currency constrained

(I’m once again with a reliable internet connection, digging my way through my mail and google.reader.)

Is our economy cash constrained? I don’t think this makes much sense, but the man who wants to teach the left how important monetary policy is (bla, bla) apparently thinks so. I shouldn’t comment, but it intersects with something I’m interested in talking about.

Yglesias begins discussing a twitter exchange (already we know this won’t end well!):

Yesterday on Twitter, I gave the short version of my theory of fixing the economy: “If people had more money, they’d buy more stuff, and more people would have jobs.”

I spelled out why I think giving people more money would lead to more spending and more employment here, but that Tweet prompted a telling objection from Sam Sherraden who asked “How about starting with ‘if ppl had more/better jobs they’d have more money.’”

I can imagine one identifying with either of the two statements, since even in their less than 140 characters they signal potential overall policy orientations. I could also see how people could take issues with either. One could ask Yglesias, who won’t allow policy inspecific discourse to taint leftist thought, how exactly we’d get money to people, and whether the people who’d receive that money would do much more spending. One could ask Sherraden, how do we magically start with more and better jobs? However, it is hard to see either, in themselves, as incorrect. Maybe that’s because we don’t have Yglesias’ intuition:

His way sounds commonsensical to people, but it’s actually wrong.

Aha! So to the average Joe his point makes sense, but it truly is wrong. Now, we know where this is leading. It happens all the time. The dance of aggregate demand and aggregate supply proponents. Yglesias will the make the pop-Keynesian point that of course if we had more employment this would mean more income and output, but how do we get more jobs without a demand for their output! Or will he?

His way sounds commonsensical to people, but it’s actually wrong. It’s true that if any given unemployed person had a job that he would have more money. It’s also true that if any given employed person got a higher paying job, he’d have more money. But it’s false that if the unemployment rate were lower, people in general would have more money overall. Society as a whole would have more real goods and services if there was less unemployment and more work happening. When people do useful work, that creates real output. But it doesn’t create money. The government creates money. Which is why the correct policy analysis starts with the observation that if people had more money they would buy more goods and services and more people would have jobs. More money would, in other words, lead to more output of real goods and services.

One doesn’t have to be a modern monetary theorist to admit enough endogeneity of money to make Yglesias’ critique sound bizarre. Assuming we interpret “more money” in a way in which it matters, wouldn’t an economy with more employment be one in which the endogenously generated supply/velocity of money was greater as well?

There is a way to interpret his criticism as sorta correct. It depends on what you mean by “have more money overall.” If you mean that the currency component of the money supply won’t increase, this might be true. We could have more jobs, more output, and more income without having more currency. Unfortunately, this is true only because “more money overall” in this sense doesn’t necessarily matter. To the extent it matters, it is only in the context of all the other aspects of our monetary-financial system. So yes, if currency in circulation stayed the same but employment/output/income increased it may be false to say “we have more money overall” in this specific sense, but who cares. It would also imply that non-currency components of the money supply and/or the velocity of money has increased. If the unemployment rate fell in half would we rush to check what components of the left side of the equation of exchange changed before smiling?

I roughly understand the argument that we won’t get more output/employment until we create more monetary stimulus. I do not understand the argument that we need more monetary stimulus because if we just had more output/employment we’d have the same amount of money overall. Ok, fine. Who cares?

This is most surprising coming from a proponent of monetary stimulus. Are not QE supporters the first ones to point out that the “printing press” metaphor is problematic (I point this out to my students as well, although my motivation is to defend QE from bad criticisms, not criticism in general)? That helicopter drops are stimulative but that is not all there is to it? That there are multiple channels through which it can work?

Where does such an idea come from? This crudest of monetarisms? The culprit is obvious, even if it is not all his fault – Delong. Delong has repeatedly made the point that many of the ideas labeled as radical, leftist, or Keynesian fit well within a long historical tradition including right wingers like Milton Friedman. In this political landscape, Republicans moving ideologically towards their old conservative heros would be an improvement – at least from a Keynesian perspective.

I get this point. I’ve been teaching money and banking and intermediate macro since the crisis. The ideological shift against anything possibly Keynesian is quite palpable. There was this feeling I used to get when teaching Marx to undergraduates. I usually feel comfortable teaching, but I’d get a little nervous pain in my stomach. How exactly do I get them to hear, understand, and evaluate the ideas of Marx – whether they end up liking or hating them – before their mind races through the “Marx-Evil-Terrorist-Bin Laden-CALL THE FBI!”? Would you believe I started getting a similar feeling teaching really orthodox monetary and macro? How do I get people to at least consider the arguments for the possible importance of aggregate demand at some times without their mind racing through the “THIS IS THE EVIL KEYNESIAN ATTEMPT TO DEBASE OUR CURRENCY AND MANHOOD I HEARD ABOUT ON YOUTUBE!”?

To be clear, I’m not dismissing or mocking any student’s criticisms of textbook material, which I always encourage and is almost always enlightening. Nonetheless, it is hard to go in and teach subject material without taking into account the way certain ideas will be initially perceived, or how people have been presented this material outside of the classroom. It is hard to go to youtube without bumping into Ron Paul’s influence. And to be super clear, my concern is never whether they adopt a particular theory. The goal is that they evaluate it in a fair and constructive way, as oppose to dismissing it through associations, even if I know that process can never be completely pure. This lead to me to the place Delong finds himself. A little bit of Monetarism is a very useful antidote to the criticism that monetary policy is just Keynesianism and therefore counterproductive and evil. If you want to disagree with Milton Friedman, you need to find something other/better than, “he is a communist!”

All this being said, there is a large jump between the idea that some people could could learn something from monetarism, to the adoption of a super crude monetarism. We have identified the relevant quantity of money! It is exogenous! We can and will control it!



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