To QE or not to QE

Steve Horwitz, one of my favorite contemporary Austrian economists – and he would be likely be one of them even if there were not such a dearth of Austrian economists to plausibly choose from — published an opinion piece in US News and World Report opposing another round of quantitative easing. His first paragraph focuses on the size of the Fed balance sheet and the (unenumerated) “new and unprecedented” powers that the Fed has accumulated, as if the size of the Fed balance sheet were somehow logically related to its accumulation of those new and unprecedented powers. But the size of the Fed’s balance sheet and the extent of the powers that it is exercising are not really the nub of Horwitz’s argument; it is the prelude to an argument that begins in the next paragraph

[P]revious rounds of quantitative easing have done little . . . to generate recovery. Of course it’s . . . possible that it’s because it wasn’t enough, but a tripling of the Fed’s balance sheet hardly seems like an insufficient attempt at monetary stimulus.

In other words, if QE hasn’t worked till now, why should we think that another round will be any more successful? But if the objection is simply that QE doesn’t matter, one might well respond that, in that case, there also doesn’t seem to be much harm in trying.

Horwitz then turns to the argument that some proponents (notably Market Monetarists) of additional QE have been making, which is that for about two decades the level of aggregate nominal spending in the economy or nominal gross domestic product (NGDP) was growing at an annual rate in the neighborhood of 5%.  But since the 2008-09 downturn, the economy has fallen way below that growth path, so that the job of monetary policy is to bring the economy at least part of the way back to that path, instead of allowing it to lag farther and farther behind its former growth path. Horwitz raises the following objection to this argument.

[M]ost economic theories explaining why an insufficient money supply would lead to recession depend upon “stickiness” in prices and wages. Those same theories also indicate that, after a sufficient amount of time, people will adjust to that stickiness in prices and wages and the money supply will be sufficient again.

If that adjustment hasn’t taken place in almost four years, then perhaps it is not this “stickiness” that could perhaps be overcome by more monetary stimulus, but rather real resource misallocations that are causing delaying recovery. Those real misallocations cannot be fixed by more money. Instead, we need less regulation and more freedom for entrepreneurs to reallocate resources away from the mistakes of the boom, to where they are most valuable now.

I have three problems with this dismissal of monetary stimulus. First, Horwitz takes it as self-evident that a tripling of the Fed’s balance sheet is the equivalent of monetary stimulus. But that of course simply presumes that the demand of the public to hold the monetary base has not increased as fast or faster than the monetary base has increased. In fact, the slowdown in the growth of NGDP and inflation in the last four years suggests that the public has been more than willing to hold all the additional currency and reserves (the constituents of the monetary base) that the Fed has created. If so, there has been no effective monetary stimulus. But isn’t it unusual for the demand for the monetary base to have increased so much in so short a time? Yes, it certainly is unusual, but not unprecedented.  In the Great Depression there was a huge increase in the demand to hold currency and bank reserves, and voices were then raised warning of the inflationary implications of rapidly increasing the monetary base. In retrospect, almost everyone (with the exception of some fanatical Austrian economists who tend to regard Professor Horwitz as dangerously tolerant of mainstream economics) now views the voices that were warning of inflation in the 1930s with the same astonishment as Ralph Hawtrey expressed when he compared such warnings to someone “crying fire, fire in Noah’s flood.”

Second, Horwitz may be right that most economic theories explaining why an insufficient money supply can cause unemployment rely on some form of price stickiness to explain why market price adjustments can’t do the job without monetary expansion. But price stickiness is a very vague and imprecise term covering a lot of different, and possibly conflicting, interpretations. Horwitz’s point seems to be something like the following: “OK, I’ll grant you that prices and wages don’t adjust quickly enough to restore full employment immediately, but why should four years not be enough time to get wages and prices back into proper alignment?” That objection presumes that there is a unique equilibrium structure of wages and prices, and that price adjustments move the economy, however slowly, toward that equilibrium. But that is a mistaken view of economic equilibrium, which, in the real world, depends not only on price adjustments, but on price expectations. Unless price expectations are in equilibrium, price adjustments, whether rapid or slow, cannot guarantee that economic equilibrium will be reached.  The problem is that there is no economic mechanism that ensures the compatibility of the price expectations held by different economic agents, by workers and by employers.  This proposition about the necessary conditions for economic equilibrium should not be surprising to Horwitz, inasmuch as it was set out about 75 years ago in a classic article by one of his (and my) heroes, F. A. Hayek. If the equilibrium set of price expectations implies an expected inflation rate over the next two to five years greater than the 1.5% it is now generally estimated to be, then the economy can’t move toward equilibrium unless inflation and inflation expectations are raised significantly.

