I realize that this is old news but I can’t help but want to respond. On a Mises Daily entry Mr. Stockman raves that Milton Friedman is a Freshwater Keynesian, most of it I’ll respond to in due time. I regard Friedman as one of the best if not the best economist ever. Before I start one should realize that the type of Austrians that partake in activities in the Mises Institute are almost all Praxeology loving Rothbardians. So, the usual blogging is filled with “look at these Keynesians” or “what a statist!” or the more patronizing tone of “yah sure lets use M2 as a monetary indicator”. The extent of the truthfulness of such statement is meaningless when they seem to be the primary form of argument of many commentators and contributors; the community is falling down the political talking points of other ideologies.
First David Stockman makes sure to use statist word to note that Friedman’s argument for government why the gold standard doesn’t work.
Friedman jettisoned the gold standard for a remarkable statist reason.
However, I think Stockman is both wrong about the Friedman’s political perspective in such an issue as well as his methodology when making the argument. In Capitalism and Friedman makes the so-called “statist” claim:
Under such a standard, any monetary powers of government would be very minor in scope. But, as just noted, such an automatic system has historically never proved feasible. It has always tended to develop in the direction of a mixed system containing fiduciary elements such as bank notes and deposits, or government notes in addition to the monetary commodity. And once fiduciary elements have been introduced, it has proved difficult to avoid governmental control over them, even when they were initially issued by private individuals.
Capitalism and Freedom, pg. 41
Friedman’s argument is anti-statist if anything. He’s correct in noting that because the fractional reserve tendencies of finance the introduction of notes will cause the government to intervene. The way the government does this is by issuing their own notes and by attempting to institute statutes regulating counterfeiting. I don’t necessarily agree with Friedman when he says that
“[Commodity standards] enhance the difficult of enforcing the contract and hence also the temptation to issue fraudulent contracts.”
To me this would only be arguable a danger if the commodity, such as gold, was determined to be the only legal tender, which it was. Under a free banking system I don’t think that gold or fiat would be the basis of all transactions and contracts and thus it has a lesser likelihood of leading to fraud.
In the end Friedman proved Mr. Stockman and for that matter hard money crowd wrong for believing that the gold standard was good or even feasible. The idea that it was truly redeemable is laughable at certain times in history, even in the good ole days before the progressive era. As well Friedman also points out in the same chapter in Capitalism and Freedom that the idea of backing money is in its self “fiduciary” meaning fractional. Thus the Rothbardians that think fractional reserve banking is fraud may find themselves almost contrary. Of course they will tell you its no longer dollars but gold coins, and some think the government can magically run it while not intervene. As shown by Friedman that’s practically and politically impossible. I assume Stockman studied law or had some knowledge of tort and civil law would be able to understand the process and the complexity of the imposition of such statutes and that they are far more expansive and easily passed than many assume. While I don’t say no to free banking as Friedman does (possible changed later) I do think that Friedman’s argument is unfairly characterized as against gold standard and for fiat when it’s really unfavorable of government gold standard because a pure one run by the government can’t exist and it would be impractical.
Also regarding the idea of fractional reserve banking. I know that some Rothbardian out there is inching to tell me that Rothbard’s gold standard has no fiduciary notes. Please go read this wonderful article on fractional reserve banking by George Selgin, I think he explains himself very well.
It’s common conception that monetary policy is to be left to cranky academics, who sometimes make their models purposefully difficult to understand. However, things have changed. A lot of this has to do with the various political movements in the 2008 and 2012 elections. While more people interested in monetary policy is great the issue is there is a large portion of this new audience that has misplaced frustration. They are suspect inflation, always predicting asset bubbles and dislike fractional reserve banking.
The inflation issue is very simple. There has been little inflation since 2008. After the Lehman Brothers bankruptcy there has been a more deflation than inflation. The temperament of the new monetary crowd is to criticize central bankers because the do not understand the complexity of markets. This is absolutely true, however then they go to judge all monetary growth as inflationary. While in the long term the quantity theory holds true. In the short term it’s a little more difficult to judge every newly printed dollar. The demand for money is a crucial aspect and for some individuals to ignore it is wrong. Ignoring demand ignores the ability for money in an easing to raise prices. Yes, in the long-term if the Federal Reserve were to print a large amount of money, past its previous growth period then inflation could occur. But the assumptions that some of the hard money crowd assumes about money itself is extremely short sighted. While their claim that central bankers ignore the complexity of markets, I believe that they act the exact same way in ignoring the complexity of monetary theory.
