I don’t have an ax to grind here, but I’ve noticed an anomaly and wonder if commenters see the same issue. I’ve always thought of the left as being vaguely “pro-life” on issues like pollution control and national health care. The right seems “pro-life” in its opposition to Medicare “death panels”, euthanasia, and of course abortion. Conservative views are often informed by religion, and there’s a clear hostility to the cold utilitarian calculation embodied in death panels and euthanasia. The idea of viewing old people as disposable, or the idea of saying, “it’s not worth spending $X to save grandma” seem especially repugnant to conservatives. This group often criticizes countries in northwestern Europe that have a more “utilitarian” approach to death. To many conservatives, life is sacred. Given these perceptions, I would not have expected so many conservatives to embrace the view that its OK to trade off the lives of a few hundred thousand mostly old people in exchange for a few trillion dollars more in GDP (and, in fairness, more freedom as well.) Note that this freedom argument could be called “pro-choice”. My partying may kill grandma, but “it’s my body, my choice”. Just to be clear, I’m not arguing here that conservatives are right or wrong on any of these views. I’m not even sure that the views conflict. I’m also not sure that I fully understand the views of “conservatives” as a whole, a label that includes people as diverse as pro-life Catholic supporters of the welfare state and pro-choice libertarian atheists. So maybe there is no contradiction here at all. Another possibility is that conservatism is evolving in a new direction. We know that ideologies change all the time. Liberals have been on both sides of eugenics, free trade, free speech, and a host of other issues. Why shouldn’t conservatism evolve as well? (0 COMMENTS)

I received the following letter last week and the author gave me permission to quote without using his name. Hi Dr. Henderson, My name is X, I’m a fan of your writing, so I wanted to thank you for your work and insight that I’ve been able to enjoy… I recently read your article “What should we fear most and what should we do about it” in the recent Regulation magazine, and while I generally agree with the policy prescriptions for the FDA I was somewhat confused about the discussion around people’s irrational reaction to different threats in life.  I’ve also heard other economists discuss irrational threat response behavior and honestly it strikes me as a bit misguided.  But I’m also not an economist or an academic so I may be missing something, and I’d be grateful to hear your thoughts on it.. One thing is that isn’t there a categorical mistake being made when comparing something like shark attacks to things like heart disease or cancer?  The latter two seem to be more or less results of aging (or long-term behaviors like excessive eating or smoking, for example).  In other words, aren’t illnesses or diseases that come with the territory of aging and dying categorically different than something like a shark attack?  I feel the same reasoning could be used to tell people not to worry about walking in a bad part of the city because your chances of dying from cancer are higher than getting shot.  It seems like a non-sequitur to me.  One way is a gruesome and sudden end to (hypothetically) a younger person’s life while the other is something that is more or less accepted by people as a very possible ending to their lives when they are older–illness and death at the end of life are accepted as part of the tragedy of the human condition.  This is not to say that I think people should be very worried about shark attacks, just that the statistical probability analysis comparing these events is missing something. The second thing is the uncertainty of some risks as opposed to others.  I’d agree with the proposition that we shouldn’t go too far in restricting freedoms in order to prevent terrorism, but comparing it to illness or automobile accidents again seems misguided to me.  I think most people would have found it irrational to say, for example after the attack on Pearl Harbor, that people should be more worried about automobile safety and cancer than Japanese acts of war because their likelihood (at that point) of dying in an attack was much lower.  People worried about it because there was uncertainty about further attacks, a time sensitivity to stop aggression as early as possible, and the possible defeat of the US in a war. Am I missing something here?  I appreciate your time and any thoughts you may have on this.  