Beckworth and Krugman on Quasi-monetarists

David Beckwoth recently linked to some criticisms of "hard money advocates" by Paul Krugman and some other blogs--such as Rortybomb. Beckworth agreed that some "hard money advocates" have made statements worthy of criticism from the quasi-monetarist point of view. Krugman responded, saying that he feels Beckworth's pain.

Beckworth and a few others are trying to keep the spirit of monetarism alive. What I mean by that is that, like Friedman, they’re trying to reconcile a conservative view of government’s proper role with a bit of macroeconomic realism. They accept that a recession represents a huge market failure demanding policy action. But they want to keep that policy action narrowly technocratic, limited to open-market operations by the central bank.

Market failure? Well, it depends. And technocratic? Them's fighting words!

Beckworth's response to Krugman was fine. Krugman had gone on to claim that the liquidity trap was real, and that open market operations in T-bills become ineffective with the short term nominal interest rates hit zero.

Beckworth explained, correctly, that while purchases of zero-nominal interest T-bills by the Fed might not do much good, that just means that the Fed should buy other sorts of financial assets. The point is to increase the quantity of money to meet the demand to hold money, or more exactly, what the demand to hold money would be if nominal expenditures on output were on target.

Beckworth also properly emphasized perhaps the most important change in emphasis for quasi-monetarists relative to the emphasis of orthodox monetarism. An explicit target for a growth path of money expenditures on output will do wonders in dampening actual fluctuations in money expenditures while avoiding any problems with the zero nominal bound on short and safe financial assets. It seems likely, in practice, that nothing more than a willingness to purchase long term or risky bonds would be necessary, and that liqudity traps can be avoided and only modest open market operations with ordinary T-bills would be necessary to keep money expenditures on an explicitly announced growth path.

Beckworth correctly points out that worries about the zero nominal bound are mostly about using the federal funds rate as an operating target. But there is more. Complicated rules about a somwhere between difficult and impossible to measure output gap along with keeping the expected price level rising two percent from wherever it happens to be now, are bad enough. Worse is the reality--generalities about high employment consistent with a commitment to stable prices that is obviously not taken literally. What the Fed is really trying to do is anyone's guess. Technocratic something or other.

Krugman's actual point was to criticize what he sees as the excessive conservatism of the Republican party. His oft-repeated, erroneous criticisms of quasi-monetarism were an aside. No, Beckworth and others (like me) supposedly have no political home, because the Republican party has given up on the tradition of Milton Friedman and has headed off into the the fever swamps of right wing extremism.

Of course, a few years ago, it would be difficult to imagine Krugman paying Friedman any kind of complement, if only a modest one. What I find most interesting is how this shows Krugman's extreme partisan focus. For him, it is all about the struggle between his heroic blue team and the wicked red team.

As someone who has always admired Milton Friedman, the notion that the Republican party of past years was devoted to implementing his libertarian policy preferences is a sad joke. I don't have a home in the Republican party? That is neither news nor is it a problem. I don't need to be on a political team, and I feel lucky when Republican politicians promote any halfway libertarian policy.

That the Tea Party has compelled the Republican party to at least rhetorically endorse a slightly more responsible fiscal policy, especially relative to the spend and borrow years of the Bush administration, is good news as far as I am concerned. How that all plays out will be seen as time passes. But what of monetary policy?

Beckworth linked to a post at Rortybomb, where Mike Konczal quoted a statement from the Club for Growth:

One of the pillars of economic growth is stable money – the most important responsibility of the Federal Reserve Board….

According to Konczal (and Krugman,) this is right wing quackery. But I heartily endorse that view, and would make it stronger-- the Federal Reserve's sole responsibility should be sound money.

The Club for Growth continued to criticize Fed-board nominee Peter Diamond:

While the Fed should be an independent institution to ensure sound money, Diamond is an activist-Keynesian who believes in a much larger role for government involvement in the economy. Most notably, he supported a larger stimulus than the failed one that passed into law in 2009. And he supports government-run healthcare administered through agencies similar to Fannie Mae and Freddie Mac….

I agree with the Club for Growth that if Diamond supports all of those things, then it does cast doubt upon his judgement. (On the other hand, from what I know of Diamond, there could be worse choices for the Board of Governors.)

And this leads to Krugman's claim that quasi-monetarists favor a "technocratic" approach to solving the "market failure" of recession. I think having the Fed implement some technocratic policy to do good is a mistake. Like many advocates of "sound money," I favor constitutional monetary reform to restrict the discretion of the technocrats at the Fed.

One reason I describe myself as a quasi-monetarist is because I believe the goal of such a reform is a stable growth path for money expenditures on output. I have given up on finding some good measure of the quantity of money and having some rule to control it, and have become very skeptical of an rule aimed at finding some appropriate measure of the price level and controlling its level or trajectory. I remain skeptical of a return to a gold standard.

Finally, while it would be nice if the market system was so good that it could overcome any interference created by wrongheaded government intervention, that is an unrealistic standard. As long as the Fed monopolizes the issue of base money, any recession due to a drop in money expenditures on output is a government failure--one that must be laid at the door of the Fed.

I admit, however, that it is likely that any fully private alternative monetary system would have similar problems to some degree--perhaps a larger degree. If we did have a privatized monetary system, then any recession due to a drop in money expenditures would be a market failure. But that isn't the world in which we live.