Third, although Horwitz finds it implausible that price stickiness could account for the failure to achieve a robust recovery, he is confident that “less regulation and more freedom for entrepreneurs to reallocate resources away from the mistakes of the boom, to where they are most valuable now” would produce such a recovery, and quickly. But he offers no reason or evidence to justify a supposition that the regulatory burden is greater, and entrepreneurial freedom less, today than it was in previous recoveries. To me that seems like throwing red meat to the ideologues, not the sort of reasoned argument that I would have expected from Horwitz.

HT:  Lars Christensen

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32 Responses to “To QE or not to QE”


  1. 1 Greg Ransom July 22, 2012 at 1:58 pm

    Two things that are different re sticky prices:

    Gov worker control of cities, states & counties and with it control over government worker compensation — which has led to massive government worker compensation increases and declining government worker employment.

    Minimum wage price controls increasing dramatically in the teeth of high unemployment and declining inflation.

    These are large and significant factors.

    And there are dozens of others.

  2. 2 geerussell July 22, 2012 at 2:05 pm

    ” First, Horwitz takes it as self-evident that a tripling of the Fed’s balance sheet is the equivalent of monetary stimulus.”

    The balance sheet is a very useful framing for QE. You mentioned what happens on the Fed’s balance sheet but the view from the non-Fed balance sheet also bears consideration.

    From the non-Fed balance sheet point of view, there is no expansion or contraction of the balance sheet. There is a portfolio change, the asset mix is different afterwards but no net change in assets-liabilities.

    To predict a stimulative effect based on portfolio change, I would have to believe that the current mix of assets was somehow an impediment to spending. Maybe the assets weren’t liquid enough and more liquidity will unfreeze economic activity. Or that interest rates were burdensome and placing downward pressure on the rate by purchasing the asset would remove a roadblock to spending.

    Is this an argument that can be credibly made in the current environment? If not, perhaps it is reasonable to predict QE might amount to a whole lot of nothing without even having to touch on price stickiness or misallocations at all.

  3. 3 Lee Kelly July 22, 2012 at 3:06 pm

    There are several issues that occur to me.

    (1) Horwitz is right to suggest that persistently high unemployment and economic underperformance does pose a problem for market monetarists. The longer such a situation persists, the more difficult it will be to explain why the real supply of money is not rising to meet demand. At some point, market monetarists may need to just acknowledge that something else is going on.

    (2) Horwitz’s preferred explanation for the bad economy suffers the exact same problem. One might incredulously ask how, after four years, the misallocation of resources has yet to be corrected? The longer the situation persists, the more difficult it is to explain why the allocation of resources appears so intransigent. At some point, Austrians like Horwitz may need to accept that something more is going on.

    (3) Horwitz’s preferred explanation to account for such intransigence is too much regulation and barriers to the entrepreneurial reallocate resources. But are things really that much worse today than, for example they were after the dot-com bubble? This explanation is really no more satisfying than just saying that prices are really very much more sticky than anyone anticipated.

    (4) Market monetarists are generally conflicted about further quantitative easing. We generally desire easier monetary policy, but would prefer it be achieved by expectations management. Quantitative easing is ad hoc and temporary. Support for quantitative easing is normally qualified: it may be better than nothing, but not much better. Ideally, and as counterintuitive as it sounds, the Fed would shrink its balance sheet by taking an easier stance on monetary policy.

