Milton vs. Mitt

Federal Reserve Chairman

If it’s within 72 hours since the latest job report, that means it’s time for centrist and left-of-center commentators to excoriate the Fed for its continued refusal to do a damn thing about the tepid recovery. And so it is!

Mr. Yglesias (you guys ever heard of him?) has been banging on this particular drum for years now, to little effect. He’s not a lonely drummer; were it deemed necessary for the cause, a marching band of likeminded econobloggers could be assembled by nightfall! As Yglesias is willing to concede, there is an almost comic asymmetry of influence present in the current debate over monetary policy:

On one team are the leaders of the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England. Alongside them are the political leaders of the United States, Germany, Japan, and England along with the main opposition parties in all of those countries. The Bank of International Settlements wants tighter money. Every few months Brazilian politicians pop up to complain about “currency wars.” And then on the other side you have … a handful of economics bloggers.

Overcrowded though the tight money bandwagon may be, they’ll have to make room for one more.

Two years late and from stage far, far right, here comes the one politician in America who makes Barack Obama look like a restless spirit of impulsive outbursts of emotion; the current, former, future and alleged CEO of Bain Capital, Willard Mitt Romney!

From the AP:

Mitt Romney says the Federal Reserve shouldn’t use new stimulus measures to boost the still-sluggish economy.

The Republican presidential hopeful says he doesn’t think another round of stimulus would help the economy, arguing that previous measures didn’t work.

Romney tells CNN’s “State of the Union” in an interview scheduled to air Sunday morning that business incentives are preferable to more government intervention.

Business incentives are indeed preferable to more government intervention, much in the same way that cake is preferable to death. It’s a less than enlightening dichotomy the (presumptive) Republican nominee is employing in defense of his chosen policy. Maybe Romney misrepresents the nature of the Fed’s decision because his current position is so radical, it wasn’t until mid-January of 2009 that it ceased to be exclusive property of the rightwing fringe. Perhaps Romney’s gone a little scatterbrained from the cognitive dissonance of being a self-described “severe conservative” while at the same time rejecting the most significant work of Milton Friedman, one of movement conservatism’s patron saints.

It was none other than Reagan’s favorite economist who argued that central bankers should never consider themselves out of options, even if they’ve lowered the interest rate (their preferred means of influencing the economy) to zero. Engaging in an after-speech Q&A session at the Bank of Canada, in the year 2000, Friedman had this to say about Japanese monetary policy:

As far as Japan is concerned, the situation… shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, [Japan] had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

Friedman died in 2006, so we’ll never know what his advice to Ben Bernanke and Barack Obama would have been. But judging from these recent comments and, more importantly, his groundbreaking work on the Federal Reserve and the Great Depression, it’s hardly outlandish to claim Friedman, were he alive today, would read much like Yglesias (just with fewer typos). Cato’s Timothy Lee  certainly thinks so. Not to put too fine a point on it, but here’s where Romney stands: To the far right of Milton Friedman and Cato. At least he hasn’t yet threatened bodily harm.

[x-posted]






51 replies
  1. 1
    Sawgrass Stan says:

    Thanks, Elias– I’m headed over to Yggie’s to check it out.
    Krugman’s on vacation, so I guess somebody has to take up the slack. Thanks for stepping up! Nicely sourced, great to see.
    Will be back to either ditto or excoriate you once I read all your links. And welcome again to Balloon Juice.

  2. 2
    Baud says:

    Experts, does this translate to the U.S. situation?

    The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

    I generally don’t find blanket comparisons with other countries very persuasive because the regulatory and market structures may be entirely different.

  3. 3
    sb says:

    Yglesias is correct in the linked column and yes, he’s been saying it for awhile. As a public school teacher, I find Yglesias’ views on education disgusting, stupid and other impolite adjectives but on the economy, I always thought he was a damn good read.

    And FWIW, I don’t think Friedman would have called on the Fed to act. I suspect he would have fallen in lock-step with our current collection of Repugs.

  4. 4
    wrb says:

    And I thought this was going to be about the poetry of the English revolution and the Protestant reformation.

  5. 5
    jwb says:

    @sb: That’s my sense too; or if he disagreed with current GOP strategy, he’d be careful to remain quiet. There are many conservative economists who fall into that camp: they understand the situation perfectly well but prefer to issue nonsensical statements than to be caught on the wrong side of the GOP.

  6. 6
    Ben Franklin says:

    But what’s truly striking about this data is that, though bad, it was hardly unexpected.