I look forward to reading more of your writings! X was referring to this article by Charley Hooper and me. Here’s my answer. First, thanks for the compliment. Second, let’s consider the shark versus heart disease/cancer point. They are different categories, but I don’t think there’s a category mistake. You’re right that the heart disease and cancer risk come with age whereas the shark attack is pretty much unrelated to age. They do come with the territory, but there’s a lot you can do about the territory. Just as you can avoid the almost infinitesimal risk of being killed by a shark by staying out of the ocean, you can substantially reduce a risk that’s a few orders of magnitude greater by, say, not smoking cigarettes, getting exercise, and eating in moderation. As someone who just turned 70, I don’t passively say, “Oh, that risk comes with the territory. I want to make it to 100 and I’m doing a number things will help me.” And I haven’t even mentioned medications that will help me as I age. Regarding the point about walking in certain parts of town, if the risk is high enough, then it easily could be the case that you’re more at risk from dying in an hour from walking in that part of town than you are at risk from dying from a heart attack or cancer in an hour. The sensible way to think about risk is per unit time, whether it be an hour, a day, or a year. As I’m sure you noticed in our article, we normalized by having it be risk in a year. You said that comparing terrorism to illness or automobile accidents seems misguided, but you didn’t say why. Why do think that? Re Pearl Harbor you wrote: I think most people would have found it irrational to say, for example after the attack on Pearl Harbor, that people should be more worried about automobile safety and cancer than Japanese acts of war because their likelihood (at that point) of dying in an attack was much lower.  People worried about it because there was uncertainty about further attacks, a time sensitivity to stop aggression as early as possible, and the possible defeat of the US in a war. You make a good point. The way to compare risks there is not to see Pearl Harbor as a one-off event but to put it in context. What was the probability of further attacks? What was the chance the United States would have been defeated in war and what would have been the consequences of that? What that basically says is that it makes sense to look at the whole thing, not just a piece. I would give you my views on the war with Japan because they are different from the views of almost everyone else I know, but that would take us too far away from the statistical issues you’ve raised. I shared the letter with my co-author Charley Hooper, who answered as follows: If we don’t want to die, or at least die at a young age, there are certain actions we can take. These actions have a cost and an expected benefit. That expected benefit is the probability times the benefit. There’s a cost I incur if I avoid swimming in the ocean to reduce my risk of a shark attack. The expected benefit is minuscule because the probability is already so low that it’s difficult to lower it further. In other words, the expected benefit is negligible. There’s a cost I incur if I exercise more, take a medication, practice meditation, or avoid eating certain foods. The expected benefit may be large because I only need to reduce the probability of dying from a heart attack or cancer a little bit to make a noticeable improvement. In other words, the expected benefit is large. X is saying that we accept heart disease and cancer because they are a part of aging. If that’s the case, then why are so many drugs sold, so many procedures completed, and so much medical attention devoted to treating cancer and heart disease? Plus, if you could prevent a death from any source, you’ve still prevented a death. A heart attack can kill you just as certainly as can a shark. We don’t act as if we accept heart attacks and cancer. And even if we did, we shouldn’t. Regarding Pearl Harbor and WWII, again it comes to probabilities, actions, and outcomes. An individual might have a greater chance of dying in a car crash than dying in the war, but the risk of war is more than death: it’s having your house destroyed, your family killed, your government overthrown, your wealth destroyed, and your daughter raped. War is hell. We shouldn’t worry about either car crashes or wars; we can worry about both and take the appropriate steps to reduce the risk of each. (0 COMMENTS)

Over the past month, I’ve been trying to pin down exactly what’s wrong with Modern Monetary Theory. Or perhaps a less presumptuous way of putting it is that I’ve been trying to figure out what mainstream economists believe is wrong with MMT. Here I’ll list 6 MMT ideas. I’ll first explain the kernel of truth in each claim.  Then I’ll explain the mistaken way that MMTers interpret these claims.  Finally, I’ll explain how and why these claims don’t mean what MMTers think they mean. I’ve taken this approach because I believe that MMT is based on a series of basic misunderstandings: 1.  Banks don’t loan out reserves. 2. There is no money multiplier. 3. Money is endogenous. 4. Interest rates are an exogenous monetary policy instrument. 5. Investment is not very responsive to interest rates. 