    (5) Data shown by George Selgin on the Free Banking Blog actually indicates that prices are not just sticky, but have inertia. They continued to rise even when nominal GDP started falling through the floor. Contrary to Horwitz’s claim, nominal wages, at least, have not stagnated nearly enough to achieve monetary equilibrium. In other words, like you say, inflation expectations are sticky too, for whatever reason.

  4. 4 Greg Hill July 22, 2012 at 6:35 pm

    David, since you mention Hayek’s classic piece, I’m hoping you won’t mind a little digression on the subject of equilibrium. In effect, Hayek defined equilibrium as a state of affairs in which everyone’s plans and expectations are mutually consistent. In effect, everyone knows what everyone else is going to do.

    Two quick points: 1) these plans and expectations range over more than just prices; and 2) Hayek’s conception of equilibrium shares a family resemblance with rational expectations equilibrium insofar as everyone’s expectations regarding prices, at least, are the same.

    Both of these equilibrium notions are misleading as a guide to what’s going on because market participants are guided by a variety of “theories,” rules of thumb, heuristics, etc., which give rise to diverse and incompatible expectations. There are “bulls” and “bears,” to mention just two such camps, and without this divergence of opinion, you wouldn’t see much trading in stocks.

    Will more QE be helpful? I don’t think you can get a good answer to this question if you assume that all market participants share the same set of expectations . . . because they don’t.

  5. 5 Max July 22, 2012 at 7:05 pm

    Horwitz’s inflation fears (“the current enormous supply of reserves sitting in banks is an inflationary time bomb”) are unfounded. Since the Fed is paying interest on reserves (since 2008), even a permanent expansion of reserves is not inflationary. The reserves are just part of the public debt.

    Aside: and a more expensive funding source than bonds, since the Fed is perversely paying an above market rate (0.25% vs <0.1% for bonds).

  6. 6 Greg Ranosm July 22, 2012 at 10:58 pm

    “Both of these equilibrium notions are misleading as a guide to what’s going”

    Greg Hill must know that Hayek did not suggest that that the pure logic / math construct of “equilibrium” limned all of the elements of the order of by-and-large coordinated & coordinating plans found in the actual economy.

    Indeed, Hayek directly and repeatedly said exactly the opposite in the clearest possible fashion.

  7. 7 Greg Ranosm July 22, 2012 at 11:02 pm

    It needs be emphasized.

    Hayek’s notion of “expectations” was not restricted to pure logic / math constructions of “equilibrium’.

    And any account of Hayek needs to engage the fact that Hayek used pure logic / math constructs for multiply purposes, and in alternative ways to help bring insight to the real world and to the _non-logical_/_non-formal-math causal elements of the real world.

    If you muddle up these core distinctions in Hayek, you don’t engage Hayek, you misreport it & botch it up.

  8. 8 Benjamin Cole July 23, 2012 at 5:30 am

    If QE did nothing, then let’s keep doing it and wipe out national debt.

    Also, the economy might have been worse without QE.

    In Japan, QE was associated with that nation’s longest post-war expansion and no inflation (2001-6). It was slow growth, but not inflationary.

    And the “structural impediments are causing recession” argument is very weak. Are there less or more structural impediments than five years ago, across, local, state and federal levels? No one knows.

    Horwitz’ commentary is wimpier than Jack Armstrong’s 90-pound weakling.

  9. 9 Greg Ransom July 23, 2012 at 8:03 am

    Note well.

    If state, local, and federal employment followed the same trend from 2008 through today as it did from 2005-2008, the unemployment rate would be 6.5% instead of 8.2%.

  10. 10 Greg Ransom July 23, 2012 at 10:34 am

    So David, what about the massive i& unsustainable increases in government spending & worker compensation at the city, county & state level, and the resulting massive cutback in employment but _not_ in government worker compensation?

    And what about the statistics which show this compensation issue is on a par with construction unemployment at the heart of the current unemployment situation?

    It seems to me there is an incontrovertible & unprecedented ‘sticky wage’ factor never seen before — the rise of school district, city, county & state government controlled by what are effectively agents of the unions, who vote to increase and sustain massive compensation & future compensation promises, even when this requires massive cutting of the level of government services and current government worker employment.