    Now I will digest that nugget, and expect some reflux.

  7. 7
    JGabriel says:

    Yglesias:

    And then on the other side you have … a handful of economics bloggers.

    Seems like someone, and I guess it’s gonna be me, should mention that those economics bloggers include at least two Nobel Prize winners (Krugman & Stiglitz). I suspect there’s a few more Nobelists in the econblogger cadre that I don’t know about.

    .

  8. 8
    JGabriel says:

    AP:

    The Republican presidential hopeful says he doesn’t think another round of stimulus would help the economy …

    Where the fuck is Mankiw? I know he’s a Keynsian, at least when no one from the Tea Party is looking at him, and I thought he was RMoney’s top econ adviser.

    You would think Mankiw would at least keep Romney from spewing such drivel. I don’t expect Mankiw to push good economic policy; he’s still a conservative, despite his Keynesianism. But I did expect him to prevent Mitt from sounding like a complete jackass on matters economic.

    I guess that was expecting too much.

    .

  9. 9
    hildebrand says:

    Why do I have the sense that if we had a Republican in the White House the Fed would have acted a long time ago. Likewise, additional stimulus, hidden in the guise of something not called stimulus, would have been added this year.

    The Republicans are simply utilitarians – whatever works, baby.

  10. 10
    Johnk says:

    There are a large number of econobloggers in tandem with Kthug. Matty is barely mentionable. You should get out more.

  11. 11

    DH and I are still having this dispute. The best 5 western soundtracks ever? Discuss. I say “Dances With Wolves” “Silverado” “Cowboys” “How the West was Won” and “Magnificent 7” We agree on the top five but disagree on their placings. I still say that “Dances with Wolves” is the greatest ever, the sweeping brass when the cart is crossing over the vastness of the plains is just perfect.

  12. 12
    John says:

    I read a lot of general “the Fed needs to do more!” talk. Yglesias is particularly prolific on this front. What I’ve rarely seen (and this is probably more my fault than anything) is explanations of what, precisely, the Fed is supposed to do, and how this would reduce the unemployment rate. Pointers to material explaining this would be welcome.

    Isn’t it possible that we’ve more or less reached the limit of what monetary policy can do to reduce unemployment?

  13. 13
    RareSanity says:

    Can someone explain what is achieved by the Fed buying long-term US Govt. debt?

    I know what lowering interest rates is trying to achieve…encourage borrowing, in the hopes that borrowed money will be spent.

    Just can’t seem to wrap my head around what buying Govt. debt does.

  14. 14
  15. 15
    geg6 says:

    @Johnk:

    This. Jeebus, to even think about putting that trustafarian Yglesius in that company makes me want to throw up. And I just had a great dinner that I’d prefer to kee down, thank you very much.

  16. 16
    jwb says:

    @raven: Because Tiomkin was too cheap to use violins.

  17. 17
    PeakVT says:

    @JGabriel: Yes, you were. Mankiw is a hack, like almost all right-wing economists, except Bartlett and other assorted folk who blogged at Capital Gains and Games. Look at the authors on this Romney campaign white paper. It gets worse from there.

  18. 18
    raven says:

    Jeremiah Johnson. It took me years to find a record and it had to be shipped from Australia. Tim McIntire did the vocals but the entire soundtrack is amazing. The record also includes most of Bear Claw’s wonderful dialogue.

    “Are you can skin grizz pilgrim?

    Skin this one and I’ll bring ya another. . “

  19. 19
    raven says:

    More Jeremiah, the opening scene.

    His name was Jeremiah Johnson, and they say he wanted to be a mountain man. The story goes that he was a man of proper wit and adventurous spirit, suited to the mountains. Nobody knows whereabouts he come from and don’t seem to matter much. He was a young man and ghosty stories about the tall hills didn’t scare him none. He was looking for a Hawken gun, .50 caliber or better. He settled for a .30, but damn, it was a genuine Hawken, and you couldn’t go no better. Bought him a good horse, and traps, and other truck that went with being a mountain man, and said good-bye to whatever life was down there below.

  20. 20
    the Conster says:

    @wrb:

    Me too.

  21. 21
    raven says:

    Thanks so much for the Western question. For some reason the DVD releases of Jeremiah were awful and this is a film that deserves the best. I just checked and it is finally out on Blu-Ray!!!!!!