6. In a closed economy, net saving equals the budget deficit. 1. Banks don’t loan out reserves. It’s true that most bank loans are executed by crediting the borrower with a new bank account, and thus the reserves usually don’t immediately leave the banking system.  BTW, for any given monetary base, the only way that reserves can leave the banking system is as currency notes. From this mostly valid claim, MMTers wrongly conclude that an injection of new reserves into the banking system does not boost bank lending. As I explain in this post, the injection of new base money by the Fed (initially as bank reserves) sets in motion a series of price and quantity changes that has the effect of boosting bank lending. 2.  There is no money multiplier. It’s true that the money multiplier is not a constant, a point well understood by mainstream economists. From this valid claim, MMTers wrongly conclude that a permanent and exogenous injection of new base money by the Fed does not have an expansionary effect on the monetary aggregates. As I explained in this recent post, the injection of new base money has a multiplier effect on all nominal variables in the economy. 3.  Money is endogenous. When there is no interest paid on bank reserves, it’s true that pegging rates makes the money supply is endogenous, which means it cannot be changed at the discretion of a central bank. From this valid claim, MMTers wrongly conclude that under an interest rate targeting regime the central bank cannot adjust the money supply to control inflation. In fact, even under interest rate targeting, central banks can and do adjust the money supply to target inflation, as during the period from 1983 to 2007.  To adjust the money supply appropriately they must frequently adjust the interest rate target, but they are quite willing to do so as required to stabilize inflation.  They didn’t target the money supply during 1983-2007, but they used OMOs to adjust the monetary base as required to control inflation. 4. Interest rates are an exogenous monetary policy instrument. On a day-to-day basis, it’s true that central banks can and do target short-term interest rates. From this valid claim, MMTers wrongly conclude that changes in short-term interest rates reflect changes in monetary policy. In fact, over any meaningful period of time, short-term interest rates are mostly endogenous, determined by factors such as the income and Fisher effects.  The Fed merely follows along to prevent an economic disaster.  As an analogy, at any given moment in time the path of a bus going over a mountain range is determined by the driver’s handling of the steering wheel, but over any meaningful span of time the path of the bus is determined by the layout of the road, combined with the bus driver’s desire not to go over the edge of a cliff.  In this analogy, the twisting road is like the fluctuating natural rate of interest.  As I pointed out in this recent post, MMTers don’t understand that if the central bank targets inflation then interest rates become endogenous, and positive IS shocks cause higher interest rates. 5. Investment is not very responsive to interest rates. It is true that a decline in interest rates does not usually do much to boost investment, and vice versa. From this valid claim, MMTers wrongly conclude that a decline in interest rates induced by an expansionary monetary policy does little to boost investment.  I.e. they conclude that monetary policy has little impact on aggregate demand. This is reasoning from a price change.  Most declines in interest rates are due to the income and/or Fisher effects, not easy money.  Those sorts of declines are not expansionary.  A fall in output or inflation reduces the natural rate of interest, in which case the central bank must cut the target interest rate even faster to stimulate investment.  Because MMTers mostly ignore the income and Fisher effects, and view the natural interest rate as being zero, they miss the fact that most changes in interest rates do not reflect shifts in monetary policy. 6. In a closed economy, net saving equals the budget deficit. The MMTers define private net saving as the budget deficit plus the current account surplus.  Thus it’s true (by definition) that net saving equals the budget deficit in a closed economy. From this valid claim, MMTers wrong conclude that if the public wishes to engage in more net saving, the government needs to run a larger budget deficit. Actually, the central bank should respond to this scenario with a more expansionary monetary policy, which will push the public’s desire to net save back into equilibrium with the budget deficit at full employment.  Conversely, when there is an exogenous change in the budget deficit, the Fed needs to adjust policy so that net savings moves appropriately, without impacting the Fed’s targets.  The Fed did this fairly well in response to the sharp reduction in the budget deficit during 2013, and again in response to the sharp increase in the deficit during 2016-18. These MMT errors are all interrelated.  Because MMTers misinterpret the supposed “endogeneity” of money and the supposed “exogeniety” of interest rates, they get monetary policy wrong, greatly underestimating its potency (at least when interest rates are positive).  This leads them to miss the importance of monetary offset, and that leads them to greatly overrate the importance of fiscal policy. At a deeper level, MMTers seem to draw invalid causal implications from a series of accounting relationships.  Those accounting identities don’t mean what MMTers think they mean. (0 COMMENTS)