  11. 11 David Glasner July 23, 2012 at 4:17 pm

    Greg, I didn’t mean to suggest that there are no sticky prices and wages or that they don’t matter. My point was just that sticky wages and prices, in the sense of exogenous impediments to price adjustment, are not necessary to explain cyclical unemployment. So I accept that the examples that you are citing may well have contributed to the rise and persistence of unemployment. On the other hand, the minimum wage in real terms or as a fraction of the median wage is still comparatively low by historical standards, and the role of unions in wage setting is greatly diminished, so I am skeptical about how much explanatory power that factor has in explaining current high rates of unemployment.

    geerussell, I don’t think about private-sector balance sheet adjustments. I think in terms of inflation and expected inflation, and I think we need more of both to get a recovery going, and I think that the Fed is perfectly capable of providing more of both if it decides that is what it wants to do and communicates that intention.

    Lee, I don’t think that our problem now is an excess demand for money. I think that we to depress the real rate of interest sufficiently to induce greater spending by the private sector. That will trigger a self-sustaining recovery with rising real and nominal interest rates. I agree with your second and third points, and I actually meant to make those points explicitly myself but didn’t get around to it, so thanks for making them for me. I agree with your fourth point also, and I think that the inertia that you identify is related to the kind of expectational issues I have addressed in some of my recent posts.

    Greg Hill, I’m always happy to discuss that piece. It’s very profound and I learn from it every time I reread it. I will just quibble slightly with your characterization of what a Hayekian equilibrium means. It’s not that everyone knows what everyone is going to do, it’s just that everyone happens to anticipate correctly what everyone is going to do. The equilibrium is contingent, not necessary. I agree with your points. But the difference between Hayek and rational expectations is what I just said, there is no logical necessity or even a theoretical tendency in Hayek toward such an equilibrium. So the way to think about Hayek’s equilibrium is not as a state towards which the economy is tending but as an ideal benchmark in terms of which to gauge how an actual economy is operating. And I agree with your last point that in a Hayekian equilibrium it would not make sense to talk about QE.

    Max, I agree.

    Greg Ransom, I think I agree.

    Benjamin, I would hate to think of where this economy would be if there had been no QE.

    Greg Ransom, Your point about the 6.5% unemployment rate sounds like something Paul Krugman would say. I don’t disagree that paring down state and local government expenditures and employee compensation may be wise, but is it wise to cut back as precipitously as your own figure suggest has been the case?

  12. 12 Greg Ransom July 23, 2012 at 6:31 pm

    David, I was quoting someone else & forgot the quotation marks and reference. The idea is that simple addition / subtraction supposedly gets you that figure. Of course its artificial.

    The point is merely that the gov worker numbers are significant as a percentage of the work force / the unemployment numbers.

    “Greg Ransom, Your point about the 6.5% unemployment rate sounds like something Paul Krugman would say.”

  13. 13 Greg Ransom July 23, 2012 at 6:33 pm

    David, I’m not arguing whether “paring down” is wise or unwise.

    In terms of revenue & expenditure, across California it is increasingly non-optional. See Stockton, San Bernardino etc. The state government is next.

  14. 14 Greg Ransom July 23, 2012 at 6:35 pm

    The role of unions in wage setting in the domain I am discussing — gov employment — is greatly, massively larger than it ever was in the past.

  15. 15 Greg Ransom July 23, 2012 at 6:55 pm

    David, at the beginning of the recession the minimum wage was $5.15 and within two years it was $7.25, in the midst of the greatest deflation since the 1930s. If you factor in deflation that’s equivalent to a 50% wage spike.

    We haven’t seen a minimum wage spike anything like this since 1950.

    In California the minimum wage in now $8.00 — ie in the state with the largest number of unemployed in America.

  16. 16 Greg Ransom July 23, 2012 at 7:40 pm

    The minimium wage in Washington State is $9.00, in Oregon $8.80, in Illinois $8.25 etc, etc.

    Many cities have minimum wage or ‘living wage’ rates one or two dollars more than the state or Federal minimum wage. In San Francisco it’s $10.24 in Los Angeles it is $11.84 etc, etc, etc, etc.

