Scott Sumner  

Still no free lunch

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Here's Matt Yglesias:


Here's the thing about the federal government -- it can print dollars, a highly profitable activity. You can't print dollars. I can't print dollars. Vox Media can't print dollars. The state of Tennessee can't print dollars. These are the kind of entities that need to worry about whether their activities generate more dollars than they cost, because they need to worry about lack of dollars. Of course there are lots of things to worry about with loan guarantees and bailouts and other things, but profits and losses is never the issue. The government always could make arbitrary amounts of profit if it wasn't to.

(I think he meant, "wanted to")

I often agree with Yglesias on monetary policy, but I think this is the wrong way to think about cost. During normal times the Federal government raises enough revenue from printing money to pay for roughly 1% of its spending. The Fed's profit has been higher in recent years, but that's probably a temporary blip due to the heavy purchases of securities in the QE programs.

Yglesias is right that there is a sort of something for nothing quality about printing money. Even a government that targeted inflation at zero would make substantial profits on currency creation, if the real economy were expanding. But the key point is that this profit doesn't become larger just because the fiscal authorities spend more money on a particular project. The central bank should and will target some sort of macro variable, such as inflation or NGDP. If they do so then the money printing profits are determined by the money creation needed to hit that target. Since seignorage only pays for one percent of spending, the cost of any additional spending, at the margin, is related to the marginal cost of raising taxes through ordinary methods, which involve deadweight costs of reduced economic efficiency.

One of the costs of the US tax regime is that Americans have become about as popular with overseas financial institutions as the Ebola virus. Many are sending letters to American investors telling them that they no longer want to do business with Americans, and that their accounts will be terminated. International business publications like The Economist are aghast at the way the Treasury tries to over-regulate financial activities that occur in other countries.

Recently I've been working with some people in New Zealand, trying to create a nominal GDP futures market. (You can read about it here.) I was reminded of the overreach of our Treasury when Eric Crampton sent me the following note, which he allowed me to reprint:

Even if you could convince the Fed that NZ's stock market regulators view iPredict as an exempt futures exchange rather than as a gambling platform, pointing to the regulation in The Gazette that allows iPredict to operate, then there'd be no more problem with Americans trading on it than there is with their trading on foreign stock exchanges or their having foreign bank accounts. By which I mean, it would be impossible because American "know your customer" anti money laundering nonsense would immediately be applied to iPredict and we'd still be in a spot where it's too dangerous to let Americans trade. Sorry, Scott, you just don't live in a free country and it is dangerous to trade with people from America.

When I travel I'm hearing the same thing from people all over the world that work in the financial sector.


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CATEGORIES: Finance , Monetary Policy




COMMENTS (9 to date)
ChrisA writes:

Scott
Its even worse than you think. I have had banks based in the US (but with overseas branches) refuse to do business with me overseas because I was once a US resident (not green card). I have not actually been living in the US since 2004. It is pretty annoying when you have had a bank account for 20 years, never an issue, and then be told with 3 months notice to close the account. And no appeal possible.

Felipe writes:

To be fair to Yglesias, he does say there is no free lunch:

The problem with the penny, if there is a problem with the penny, is that it's a waste of zinc, not a waste of money.

...
The question is something like, did bolstering the financial system do lots of social good by keeping credit flowing or did it do lots of social harm by preventing a corrupt and decadent banking industry from burning to the ground.

I think the point he is making is that we should think about government programs in terms of real resources being put to use. Are they in good use in a bailout? Or would they be better used elsewhere?

I agree with him that for most (if not all) government programs, profit and loss are irrelevant. The government receives income from other sources, not its (spending) programs.

foosion writes:

"know your customer" anti money laundering nonsense

The driving force behind this is the war on terror (or at least that's the justification), which has cost many more American lives than it has saved (and vastly more foreign lives), cost untold hours and disruption, and wasted trillions of dollars.

The AML nonsense is yet more collateral damage.

Barry "The Economy" Soetoro writes:

It is disturbing that highly educated economists think there is a "something for nothing quality about printing money." It is not for nothing, it is just not seen as easily, but it is no doubt theft from those that hold dollars. There is no way around it and it doesn't matter if the economy is growing or not. It is stealing purchasing power and it is not free.

Scott Sumner writes:

ChrisA and Foosion, Both very good points.

Felipe, Well maybe I misread him, but I think others would have as well. There are people on the left claiming that printing money is a free lunch. If he wants to claim that bailouts are not costly because they prevent deeper depressions, that's one thing. It's a defensible argument, although I'm still not keen on bailouts. But that really has nothing to do with the Federal government's ability to print money at zero cost. The argument you discuss is more like a Keynesian version of the Laffer Curve.

Mike Sproul writes:

"You can't print dollars. I can't print dollars."

Yes I can. I do it all the time. I say to my mechanic: "Sorry I'm a little short this week. Here's my paper IOU for $50 to cover that oil change." My mechanic pays that IOU to one of his workers, who rents a house from me and knows I will accept it in payment of rent. (The government does the same thing when it prints dollars and accepts them for taxes.) The worker might also pay it to the grocer, who knows that our mutual mechanic will accept it for oil changes.

Walmart does the same thing when it issues gift certificates. Their money circulates far and wide, while mine only circulates within my neighborhood.

Of course, Walmart and I both recognize our IOU's as our liability, and we would not be fooled by people claiming that we earn a free lunch by issuing money. We'd also never bother to follow a NGDP targeting rule when issuing our money.

Andrew_FL writes:

Scarcity? What scarcity? Matt sees no scarcity, after all an endless amount of dollars can be created!

What do you mean that a profit is something different than a piece of green paper? Preposterous!

Good old fashioned monetary crankery at it's finest.

Kevin H writes:

If you're a free banking type, you should view the opportunity cost of the government printing more money vs allowing banks to issue banknotes. So even government seignorage isn't a free lunch from this point of view, because when demand for money increases banks could meet the demand by printing banknotes rather than the government doing so, and bank investments thereby financed could perhaps be more productive than government investment.

Scott Sumner writes:

Barry, That right, someone must pay.

Mike, Yes, but I think he meant "you can't print generally accepted US currency notes." But yes, you can print IOUs that are less widely accepted.

Kevin, That's actually a very complex issue, which is widely debated. There's definitely some truth to that, but the fixed nominal price of currency could lead to socially wasteful non-price competition in currency with free banking.

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