JP Koning has a proposal for simplifying the teaching of basic monetary economics. He starts with this Venn diagram: Which he explains as follows: Monetary economists such as Nick Rowe and George Selgin have proposed, and I concur, that we just chuck store of value from the definition of money. But we are still left with two useful definitions for money, unit of account and medium of exchange. Which gets us to the money circle. Note that the two circles in the diagram, medium of exchange and unit of account, don’t perfectly overlap. About 99% of the time the things we use as media of exchange are also the things we use as a unit of account. So the contents of our wallets or our bank accounts, dollar banknotes and dollar deposits are functionally equivalent to the $ units displayed in signs in grocery aisles. But for the remaining 1% of the time, the unit of account and medium of exchange are separated. The idea of a separation is tough to get one’s head around. Luckily we’ve got a nice example. In Chile the prices of many things, particularly real estate, are expressed in terms of the Unidad de Fomento. But no Unidad de Fomento notes or coins circulate in Chile. It is a purely abstract unit of account. I have a slightly different view.  Because I define “money” as the monetary base, and because most base money is held as a store of value, I view that use as more important than the medium of exchange role.  Nonetheless, I’d also drop “store of value” from the key characteristics of money, and just go with “medium of account”, where the medium of account is defined as the good in which other goods and labor are priced.  In Chile, peso currency notes (and bank reserves) probably best meets that definition.  Here’s Koning again: The differences between Chile’s monetary system and those of other nations only emerges when we begin look at the unit in which goods are priced. Most nations have one unit-of-account, but Chile has two. While many Chilean prices are expressed in terms of the peso, or P, a broad range of prices are expressed in an entirely different unit, the Unidad de Fomento, or UF. Real estate, rent, mortgages, car loans, long term gov securities, taxes, pension payments, and alimony are all priced using UF. As examples, this real estate website sets prices in UF terms, and this car rental business levies insurance in UFs. On the other hand, wages, consumer good prices, and stock prices are expressed in peso terms. In the end, I see no reason to focus on money’s role as a medium of exchange.  Money is important because the nominal prices of goods, services and labor are priced in money terms, and because those prices are sticky.  Thus when a shock to the supply and/or demand for money changes its value (i.e. its purchasing power), it will cause disequilibrium in the markets for goods, services and labor. [It might also cause a financial crisis.  But not necessarily in Chile, where financial contracts are not priced in terms of ‘money’ as I define money.  Chilean financial contracts are not denominated in peso terms.] The easiest way to teach money to students is with a supply and demand model for the medium of account  (which might be gold or cash), where the value of money is defined as 1/Price level, or better yet 1/NGDP.  All that’s left is to explain how and why the supply and demand for money changes over time.  That can’t be so hard!!  (Just kidding.) HT:  David Beckworth (0 COMMENTS)

Matt Zwolinski, a philosophy professor at University of San Diego and a “bleeding heart” libertarian, is engaged in a gallant but—I am afraid—hopeless conversation on Twitter with “Existential Comics.” The latest of such comics deals with Herbert Spencer‘s visit to the U.S. and builds on Spencer’s well-known disappointment in meeting the culture of rampant free entrepreneurs. Spencer took an intense interest in mechanical devices, as Andrew Carnegie recorded, but he was also perplexed over Americans’ “persistent activity.” At the banquet held in his honor before leaving the States, he commented, “I have been struck by the number of faces which told in strong lines of the burdens that had to be borne… Immense injury is being done by this high-pressure life.” And again “we have had somewhat too much of the gospel of work. It is time to