  22. 22

    @efgoldman:

    LOL DH and I are STILL debating this, and are still debating over the first place position. Of course he is a musician so I am fighting from a non-musician position which makes me a hack with a tin ear from his stand point, but I also have to fight against the fact that as a USMC musician he played “The Cowboys” constantly while he was at El Toro, it was one of their standards along with “How the West Was Won”.

  23. 23
  24. 24
    PeakVT says:

    @RareSanity: When the Fed buys a certain class of Treasuries, it bids up the price of those securities, which means the securities’ effective interest rate goes down. Any type of loan benchmarked to that interest rate should go down as well.

  25. 25
    James E. Powell says:

    @John:

    Isn’t it possible that we’ve more or less reached the limit of what monetary policy can do to reduce unemployment?

    It’s more than possible, it’s likely. Some might say it’s clear.

    The reason that there is so much harping on the Fed to do something goddamit! is that everyone realizes that the Republicans will not permit any fiscal action: no jobs program, no infrastructure spending, no help for long-term unemployed, etc.

    That 2010 election turns out to have been pretty damn important.

  26. 26
  27. 27
    burnspbesq says:

    Thread needs a dead mouse.

    http://img.photobucket.com/alb.....inwork.jpg

    Laettner says “you’re welcome.” Kitteh is doing more work than Bernanke.

  28. 28
    Regnad Kcin says:

    @hildebrand: i am more of the opinion the republicans have now committed to being externalitarians

  29. 29
    Ben Johannson says:

    Mr. Isquith,

    The Federal Reserve has increased reserve levels (the supposed “high powered” money of Friedman’s fevered imaginings) by 2000% since the financial crash. The banking system is swimming in liquidity.

    Do you or Yglesias understand one single thing about central bank operations? Do you understand that increasing bank reserves does not increase banks’ capacity to lend? Do you undertand that banks are never reserve constrained? That because they can always obtain whatever reserves are required via the inter-bank market or the Federal Reserve’s discount window, that adding lots of reserves to their balance sheets is, in fact, completely ineffective in stimulating aggregate demand via loans?

    They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

    Mr. Isquith, do you understand that today we call this something you may have heard of at one point, quantitative easing? That acquiring securities with reserves is literally nothing more than a vast financial asset swap which does not increase the private sector’s financial wealth? Do you understand the Federal Reserve cannot force the private sector to take on debt so as to stimulate aggregate demand?

    Did you notice how, in yet another vapid column, Yglesias fails to produce any detail regarding his call for monetary policy to save the day?

  30. 30
  31. 31
    Fluke bucket says:

    Like I said the other day, I wish I could understand money.

  32. 32
    Ben Johannson says:

    @raven: I bet you get frustrated.

  33. 33
  34. 34

    @Litlebritdifrnt:

    Top 5 (in no order):

    Once Upon a Time in the West
    For a Few Dollars More
    A Fist Full of Dollars
    The Good, the Bad and the Ugly
    A Fist Full of Dynamite

    All by Ennio Morricone. Nobody does (or ever did) western music as well as he does.

    Also too, Ben Bernanke has a really shiny head.

  35. 35
    Shawn in ShowMe says:

    @James E. Powell:

    There are two kinds of political bloggers: Those who watched Schoolhouse Rock and those who did not.

  36. 36
  37. 37
    RareSanity says:

    @PeakVT:

    Thanks!

    Now that I understand that, I don’t see how that would have positive affect on unemployment. The problem with the economy is that aggregate demand needs to be increased, loose financial policies only work where there is pinned-up demand, mostly in business capital expenditures.

    That’s not the problem we have.

    The problem is that when people are unemployed/underemployed, or have a fear of becoming one of those two things, they don’t buy stuff and demand takes a nose dive. Because of the low demand, companies are more than happy to sit on billions in cash, because there’s no reason for them to spend it increasing capacity and hiring workers.

    Although it will never happen, my opinion is that the only way out of this mess is to end ANY tax benefits for a U.S. company to outsource manufacturing/call center operations overseas, paired with incentives to repatriate those operations. After that, the tax rate on large corporations needs to be INCREASED, to encourage them to reinvest profits into their companies, instead of just holding on to cash. Lastly, the capital gains rates need to be raised, along with there being some sort of increase in fees related to equities transactions, to encourage actually investing in companies, and discourage “trading”.

    The answer is not monetary policy, the answer is tax policy. Tax (or remove incentives) for those things you wish to discourage (outsourcing, sitting on cash), provide tax incentives for those things you wish to encourage (repatriating operations, capital expenditures, profit reinvestment).

