- First, Unlearningecon critiques exogenous money theories. As is often the case, I think he's right on a lot of points, but overstates the argument against the mainstream. I've always thought about the money multiplier as an upper bound determinant of the money supply, and I've always thought that's what everybody thought. Money supply is endogenously determined the actual interests of banks. It seems to me you can still have exogenous policy levers in an endogenous system, though.
- Recently I've criticized Scott Sumner for missing the point on fiscal policy and unnecessarily turning friends into enemies. He doesn't seem to get that the New Old Keynesian point is that in a liquidity trap, when monetary policy works largely through expectations, fiscal policy helps monetary policy become more effective than it otherwise would be (this is the old Krugman argument). Noah Smith makes a similar point here, arguing that simple counter-cyclical fiscal policy that dampens AD swings can reduce the cost of monetary policy.
- Lars Christensen cites a new paper by Boettke and Smith on robust political economy. As regular readers know, I think institutional robustness is very important, but I also think a lot of the discussions of institutional robustness have been pretty weak. One of the interesting things to me is that people who talk about robustness often claim that their opponents are idealizing an institution, when they really aren't! When there's not an appreciation of that point you have people like Mark Pennington advocating libertarianism as a solution to the unjustified idealization of people unable to really answer questions from people like me who reject libertarianism precisely because I don't think men are angels. For people like us, the issue has never been whether the Fed can be made to do "the right thing". Of course it can't. No human institution can. We have reams of historical evidence suggesting that it can't. What we say is that (1.) if the Fed or the fiscal authority for that matter were to move in X direction things would be better than worse, and (2.) removing fiscal and monetary authority to do X is unambiguously worse - half-assed is better than full retreat. You might model the fiscal or monetary authority "doing the right thing" to demonstrate point (1.), but this hardly suggests you think they will do the right thing. Again, I'd point back to Krugman (1998) which I'm really glad I read again the other week, given the flurry of discussion on monetary and fiscal stabilization recently. His whole point is to outline a policy that could be beneficial when the Fed isn't run by angels or supermen. Until the "robustness" crowd recognizes that this is what we're saying, I don't see how far these arguments can get. We know men are not angels. We never said they were. What we're saying is that half-assed pursuit of an optimal policy by non-angels will yield better results than abdication of policy-making altogether by non-angels. That doesn't mean there aren't smart institutional reforms. In the political arena, we decentralize, democratize, and constitutionally restrain precisely because these things help when you deal with non-angels. In the monetary arena, similar reforms will also help. But none of the answers that we've given (to my knowledge - correct me if I'm wrong) rely on men being angels. That would obviously be a non-starter, which is precisely why nobody assumes it.
4 hours ago