preach the gospel of relaxation.” He saw his own speech as “mainly devoted to a criticism of American life as characterized by over-devotion to work.” Now you can see why the episode was used to prove that cutthroat competition could seem unbearable to the foremost theorist of unfettered competition itself. Let’s leave that aside. The story should simply suggest that Spencer was a less straightforwardly simple character than his critics have imagined. Perhaps thinking that reducing government intervention was needed to preserve liberty and protect the economic ecosystem from dangerous disruptions does not imply the idea that production is an end that justifies all means (a point critics of the free enterprise system have difficulty grasping even today). Yet “Existential Comics”, particularly in the text under the comic itself, attacks Spencer as a “eugenicist,” due to the fact he employed the metaphor of a “purifying process” to mean that economic incentives should be preserved, in order to prevent “charity that dins up creating dependency and harm” (Matt’s words). Existential Comics cites examples from Spencer’s Social Statics and maintains these examples are about “removing people from the gene pool.” Matt very aptly replies with a quotation from “just two paragraphs after the passage you cite,” in which Spencer defends and endorses “charity which may be described as helping men to help themselves.” In another tweet, Matt points to Spencer’s vigorous anti-imperialism. Spencer, an anti-militarist to the bone, denounced “treachery’s, deeds of bold and rapine” as a consequence of “colonization under state-management.” I’d like a mention, in this respect, a little anecdote. Spencer was rather frail, had a “greatly disordered nervous system,” and suffered from chronic insomnia and nervous breakdown. For him, organizing stuff was painful. Still, in 1881 (when he was 61), he tried to mobilize friends, including John Bright, for setting up an Anti-Aggression League as he felt indignant about “our [English] doings in Afghanistan, in Zululand, in the Transvaal,” all of which were a “scathing exposure of the contrast between our Christian creed and pagan doings, our professed philanthropy and our actual savagery.” As David Duncan wrote, “it would be difficult to say which feeling was stronger – that roused by the aggressions of the Government on weaker nationalities, or that roused by the aggressions of the State on the liberties of the citizens.” This doesn’t quite fit with the cliche of a thinker obsessed with the “survival of the fittest” as we typically consider it, does it? Matt is right in pointing out that the “Existential Comics”’s position is quite paradoxical: he quotes Spencer out of context and he does so triumphantly claiming “he isn’t being obscure.” He is not, but Spencer was a man of his time, writing for his contemporaries, using words that we need to put in context and necessarily “interpret,” as our political vocabulary has changed. Harrying past thinkers because they use language we won’t use is quite popular (think of the fatwa against David Hume for a modest footnote) but doesn’t make much sense. And, at the same time, “Existential Comics” doesn’t see that Spencer was instead an outspoken critic of imperialism, with arguments and in a fashion that would be easily attuned to our own tastes. This is an interesting case of selective anachronism. Plus, one point on eugenics: advocates of eugenics are typically arguing not so much about *that* single poor person who does not deserve our help; they are arguing about groups, about classes of people that share certain features, about races. The eugenicists want, in essence, population control aiming at “removing from the gene pool” particular kinds of people. For an individualist it is quite difficult to reason in this way. (0 COMMENTS)

As a long-time advocate of expanded immigration, I am delighted to have left/liberal Matthew Yglesias as an ally. Yglesias, who helped found online magazine Vox, is one of the rising stars in journalism and, especially, economic journalism. His latest book, One Billion Americans, advocates what the title says: we should change institutions so that we have 1 billion Americans. This book is particularly needed now. Yglesias’s major argument for more population, though, is not mine: he wants the United States to continue to be the world’s dominant power and worries that if we do not greatly expand our population, China will dominate. In making this case, he advocates changing several government policies beyond immigration. In fact, he writes much more about those policy changes than he does about changing immigration policy. So, for example, we learn more about his proposals for government-funded childcare, housing, and transportation policy than we do about how many new people and what kinds of people he wants to let into the country each year. He does say he does not want open borders, but he