Bill Woolsey Replies on Cantillon Effects
Bill Woolsey opened a long comment in my last post by writing, “Suppose the government decides to increase tank production. It might fund this by printing currency, by borrowing money, or by raising taxes. The tank manufacturers benefit the same amount regarless of this choice.”
Hang on a second, fellas. You are changing the question.
When someone asks, “Does it matter where the government injects new money into the economy?” the natural interpretation is to say that we first inject $x billion into one place, then we hold everything else constant, and instead inject the $x billion somewhere else. If things change, then we say, “Yes, it matters where the government injects new money into the economy.”
In contrast, Bill (following in Sumner’s footsteps) is asking, “Does it matter to the recipient how the government finances a new expenditure?” (I actually think it does matter, but even if it didn’t, the question is still a different one from the one we were all supposed to be answering.)
More generally, my stance isn’t some arbitrary approach. It is exactly this kind of behavior by Scott and many other proponents of “Bernanke needs to do more!!” that has me so upset. When QE3 was announced, Sumner et al. were mildly pleased, they just wished the numbers had been bigger. That’s because Sumner cares about NGDP first, NGDP second, and NGDP third. Whether the Fed bought MBS, Treasuries, or Robert Murphy books, he didn’t care. The important thing was, pump more money into the economy and get the public to think future NGDP would be higher.
So that’s not at all a scenario of, “The government was going to buy a certain amount of MBS, and the question is, should it do it by raising taxes, or by….” If the Treasury had started buying $40 billion of MBS each month, and paid for it by raising income taxes, do you think Scott would have approved? Of course not.
So Woolsey’s question, though perhaps interesting in its own right, has no bearing on this argument over the Austrian usage of Cantillon effects.
I think the distinction Bill is trying to make is the same as Nick Rowe is making. If the govt wants to increase tank production then that is fiscal policy. and it does not matter (in terms of tank production) if that is done via tax, borrowing or money printing.
If the govt decided to use the money-printing approach this would have monetary-policy effects. Abstracting away from any effect on tank production the govt actions would have increased the money supply and this would have some effects on the economy. Market monetarists would argue that if the economy would otherwise be missing its NGDPT this would be a good thing, hard-line Austrians would argue that it would be inflationary and a bad thing.
The discussion IMO becomes easier if one separates out the fiscal from the monetary. Of course in reality it would be impossible to abstract the pure monetary aspects (that just change the value of money while leaving everything else unchanged) from the distributional effects (the way the money gets dispersed changes relative prices of all goods, which Rowe is saying is fiscal policy).
But at the theoretical level I think the distinction is useful.
It’s cool.
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Isn’t the point of inflation to enable a certain fiscal policy?
Austrians say that the spending of printed money is what causes the problems, rather than merely the act of printing. Maybe we’re all talking about the implications of monetary policy FOR fiscal policy; and that, as opposed to, say, borrowing, taxing/stealing, and funding fiscal policy with commodity money.
This is helpful:
War and the Fed | Lew Rockwell
http://www.youtube.com/watch?v=Tl9lS5k7H5M
I think the distinction Bill is trying to make is the same as Nick Rowe is making. If the govt wants to increase tank production then that is fiscal policy. and it does not matter (in terms of tank production) if that is done via tax, borrowing or money printing.
If the govt decided to use the money-printing approach this would have monetary-policy effects. Abstracting away from any effect on tank production the govt actions would have increased the money supply and this would have some effects on the economy. Market monetarists would argue that if the economy would otherwise be missing its NGDPT this would be a good thing, hard-line Austrians would argue that it would be inflationary and a bad thing.
The discussion IMO becomes easier if one separates out the fiscal from the monetary. Of course in reality it would be impossible to abstract the pure monetary aspects (that just change the value of money while leaving everything else unchanged) from the distributional effects (the way the money gets dispersed changes relative prices of all goods, which Rowe is saying is fiscal policy).
But at the theoretical level I think the distinction is useful.
Apologies, obviously hit the end button twice
Thank you for the reply.
In my view, Richmond’s short quotation and your short quotation about Wall Street restaurants were very much wrong and focus on from whom particular assets are purchased. In particular, the notion the somehow that whatever benefit primary security dealers get from trading with the Fed is similar to the benefits of counterfeiting is very much wrong.
What about purchasing MBS already guaranteed by the Treasury? I don’t think it has much effect I disagree with the Fed on the effectiveness of that element of credit allocation, and think it is a really bad idea if it does work. Still, I think that if the Fed pays interest on reserves (like it does) it can almost certainly subsidize particular sectors of the credit market.