    You can’t any more just look at the Federal minimum wage to know the minimum wage rate for much of the population of the country.

    If you are thinking of the Federal minimum as the minimum wage rate for most of the country you are living a past that no longer exists.

  17. 17 dwb July 24, 2012 at 10:58 am

    nominal debt contracts are effectively sticky prices for housing, and seeing as how we have not worked out (via foreclosure etc) all of them we have not see a recovery yet. It takes 700 days to get a house through the “foreclosure pipeline.”

    However, in places where we are nearing the *end* of the process like NV, AZ, we are in fact seeing a pick up in homebuilding (not all for new sales: some for rentals, etc). And we are also seeing signs of house price gains (tho small).

    So is it a coincidence that as we near the end of the “workout” process for a bunch (like, 8 million) nominal debt contracts we also start to see a pickup in housing construction? 18 months from now when construction employment has also picked up will we still see that at a coincidence?

    You know, in 5 years, the over-20 population grows about 15 million, which requires about 7.5 million new places for couples to live…

  18. 18 David Glasner July 25, 2012 at 9:04 am

    Greg, Even I don’t claim that there has been 10% deflation since 2008, so I don’t exactly get how you come up with a 50% increase in the federal minimum wage, which, in relation to median wages, is not that high by historical standards, or at least that is my impression. But I take your point that a number of states have been aggressively raising their minimum wages. Still I don’t know how to measure the effect of state increases in minimum wage relative to the federal minimum wage. Perhaps some labor friendly labor economist out there would like to comment on that. I also agree that the timing of these increases has been really bad.

    dwb, I agree that we are gradually working our way through the foreclosure backlog, which is a good sign for the housing market. But an overall recovery does not necessarily hinge on a recovery of the housing market, and an overall recovery would have helped speed the recovery in housing.

  19. 19 Greg Ransom July 25, 2012 at 9:11 pm

    When you look at the education level of a large percentage of the work force in Los Angeles — the city has a 45% high school drop out rate & much of the immigrant population has less than an 8th grade education — and look at the declining number of unskilled jobs available .. then going from something close to $6 an hour to near $12 an hour in a very short period is rather significant.

    The unemployment rate in LA is still over 10% and recently was close to 13%.

    There are 10 million people in LA county, more than in most states.

    There were over 2 1/4 million people unemployed in California in 2010.

    (My “50%” figure was a crude rounding — there is no way to give a precise number. It was an over 40% increase and over 45% depending on how you pretend to measure deflation / inflation. Historically large & historically unusual in the midst of a recession.)

  20. 20 Greg Ransom July 29, 2012 at 9:02 pm

    The government has also created “sticky wages” in the automobile & finance industries — dedicating tens of billions of dollars to propping up compensation in those industries via TARP, bailouts, the Federal budget, and via the Federal Reserve.

    GM wages are tens of dollars higher than they would have been without the bailouts — tens of dollars an hour higher than their industry rivals.

    Without government, compensation in these dominant US industries would no have adjusted in ways that they haven’t, they are sticky because of governments counter-cyclical policies & because of the corrupt nature of our contemporary political economy.

  21. 21 David Glasner July 31, 2012 at 9:45 am

    Greg, You are getting a bit carried away (which is not at all like you). In the context of the 2008-09 financial crisis, allowing the failure of GM could very well have fed the downward spiral then under way. In that environment, the dangers of allowing a failure when there was no mechanism in place for preventing the dismemberment of the GM assets and displacement of the GM labor force and supply chain could have been greater than the cost of partially maintaining excess GM labor costs. In a crisis, you sometimes have to take measures that you wouldn’t take otherwise. Hayek understood that, too.

  22. 22 Greg Ransom August 1, 2012 at 11:32 am

    You’ve got the issue wrong, David.

    Obama circumvented the law to prop up UAW wages and benefits, putting the UAW to the head of the line, contrary to bankruptcy law.

    GM did fail. We are talking about how the failure was managed.

    There are lots of articles on this. It’s not a matter of debate.

