I can’t remember the course number for Intro to Micro, but I know I never actually taught “101” so maybe it was 201. Anyway, one of the points I would hammer home with the students was to distinguish between a movement in demand, versus moving along the demand curve. I would warn them not to say something dumb like, “The explosion in Libya reduced oil supply, causing the price to rise, which reduced demand, causing the price to fall.”
So, it’s frustrating when Scott writes stuff like this:
Instead, the view that Bullard attributes to monetarists is actually the Keynesian/Austrian view. It’s Keynesians and Austrians who reason from a price change. They are the ones who insist that low interest rates are expansionary.
OK, back in 1949 Mises published Human Action. It contained this passage (thanks to David Gordon for helping me find it):
It is necessary to stress this point because it explodes the customary methods according to which people distinguish between what they consider low and high rates of interest. It is usual to take into account merely the arithmetical height of the rates or the trend which appears in their movement. Public opinion has definite ideas about a “normal” rate, something between 3 and 5 per cent. When the market rate rises above this height or when the market rates–without regard to their arithmetical ratio–are rising above their previous height, people believe that they are right in speaking of high or rising interest rates. As against these errors, it is necessary to emphasize that under the conditions of a general rise in prices (drop in the monetary unit’s purchasing power) the gross market rate of interest can be considered as unchanged with regard to conditions of a period of a by and large unchanging purchasing power only if it includes a by and large adequate positive price premium. In this sense, the German Reichsbank’s discount rate of 90 per cent was, in the fall of 1923, a low rate–indeed a ridiculously low rate–as it considerably lagged behind the price premium and did not leave anything for the other components of the gross market rate of interest. Essentially the same phenomenon manifests itself in every instance of a prolonged credit expansion. Gross market rates of interest rise in the further course of every expansion, but they are nonetheless low as they do not correspond to the height required by the expected further general rise in prices. [Human Action, p. 549]
All right so Mises is certainly on to the general concept here (which I read back in high school), and this came out more than a decade before Friedman & Schwartz. It’s not the exact thing that Scott is talking about, but it’s the mirror image and it should certainly be evidence that Austrians aren’t complete idiots when it comes to interpreting monetary policy and interest rates.
(Further, the renewed interest in Wicksell’s “natural rate” is also not new to Austrians–Mises’ theory of the business cycle used this concept as one of its key building blocks.)
What’s super duper weird is the following:
==> Scott and I both agree that if the Fed were to raise its interest rate target by 25 basis points at the next meeting, it would signal a tightening of monetary policy. In contrast, if the Fed were to keep interest rates at their current level, this would be a looser stance of monetary policy compared to the alternative of raising rates a quarter point.
==> Scott and I both agree that the Fed has done things since 2008 that, if not handled correctly in the future, could lead to hyperinflation.
==> Scott and I both agree that if the Fed since 2008 had engaged in our preferred monetary regimes (meaning I think it would be true of my regime, and he thinks it would be true of his regime, but not that we think it would be of the other guy’s proposal), then the Fed right now would have a much smaller balance sheet, and interest rates would be higher than they are now. (See his point 2 here.)
CONCLUSION from the above points: Scott and I both agree that the Fed has done terrible things since 2008, which have made interest rates much lower than they would have been with a sensible policy, which risks hyperinflation, and that if the Fed were to raise rates this year, it would be tightening of monetary policy.
And yet, he continues to quote Milton Friedman and lecture people–including James Bullard if you click his post–on a very elementary point, that I for one first encountered as a senior in high school.
And the ultimate last point I’ll make: In other posts (e.g. here), Scott said that you shouldn’t trust his personal views on monetary theory, but instead you should take the view of the economics profession as a whole. And they right now don’t agree with most of Scott’s views. So…
P.S. I’m firing this off before I go to bed, and it’s hard to convey tone of voice over the Internet. If you read Scott, you know he often makes “jokes” that his commenters don’t get. The above should be taken in that light.