Posts Tagged ‘Milton Friedman’

Fig 48

Donald Trump is right—and his critics are wrong. (I’ll bet you never thought you’d read that on this blog.)

This one actually comes from a reader (ht: db) who wanted to know what I thought of the recent article by Ellen Brown on the debate concerning Trump’s “reckless” proposal to “print the money.”

First, though, a couple of key corrections: First, modern money takes the form of both bank deposits and currency (bills and coins).* Second, while sovereign governments (like the United States) can create money, they don’t print it (at least most of it). Instead, they create it electronically by purchasing financial assets or lending money to financial institutions (as with the various rounds of so-called quantitative easing, which increased the Fed’s holdings of mortgage-backed securities and other forms of bank debt and were purchased by new money that simply appeared on the banks’ computers).

Aside from that, Trump is right (as Brown explains), both historically and theoretically.**

The United States has long created money—to finance war, to purchase private and public debt, and so on—stretching back to Abraham Lincoln’s $450-million greenback program on up to the total of $4.2 trillion across three rounds of quantitative easing. In every case, it was money created by the government from nothing.

And, theoretically, that’s exactly how government money creation works. The only real distinction that needs to be made is between using the newly created money to purchase private debt and thus to create bank reserves (as was the case with quantitative easing) and using it to directly finance government deficits or to pay off government debt (otherwise known as monetizing the debt). The latter usually falls under the rubric of “helicopter money,” a term coined by Milton Friedman in his now-famous paper “The Optimum Quantity of Money”(pdf):

Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.

The effects are, of course, different in those two different uses of government-created money but the basic idea—that a sovereign government can create money for many different purposes—remains the same. It’s simply not controversial—or at least it shouldn’t be.

The only real issues from the government creation of money are (1) timing and (2) who benefits. Obviously, creating more money under conditions at or close to full employment has implications that are very different from a situation characterized by less than full employment (as has been the case for the past eight years). If resources are not being fully utilized, more money (helicopter or otherwise) does not lead to hyper-inflation. So, the critics who claim that, under current conditions (with millions of people who are unemployed or underemployed), creating more money is inflationary are simply wrong.

As for who benefits, that’s the real controversy—and the issue that is rarely discussed. Creating money to finance purchases of private debt from banks obviously improves bank balance sheets (and the incomes of their owners and the power wielded by the boards of directors) but it doesn’t necessarily stimulate economic growth (if banks are unwilling to lend, because for them it’s not profitable), and it doesn’t help homeowners and others who are drowning in debt. In fact, one can argue, as former head of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota recently did, that Federal Reserve’s policies after the Great Recession actually contributed to increasing wealth inequality in the United States.

That’s the real issue, as it is with all forms of government financing. Who benefits? Think about increasing taxes versus running deficits. Would wealthy individuals prefer to be taxed to finance government expenditures or, instead, do they want to be paid (via interest payments) for the privilege of lending money to the government? The answer is obvious.

Continually raising the specter of deficits and debt keeps the debate within their purview. Their real opposition to creating money is based on the fact that they’d have less control over the amount and kind of government expenditures that might be made. Things might get out of control—not the price level (that’s just a scare tactic, which too many people fall for), but the mass of ordinary people. They’re the ones who could demand and who would benefit from new schools and better-paid teachers, clean drinking water and more drug clinics, programs that offer jobs as well as assistance in forming worker-owned enterprises, and so much more through the expenditure of government-created money.

That, of course, is not what Trump (or, for that matter, Clinton) is proposing. But it’s the issue that really should be at the center of economic and political debate in the United States.

 

*When a bank makes a loan, a deposit is created in the borrower’s bank account. Thus, new money is created as a bookkeeping entry, with the loan representing an asset and the deposit a liability on the bank’s balance sheet. Thus, for example, the total amount of U.S. money (defined in terms of M1) at the end of April 2016 was $3,184.9 billion, the major components of which were currency ($1,365.9 billion) and bank demand deposits ($1,298.4 billion). Currency is an even smaller proportion of “near money” (defined as M2), which totaled $12,659.3 billion at the end of April.