    There were ways to manage the bankruptcy that didn’t violate the rule of law & didn’t put the UAW at the head of the line.

    The GM failure was managed to protect the GM/UAW wage structure — which very well may not be sustainable even with tens of billions of taxpayer subsidy.

    I’m surprised that you don’t know the basics of this and are dodging the central point — which remains true — the government created massive sticky wages in several of our largest sectors.

    “Greg, You are getting a bit carried away (which is not at all like you). In the context of the 2008-09 financial crisis, allowing the failure of GM could very well have fed the downward spiral then under way.”

  23. 23 Greg Ransom August 2, 2012 at 8:03 am

    David perhaps I missed your argument.

    You seem to be arguing that government measures to achieve and sustain sticky wages are required to achieve economic recovery.

    Is that the argument?

  24. 24 David Glasner August 4, 2012 at 8:36 pm

    Greg, I think the term “sticky wages” is problematic, because there are many causes for such stickiness, and not all these kinds of sticky wages can be attributed to government intervention in or interference with the operation of the price mechanism. I am not necessarily defending the specific measures by which GM and Chrysler were bailed out. But I believe that, under the circumstances, a lengthy bankruptcy process in which competing claims had to be litigated in the courts could have had serious harmful repercussions, so that legislation to short-circuit the process was justified.

    I am not sure what you mean by “government measures to achieve and sustain sticky wages are required to achieve economic recovery.” The point is to ensure that wage expectations not be disappointed by macroeconomic policies that cause actual wages to fall short of expected wages. In most circumstances, measures to ensure that average wage expectations are realized do not involve measures to save particular firms from bankruptcy. In 2009, I think there was a danger that a collapse of the US domestic auto industry could have exacerbated a general collapse of confidence that would have fed a general collapse of aggregate demand.

  25. 25 Blue cat August 7, 2012 at 9:52 am

    Dr. Glasner, I just discovered your blog by following a pointer from today’s Krugman blog. I enjoy what you have written — especially your piece on Art Laffer. I’m making this comment here, though, because I would like to know what you think of the following idea.

    Authorize the Fed to add a surcharge rebate to all commercial transactions. The rebate would be used when the economy needs help (like now); the surcharge would be used to combat inflation when necessary. I’ve added 1000 more words of explanation here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1977688

    Thanks for your comments.

  26. 26 Mark Stamatakos August 8, 2012 at 8:24 pm

    I’m just an average Joe here, and these discussions are way over my head.
    I read and try to understand economics but it’s beyond me. I am fascinated by it though, and from what I can understand I just don’t get how following Keynesian economics makes any sense. I would appreciate some feedback from those who know more if it is possible…

    Here are my observations I have as a typical American in the middle class.

    As a saver, I have seen the value of my money shrink. They say inflation has been fairly “steady” despite this economic crisis, but gasoline, education costs, health insurance, and of course mortgages are/were all rising way faster than my wages could keep up (by the way, my wages have been stagnant the last four years). So my savings, my wages, and my net value are worth less and less every year.

    Does pumping trillions of dollars into circulation (or from what I have read, into banks all around the world and not consumers) from the Fed in these QE stimulus packages really do much of anything OTHER than devalue the dollar??? Don’t we have bankruptcy laws that were created to deal with this housing mess? Are we that afraid to face the music?

    What is the real damage of the U.S. running deficits, quite steadily, since Reagan? At what point will the Fed Gov. be forced to raise taxes or be overwhelmed with entitlement costs/interest on the debt. What would happen to me if I behaved this way financially? DO ANY Western governments run their economy without deficit spending? If so, how are they doing?

    I am particularly pissed off that as a saver who has done everything right in my life financially, I am being punished for the sins of others (banks, consumers, Fed Gov., etc.) How can an economy work if the leaders of it see no problem spending money they do not have? I have this very strong feeling that the longer we keep throwing more money at the problem, the bigger the bomb will be that goes off when the whole thing collapses. I’d rather face that pain now.

    Any replies or thoughts would be appreciated. Thank you.