It seems since the financial crisis the amount of asset bubble predictions has increased. Most of this is likely due to link between the housing bubble and the recession. The many talk show hosts and gold bugs with blogs that may or may not have seen the housing bubble come have now began calling out the next bubble. Every time an index goes up the United States is for some reason at risk of an inflationary recession. Easy money can cause inflation, and in some cases can cause recession and mal investment (maybe). However assuming that all economic downturns can be explained by one model is in accurate. The same individuals who believe that the entire current recession was caused solely by the housing crisis also believe that the Great Depression was caused by easy money. I blame such ideas on Murray Rothbard, who reasoned that a 2% monetary growth in the early twenties caused depression. This is of course hardly what occurred; in fact deflation is responsible for much of the depression. Why do these individuals reason from only interest rates or monetary growth, most likely because of their ignorance of economic methodology. Murray Rothbard for example thought that using aggregate demand and supply models was a crime akin to economic treason. For him every thing could be reasoned through a little thing called Praxeology. Basically all economic analysis can be accomplished through deductive reasoning. The issue with such a process is that in many respects it makes wide ranging assumptions about economic activities. The assumptions are absolute and while they claim to be understanding of human behavior unlike traditional aggregates they are really no different, maybe worse.
These new ideas in monetary policy are not as new as some would like to think of them. It’s mostly the rebirth of hard money economics, almost as bad as the loose money economics of the 70s. However, the issue is that there are various other schools that are the complete opposite, suggesting the inflation causes unemployment to go down. It seems that some inaccurately believe they understand the intricacies of the market and others believe such complexities do not exist. The misplaced frustrations of various thinkers to believe that under a hard money system that recessions can be avoided is inaccurate. History tells a different story.
In the end one has to understand that with monetary policy the same rules of complexity apply. One can’t assume that all money printed is inflationary; there are way too many factors for some shock jock to tell you to buy gold before 2010, 2012 or 2026…. The gold standard is another issue for another post but for now I think its important to realize that monetary policy is not as easy as Ron Paul or Greenspan make it out to be. Targeting unemployment and inflation, or even instituting a gold standard in the hopes of creating “sound” money won’t help avoid upcoming disasters.
In the last few months I have been delving into the rabbit hole that is the monetary policy blogesphere. I don’t regret it, I feel my knowledge and confidence has enhanced by a few economists. It was like a new set of eye glasses that put the world into focus. One of the most interesting things I read was on NGDP targeting and the revisiting by some bloggers (mostly Market Monetarists) of Friedman’s interest rate fallacy and Abenomics. With this I tried to see if Libya’s current disfunction is linked to poor economic policy. Of course as a monetary policy fanatic I focused on that first. The central bank of Libya is anything but accurate. I find that their website is difficult to navigate and all my data on Libya comes either from IMF or the World Bank. So, there is extreme difficulty in getting data. But from the data one can see that Libya is not Japan or the US in the sense that its position doesn’t mirror too little money but rather (most likely) too much.
Using the Market Monetarists 5% growth rate for nominal growth one can see that Libya after the war will be above the potential rate of growth since 2007.
Why I chose 2007 is simple, it was a year of moderate growth that was the basis for the function of Libya before external conflicts interrupted. If I set the rate of growth from 2000 or even 2005 I don’t think that captures a realistic growth path. Currency devaluation occurred between 2000-2005 that increased exports dramatically, as well much of the economic sanctions were removed, thus for a period the growth rate and state of the economy were irregular in the sense that that would be unlikely to occur gain. Thus basing the potential growth on 2007 is realistic but I will constantly review it, even the 5% might be too low. Based on historical performance I think an 8 or even 10% growth rate in NGDP would be healthy but Libyan macro data is highly inaccurate.
Anyways, you can see the gap between potential NGDP and actual (plus expected). If this is correct Libya could be out preforming and the monetary state might be expansionary. I believe that the graph is understating the projections for Libya. With a large part of the oil industry dormant and much of the international trade stalled I think that once the political situation settles I won’t be surprised if by 2015 they hit 150 Billion in US Dollars. Just based off of previous historical evidence of their trade one can see that in 2003 when the sanctions were lifted trade boomed. So, really the projections are understated and this is why I am proposing that the central bank possible look at a tighter policy in a year or so. Recreating the inflation of the 70s and 80s would be detrimental for Libya. The central bank would benefit from pursuing a nominal GDP target and if not, since tools are extremely limited in Libya, than even an M2 target would be suffice but only for a limited period. If the financial sector grows so does the complication of targeting quantity.
PS. There is much more to the Libyan economy than just monetary policy. But while I struggle with my Arabic while navigating the central bank’s website expect more of the wonderful world of Libyan macro in the coming days.