    At least that makes sense to me.

  38. 38
    Ben Johannson says:

    @Baud: The Bank of Japan did exactly what Friedman recommended, quantitative easing via massive swaps of securities for reserves. The idea is that by loading up banks with reserves that aren’t generating a return, thy’ll be motivated to loan it all out and stimulate the economy. But it didn’t happen because banks don’t need to have reserves dumped in their laps to make loans. When a bank finds a customer it deems creditworthy, it makes the loan and then goes to the market or the Fed at the end of the day to get whatever reserves are needed. So long as banks have adequate capital to cover their losses, the only limit to their ability to make loans is the number of credit-worthy customers who come in the front door.

  39. 39
    PeakVT says:

    @RareSanity: Well, I’m pretty sure that lower interest rates will have some positive effect on employment. The question is how large the effect might be compared to any possible downside effects.

    Also, even if altering tax policy was “the answer”, it has about as much chance of happening as fiscal policy – zero. Which brings us back to the Fed.

  40. 40
    arguingwithsignposts says:

    @Johnk:

    There are a large number of econobloggers in tandem with Kthug. Matty is barely mentionable.

    This. Other than the fact that he was early to the blog-party, and wrestled a seat at the cool kids table, exactly what the fuck does Matt Y bring to this conversation?

  41. 41
    RareSanity says:

    @PeakVT:

    Also, even if altering tax policy was “the answer”, it has about as much chance of happening as fiscal policy – zero. Which brings us back to the Fed.

    Well…I did say that I thought it would never happen.

    Tax policy, and crank up the government spending…a lot.

    Problem is, as you have noted, neither has a snowball’s chance in hell of actually happening.

  42. 42
    Ben Johannson says:

    @PeakVT: The problem is rates are as low as they can get, from 5.4% in 2008 to 0.25% today. Boosters of unconventional monetary policy want the Fed to set a negative rate in the hope that this would force banks to make loans, but it won’t work. All that will happen is the Fed will lose control of the overnight rate (rate banks charge each other for loaning reserves), which it can’t permit because the law requires the Fed to remain in control.

  43. 43
    Ben Johannson says:

    @RareSanity: The best chance politically is to go hard after a massive tax cut for the middle class and the poor. I strongly support permanently ending FICA taxation with government making the contributions on citizens’ behalf.

  44. 44
    Anne Laurie says:

    @Fluke bucket:

    I wish I could understand money.

    Best I can tell, it’s like the (Catholic) Dominican fathers used to say about God’s Grace: To those who believe, no explanation is necessary. To those who don’t believe, no explantion is possible.

  45. 45
    PeakVT says:

    @Ben Johannson: Do you have any suggestions that are politically feasible?

  46. 46
    Brother Shotgun of Sweet Reason says:

    @Horrendo Slapp (formerly Jimperson Zibb, Duncan Dönitz, Otto Graf von Pfmidtnöchtler-Pízsmőgy, Mumphrey, et al.):

    Yep.

    I know jack shit about movie scores, but at least one of these has got to be in the top 5 for Westerns. I’d go for “Good, Bad and the Ugly” myself, just for the whistle in the theme.

  47. 47
    Ben Johannson says:

    @PeakVT: It’s a possibility the Republicans could be talked into a tax cut, just not very much of one. That still puts it ahead of everything else.

  48. 48
    mclaren says:

    Frankly, I don’t see the point of screaming at the Fed to do something. Obviously they should, but as many an economist has pointed out, once you near the zero bound in interest rate, further interest rate reductions are like pushing on a string.

    The real solution to this kind of economic problem involves the congress appropriating a metric shit-ton of money and spending it to create jobs. That was what America used to do when the economy went downhill, back in the olden days when politicians actually paid attention to things like the unemployment rate.

  49. 49
    mclaren says:

    @Horrendo Slapp (formerly Jimperson Zibb, Duncan Dönitz, Otto Graf von Pfmidtnöchtler-Pízsmőgy, Mumphrey, et al.):

    Well, Elmer Bernstein’s score for THE MAGNIFICENT SEVEN should be right up there, and Jerry Goldsmith’s score for HOUR OF THE GUN.

  50. 50
    Peter John says:

    The Republicans want to crash the economy so that the rich can buy up the rest of the stuff they don’t already own real cheap. Ain’t nothing like another Great Depression to get the fire sale going.

  51. 51
    flukebucket says:

    @Anne Laurie:

    I believe! Please help me with my unbelief!

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