Responding to David Beckworth on the Canadian “Expansionary Austerity” of the 1990s
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.
I hate the concept of “passive loosening.”
Question: suppose for the sake of argument that some event suddenly destroyed a significant portion of the productive capacity of a country: no matter what, it will produce fewer consumer goods and capital goods after the event than it was capable of before hand, and “real GDP” will certainly be measured to fall. Imagine this country has a central bank: would this central bank be engaged in “loosening” of any kind if prices generally rose after this hypothetical event?
I say no, not necessarily, only if they increase the total spending stream relative to what it would have been in a free market struck by the same event. Calling that “passive loosening” would only muddy the waters.
I think Market Monetarists have poisoned their own well by naming “monetary offset” the way they have and selling it enthusiastically as an activist central bank policy.
Isn’t Beckworth making a distinction between the ‘Target Interest Rate’ and the ‘monetary base’?
Him suggesting that because of the lowering of the target interest rate in Canada as compared to the US, short term monetary conditions were looser regardless of the neutral monetary base – ie. As Nick Rowe points out the stock of currency did increase during this period?
Adrian where does Nick say that?
They attempt to define the input by examining the outcime and working retrospectively. Not only is this useless in policy making (the outcome is not known at the time policy is decided) but if we attempted to use the same concept in everyday life it would be ridiculous.
Suppose I told you to feed your dog enough to keep him healthy… that doesn’t help you when you are at the store buying dogfood. Then you take the dog to the vet, “Hey the dog’s been limping, can you take a look?
Vet: You should feed him more.
Dog owner: No I think he hurt his leg.
Vet: Don’t you understand anything? If the dog isn’t healthy, then by definition you aren’t feeding him enough. “
But the correct analogy would be the dog’s weight (because food is to weight as monetary policy is to NGDP).
See, it may be that 1/2 cup of chow twice per day is recommended. Here the assumption is that a mature dog will maintain optimal path given the recommended daily portion.
Obviously, the amount of food the dog requires depends on lifestyle and genetics; lifestyle being dynamic over time is a further complication. Ergo, the *correct* amount of food is only knowable in retrospect when benchmarked against a desired outcome.
If the dog is losing weight despite being fed the recommended daily portion, then clearly the recommended portion is optimal, and you aren’t feeding the dog enough.
Back to econ terms: MM views NGDP (or even nominal wages) as the best benchmark. Even better are the use expectations of in order to avoid ‘driving via the rear view mirror’. The underlying logic of MM is totally sane and refreshingly perceptive.
Bob,
In the comments of your august 13th post – Austrians vs the world
Bob. Suppose, for weird historical reasons, the Fed followed a policy of targeting the inflation rate on Ford vehicles. (instead of, say, targeting the CPI inflation rate, or the price of gold). People would talk about the Fed loosening monetary policy, by letting the price of Fords rise, instead of letting all other prices fall.
Compare to how we would talk about the Fed on the gold standard, if there were a fall in gold production (or some gold got lost at sea), and the Fed responded by raising the nominal price of gold, we would talk about the Fed loosening monetary policy.
It’s all relative to what we consider “normal”.
If an economist defines the stance of monetary policy in a certain way, and he uses thst definition consistently , it seems odd to be challenging them. Definitions are definitions.
In regards to the Ford example – if economists 1 defines the stance of Ford policy by whether it results in the price of its cars going up or down – then (by the definitions he has chosen) his statement ““Well, the Fed obviously just loosened policy, causing Ford prices to rise” is true.
Economist 2 can then either just spend time challenging economists 1’s definition (which seems counterproductive), or say something like “OK, lets go with your definitions. However I do not think that Ford has any control over it market price so its so-called monetary stance is just a random variable” or “OK, Ford can control its prices via its policies, but in the long run this will end badly”.
A consistent definition can still be nonsensical. As I said above if you define policy with respect to an inflation target, an adverse supply shock would lead to “loosening” of policy unless the Central Bank acted in such a way as to contract the spending stream to “fight inflation.”
I don’t see why that would make the definition nonsensical – it would just mean that the target (inflation) was a non-optimal thing to be targeting. Indeed the case of an adverse supply shock is the reason why most MMists support an NGDP target .
Transformer, I happen to think “tight” or “loose” are relative to some optimum. So what’s nonsensical is the implied optimum of inflation targeting.
I would prefer to say a consistent definition can still be useless or unhelpful. If it is consistent, I don’t see how it can be literally nonsensical. (If it is nonsense, how could you even tell if it is consistent?) Of course, this all depends on one’s definition of “nonsense”!
“Of course, this all depends on one’s definition of “nonsense”!”
I guess technically useless is what Andrew actually means with nonsensical. He is just using a more aggrasive way to express this.