Althouse sounds like an academic economist, a lot of whom I've heard say "The federal budget is not the same as a household budget scaled up." but in practice, I've concluded the federal budget is almost exactly like a household budget. To wit:
* No, you can't raise the debt ceiling, but as a household you can certainly overextend yourself and go too far in debt. There's millions of households out there, apparently, who have borrowed exactly like the federal government, and let's not forget they've probably voted accordingly.
* No, you can't command other people to give you money as taxes, but really, Barack Obama cannot command anyone either, it's Congress that controls tax policy, and their jobs are frequently lost when they tell folks to pay more taxes. There are significant trade offs to a government when they make a tax decision, just like its a costly decision for families to give up more of its scarce "free time" to get a second job, or a better-paying one in order to bring in more revenues.
The analogy can actually be very sophisticated and accurate if you think it out. The fact that Barack Obama did a ham-fisted and contemptible job of it doesn't mean the analogy itself is ham-fisted and contemptible, just Obama's use of it.
Bonus points... no, the government would never actually default on their debt when they can just print more money, which a household can't do, but the practical effects wouldn't be much different. Monetizing the debt is the government version of personal bankruptcy and will come with similar costs in terms of damaged credibility and ability to borrow for necessary expenses in the future. Focusing on the pedantic differences while ignoring the obvious similarities strikes me as... odd.
Wednesday, August 17, 2011
I find the focus in this post by Scott Sumner pedantic in the extreme. We all acknowledge that almost no one (including most distinguished economists) is qualified to talk monetary policy, so focusing on the language rather than the practicalities seems very odd.
To me, it breaks down quite simply.
The language people like Perry and Stockman have used to describe the problem is all wrong and results from not really knowing monetary economics. However, they see the problem quite well; Contractionary and bordering on corrupt monetary policy run for the apparent benefit of big finance, conducted with complicity of a spendthrift federal government administration in the face of persistent high unemployment and crummy private sector business conditions.
The other side of the political divide is certainly more sophisticated. They have the language to describe the problem, but their years in power have demonstrated they fundamentally do not understand it or have other priorities and will do nothing about it.
Historically, changing monetary regimes has never been a sophisticated and technical process. It's probably the biggest factor underlying many, if not most of America's populist upheavals. There's passion, yelling, lots of anger, and rarely does the popular debate inform us of what's actually happened. That's just the way it is, and it sucks. Except it sucks less than the alternative of some sort of technocratic authority, which is what's pretty much gotten us into this mess. Scott's solution offers a way out that addresses the concerns of the populists, but is fundamentally antithetical to the technocrats.
I mean, seriously, can anyone picture Mitt Romney hammering the Fed and telling the banks that they're no longer going to get a free lunch in the form of IOR? My ass he's gonna do that, and Obama clearly isn't.
Will Perry? I have plenty of doubts, but simply by tough criticism he changes the game somewhat, when the political process has been deferential for probably three years too long.
Tuesday, August 16, 2011
From a populist perspective (on both sides of the political spectrum …) printing money hurts the economy because it looks exactly like a big scam. While they’re like the shackled prisoners in Plato’s cave, what they perceive is:
1. The government is spending at an unsustainable rate and borrowing to do it. Everyone on both sides knows it’s unsustainable, yet the government gets to borrow at shockingly and seductively low rates. How?
2. Well, the Fed, which is owned by its member banks but somehow given nearly omnipotent power by the government, creates new money out of thin air (thereby devaluing all the money in my populist pockets). The member banks buy government debt notes with cash on hand, then sell the notes to the Fed for the newly created cash. Which they then sit on, deposited at the Fed, and collect interest.
3. In looking this over, who are the winners and who are the losers? The winners are the corrupt and interest groups.
- Well, the Fed banks are winners. They have a license to print money, and coupled with the Fed paying its members interest to sit on the money, have rapidly recovered from the losses they mostly shouldn’t have been allowed to recover from in 2007-2008.
- The supplicant constituencies of government are winners, because they’ve been allowed first place at the trough on the debt extravaganza.
- Yes, to the extent this reflated the stock market, it’s good for everyone that has a 401(k), which is most of us, but the average populist understands that this intent is secondary to the borrow/spend-print/stash money laundering scheme, and it’s largely folks with 401(k)s that are gonna pay the price when it ultimately can’t be done anymore.
And the losers are:
- The vast number of unemployed out there, despite what everyone assures us are gigantic quantitative easing efforts. This is especially true in the private sector.
- Folks in the private sector who understand that ultimately devaluation hurts everyone with money, but seems to be disproportionately helping the big banks and supplicants of big government.
- Folks in the private sector who still face tight credit, but also face increasing regulatory and perceived tax burdens and who thus conclude that now is not the time to expand.
Call these crazy populist rantings, but they have import since something like 80% of economists, 98% of politicians, and 99% of the general public don’t understand monetary policy. Thus I find it difficult to get worked up about quotes from one particular politician who doesn’t understand monetary policy. One can bet candidate Barack Obama would say the same in a world where there is a President Rick Perry.
But more importantly, the average left or right populist truly thinks this way, and has very little faith in the current monetary regime because of it. It’s one thing to say they’re totally wrong, but there’s some germs of truth in their too. And worse still, when we’re talking about what 80-99% of people think, it doesn’t much matter whether it’s right or not; it takes on a life of its own, and I seriously question whether even a correct answer from this monetary regime can succeed when the regime itself has come to be seen as so fundamentally illegitimate.