David Beckworth wrote up a nice response to my previous Mises CA post on the Canadian fiscal turnaround of the 1990s. At this point, I just have two main replies:
(#1) ==> The whole point of my previous Mises CA post was to show that what David had earlier referred to as an expansion in the monetary base, was in fact an elimination of reserve requirements. So it’s frustrating to me that David describes our exchange like this:
Nonetheless, I laid out further evidence for the monetary offset view in a later post. Bob Murphy has now replied to me in a new post and concedes that at least one of my points, the permanent increase in the monetary base, does lend some support to our view. (However, he correctly points out there are timing issues with the increase in the monetary base.) So he does concede the story is more complicated than he originally envisioned.
I must confess, that just seems weird to me; I almost wonder if David understood my post. I was pointing out that there WAS NO “increase in the monetary base,” so I certainly wasn’t conceding that it lent support to his view. (To be clear, I was saying that the phase-out of reserve requirements was a loosening of policy, and that lent support to his view–though even here the timing was not great for his position.)
This ties in to my broader frustration with the Market Monetarist approach, epitomized in the writings of Sumner but endorsed by Nick Rowe and (I think) David here. They call Fed policy since 2008 incredibly tight because NGDP has risen so slowly, when I think it makes much more sense to call it “incredibly loose but according to some economists not loose enough.”
Especially when the very issue under dispute is whether more or less monetary easing is a good idea, it seems very dangerous to me to use definitional moves that make it impossible for the neutral outsider to even understand what is really occurring.
(#2) ==> More fundamental to the dispute over Canada, again because David isn’t trying to even knock down my own position, I worry that he’s not fully grasping why my view–if right–would sterilize what he thinks is such compelling evidence for his position.
First let’s consider an analogy. Suppose Ford announces that it is cutting production by 20%, and consequently the price of Ford vehicles rises dramatically. Economist #1 says, “Well, the Fed obviously just loosened policy, causing Ford prices to rise.” Economist #2 says, “Huh? Look at the Fed’s behavior–its purchases are the same as 6 months before. What’s happening is that the drop in Ford output corresponds to a lower supply and higher price. This would happen even if there were no central bank at all.” Economist #1 comes back and says, “No, the Fed passively loosened. Look, the auto market is very competitive. Ford vehicle prices rose relative to GM, so this is a clear-cut natural experiment. Obviously this is the result of Fed tinkering with Ford prices.”
Do you agree with Economist #1 or #2? Okay, now instead of Ford cutting production of vehicles, plug in the Canadian federal government and its production of bonds. Economist #1 is David Beckworth, while economist #2 is Bob Murphy.