Printing Money Is Not Enough

Matt Yglesias again trots out his tired trope that "the Left" does not understand the importance of monetary policy:

Part of what I think goes wrong in the contemporary left’s understanding of this is that people have a kind of romance with the idea of the Works Progress Administration. [. . . H]owever, [. . .] lurking behind this fiscal measure is a monetary one. Under the fiscal system that prevailed between the wars, the government’s ability to spend money on public works was limited by its ability to get its hand on gold. This is why leaving the gold standard is so crucial, both here and abroad, to launching recovery from the Depression[.]

"The Left" fully understands this. But it understands something more - that printing money is not enough in a liquidity trap. In 1938, Keynes explained it to FDR:

The recovery was mainly due to the following factors:—

(i) the solution of the credit and insolvency problems, and the establishment of easy short-term money;
(ii)the creation of an adequate system of relief for the unemployed;
(iii) the public works and other investments aided by Government funds or guarantees;
(iv) investment in the instrumental goods required to supply the increased demand for consumption goods[.]
(v)the momentum of the recovery thus initiated.

Now of these (i) was a prior condition of recovery, since it is no use creating a demand for credit, if there is no supply. But an increased supply will not of itself generate an adequate demand. The influence of (ii) evaporates as employment increases, so that there is a dead point beyond which this factor cannot carry the economic system. Recourse to (iii) has been greatly curtailed in the past year. (iv) and (v) are functions of the upward movement and cease—indeed (v) is reversed—as soon as the position fails to improve further. The benefit from the momentum of recovery as such is at the same time the most important and the most dangerous factor in the upward movement. It requires for its continuance, not merely the maintenance of recovery, but always further recovery. Thus it always flatters the early stages and steps from under just when support is most needed. It was largely, I think, a failure to allow for this which caused the ‘error of optimism’ last year.

Krugman writes about the importance of fiscal stimulus today:

As Brad DeLong argues, there’s a very good case to be made that we’re currently living under conditions in which fiscal contraction actually worsens the long-run deficit. Why? The argument runs like this:

1. Fiscal contraction reduces output in the short run; this immediately means that part of the initial gain in terms of a lower deficit is offset by reduced revenue and higher safety-net spending. These effects are especially large when you’re in a liquidity trap, so monetary policy can’t fight the fiscal contraction.

2. Reductions in short-run output and employment take a toll on long-run growth, too: capital investment is depressed, workers lose their skills, and so on. This in turn reduces future revenues.

3. Meanwhile, with real interest rates very low — actually negative on 5-year bonds — the cost of borrowing now in terms of future debt burden is also very low.

So there is no plausible argument on behalf of the claim that fiscal contraction expands output; there is, on the other hand, a very plausible argument to the effect that fiscal contraction doesn’t even help the fiscal situation.

President Obama has unlearned the lesson of 1938. But there is no reason the Dems in Congress should follow him over that cliff.

Otherwise, we can all play John Maynard Keynes:

Unless, therefore, the above factors were supplemented by others in due course, the present slump could have been predicted with absolute certainty. It is true that the existing policies will prevent the slump from proceeding to such a disastrous degree as last time. But they will not by themselves—at any rate, not without a large-scale recourse to (iii)—maintain prosperity at a reasonable level.

Speaking for me only

< Roger Clemens Mistrial: Felony Stupid or a Fast Ball? | Federal Appeals Court Rules on TSA Body Scanners >
  • The Online Magazine with Liberal coverage of crime-related political and injustice news

  • Contribute To TalkLeft

  • Display: Sort:
    Joker of all trades. (5.00 / 4) (#1)
    by Addison on Fri Jul 15, 2011 at 02:53:13 PM EST
    How much does ThinkProgress pay Matthew Yglesias simply to know the URL of wikipedia and the basics of beltway common wisdom?

    Great post (5.00 / 1) (#2)
    by Dadler on Fri Jul 15, 2011 at 03:13:27 PM EST
    Simply creating new money, without a specific and targeted and humane planned use of it, for the benefit of the nation as a whole, and those who need the most help, without the kind of oversight and regulation we seem incapable of doing...of course that "new money" will end up with the same old crooks.  