**At least right now, unless and until Trump changes his mind and announces a very different approach.

keep-calm-and-kick-racism-out-of-football

Is there racism in modern football?

There is according to former Manchester United defender Rio Ferdinand. And not only in football.

There have been a string of incidents over recent seasons, with CSKA Moscow’s European Champions League tie with Bayern Munich on Tuesday held behind closed doors due to a racist incident in last season’s competition.

Brazilian club Gremio was banned from a cup competition in September after an opponent’s goalkeeper was racially abused during a match.

And Ferdinand thinks heftier fines would act as firm deterrent, with stadium bans dished out to repeat offenders.

“If it’s going to be money, then it’s got to be huge amounts,” he explained. “There’s vast amounts of money in the game so it should be reflected in the punishment.

“If you’re going to hand a Federation a £60,000 ($96,000) fine when that Federation’s pulling in millions a year that is not going to hurt. So it’s got to equate to what they generate I think. Or you ban them from playing in their home country.

“If you say to a country ‘Listen you’re not going to play your national games in your country now after what just happened in the stadium,’ I think the fans will start thinking a bit differently.

“And as I said that doesn’t stop racism. It just stops it in a stadium.

“So that’s why I always talk about a bigger idea on racism and a social element rather than just football but it stops it in a stadium and hopefully that can be then hopefully replicated, maybe, in society.”

But not according to Chelsea manager José Mourinho.

Chelsea manager Jose Mourinho says “there is no racism in football”, amid calls to introduce American Football’s ‘Rooney Rule’ to the game in England.

With only two black managers in the Premier League and Football League, such a rule would require at least one black or ethnic minority candidate to be interviewed for each vacancy.

But Mourinho said: “Football is not so stupid to close doors to people.

“If you are good, you get the job. If you are top, you are top.”

Clearly, Mourinho is channeling his inner Milton Friedman.

shock_doctrine pinochet2

The Wall Street Journal, it seems, can’t get enough of Chilean dictator General Augusto Pinochet.

Just last week, the editorial board published a statement in which they argued Egyptians would be fortunate if their newly installed military government behaved like Pinochet’s.

As it turns out, they expressed their admiration for Pinochet in an earlier opinion piece, published in 2010 [ht: mfa] arguing that Chile had survived its earthquake better than Haiti had because of the years of Pinochet dictatorship:

One reason is luck, as the quake hit offshore and away from populated areas, save for the city of Concepción. But even in that city of one million, the death toll might have been worse. That it wasn’t is due in part to Chile’s stricter building codes, which have been developed over long experience with quakes along the Eastern Pacific fault line. Chileans have prepared well for the big one.

But such preparation is also the luxury of a prosperous country, in contrast to destitute and ill-governed Haiti. Chile has benefited enormously in recent decades from the free-market reforms it passed in the 1970s under dictator Augusto Pinochet. While Chileans still disagree about Pinochet’s political actions, they have not repealed most of that era’s economic opening to the world. In the 2010 Index of Economic Freedom, compiled by the Heritage Foundation and this newspaper, Chile is the world’s 10th freest economy. Haiti ranks 141st.

There is, of course, no mention of the brutality of the dictatorship itself—or, for that matter, of the fact that Chile currently has one of the most unequal distributions of income in all of Latin America, which is a legacy of the way the economy was restructured (with the help of Milton Friedman and the Chicago Boys) under Pinochet. As for Haiti, the fact is the country was unprepared precisely because of the legacy of a pair of U.S.-backed dictators and of the successful implementation of “free-market” reforms.

But facts certainly won’t stand in the way of the Wall Street Journal‘s sympathy for the dictator Pinochet.

Jeff Wall, “A Sudden Gust of Wind (after Hokusai)” (1993)

Uncertainty is all the rage right now, with a wide variety of economists and central bankers “discovering” its disturbing effects in the midst of the current crises of capitalism.

But I’ll bet it’s just a passing fad. As soon as things return to normal, uncertainty will be put back on the shelf and, once again, be tamed and domesticated.