does not say what immigration reform he wants instead. On the non-immigration issues, he vacillates between intolerance of other people’s choices and great tolerance: he is intolerant of voluntary contracts between employers and employees that do not include paid parental leave, but he is highly tolerant of people’s decisions about what kinds of dwellings to live in. Where he is tolerant, he makes a good case. Where he is not, the book fails. Still, the big picture he paints is good: he shows that we can relatively easily triple the U.S. population without making our country too crowded or overly stressing most of our institutions. These are the opening three paragraphs of David R. Henderson, “A Reasonably Strong Case for Way More Immigration,” my review of Matt Yglesias, One Billion Americans: The Case for Thinking Bigger, 2020. Another excerpt: Yglesias points out that in 2018, the U.S. fertility rate fell to an all-time low of 1.72 births over the lifetime of the average woman. He argues, probably correctly, that an important factor causing women to have fewer children is the increasing cost of raising them. Whether the primary caretaker is a woman or a man, the persistent growth in real wages is raising the opportunity cost of rearing children. The law of demand rears its ugly head: when the price of something rises, then, all else equal, people buy less of it. In a book that advocates massive increases in immigration, a natural next step to take would be to argue for reducing the cost of child rearing by allowing millions of immigrants, probably disproportionately women, into the United States from the poorest countries in Latin America, such as Guatemala and El Salvador, the poorest countries in Africa, such as Zimbabwe and the Congo, and the poorest countries in Asia, such as India. It would not be hard to get 50 million immigrants from those places in a period of, say, five years. They would benefit and many current U.S. families would benefit from a dramatic fall in the cost of childcare. But that is not where Yglesias goes. Instead, he advocates massive new government programs to subsidize the provision of childcare. He writes that “the United States has been shamefully slow compared with some peer countries to provide subsidized child care.” But the closest he comes to explaining why U.S. policy is shameful is to argue that because other countries are doing it, we should too. Read the whole thing.   (0 COMMENTS)

Dr. Sunetra Gupta and Dr. Martin Kulldorff, two of the three authors of the Great Barrington Declaration, write: The Canadian COVID-19 lockdown strategy is the worst assault on the working class in many decades. Low-risk college students and young professionals are protected; such as lawyers, government employees, journalists, and scientists who can work from home; while older high-risk working-class people must work, risking their lives generating the population immunity that will eventually help protect everyone. This is backwards, leading to many unnecessary deaths from both COVID-19 and other diseases. This is from their recent article titled “Canada’s COVID-19 Strategy is an Assault on the Working Class,” AIER, December 4, 2020. When I read the first sentence in the paragraph above, I thought the authors would go in the direction I’ve been speaking and writing about since April. I thought they would make the point that while many professionals can work from home and, therefore, don’t suffer much of an income loss, many working class people have been put out of work by government lockdowns. Think bars, restaurants, hair salons, nail salons, etc. But that’s not the direction they go in. They write: older high-risk working-class people must work, risking their lives generating the population immunity that will eventually help protect everyone. I run into these people a fair amount at Lucky, Safeway, Trader Joe’s etc. To the extent they express themselves on the issue, a substantial majority of the ones I’ve talked to are thrilled that they are allowed to work. The working class people who I’ve noticed are most upset are those whom the government has prohibited from working. Forcibly preventing people from working = assault on the working class. Allowing people to work and take risks does not = assault on the working class.   (0 COMMENTS)