  27. 27 David Glasner August 9, 2012 at 11:37 am

    Blue cat, I guess I don’t see why the Fed would need to add a surcharge or rebate when it already has the tools it requires to achieve its targets. Administering, collecting surcharges and distributing the rebates sounds like way more than the Fed is equipped to do and I can”t see Congress ever delegating its taxing authority to the Fed.

    Mark, In the summer of 2008 gasoline was over $4 a gallon; it’s now about $3.65. I don” know why your mortgage costs would be rising when rates on 30-year fixed mortgages are at an all-time low and housing prices have fallen for at least 6 years in a row. There has never been a time in which it was not possible to find some prices that were rising. At the moment, measured inflation is between 1 and 2 percent, which is the lowest in 50 years.

    The dollar has not been devalued. Relative to the euro, it is worth about 20% more than it was in July of 2008. And relative to a weighted average of all other currencies, the dollar is worth 5-10% more than it was worth in the summer of 2008.

    An individual or a business is not the same as a country, so the rules of finance that apply to you don’t necessarily apply to the country as a whole. The idea is not to make the government wealthier, the idea is to come up with policies that make all the people in the country more prosperous. The prosperity of the country is not measured by the size of the budget deficit. A prosperous country can afford to accumulate debt because it will have the economic resources with which to pay back those debts in the future. And unlike an individual, the country as a whole does not die after 80 or 90 years.
    I hope that provides you with a little bit broader perspective from which to consider our economic problems.

  28. 28 Mark Stamatakos August 9, 2012 at 10:03 pm

    David, thank you for the reply. You will be helping me teach my class this year on the current economic crisis and what is being done.

    Some counterpoints to your responses…of course I am just a layman here so my explanations might be tantamount to Fred Flintstone operating an IPAD.

    As I recall it, gasoline used to be under $2.00 a gallon when Clinton was in office. It was fairly stable for some time. Then, when Bush took over, the price started DRAMATICALLY spiking (all the way until his last year in office). I understand that adjusted for inflation, gas prices at $3.75 (roughly) a gallon are not dramatically different from the 1920s, but the price spike of the 2000s is extremely odd. Doesn’t this look to you like the 1970’s all over? When a weak dollar, lots of regulations (like in Illinois, the gas has to have 10% ethanol as one example), and high gas taxes led to stagflation? To me, the gas surge in the 2000s is certainly hyper-inflation for that small sector of the economy.

    Does the dramatic rise of the budget deficit under Bush have anything to do with it? It doesn’t seem like a demand problem. Was something else going on I missed?

    When I was referencing mortgages, I meant the mess I was already in. I bought my house in 2006, unfortunately at the apex of the housing bubble “pre-pop.” Bad timing for me I must say. Now I am stuck with the mal-investment, which I overpaid for. In addition, property taxes, unquestionably, exploded during the decade of the 2000’s WAY FASTER THAN inflation. They have since come to a dead halt of course, but this is yet another issue. These make trying to get and maintain a foothold into the middle class difficult. I am a victim of my own decisions of course, but I am also a victim of (in my view here), reckless government creditory policies of encouraging home ownership (Clinton and Bush…take a bow idiots) without the means to pay for it.

    Your statement about inflation rising at only 1-2% percent seems to make sense, but does that include food and energy prices? Are these really issues with too many dollars in circulation anyway? I’m afraid I don’t get it. I use a budget program on my computer, and as I looked back in the last 10 years, the costs of my “expenses” are taking up a bigger and bigger chunk of my budgetary pie. I can only see that as the value of my dollar stagnating or declining.

    I recognize the fall of the dollar has largely stabilized since the crash. Most idiots think this is some kind of Obama problem. But from what I have read the dollar nosedived a ton in the Bush years. But certainly under Obama the Fed has pumped trillions more dollars into circulation (or into bank’s coffers, more honestly). Doesn’t this ultimately lead to another inevitable drop in the value of the dollar. Once the interest rates start to rise (again, forgive me if I don’t get this).

    I’d also point out, as I understand it, that even if the dollar has not lost value during Obama’s administration (and actually risen), I sure as hell know my wages have been frozen for several years now. If this housing crisis had been allowed to run its course (without all the government meddling), would the pain have been greater but the recovery been quicker? I don’t know. Wouldn’t utilizing the bankruptcy laws have been more efficient?

