Of course, Professor Beckworth, being an obedient neoliberal, doesn't meet the Keynesian objection concerning where the effective demand is going to come from either to purchase increasing supply or to send a signal to suppliers to produce more, and he doesn't give any indication that he is even familiar with the Keynesian argument, not realizing that New Keynesians are not actual Keynesians at all, but neoclassical economists at bottom, just as Samuelson was.
Beckworth is just "monetary policy, monetary policy, monetary policy." How is that monetary policy working for you these days? Oh right, the Fed is not targeting NGDP.
Market monetarists like Beckworth don't understand money, the relevance of accounting and finance to economics, or stock-flow consistency macro modeling. Have they even perused Godley and Lavoie, for example?
The kicker, however, is that real wages have been falling over the last couple of years, not rising. Oh right, they are not falling fast enough. I see. How about wage stagnation over the last thirty years and an inverse relationship between labor share and profit share. Oh right, not enough, even though inequality of income and wealth and the Gini coefficient of the US the highest of developed countries.
Oh, and did I mention that corporate profits have been rising since the Great Recession? Yeah, those corporations are really being squeezed by wage rigidity, it seems. NOT.
What neoclassical economists dont' see is that there is a tradeoff between wage flexibility and unemployment. Employers generally use both. They cull their work force and also do their best to reduce wages to control costs. But their best strategy is let the least productive workers go and continue to pay productive workers well so that they don't lose them to higher competitive bids, so that their workforce decline competitively.
Economists should be required to work in business for a few years before going to grad school to learn how business actually operates. Sorry, guys, it's more nuanced than you think.
Did I forget anything? After all I am not an economist.
Macro and Other Musings
A Paradox of Flexibility or Central Bank Incompetence?
David Beckworth | Assistant Professor of Economics at Texas State University in San Marcos, Texas
9 comments:
We have two ways to go wrt money* creation: As debt (Liabilities) or as shares (Equity).
So what excuse is there for a government-backed debt-creating cartel? None?
Precisely.
* My definition of money is "symbolic purchasing power."
market monetarism is about trying to force people to spend more of their current income and savings by scaring them with the threat of inflation.
It seems to me, however, that any expansionary effect of monetarist policies happens mainly through an increase in leverage or private debt, rather than an increase in velocity.
Well said, y.
I understand the desire to try and increase the velocity of money, but relying solely on manipulation of interest rates to do this is demonstrably ineffective over any substantial period of time. There are more fundamental forces driving the economy, i.e. technology and globalization. Decreasing interest rates does not offset the deflationary impact of these more fundamental forces...
market monetarism is about trying to force people to spend more of their current income and savings by scaring them with the threat of inflation.
Exactly, and it's a stupid argument that depends on convincing people to expect the Fed not to react to inflation when it gets going but to commit to letting it happen and risking inflation getting out out control. Monetarists will say that the Fed can always get it under control by raising rates, but once inflation starts picking up that means raising rates quickly and much higher than otherwise, undermining cb credibility, and therefore potentially cb independence as well.
These guys are all theory and don't have clue about reality.
Right, the MMers believe in all sorts of mysterious transmission channels from the Fed to the real economy that would make the Fed into an all-encompassing "monetary authority" of the economics textbooks.
But the Fed is just the central bank. It sits at the apex of the nation's banking system. It does have the ability to emit USG liabilities, but can only use them to purchase financial assets from financial markets. It doesn't directly connect with the non-financial economy other than via its more immediate connections with credit markets.
Monetarists will say that the Fed can always get it under control by raising rates, but once inflation starts picking up that means raising rates quickly and much higher than otherwise, undermining cb credibility, and therefore potentially cb independence as well. Tom Hickey
And raising interest rates is a VERY BLUNT TOOL. Moreover, it probably hurts sound investment more than mere speculation since speculators merely need a spread between what they can borrow at and expected price increases which they, to a large extent, drive themselves.
So then you'll consider rationing credit to limit price inflation and a fine argument that'll be as to who is "creditworthy."
Look. We can argue till Doomsday over how a single, government-enforced monopoly money* supply for private debts should be managed OR we can abolish government privileges for the banks and let the private sector sort out** its own financing as Tom suggests elsewhere.
* I define money as "symbolic purchasing power" which is probably how most people do too.
** This will require a universal bailout, including non-debtors, at least until all deposits are 100% backed by reserves.
MM is based on the 'rational expectations' theory.
I don't really know enough about MM, but the idea seems to be:
(1) everyone rationally expects that printing money eventually leads to inflation, therefore if the cb prints enough money people will rationally expect inflation to result.
However, (2) everyone also rationally expects that if inflation leads to NGDP above the cb's target rate then the cb will control it by raising interest rates.
So, (3) everyone rationally expects that the actual result will be an increase in NGDP in line with the cb's target, which will be comprised of some inflation and some real growth.
This leads to the rational conclusion that in future people's incomes will rise in line with the cb's NGDP target. So people rationally choose to spend more given the rational expectation that their income will be higher in future.
As a result everyone's income rises, the cb hits its NGDP target and everything is ok.
I'm not sure if that's correct but if it is then it's a bit nuts.
Here's a post by Scott Sumner explaining MM:
'What is market monetarism?'
http://www.themoneyillusion.com/?p=13353
quotes:
"Put simply, we assume that a big crop of new currency lowers the value of money (i.e. its purchasing power) for the same reason that a big crop of apples lowers the value of an apple".
i.e. we believe that printing money leads to inflation.
"If a central bank promises to inflate and do level targeting, it will be believed".
i.e. everyone else also believes that printing money leads to inflation.
"Higher expected future NGDP tends to increase current AD, and current NGDP".
i.e. because everyone believes printing money leads to inflation and that the cb can perfectly control NGDP they will increase demand NOW if the cb says it will raise NGDP in the future.
??
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