Scott Sumner popped in to leave a comment on my earlier post. To refresh your memory, I was complaining that Scott (and his quasi-monetarist peers) is so sure that tight monetary policy is to blame for our economic woes, that he’s neglecting the host of other massive interventions into the market economy that have occurred in the last 3 years in particular. One of the things I mentioned was the continued extension of unemployment benefits. In his comment Scott said:
“I think the 99 week extended [unemployment insurance] has sign[i]ficantly increased unemployment. But that doesn’t reduce M*V.”
OK, this floored me. (I know, I know, maybe what’s happening here isn’t that Scott is a shocking fellow, but that I just need to get out more and experience the world.)
Let me say it plainly: Some economists (largely centered in the Rothbardian tradition, but perhaps there are others) REJECT the theory that explains years-long recessions on “inadequate demand.” In a healthy, free market economy, if for some reason people decided they wanted to hold 10% more in cash balances, then prices would fall. I’m not saying it would happen instantly, and of course it would screw up people’s plans if they didn’t see it coming. There might be bankruptcies, wealth transfers from debtors to creditors, etc. etc. But I don’t think you would see (the broadest measures of) unemployment shoot up into double digits for years on end, nor would real output collapse for years on end.
In contrast, when I am asked to explain why we’ve been stuck in such a slump for the last 3-4 years, I would go through and list the incredible interventions. (I’m not going to make this list now; I’ll do an article at Mises.org on this.)
Go look at Scott’s comment again. He is agreeing with me that extending unemployment benefits–i.e. paying people to not find a new job–is keeping unemployment high. OK, how are real goods and services produced? Firms hire workers who then process natural resources and capital goods, to create the output.
So, if we can explain why unemployment remains high, that’s a darn good start on explaining why (a) unemployment remains high (which is what most people care about) and (b) why real output isn’t snapping back (which is what economists care about).
As Scott’s comment reveals, he doesn’t think this can be a large part of the story, because it doesn’t explain the trend in MV. But what if the trend in MV is an interesting bit of trivia?
You don’t have to share my extreme views that aggregate demand will largely take care of itself, to at least see that Scott is unwittingly going to the other extreme.
Last point: The reason I pick on Scott so much is because he is such a good representative of the quasi-monetarist position. Let us recall my August 2009 blog post:
Wow. I am totally blown away by Scott Sumner’s blog, The Money Illusion. He is a Chicago PhD who specializes in the gold standard and the Great Depression. I don’t even necessarily agree with his overall views, but WOW his posts are really really good. It’s what I would have expected from nerdy academic economists before I actually saw the real world buffet available for sampling.