    In terms of the government not being like me in how it runs its finances, I do understand that, even as an individual, some kinds of debt can be beneficial to my ability to succeed. College loan debt and mortgage debt come to mind (I have plenty of that—my college costs went up 17% in the four years I was in undergrad, and another 7% the 3 years of grad school). But where I see the government and myself as equal here in terms of financial behavior is this—at what point does taking on TOO much debt tip the scales into a negative blackhole? If I went to grad school for $150,000 (of which I didn’t have), and took on paying that off with a job that made only $50,000 a year, I would be dooming myself to a life of slavery to debt. Isn’t that what we are doing right now? And does selling treasuries to finance this reckless behavior—does this gimmick eventually lose its luster? How long will the world want a piece of our debt?

    From what I have read, we will pay 327 billion in interest payments on the national debt in F2012. This number is and has been rising, very pointedly in the last 12 years. I assume the government has favorable interest rates on this debt. But anyway, 327 billion probably makes up about 6 or 7 percent of the pie. By 2017, it blossoms to 11 or 12 percent. Krugman says he’ll be a deficit hawk once he is sure the economy can stand on it’s own two feet. The Ron Paul argument is cut a trillion off the federal budget right now. Paul’s position seems logical to me. Can we afford to keep risking that it will, and which politician is going to have the courage to suggest to the Congress a balanced budget?

    England said enough is enough. They instituted the austerity measures and made slashes across the board to just about everything. I know the “pain” has been tangible. But, correct me if I am wrong, are they going to see GDP growth (however marginal) in 2012 and 2013 despite this? And
    England’s debt is nothing like ours is…they made the decision to put an end to it now. Maybe they will be the test case for which the U.S. can find the inspiration to make a change.

    Thank you again for your responses if my diatribe here is worthy of them.

  29. 29 David Glasner August 15, 2012 at 9:18 am

    Mark, In the late 1990s, gasoline was less than $2 a gallon. I remember as a child when gasoline was less than 20 cents a gallon. The increase in price is partly because the dollar has lost value and partly because gasoline has become more valuable relative to other commodities. Since 2000, it’s mostly the latter. Most of the increase in the price of gasoline in the 1970s was caused by an increase in the international value of crude oil in terms of all currencies independent of any of the factors that you mention. Stagflation was the result of the increase in the international value of crude oil and an inflationary monetary policy followed by the Fed during most of the decade.

    And yes, the 1-2% inflation since 2008 certainly does include food and energy prices. The shift in your budget is not inconsistent with low inflation. It happens that the stuff that you are spending a lot of your budget on have been going up in price more than the prices of the other stuff, which have been falling. So you are spending more of your budget on the stuff that is getting more expensive stuff and less of your budget on the stuff that’s getting cheaper. No mystery there. If the other stuff were getting more expensive, the share of your budget spent on “expenses” would not have increased as much as it has.

    If the increase in the number of dollars meant the prices would “inevitably” rise, they would have risen already. If people today know that the price of something will rise tomorrow, the price will rise today. If prices haven’t risen, it’s because it’s not inevitable that they will rise tomorrow.
    Finally, I am sorry to hear that your wages haven’t increased for several years. Neither have mine. Wages are not an entitlement. They are determined in the market. If your wages haven’t risen, in your current job, you have the option of searching for another higher-paying job, as do I. If prices had been rising even more slowly than they have over the last four years, what makes you think that your wage would not have been cut, or that you would not have been out of a job altogether?


  1. 1 Blinder Talks Sense to Bernanke: Stop Paying Interest on Reserves Now! « Uneasy Money Trackback on July 22, 2012 at 7:09 pm
  2. 2 Browsing Catharsis – 07.23.12 « Increasing Marginal Utility Trackback on July 23, 2012 at 5:01 am
  3. 3 The Hargrove Critique and why I am skeptical about QE3 « The Market Monetarist Trackback on July 23, 2012 at 11:48 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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