It is just that those selling MBS to the Fed don’t benefit any more than people selling MBS to other investors. Getting new money rather than old money for the same asset is the same.
I don’t think it is the brokers and dealers on Wall Street that bet the major benefit. With MBS, alot of the benefit is ending up in the hands of people making lower monthly payments on their refinanced loans and construction workers put back to work.
But that doesn’t mean I think it is a good idea.
I personally think that the Fed should be charging banks to hold reserves now. And the Fed should buy up T-bills and then move up the Treasury maturities. Agency securities (like Treasury guaranteed MBS) would be on the list, but what out there.
But I think the introduction of nominal GDP level targeting would actually require to opposite–sales of securities, and would make higher interest rates on reserve balances appropriate. But the possibility of negative interest on reserves and purchasing the entire national debt, including agencies would be there. I just think the result would be higher nominal (and real) interest rates at nearly all maturities.
It is just that those selling MBS to the Fed donât benefit any more than people selling MBS to other investors. Getting new money rather than old money for the same asset is the same.
If the other MBS investors are going to see their MBS prices rise, in response to the MBS sellers selling to the Fed, then they will benefit in the same way, and thus have no relative benefit to the MBS sellers, but then they benefit relative to those who don’t sell MBS at all.
The argument “it matters who gets the new money first” is a function of what assets the Fed buys. Not everyone owns the exact same portfolio.
I did it again. Richman…
I think I see the gripe here.
Given that the Fed is going to purchase MBS, then it doesn’t matter who they purchase the MBS from. Whether they buy them from A or B is irrelevant because the price of these assets rise and so A or B can both sell them at the prevailing price. Whether the purchases are from Goldman Sachs or a pension fund from Omaha doesn’t really matter. This is (at least part) of what Sumner and Woolsey are saying, and by all means, it seems fairly self-evident.
But the Austrian point isn’t that whoever the Fed actually buys from benefits relative to other holders of MBS. Their point is that all the holders of these assets benefit relative to everyone else who doesn’t own the asset that the Fed chooses to purchase. This is what I think Richman means. They benefit in two ways. 1) When the Fed buys a certain asset the price of that asset will tend to be higher than it otherwise would be if the Fed wasn’t purchasing it. Therefore holders of MBS will receive a higher price than they otherwise would have, and this is a benefit for these holders (obviously). And (perhaps more importantly) 2) Prices don’t instantaneously rise in the economy, they will adjust over time and certain prices will adjust differently to increases in the money supply. Those who receive the new money first can spend it before prices rise in total. Furthermore, people are also affected by the relative price changes that show up along the path of how that money is distributed and spent.
The market monetarist rebuttal to #2 (i think) is rational expectations and an immediate or nearly immediate change in prices once we know there is an increase in the money supply. This would reduce the Richman position to #1, and then the only way certain people would benefit from being at the injection point of new money is by how much the prices of their assets increased. This is rejected by the Austrians, so they believe that #2 stands.
But more on the second point. The primary dealers or whoever holds the asset that the Fed decides to purchase doesn’t necessarily have to see its price rise to benefit from the newly injected money. Even if the price stayed exactly the same, Austrians would still say that as money makes its way through the system, those who receive it and spend it first still benefit from a relative increase in purchasing power. Those at the end of the line will be spending new money after prices increase. Again this is because prices don’t perfectly shift in the economy each time the FOMC results flash across the web. So the second point can still be valid regardless of the first. It is in this sense that Goldman Sachs might benefit relative to the Omaha pension fund, even though they hold the same assets. Goldman gets to spend that money before prices change, while the old folks at Omaha do not. This happens whether or not they both receive a benefit from higher asset prices.
Please stomp on my intelligence and criticize me harshly if I went wrong somewhere.
Inflation can’t really fund spending. It can reduce the debt load, in exactly the same way as a default. And by reducing the burden of *past* spending it can enable more current spending. But nobody ever says that the government can fund spending by defaulting on its debt.
Yes, there’s also seignorage. But that is small enough it can be ignored. The financial benefit of inflation isn’t seignorage, it’s reduced (real) debt.
War and the Fed | Lew Rockwell
http://www.youtube.com/watch?v=Tl9lS5k7H5M
Also, if someone forgives a debt, he is effectively funding the debtor’s spending. Same thing happens in a default.