Arnold Kling  

Evening Commentary

Another Speaking Opportunity... I Challenge Richard Florida...

Tyler Cowen writes,

In my opinion the sophisticated Keynesian view is still that the stimulus won't work.

Great, great sentence.

Has Jeff Frankel joined the ranks of the deranged? What he writes strikes me as not terribly different from what I said in my talk.

I want to say that I wish Jeff Frankel were in the Administration, but actually I don't think that the problem is a lack of economic talent. With all of the economic luminaries President Obama brought on board, he outsourced his key economic policy to the Democratic Congressional leadership. I repeat that the bar of having 75 percent of the stimulus kick in before 2011 is absurdly low, not to mention rather inconsistent with the high pressure to pass the bill now-now. A better bar would be for 75 percent of the stimulus to kick in before 2010, and none of it to kick in after 2010. Yes, that might prejudice things in favor of tax cuts rather than spending cuts, but so be it. I can remember when Democrats' idea of a clever stimulus was the investment tax credit. And whatever your views of the relative size of the spending multiplier and the tax cut multiplier, you have to admit that most Keynesian models would show more stimulus from a tax cut in 2009 than a spending increase in 2011.

David Henderson asks readers to name their favorite liberal economist. I've only recently come across Simon Johnson (is he a liberal in the contemporary sense? I think so, but I can't be sure). He is just darn nice. So is Jeff Frankel, for that matter. Simon Johnson's aversion to bank bailouts is one that I share. It seems that, unlike the stimulus bill, the bank bailout does not sort economists by ideological outlook.

The Washington Post reviews The Lords of Finance, focusing on the role of the gold standard as a policy blunder contributing to the Great Depression. As I've said, a great swath of economists (starting with Milton Friedman and moving left) takes this view.

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COMMENTS (3 to date)
MattYoung writes:

He stimulus, though headed in one direction, will at least be veered from bad targets by the natural market forces of society. We will adapt it, somewhat. So if we expect the distribution of elasticities from government to be at odds by some percentage from the likely, then it is will likely to be less deranged as it gets rationalized.

fundamentalist writes:

“Liaquat Ahamed notes in Lords of Finance, all the gold mined in history up to 1914 "was barely enough to fill a modest two-story town house." There simply was not enough of it to fund a global conflict or to allow economic recovery afterward.”

That statement is so ridiculous that I can’t understand anyone taking it seriously. The period from 1870 until WWI saw the greatest expansion of commerce and wealth worldwide in the history of mankind and the amount of gold available at the time was clearly sufficient. How is it even remotely possible that after WWI with reduced commerce the amount of gold was suddenly insufficient? That is simply nonsense!

“That role should have fallen to John Maynard Keynes, one of the few heroes of Ahamed's book. Keynes called the gold standard a "barbarous relic" and clearly explained its limits; in 1925…”

Keynes clearly didn’t understand monetary theory as Hayek explains in “Pure Theory of Capital.” That’s why Keyne’s “General Theory” has so little to say about money. And the problem persists today. Mainstream econ has such an emaciated theory of money that economists simply cannot understand what is happening in the current crisis. All of the advances in monetary theory made during the 1920’s and early 30’s Keynes didn’t understand and so ignored it. Mainstream economics has followed suit ever since. Milton Friedman made slight progress with monetary theory, but Wicksell, Hayek and Mises forgot more than Friedman ever knew about money.

The truth about the interwar years is that no country in the world was on a gold standard, not even the US. A gold standard limits the amount of money in circulation to the amount of gold in the country. The US never limited the money supply but printed paper money and expanded credit at will with no regard whatsoever for the amount of gold. The US and Britain pretended to be on the gold standard, but it was a hypocritical lie. Every other country was on the gold-exchange standard in which they would hold “hard” currencies like the dollar and pound and use them to back the issue of their own currencies.

No one but the US and Britain pretended to be on a gold standard and that was a lie. The US and Britain printed as many paper dollars as they wanted and many of them would end up in foreign central banks as reserves for their own currency, just as has happened in the world over the past 40 years. As the US and Britain flooded the world with paper dollars and pounds, so other countries could use their increased reserves to flood their own countries with their own paper money. The result was enormous inflation worldwide. (China has used the inflated US dollar as reserves for inflating its money supply.) The only time the US would get concerned was when they inflated more than another country and gold began to leave, but as long as every country inflated at the same rate, gold would remain put. A major cause of the Great Depression was the unraveling of the mountains of debt and inflated money supplies built up during the 1920’s, just as the cause of today’s crisis is the huge debt and inflation of the 1990’s and the previous eight years.

At least since the days of John Law and the Mississippi Bubble of 1720, bankers and businessmen have claimed that growing commerce must have a growing money supply. Behind that fallacy is the stupid notion that rising prices are an indicator of a healthy economy. History has proven both concepts to be false, yet mainstream economics still peddles that old snake oil as a cure for everything that ails you. If they had a sound theory of money, they would understand that the effects of boosting the money supply are temporary and unsustainable. Like getting drunk, the hangover follows very quickly.

Depressions are economic hangovers from binges of monetary inflation. They always have been and always will be. The long list of causes of crises that mainstream econ tack up after each crisis are not causes at all, but symptoms and effects of previous monetary inflation.

SheetWise writes:

This argument is embodied in the straw man named "The Economy". Liberal commentators see The Economy abstractly, not personally.

While Conservatives view the government as thieves raiding our stores, Liberals view the government as Robin Hood -- taking from the rich and giving to the poor.

Your prior view, that Robin Hood should take less -- and your current view, that Robin Hood should take nothing -- are being presented by your opponents as contradictory positions.

I see it as enlightenment. Then and now.

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