Scott Sumner  

Once again, tight money is the Achilles heel of the right

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This is beginning to sound like a broken record. A reformist right-wing government does lots of good things, trimming the size of the public sector. It promises monetary stability but delivers instability---a contractionary monetary shock.

This time it was in Sweden, where the coalition government narrowly lost an election to the left-of-center parties, mostly due to the decision of the Riksbank to ignore the advice of the only qualified person serving on their board---Lars Svensson. Instead of targeting inflation and employment, as they were legally required to do, they went off on a quixotic mission to pop imaginary "bubbles." As a result inflation fell far below target and unemployment stayed unacceptably high. One of Obama's Fed appointees wanted to do the same in the US.

Now Sweden will probably edge back toward bigger government, although thankfully not too rapidly. Because Swedes are relatively moderate and sensible, they won't swing as sharply to the left as Argentina did in 2002, or America did in 1929-33.

Perhaps someday right-wingers will learn how counterproductive it is to discredit their market reforms with tight money policies that result in high unemployment, opening the door to the left.

But we're not there yet.


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CATEGORIES: Monetary Policy




COMMENTS (10 to date)
geoih writes:

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Nick Rowe writes:

Swedish tight money was clearly a left-wing conspiracy by the Riksbank to get the right-wing party out of power.

Tom writes:

This appears to be another case where politics trump economic thought. Right-wing political groups are reluctant to lose the label of the “tight-money”/ “inflation fighter” political entity. They view this as a major selling point to the general public:Inflation is bad, we are the party that takes fighting inflation seriously!

Until the economics field weights the importance of stable NGDP Growth over keeping inflation below the common 2 or 3% mark (or 1% in Europe), politics will triumph over progress.

At the end of the day, most politicians and especially the political party bureaucracy would be unwilling to take the risk of losing that title outlined above by taking on a new economic thought; even if that thought would support many of the free market fundamentals they arguably believe in (Scotts- NGDP Futures Market).

Andrew_FL writes:

Your assessment seems overly pessimistic-at least in the short term. If they do cobble together a Social Democrat coalition, the person they will most likely name as finance minister is fairly moderate, so in terms of broad size of government a big shift seems unlikely, especially if the coalition doesn't last all that long (which also seems likely). It also seems like the new government will not really shift monetary policy. Which, if it's really so bad, will expose the new government to the same criticism as the old and should threaten its ability to hold together, too.

Glen writes:

If you really want to have some practical effect on the largely bipartisan and non-ideological desire for “hard money,” then you should at least try to educate the lay public about why it's such a bad idea.

Having a central bank print trillions of dollars of new money year after year just seems wrong to most people. Particularly when the amount of money created by the central bank roughly equals the federal budget deficit...

Scott Sumner writes:

Glen, OK, let's start the education on your point. Does the metaphor "printing money" really apply to exchange of an electronic Fed liability yielding 0.25% interest for a Treasury liability yielding less than 0.25% interest? I'd say no.

Over in the right margin of the blog "TheMoneyIllusion," I have a link to a short course on monetary economics, which may be helpful.

Ali Bertarian writes:

Regarding Scott's question to Glen, "Does the metaphor 'printing money' really apply to exchange of an electronic Fed liability yielding 0.25% interest for a Treasury liability yielding less than 0.25% interest?"

I'd say yes. None of the "money" in my checking account from employers was in the form of greenbacks. It was all 1s and 0s in a computer. It is still money.

Glen writes:

Scott, when you start talking about the exchange of “electronic liabilit[ies] yielding 0.25% interest,” you've already lost most everyone except professional economists.

And anything with nine parts isn't targeted at the lay public, either.

For starters, why is the Fed lending money? And if it is, what stops it from lending unlimited amounts? Most people only vaguely understand the Fed's role in the banking system, so they fall back onto the aphorism that “money doesn't grow on trees.” If the Fed can lend any amount of money to anyone, then either there are grave consequences to doing so or their foundational common sense is wrong.

You seem to be saying that the Fed can lend unlimited amounts of money to the federal government and the only consequences are good. If this is true, then why does anyone care about the federal deficit? Or the level of federal spending? And given that the vast majority of federal expenditures are transfer payments to individuals, why doesn't the Fed just start making direct deposits into every American's bank account?

Ognian Davchev writes:

Glen, I am with you on this one. Although Scott has said multiple times that there is no such thing as a public opinion, there seems to be something out there which resembles a public opinion and makes economists and especially politicians change their views all the time.

Economics and especially money is extremely boring and very counterintuitive to a normal person. The current intuition may possibly be changed either by making Scott's 9 part intro a mandatory subject in school and waiting for the kids to grow up or through some sort of art. Like a catchy limerick or a popular movie making the market monetarist wisdom mainstream. :)

It was art that changed the "public opinion" on gay people for example. Unfortunately good art involves people and relationships between them and there is very little of that in monetary policy. It is possible to explain the MM view with pictures or a very short animated clip however and this is a good step in making the subject more accessible for people.

Gordon writes:

I'm a member of the lay public and I went through all parts of Scott's course. If not Scott's course, then people should at least read Steven Horwitz's "An Introduction to U.S. Monetary Policy". I disagree with the free banking solution for maintaining monetary equilibrium. But at least I respect the fact that Horwitz, George Selgin, and Larry White understand monetary history and monetary economics. And I don't believe that is true of the vast majority of Austrian economists. Unfortunately, I suspect it's those who don't understand monetary economics who are influencing the decisions of conservative policy makers.

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