Libya could be an ultimate experiment in monetary policy for Monetarists or Market Monetarists in general. If such a policy occurs then possibly economists can see the effectiveness of monetary policy over fiscal policy. However, if anyone from the Libyan central bank reads this I stress that rules matter, toss that discretion right into the Mediterranean.
Since Rand Paul is under the spotlight for some (pathetic) plagiarism, his comments on auditing the Federal Reserve came into mind. This is not the first time Rand has supported such caused. His father had brought a bill to the house, which got the needed votes but Harry Reid blocked it. There are a lot of politics surrounding this bill, I don’t care for politics. Instead I think there is a way to make this auditing worth it in the long-run.Regarding the reasons people like Rand and Ron Paul want to audit the Fed, it is clear they see it as some anti-populist machine. They believe that the Fed is handing out money to select banks and individuals. While in a way that is true I wouldn’t call it unprecedented before the Federal Reserve was created, which is the standard that the Pauls want to return to.
First the reality is that an audit will get very little done. Compared to Greenspan, Bernanke is a very transparent chairman and Yellen will likely be the same. So, really auditing the Fed will not gather any information already not available to the general public. I fear that if auditing is allowed then officials will impose more influence over the Fed and repeat the mistake of the 60s and 70s by using the Fed to inflate the economy for political wins or to support their future unsustainable aims. If the GOP is scared of inflation then giving congress influence over the central bank will create a decade of inflation. When I listen to the conversations congressmen have on monetary policy I really believe that they don’t know anything about monetary policy. I might know more about it then them and I don’t know that much. Auditing the Fed really won’t help the political progress any more, I only see it as a one step towards a period of great inflation.
If Rand Paul or any of his anti-inflation colleagues want to restrain the Fed they should instead push Yellen to define specific rules of conduct for the Fed’s function. I understand that this is hard to get from a gold bug but they should realize that for the time being that rules can at least help market expectations improve and monetary stability to ensue. Of course not all rules are created equal. Some like the Taylor rule seemed to just create inflation outright. Various other rules or quasi rules such as using employment and inflation as a target are useless. This leaves only one rule, one rule to rule them all, and in darkness bind them (any Lord of the Rings fans on this blog). That rule is nominal GDP targeting. There are some slight variations of this rule, but the one promoted by Lars Christensen, Scott Sumner and their company of Market Monetarist is currently a highly viable solution.
NGDP target removes the political motivation, it defines a clear path for expectations, and above all reduces the role of central banks dramatically. It is by far the most free market solution to the current system. The gold standard is not viable and free banking is a little far away (still got hope though). If the GOP and the so called libertarians really want to propose real solutions instead of bucking the line that everything is inflationary then they must propose a policy of NGDP targeting. If you really want to understand how Market Monetarism is not “statists” read this article by James Pethokoukis. As well just read any market monetarist blog. I would also highly recommend reading George Selgin‘s writing on this issue of NGDP so that the free banking perspective can be clear. After all, NGDP targeting is not without its reservations but those reservations are for another day.
PS: Rand Paul’s plagiarism is getting out of hand, guess he might actually become a great president.
The difference between European and U.S. healthcare systems is not how humane the system is, but rather what form of imperfect competition is in place. In the single-payer healthcare of Canada and Scandinavia the market is structured as a monopsony. In the U.S. it is easily argued that the system is an oligopoly on both sides of the productions line, both in health provision and input supplies.
The implication of an oligopoly and monopsony is that inefficiency is occurring. This means that a lot of improper allocation is produced and that the market is nowhere near as capable of functioning at maximum efficiency.
In the U.S. you have a healthcare oligopoly behemoth so large only big oil gets close to its market dominance. From healthcare providers to insurance agencies the limited competition creates a market of high prices and in some cases low quantities. These situations are created by a variety of factors. First of which is subsidies. Compared to Canada for example the U.S. government spends more on healthcare per capita. This is surprising considering the fact that the Canada has government run hospitals. Most of this money is split between subsidies to pharmaceuticals and other healthcare product and service firms and Medicare. Subsidies while may lower costs give a competitive edge to certain firms. This creates the market dominance that some pharmaceuticals have as well as other health device manufactures. This causes prices not to react to market changes and thus one is left with large input prices into healthcare. This translates into high costs to consumers.
