There were four posts yesterday. The first was “The Monetary Base, IS-LM, And All That (Very Wonkish):”
Cullen Roche weighs in on my arguments about the usefulness of IS-LM — and I think we’ve reached a moment of impressive clarity. Basically, we aren’t having a real argument about the economic substance, on which we appear to agree. Instead, Roche and others are misunderstanding both what I mean by IS-LM and my reasons for invoking it in our current predicament. And much of the blame probably rests with yours truly: I probably haven’t been explicit enough about what I’m doing and why.
First things first: one thing I do think Roche gets wrong is misunderstanding the reasons I cite Tobin-Brainard (pdf). Yes, it’s half a century old, and it discusses things like changes in reserve requirements as a tool of policy that don’t happen any more. But the whole point of the paper was to ask what would happen if all that stuff went away, if we started to have financial intermediaries that don’t hold reserves at the central bank. In effect, it was an attempt to anticipate the world we now live in, where even commercial banks hold minimal reserves in normal times and there’s a large shadow banking sector that has no reserve requirements at all.
They asked, would the central bank still have power in such a world? Their answer was yes — and they were right! Until we hit the zero lower bound, central banks clearly retained the power to set short-term interest rates, and this in turn gave them lots of traction on the real economy.
But in this more complex world, where even the definition of the money supply becomes highly dubious, why even talk about an LM curve? Well, before 2008 most macroeconomists didn’t! They talked instead about interest rate targets, Taylor rules, and all that. Mike Woodford, who is probably our leading macroeconomist’s macroeconomist, has even made one of his signature modeling tricks the building of models in which there is (almost) no outside money. Sensible macroeconomists have known for a long time that quantity-theory type models, if they were ever useful, aren’t much use in the modern economy.
So why am I bringing IS-LM into the discussion? First of all, I should have been much clearer than I have been that the LM curve I’ve been drawing is for a given monetary base, not a given M1, M2,or whatever. I guess I haven’t said that clearly, although it’s implicit in my old Japan paper (pdf), where I do state clearly the point that in the liquidity trap the central bank, while it can control the monetary base, generally can’t control broader monetary aggregates.
But still, why use any kind of “quantity-centric” approach at all? The answer is, to refute the bad guys! Remember, in 2009-2010 there were a lot of people pointing to the rapid rise in the monetary base and declaring that massive inflation was coming any day now; some of them are still waiting. So I rolled out good old IS-LM to show that in a liquidity trap they were all wrong, that even a huge increase in the base would go nowhere.
This conclusion, by the way, did not depend on interest on excess reserves. As I’ve pointed out in the past, Japan did a massive quantitative easing without IOER, and the results were basically the same — nothing much — as QE here. Of course IOER offers a new tool of monetary control — Woodford talked all about that in the 12-year-old paper cited above. But the fundamentals haven’t changed.
So, if and when we finally emerge from this trap and reenter the world of significantly positive short-term interest rates, will I still be talking in terms of IS-LM? In normal times central bank monetary policy is conducted in terms of, and best thought of in terms of, the target interest rate — and I won’t have to worry about refuting the inflationary scare stories of Allan Meltzer et al. So the LM curve will go back into the drawer. But I will keep it there in case I need it again; it has come in very useful these past five years.
That’s one of my very favorite Monty Python bits. The second post of the day was “Singapore Is The New Chile:”
Remember the 2005 Social Security debate? George W. Bush had just been returned to office; his campaign was focused on national security and social issues — as I like to say, he ran as America’s defender against gay married terrorists — but as soon as the returns were in, he declared that he had a mandate to … privatize Social Security.
During the war of ideas that followed, conservatives repeatedly pointed to the example of Chile, with its privatized retirement scheme, as a shining role model for America to follow. Nonetheless, American voters, it turned out, really really didn’t like the idea of meddling with Social Security, and the Bush campaign fizzled away into slow debacle.
And then a funny thing happened: it turned out that the Chileans didn’t like their system either; it was massively reformed in 2008:
The cornerstone of the new law sets up a basic universal pension as a supplement to the individual accounts system.
In other words, Chile moved its system a substantial way towards being like, um, Social Security.
In the health reform debate, Singapore has played much the same role for conservatives that Chile played on Social Security — once again it was a small, far away country of which we know nothing, which supposedly had a wonderful health system based on free market principles. As Aaron Carroll has been pointing out, Singapore’s actual system is much less free-market, and involves much more government intervention, than legend has it. In any case, however, guess what: it turns out that Singapore isn’t happy with the system, and has just reformed it in a way that makes it much more like … Obamacare.
The third post yesterday was “Don’t Let The Government Get Its Hands On Obamacare!”:
Lots of people having fun with this great report from Jason Cherkis at the Kentucky State Fair:
A middle-aged man in a red golf shirt shuffles up to a small folding table with gold trim, in a booth adorned with a flotilla of helium balloons, where government workers at the Kentucky State Fair are hawking the virtues of Kynect, the state’s health benefit exchange established by Obamacare.
The man is impressed. “This beats Obamacare I hope,” he mutters to one of the workers.
This goes along with all the polling evidence, which says that people like the actual provisions of the Affordable Care Act, but have no idea that those provisions are in fact the substance of that terrible, tyrannical “Obamacare” program they keep hearing about. And because the insurance exchanges that are at the heart of the program will be run at the state level, with many different names, we’ll have quite a few people happily signing up for Obamacare while denouncing the program and believing it has nothing to offer them.
And I say that it’s all good.
It’s true that Democrats running in 2014 will have the extra problem that even people who are getting big benefits from the new program may not understand who to thank. On the other hand, the first and most crucial thing is to get the program up and running, with as many eligible people as possible — especially the relatively young and healthy — signing up. And Republican efforts to dissuade people from joining Obamacare will be blunted to the extent that Americans have no idea that Kynect, or Your Health Idaho, or whatever is in fact the local incarnation of the dread program.
Given all the disinformation out there, the strategy of think globally, name locally is actually a great idea. Eventually people will probably figure out that it is in fact a federal program — although maybe not, since a fair number of people apparently don’t know that about Medicare. But by the time they do, they’ll have experienced the thing’s reality, and realized that guaranteed, subsidized insurance is not, in fact, slavery.
The last post on Friday was “Friday Night Music: Lucius, Go Home:”
I first found this band on a Tiny Desk Concert, which was wonderful; but I’ve been checking in every now and then for more recent performances, and they have gotten even better — incredibly intense. Wait for the 3:10 or so mark: