inflation is normally considered a means to reduce a debt but apart from bracket creep effects, dont generally affect the deficit.
The main problem with this argument is that although the deficit is increasing - the US national debt a % of GDP isnt due to high nominal GDP growth and low interest rates.
I'll tell ya how Bush controls the economy (and money supply): IT'S SKULL AND BONES, IT'S THE TRILATERAL COMMISSION, ITS...ITS....ITS ALIENS, THAT'S IT!!!!! ALIENS.....FROM ARCTURUS.....YEAH.....
Why don't people (including, it seems, some economists) realize that, due to the nature of our financial system, the whole idea of "running the printing press" is obsolete? The U.S. Mint only issues currency in response to demands from banks, in exchange for reserves. Otherwise, the federal government never touches the stuff. All U.S. spending is done by checks and bank transfers, which amount to crediting and debiting banks' federal reserve accounts. Any excess reserves in the system are automentically removed by the Fed in it's operations to maintain target interest rates. Inflation would only result if the Treasury spent so much that it ran up against real capacity contraints in the economy and started bidding up prices. Wiemar-type "printing press" hyperinflation cna only happen in a system in which the government is issuing unbacked paper money and directly using it to pay for stuff. So if Bush announces that henceforth all U.S. employees will be paid in cash, worry - but otherwise, don't sweat it...
Since I am a monetary economist...
The Fed controls monetary policy, but Congress and the Pres could, in principle, alter the legislation that created and governs the Fed. They could, e.g., eliminate the Fed and grab monetary policy themselves. To repeat, the Fed is not mentioned in the Constitution; it was created by Congress and the President in a normal act of legislation, the Federal Reserve Act of 1913.
In my judgment, a radical change in the governing legislation is very unlikely for political reasons.
The broad point that the only ways out of a deficit are to reduce spending, raise taxes, and/or print money is correct. (I suppose there's a fourth-the govt could simply repudiate its bonds. Of course, that only works once.)
Oh, yeah, I'm also baffled by that "some." More like all economists think running the printing presses causes inflation. It's rare to come across a wacko who doubts it.
Oh, I'm aware that the Federal Reserve could, theoretically be abolished; or that Bush could find some wing-nut, somewhere, who would agree that the ouput gap is 8% and inflate like hell. But the former would be politically impossible, and the latter would a) only happen in the third year of Bush's term, and b) send long terms skyrocketing, wiping out any benefit to the government.
jimbo,
There is a lot more to money supply than currency, so called M1. New 'money' is created by the fractional reserve banking system and directly by the Fed when it 'monetizes debt' by 'purchasing' US bonds. This is most definitely inflationary in that it increases the total money supply. Whether this directly leads to price inflation depends on many other factors, but all things being equal the end result of increasing money supply is price inflation.
What exactly do think the dollar is 'backed up' by? The US dollar is fiat money pure and simple. It is most definitely paper money not backed up by anything. The only reason the dollar has value is because the majority of people believe that the US govt. will pay its debts. If that beliefe ever wavers... pffft.
"The only reason the dollar has value is because the majority of people believe that the US govt. will pay its debts. If that beliefe ever wavers... pffft."
No. It has value because government agencies at all levels, from the Treasury to small towns, will send armed men to kill you if you don't pay taxes with dollars.
Re. underemployment: people who have given up hope of finding work are ignored by the official statisticians. They do not count in the unemployment rate. Yet their numbers are important for political stability and productivity.
"No. It has value because government agencies at all levels, from the Treasury to small towns, will send armed men to kill you if you don't pay taxes with dollars."
I stand corrected. :-)
"New 'money' is created by the fractional reserve banking system and directly by the Fed when it 'monetizes debt' by 'purchasing' US bonds. This is most definitely inflationary in that it increases the total money supply."
Austrian,
You need to look at the system as a whole. True, the fed injects money into the banking system by purchasing government bonds. But it is not at liberty to do so whenever it feels like it. It is constrained by the fact that it maintains a positive overnight interest rate. The only way to do that is make sure that at the end of every accounting cycle there is no general excess of reserves in the system, since at that point the bid on reserves goes to 0 (Since banks do not recieve interest on reserves, and can get them at any time they need them iother on the open market or at the discount window, no bank wants to hold more reserves than the absolute minimum required by law - in the face of a completely "full" system, where everyone has met their requirements, anyone offering reserves will find no takers.) So, in the case of any positive interest rate, any reserves the fed "giveth" it must "taketh away" - there is no other place for the reserves to go, since ultimately they are all just accounting records at the fed.
I'll even go one better and say that a positive interest rate isn't necessary. The Bank of Japan has been allowing reserves to pile up for years in it's banking system by maintaining a 0 rate, and everyone there has been worring more about deflation than hyperinflation. Numbers on an accounting sheet don't matter unless they translate into real-world spending, which they haven't for the most part in Japan.
The ulitmate point is (as a few lonely postkeynesians and others have been saying for years) the fed in no sense "controls" the money supply. By affecting the price of money it can influence loan decisions, but ultimately the money supply is determined by the demand for loans in the private banking system. The fed, by its very nature, must accomodate that demand with as much or as few reserves as the system requires.
Jimbo:
Help me out here. I'm not sure I'm understanding what you're saying, so I'll just restate, and you can correct it -
1. Fed can pump money into the economy by buying T-bills.
2. Fed can pump money into the economy by lowering reserve requirements, thus allowing banks to lend out more money.
OK, at this point, I'm not sure how #1 and #2 are related in your formulation. Is it that there is an aggregate demand out there, and the Fed can't do much to pump money into the economy if there is not sufficient aggregate demand to take it up? Is that how #2 limits #1?
And isn't that special case the situation in which Keynesians say that the gov't should step in and start spending? And isn't the major chord of the other side that we should just wait it out, the market will know what to do with the capital, and do it better than the government?
Tim -- the limit is
a) the willingness of the banks to make loans -- this can vary depending on the performance of their portfolios, and the underlying credit quality of potential borrowers, as well as their expectations of future economic performance and a few hundred other things
b) the willingness of consumers to borrow money -- this can vary based on their debt load, their expectations about their future earnings, and another few hundred things such as you think about when you're contemplating a mortgage or a new car.
The argument, which has much truth, is that the Fed can play with the money supply all it wants, but if the banks ain't lending, the money isn't being created. This is probably the biggest factor underlying Japan's ten year economic doldrums, which are now ending as the banks finally get their portfolios in order.
I think the biggest change in monetary policy in the last 10 years has been the enormous growth of mortgage debt that has been encouraged by the Government Sponsored Enterprises- Fannie Mae and Freddy Mac. Fannie Mae in particular is a Bull in the Monetary China Shop because it has used its lobbying power in Congress to lend ever growing floods of money at giveaway terms (like mortgages without any or negligible down payments). The Fed's ability to tinker with short term interest rates would quickly become irrelevant in the eyes of the Market in the face of a surge in mortgage defaults (can you say Puncturing the Housing Bubble?)
Tim:
The real problem is with the concept of the federal reserve "pumping money into the system". It's a phrase you hear all the time, but it doesn't really capture the reality of whats going on operationally.
The best metaphor I can think of is a water utility. It regulates the flow of water - it can open the taps or close them - but in reality, once you turn on your shower, it has to open the taps in response or face a reduction in the overall pressure in the system. Since it's mandate is to keep that pressure at a constant level, it has no choice but to open up the taps. The rises and falls of interest rates correspond more to an increase or decrease in the total pressure of the system than to how much water is flowing through it. So if if your local water company decided, in order to save water, to reduce the pressure in the system by 10%, it might indirectly have an effect on how much water it was pumping out, but if people instead responded by simply taking longer showers, there would be nothing it could do - no matter what the pressure level, it has to pump enough water to maintain it.
So when people talk about "printing money", what they usually mean is something like the federal government issuing checks on it's fed account without selling or collecting taxes to "cover" them, thus creating new reserves in the banking system as people cash them. But what are taxes and bond sales? They are simply ways to remove the money spent into circulation by the treasury. If the treasury, in a fit of pique, did not issue enough bonds (which have the effect of transfering money to the treasury's fed account, where it to all intents and purposes does not exist as anything more than an internal accounting entity of the fed/treasury) to remove the reserves from the system, the fed - in order to carry out its operational responsibilities - would be forced to sell bonds on its own account, using open market operations, in order to accomplish the reserve drain. Otherwise, the immediate effect would be a drop in the overnight rate to 0%, as banks scrambled to get rid of their excess reserves and found no takers. The effect on real money in real circulation would be nil in both cases. (It could have nasty effects on bank's bottom lines, however - as they are forced to carry underperforming assets.)