Herbert Spencer’s “From Freedom to Bondage” famously claims that “[T]he more things improve the louder become the exclamations about their badness.”  And he offered a bunch of great examples.  Inspired by Spencer’s insight, I recently turned to Google Ngram to look at long-run trends for six oft-named expressions of prejudice.         Notice: Four out of six evils  – racism, sexism, homophobia, and transphobia – are now vastly more discussed that they were in early decades.  As Spencer would have predicted, it’s clear that all four used to be vastly worse.  When they were ubiquitous, people took them for granted.  Earlier generations clearly wrote virtually nothing in defense of prejudice.  Instead, earlier generations barely talked about it at all. How would Spencer explain the result for “imperialism”?  Well, the Soviet Union aside, imperialism all but disappeared in the mid-70s, when the Portuguese finally abandoned their overseas possessions.  The result: While discussion of “imperialism” steeply fell, its been stuck at the level of the 1950s for the last thirty years. What about “xenophobia”?  Objectively speaking, this form of prejudice massively outweighs all the others combined.  As I’ve said before, immigration restrictions make Jim Crow laws look mild by comparison.  Current immigration laws continue to deprive billions of their basic rights to live and work where they like.  Yet even today, we barely discuss the xenophobic attitudes that make immigration restrictions possible.  True, there has been a mild upward trend since 1990, but the ratio of words to harm remains miniscule. I predict that a great conversation about xenophobia will come.  Judging by past trends, however, that conversation is going to happen a few decades after open borders arrives. (0 COMMENTS)

Tim Peach directed me to a graph in Paul Krugman’s International Economics textbook (coauthored with Maurice Obstfeld and Marc J. Melitz.) It’s a very elegant display of the long run effect of an acceleration in the money supply growth rate (and roughly describes the US economy from 1963-73): Here’s how to read these graphs.  Graph A shows the money growth rate increasing, say from 5%/year to 8%/year (a steeper slope to the line).  Graph C shows that the growth rate of the price level also increases due to the quantity theory of money.  Prices take a sudden jump at time=0, which we’ll consider later. In Graph B you see the nominal interest rate jump up at time=0 due to the Fisher effect—higher inflation leads to higher nominal interest rates.  Because the nominal interest rate is the opportunity cost of holding money, this causes money demand to fall at time=0, or if you prefer it causes velocity to rise.  Going back to graph C, this drop in money demand explains the sudden jump in the price level at time=0.  The bottom line is that when money growth accelerates, prices rise even faster than the money supply, as there’s less demand to hold zero interest money.  Both the growing money supply and falling money demand push prices higher. And in Graph D we see the exchange rate follow the price level, due to purchasing power parity.  BTW, an increase in the price of euros means the dollar is actually depreciating. This is roughly what happened during 1963-73, and the analysis is right out of Milton Friedman’s monetarism.  Money growth accelerated, inflation accelerated, nominal interest rates rose, and the dollar depreciated.  The process was less smooth than you see here, because in the real world prices are sticky and hence the price level does not jump discontinuously when money growth accelerates. This exercise helps us to understand the difference between New Keynesians like Krugman and MMTers.  Both groups tend to agree on policy at zero interest rates, favoring fiscal stimulus and not worrying about crowding out.  Both are skeptical of the efficacy of monetary policy at zero rates (although MMTers are even a bit more skeptical than New Keynesians.) It is when nominal interest rates are positive that the two schools of thought sharply diverge.  When I try to explain the views of MMTers I get shot down.  But that’s never stopped me before, and so I’ll try again here.  I believe that MMTers would start by claiming that the Fed can’t increase the money supply growth rate, as money is “endogenous”.  If you insisted that they consider what would happen if the Fed persevered in trying to force more reserves into the economy, they’d argue that this would drive rates to zero.  Krugman is arguing that faster money growth raises interest rates in the long run.  This difference helps to explain why Krugman differs from MMTers on the existence of a “money multiplier”. MMTers would claim that driving interest rates to zero would cause banks to hoard most of the new money, and thus it would not have a multiplier effect.  They’d also suggest that it would have relatively little impact on the price level, as aggregate demand is determined by spending, not the stock of bank reserves. Both New Keynesians and monetarists argue that the Fisher effect is very important when thinking about the long run effect of a change in the money growth rate.  In contrast, MMTers seem to pretty much ignore the Fisher and income effects, and view interest rates as being set by the central bank via the liquidity effect.  An exogenous increase in the money supply growth rate would lead to lower interest rates, in their view.  Because central banks target interest rates, MMTers assume money is endogenous.  They basically ignore the vast empirical literature on the “superneutrality of money” when the money growth rate changes. To be a good macroeconomist, you need to hold two models in your head simultaneously.  One is the long run flexible price classical model, such as Krugman illustrates in the graph above.  The other is the short run sticky price model, which has special characteristics at zero interest rates.   Krugman’s a brilliant macroeconomist, and thus is not attracted to MMT models that have no tools for evaluating the long run impact of changing money supply growth rates.   (0 COMMENTS)