The other half of the picture is the oligopoly in insurance provision. In California two insurance companies control 44% of the market. This occurs even though California is the most competitive market for insurance companies out of any state. These oligopolies become the market and thus they control prices and from this you have the inability for prices to react to social needs. The reason for insurance oligopolies arises from many factors, most of which are linked to regulations. The lobbying body that is at the helm of corporations such as State Farm, Blue Cross and others is incredibly influential and cause of great harm to consumers. This lobbying body is not at just the federal level but deeply entrenched in the local and state levels. This creates the imposition of high costs that prevents competition. Once they control the market they do not negotiate regularly.
To solve such an oligopolistic structure only an introduction of competition can help. This includes revisiting regulations, removing subsides as well as targeting state legislators to have more streamlined regulations that are uniform and allow for interstate insurance markets. The incentives for large firms to yield power have to be removed. The programs that provide them with subsidies and contracts have to be terminated. The incentive for corruption has to also be removed. This is far more effective than legal or regulatory action.
Some will suggest pursing a single payer healthcare system. Such system has merits. The main one of which is low cost compared to the oligopolistic system. With one healthcare provider, the government, the bidding for supplies can drive down costs. This is the reason behind the cost effectiveness of single payer. In some ways it is far more fiscally conservative than a federally subsidized option. However this is where the buck stops. The corruption is far from ending in single payer than it is in an oligopoly. The theories of the Public Choice School of economics play perfectly in any illustration of single payer healthcare. The amount of corruption behind government contracts is tremendous. In Canada the cases have gone on for years. The last scandals have come from Quebec (McGill Health Centre) and Alberta (health expense scandal). Showing that such scandals can affect two completely different provinces.
Besides the obvious political ramifications of single payer there are obvious economic issues. A monopsony is not close to perfect competition. There are issues with long-term outlook and the subjective value of healthcare. While many systems of healthcare in Europe are roughly 20-40 years old. Their capitalization of the healthcare market did not occur till recently. And even now countries are beginning to introduce more market friendly reforms to help create long-term potential. Switzerland comes to mind when speaking of market reforms to single payer. As single payer has grown in Europe innovation has been more dependent on American research. This correlation has resulted in the need for market reform. As well as other economic freedoms are granted people’s wants for a wider range of services has forced for the introduction of more choices that are not provided through tax dollars but rather through private exchanges. This has also forced upon Europe more and more market reforms.
People that espouse the ability to bid down prices in a single payer are ignoring one glaring issue. When they drive down the prices they are not negotiating for a better product all the time. The government now represents the whole market and thus removes all possible forms of knowledge as to what to buy. Thus the balance between price and quality is based on one perspective not an aggregate. Couple this with the propensity to be corrupt with government contracts and a recipe for neglect is created.
I don’t have to drone anyone with the stories of avoidable deaths created by single payer systems. While such events took place the empirical evidence of a correlation and causation have not convinced me as of yet. However there is a higher chance theoretically of such incidents occurring because of structure of market. Information would not be traded and exchanged similarly to a free system thus whether or not an avoidable death occurred such an event would be unknown because of the monopoly on service. This is extremely important as proponents of single payer healthcare see it as just universal provision when it is really the exchange of knowledge and quality that drives health. Provision will only come successfully and sustainably when knowledge is exchanged and research is conducted.
The lost service and potential a government system creates is tremendous. A simple concept to compare it to is a monopoly plus monopsony plus a price ceiling. The amount of uneconomic allocation is profound. Such analysis into the misallocation requires one to suspend what can be seen and try to look past the first dimension and see what can’t be seen. In most single payer systems what can’t be seen is an aging population and increased costs. What can’t be seen is negative consequences on knowledge and increased asymmetry (contrary to popular belief) created by a monopoly (as well as a monopsony) and the assumption of having knowledge.
There are other issues with single payer healthcare that deal more with the philosophical aspects. Healthcare has been and can be provided in diverse ways by diverse channels. Unlike the arguments for roads, police, and fire fighters the argument for healthcare is a reaction to what is seen. The lack of humility and perspective in such ideas is caused by a poor understanding of economics. It is important to understand that there is no such thing as a free lunch and that nothing has intrinsic value.
There has been considerable talk about the adverse effects of ending quantitative easing and the rest of the Federal Reserve’s unconventional monetary tools. The talking has also been surrounding other unconventional central bank that partook in similar policies after the Great Recessions. What has to be clear is that it will end. When it will end and at what rate is the question.
Personally I don’t think that QE has been as distortive as pervious Fed policies. Previous ones lacked scheduling and had no end dates. Others included fiscal policy that worsened the situation. The housing crash is prime example where the president’s office pushed for more sub-prime loans and the initial change in monetary base was largely expansionary, this lead to the good all Hayekian mal-investment. QE is obviously different. The central bank is announcing whether its continuation or tapering constantly. It is always telling the markets that it might any day shutdown the operation, while its not perfect in its communication it is a large improvement over pre-2009 years.