These are the realities of a modern financial system (others are run with different - and often better - operational constraints, such as more reliance on the discount window, no reserve requirement, etc, but they all face the same fundamental realities.). It's just the way the mechanics work, on a day-to-day basis. It really doesn't have anything to do with economic theories on who should spend what, etc. So all I'm, saying is that, unless we seriously changed our finaincial system, "printing money", no matter how nefarious you think the current administration is, is simply not an option.
The key issues are the ability of the government to service its debt, and the effect of high levels of government spending on economic efficiency. With the exception of the Medicare program, government is not stretched beyond the limits of its ability to service debt. Economic efficiency, however, could be damaged by unchecked levels of government spending. Tax cuts tend to counterbalance these detrimental effects, but should competition for capital become keen, large government deficits could become troublesome.
Michael Kinsley can judge a book by its cover. He used to write reviews of books without ever reading them.
Re. underemployment: people who have given up hope of finding work are ignored by the official statisticians. They do not count in the unemployment rate. Yet their numbers are important for political stability and productivity.
"Discouraged worker syndrome"
However there are at least two factors that can make the actual number of discoruaged workers difficult to quantify in practice:
1. Two-income families become one-income families due to a loss of employment, but the spouse then decids to drop out of the employment search and be a stay-at-home parent.
2. A person starts a home businesses and is thus self-employed, may not be counted by an employment surveryor.
I haven't read Quiggin's piece, but am nevertheless amused that even Democrats admit that some of their positions are indistinguishable from a joke.
I haven't read Quiggin's piece, but am nevertheless amused that even Democrats admit that some of their positions are indistinguishable from a joke.
Democrats are advocating hyperinflation? Is it perhaps the case that the inability to recognize a joke is the fault of the reader?
Democrats are advocating hyperinflation? Is it perhaps the case that the inability to recognize a joke is the fault of the reader?
No, your streak at failing to grasp the point remains intact. Eric Gagne is envious.
The point was that, if Quiggin were joking, he was poking fun at those who presume that Bush has cloven hooves. If not, he was advocating another moronic Democratic meme of the Diebold variety.
It's hard to distinguish seriously held (albeit intrinsically risible) Democratic positions (Diebold) from jocularly espoused satire (perhaps this instance). And that is funny.
Quiggan is an Australian. I no longer bother reading him. And he takes himself far too seriously for his post to be a joke--anti-Bush/Republican comments are a recurring theme, whether in blogs or the mainstream media. He's much worse, believe me, when he gets off economics topics.
Yeah, we all know the concept of Alan Greenspan going along with something stupid because he likes small government and Republicans is ridiculous. He certainly didn't roll over for the tax cut, which any idiot could see was going to lead to a deficit.....
Jason, the fact that Brad DeLong does not like a tax cut does not make it an economically insupportable policy. Support for Bush's tax cut was well within the mainstream of reputable economists policy positions. Support for wildly inflating the currency is not.
Jane said: "...he's saying that the government will run the printing presses. And his readers appear to be taking it seriously."
Ummm. Which readers might you be referring to? Perhaps you are talking about the comment that points out inflation is good for the wheelbarrow industry -- right, that was serious. Or the comment which claimed that inflation was a relief to thoughts of suicide? That happens all the time, after all. The one that supports inflation because its bad for "cowardly investors?" The one that pointed out inflation is a part of the French patriotic tradition and therefore sounds like a John Kerry campaign promise? Dsquared saying inflation is a good idea because it hurts the poor? Adam Kotsko remarking "I was an English major in undergrad, so I don’t understand this… “economics”? That’s what you call it, right?"
No doubt, you can find a couple of thick-headed comments on the post -- as you can virtually on any popular blog -- but virtually all of us got it.
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