Fortunately, socialism and fascism are not the only two political alternatives, for neither is attractive. Moreover, a well-kept secret is how similar the two ideologies are. Substituting socialism for fascism in many statements from fascists would bring instant approval from socialists. Many antifa agitators would be surprised to realize that they are doing fascism unknowingly, just as Mr. Jourdain was doing prose without being aware of it. The following quotes come from The Coming American Fascism (Harper & Brothers, 1936) by Lawrence Dennis, a well-know American fascist of the time: Fascism does not accept the liberal dogmas as to sovereignty of the consumer or trader in the free market. It does not admit that the market ever can or should be entirely free. (p. 299) Social planning is the outstanding imperative of public order and material abundance in the present day and in the near future. (104) Fascism assumes that individual welfare and protection is mainly secured by the strength, efficiency, and success of the State in the realization of the national plan. (p. 160) Under fascism, private property, private enterprise, and private choice in the market, have no rights as ends in themselves. They have different measures of social usefulness subject to proper public control. (p. 180) Light and power, transportation, and basic foods and textiles in given but limited quantities, can be assumed necessary at an arbitrarily fixed price, and State intervention can insure the production of an adequate supply of these goods within an arbitrarily fixed price range for the common good. (p. 180) The source of the similarity between the two ideologies is that both want to impose politically-chosen ends on everybody. The main source of difference is that each system coercively favors and harms different groups of individuals in society. Comparing moderate fascism to communism (which is extreme socialism), Dennis chooses the former. Somewhat surprisingly, he refers to Ludwig von Mises’s and F.A. Hayek’s arguments about the impossibility of calculation under communism: In so far as property rights and private enterprise are concerned, however, the strongest argument for fascism instead of communism may be found in the regulatory functions of an open market. The strongest criticism of any socialism of complete expropriation is that it leaves no free market, no pricing mechanism and no valid basis for economic calculation. Pure socialism is collective ownership and unified central direction of material instruments of production which, sooner or later, must leave little or no freedom of choice for the individual as to consumption or occupation. These criticisms may be brought up to date and made relevant to communism in operation in Russia in the symposium of Professors Hayek, Pierson, Barone, Halm and von Mises entitled Collectivist Economic Planning, and the work of Professor Boris Brutzkus entitled Economic Planning in Soviet Russia. (pp. 177-178) Dennis exaggerates the place of markets—of free markets—under fascism. In “Why Hayek Was Right about Nazis Being Socialists” (AIER, December 8, 2020), Richard Ebeling mentions many similarities between socialism and the Nazi brand of fascism. He is responding to Ronald Granieri who, in a Washington Post article, objected to the argument that the National Socialists were indeed socialists “The Right Needs to Stop Falsely Claiming that the Nazis Were Socialists,” February 5, 2020). Given the logic of state power, fascism is likely to steamroll obstacles in the path of the state and thus economic freedom. Moreover, fascism’s heightened nationalism is likely to lead to war against foreign or internal scapegoats. Fascists hate different minorities (the Jews, for example) than socialists hate (the merchants and the rich). Dennis naïvely dismisses these dangers: It is easy to draw alarming pictures of a powerful State against which the individual would have the resource of no judicial veto on government acts. Conceivable, of course, a State and government might fall under the hands of a few individuals whose every act would be an abuse. But such an eventuality seems most improbable in any modern State, least of all in the United States. (P. 160) The other alternative besides the different forms of socialism and the different forms of fascism lies, of course, on the continuum of classical liberalism and libertarianism. (0 COMMENTS)