The Note
So a while back I expressed interest in a much more rigorous empirical investigation of the elongation of the capital structure, using input-output tables produced by the Bureau of Economic Analysis. I think Austrian arguments about the elongation of the capital structure make good sense, and I think it would be nice to confirm that in the data. I thought of a major problem with the interpretation of this sort of results recently associated with the question of identifying a "natural" or equilibrium interest rate, and therefore a "natural" capital structure. Austrians say that interest rates during the boom are too low, distorting the capital structure and setting malinvestments up for the bust. After the bust, interest rates return to "normal" and the capital structure becomes less elongated (shedding jobs in the process). Keynesians suggest that interest rates during the boom are largely fine, and we have busts when shocks make interest rates too high. You can see the fundamental disagreement between the two arguments, but the data should look the same. I think an analysis of the capital structure of the sort that I talk about in the link would still be interesting. It would be good to know more about how substantial the shifts in the capital structure are. But assuming they are significant, what would the Austrian model predict? Long capital structure in the boom, shorter in the bust. What would the Keynesian model predict? Precisely the same thing - long capital structure in the boom, shorter in the bust. The only difference is in what is considered natural. Keynesians will say the boom was natural. Austrians will say the bust was. Looking deeper into the capital structure is not going to be able to arbitrate that one.
The Question
The question I had for Austrian readers is how they explain interest rate behavior in light of deficits and monetary expansion, which Krugman talks about here. I know there was some related discussion about inflation several months back. Many Austrians had predicted runaway inflation and had to eat their words when it didn't materialize. More circumspect Austrians criticized them for making those predictions in the first place, noting the role of interest on reserves and other factors that would have prevented runaway inflation. So the inflation question seems to have been settled amongst Austrians, but I'm not aware of the Austrian story on why massive deficits and lots of money printing hasn't raised interest rates. Keynesians have a very clear answer - we're in a liquidity trap. Or more generally speaking, interest rates clear two markets - the credit market and the money market - and its possible for disequilibrium to persist in one while equilibrium persists in another. I'm not quite sure how Austrians account for this. Can they account for it? How? Just curious and figured someone might have insight.
Wednesday, March 16, 2011
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Da Answer
ReplyDeleteYou are not a scientist. Austrian macroists are not scientists. Here's how it works:
Make prediction, be right, crow.
Make prediction, be massively wrong, say that unemployment would have been much higher without the stimulus or that inflation is just around the corner.
Make a statement that sounds like a prescription, when it seems to cause bad things to happen, say that it was a description, which any idiot could figure out.
Call people "folks."
Write "um" and follow it with blather and a stupid graph.
Find work as a tax-funded soothsayer.
Science!
re: "You are not a scientist"
ReplyDeleteSure I am.
If you're not sure of the answer, it's OK to just say that or just not comment. I don't know what the answer is.
Hopefully Jonathan will have some insights.
Arnold Kling has thoughts on Krugman's point here:
ReplyDeletehttp://econlog.econlib.org/archives/2011/03/morning_crankin.html
It's not exactly an "Austrian" answer, and it's something DeLong says a lot, but it may be sufficient.
I very easily could be missing something here, but why couldn't the low interest rates be mostly attributable to the Fed's attempts to keep interest rates low? All of the monetary injections are clearly putting downward pressure on short-term and long-term rates, so why isn't that the answer?
ReplyDeleteIt seems like in the absence of the Fed's monetary policy, interest rates probably would rise.
Okay, so now that my naive crack at the question is out of the way, what elephant in the room did I miss?
Ah, I didn't read the part of the question where you specifically mentioned "lots of money printing." >.<
ReplyDeleteI think one of the reasons many Austrians mistakenly predicted hyperinflation was because they failed to take into account that the recession would hit other major economies just as hard, if not harder. Peter Schiff was predicting that the dollar would collapse because investors would flee to the euro, or the yuan. But the Euro-zone was hit harder than we were (once the problems with the PIIGS became apparent, at least), and China has its own problems with inflationary tendencies and a currency that will, eventually, appreciate relative to other currencies and put a brake on exports. Had other parts of the world avoided the global recession, maybe the dollar would have rapidly and precipitously declined?
So maybe interest rates aren't rising even with the massive money printing and deficit spending because, relative to the alternatives, U.S. debt is still the safest and most reliable. If there had been a better alternative, we might not be having this conversation today.
Dunno if that makes more sense. Kinda got that off the top of my head.