However, for QE not to hurt the Fed must actually stop in the upcoming year or two. The policy must decrease in size and it must declare a more neutral policy afterwards. You don’t want a market that relies solely on the policy of the Fed. You want a return to moderation and monetary stimulus at least in the current construct of banking is only helpful to a point. The rest needs to be done through a market clearing approach so that health is restored to the market.
The most sensible approach for Janet Yellen or whomever takes over is to target NGDP. This is a clearer and more market neutral policy rule. If anything the Evans rule has not worked and in my opinion very unsustainable. While I see current policies as unsustainable and potentially not good enough to promote long term prosperity I don’t like the tone of some of Obama’s administration regarding bubble predictions. From my last post it is clear I have issues with the rhetoric in bubble predictions, bubble predicting is especially toxic if the Fed also participates. If you thought radio talk shows were the most dangerous predictors, wait till you see what happens when Obama tells Yellen to target bubbles.
PS When I mentioned that QE is not as distortive I think I misspoke. It is distortive but the issue is that theoretically not as capable of creating mal investment as some of the money flows to fill gaps in the money supply. However, the issue can arise in which the wrong gaps are filled and the wrong people get the money. Therefore, really QE is in advisable especially the current program. QE1 may be fine if under some strong rule and done earlier and held for longer. Slower rate might also be advisable.
There is a bubble in bubble predictions. These predictions are made by a variety of individuals from different political ideologies. These predictions aren’t articulated in a way to argue certain changes in GDP or changes in employment but predictions on cataclysmic changes in the economy. Whether they think George Soros is master minding international inflation or that the Bond market has a bubble, the futures market has a bubble, the derivatives market has a bubble, or the apple market has a bubble, to them it seems everything is bubbling except their book sales from their predictions. Money printing or not enough regulation causes all of this to them. The answer is vote for Bernie Sanders or buy gold from a questionable source, and the catch is that it’s a certificate not the real stuff.
The issue with predicting bubbles is that really no such thing exists. There is a misallocation but no bubble. One can’t say something is overvalued based on price alone. It’s a rash decision based on feelings and growth rates. When the housing crises occurred prices rose but that wasn’t the reason for that meltdown. Instead it is caused by years of poor policy by the Fed and the federal governments involvement in mortgage market. You can’t wave a magic wand and say that “well interest rates are low and it’s the governments fault” or that “a former CEO of Morgan Stanley is the Secretary of the Treasury therefore he is vouching for more derivatives trading” thus a bubble is created. Each effect has a cause but the causes are far more complicated than what Glenn Beck or some people over at Thinkprogress.org have you thinking (or unthinking in their case).
Some of the “predictionsists” that are famous for being right once and then being wrong every other time is Peter Schiff. Yes, he predicted the housing crisis but the housing crisis isn’t the entire piece of the puzzle when it comes to the recession. After his prediction he gained some airtime and with this airtime he started his media machine with books detailing a bad economy and a possible depression. Have any of his predictions since the 2007 come true? No. Inflation is not up; in fact deflation is a better prediction. Prices are stable, GDP growth is lousy but could be worse and thanks to a federal government stalemate the government has been relatively out of it so that at least no more intrusion can occur. Mr. Schiff would probably agree with me on the value of a free-market economy and possibly agree with me on fiscal policy (more likely supply-side) but I disagree on monetary policy. I am not a monetary genius, if anything I am a beginner. However I will note that not just his empirical evidence that is off but his methodology in arguing is also a little confusing. He claims to be an Austrian economist but from almost all the readings of Hayek and Mises I have read, they both were extremely careful making predictions. Their entire methodology was based on knowledge. Individuals lack the knowledge to know the future of an economy thus central planning is inefficient. This isn’t their whole argument but for F.A. Hayek this was extremely important. Yet Schiff seems to know everything about bond markets and how every single dollar is going to effect inflation, he knows the velocity and demand for money. He also knows when you are naughty or nice.
Predictions aren’t always bad but one has to be careful not to make them hastily. I am an economics student and I have a hard time getting over the math in economics, please don’t confuse me with your crazy predictions.
Here is an article on Peter Schiff’s predictions showing some his wrongs and right predictions at least his most public ones: http://www.economicpredictions.org/peter-schiff-predictions/
Also Nouriel Roubini is Peter Schiff’s distant cousin, right about the housing crisis, wrong ever since: http://www.economicpredictions.org/nouriel-roubini-predictions/index.htm
Both lists just go up to 2010, this site has really updated but I think this still speaks volumes.