As I’ve shown many times over the last few years, the failure of mainstream economics has prompted a rediscovery of uncertainty—not unlike during the First Great Depression when Keynes argued that investors were subject to fundamental uncertainty (as against probabilistic risk) and therefore guided not by rational calculation but by “animal spirits.”*

The latest to announce the relevance of uncertainty is Andy Haldane [ht: sb], Executive Director for Financial Stability at the Bank of England—who, according to Ismail Erturk et al., has become the bank’s “radical house intellectual who, through his interventions after the crisis, has become the darling of the intelligentsia.”

On one hand, there’s something refreshing about Haldane’s critique of mainstream economics.

The notion of not knowing, of imperfect information, of uncertainty (as distinct from risk) got lost from economics and finance for the better part of 20 or 30 years. . .

I think one of the great errors we as economists made in pursuing that was that we started believing the assumptions of economics, and saying things that made no intellectual sense. The hope was that, by basing models on mathematics and particular assumptions about ‘optimising’ behaviour, they would become immune to changes in policy. But we forgot the key part, which is that the models are only true if the assumptions that underpin those models are also true. And we started to believe that what were assumptions were actually a description of reality, and therefore that the models were a description of reality, and therefore were dependable for policy analysis.

On the other hand, Haldane’s critique is quite limited, in at least two senses. First, it’s haunted by a nostalgia for a better time, before the neoclassical synthesis, and thus harkens back to the work of Hayek, Keynes, and Friedman, who “were all some hybrid of economist, sociologist, mathematician, political scientist and philosopher” and understood that “our socio-economic knowledge might be deeply imperfect.” Second, it quickly moves beyond the problem of uncertainty, by attempting to replace the physics-inspired certainty of the neoclassical synthesis with the life-sciences certainty of evolution. So, in the end, he really does know what happened:

For example, the notion of ‘too big to fail’ is a form of evolutionary equilibrium founded in a set of self-reinforcing state interventions, each of which individually made sense. Because if a bank goes bust, it may make perfect sense for a government to ride to the rescue, which in turn gives rise to a set of incentives for those running the banks, which makes the next bank failure even bigger, which states then have to deal with. This creates a ‘too big to fail equilibrium’. And therefore to tackle that evolutionary problem you need to break the cycle. In the case of banks, you can fine them, you can regulate their behaviour, but unless and until this structure of incentives is altered, to change this fundamentally, you won’t reverse the cycle.

In the end, Haldane’s critique is really only aimed, looking backward, at the uncertainty concerning the particular set of assumptions of the neoclassical synthesis. Moving forward, it leaves open the door for a new science of economics and a new warrant for certain economic knowledge—to understand and then regulate the banking system—based on evolution and complex systems. In that world, the only role for uncertainty is to create the conditions for a new kind of authority.

Mistakes will be made – that is in the nature of public policy. The important thing is that they are made, when they are made, for the right reasons. That they’re honest mistakes, they’re technical mistakes, that anyone could have made given how uncertain the world is. That’s what protects you. That’s what gives you authority. It sounds perverse that admitting to mistakes can be credibility enhancing, can be authority enhancing. But my very strong view is that that is the only thing which can protect you, can enhance understanding and therefore authority.

In Haldane’s world, uncertainty is a problem that can be explained (with the correct set of models) and then used (e.g., by the Bank of England) to create a new kind of regulatory authority. It is precisely not an issue of “undecidability” or “indeterminacy” that challenges the pretenses and protocols of modern economic knowledge.

Thus, I am quite certain that, once again, it will be put back in the box—once Haldane and others believe that the gust of wind has passed, the regulators’ control has been reasserted, and the banks return to business as usual.

*This is radically different from the current mainstream-economists-for-Team-Republican focus on policy uncertainty, which is just another way of arguing for continuing the Bush-era tax cuts for wealthy individuals and large corporations. Mike Konczal does a good job taking apart the mainstay of their approach, the economic policy uncertainty index.

No wonder students walked out of Greg Mankiw’s principles of economics class: the best he can come up as a way of responding to the Occupy movement are two patronizing clips from Milton Friedman.