    Dontcha know, Tent, it's still the damn progressives who are the real problem.  When was the last time any real progressive policy was put forth and fought for by this administration or congress?


    Right wing paradigms rule the day, and rule us.

    I need to check this (5.00 / 2) (#16)
    by observed on Fri Jul 15, 2011 at 05:59:07 PM EST
    Out on FOX, stat!

    Hahahahahaha! (5.00 / 1) (#17)
    by Zorba on Fri Jul 15, 2011 at 06:29:18 PM EST
    Okay, I just spewed my tea on the keyboard- you may owe me a new one!     ;-)

    The problem is it ain't just Fox (5.00 / 1) (#19)
    by Dadler on Fri Jul 15, 2011 at 06:34:34 PM EST
    All the network talking head-givers have bought into this debt ceiling theatre of the absurd.  I'd like to think FOX is going to fall too, but I'd like the others to fall in their own way as well.

    I'm staying tuned, but I do like Grinch Murdoch's chest ripped open and his heartless state revealed for all to see.


    The problem, (none / 0) (#21)
    by cal1942 on Sat Jul 16, 2011 at 02:04:26 PM EST
    right-wing dominance, is far, far deeper than the Murdoch empire.

    It depends (5.00 / 1) (#4)
    by Warren Terrer on Fri Jul 15, 2011 at 03:33:52 PM EST
    who is printing the money. When the Fed prints money it exchanges it for some other financial asset, typically treasuries but not always. This is called 'monetary policy'. This results in a net money creation of zero and hence no stimulus.

    The Treasury, otoh, creates financial assets, treasuries, which it exchanges for money, then it spends that money into the system. This is 'deficit spending' and is a form of 'fiscal policy'. This results in net money creation in the private sector, which is stimulative.

    Matt's main point seems to be we can't have recovery without inflation. And yet we have had good economic times in the past without inflation, and bad economic times with inflation. It does not follow that inflation must arise from a good economy.

    I think you wrong about the net zero (none / 0) (#10)
    by Militarytracy on Fri Jul 15, 2011 at 04:37:16 PM EST
    creation, unless you are taking into consideration that it has caused a huge meltup in the markets and now risk is mispriced and we have new asset bubbles that will eventually blow.

    Stocks (none / 0) (#12)
    by Warren Terrer on Fri Jul 15, 2011 at 05:08:21 PM EST
    aren't money.

    True in a way, but not (none / 0) (#14)
    by Militarytracy on Fri Jul 15, 2011 at 05:27:00 PM EST
    People are borrowing against them, they have worth and are generating wealth by the opinion of some.  What about bonds, do you consider them money?  Is there really a difference between asset worth that is being borrowed against and your definition of money?

    Reagan mythology leading US of a cliff (5.00 / 1) (#18)
    by Dadler on Fri Jul 15, 2011 at 06:31:59 PM EST
    Dadler (none / 0) (#22)
    by cal1942 on Sat Jul 16, 2011 at 02:14:35 PM EST
    thanks for the link.

    If only Obama and the Dems (none / 0) (#3)
    by shoephone on Fri Jul 15, 2011 at 03:18:02 PM EST
    had been willing to force a real discussion -- even battle -- over monetary vs. fiscal policy. But considering that there has been no jobs bill in the first 2-1/2 years of this administration, and considering that the CW is that Obama can't get one through Congress now, it's guaranteed we won't be getting out of the current economic doldrums for a long time yet. What a shame that so much time and so much political capital was wasted.

    I wish I had even a feeling that he would (5.00 / 1) (#11)
    by Anne on Fri Jul 15, 2011 at 05:07:09 PM EST
    have used that political capital on a fiscal/monetary policy agenda in ways that I would have expected from a Democrat - the traditional kind, that is - but I don't now and I didn't throughout the 2008 campaign.

    What's so tin-foil-y about all of it is that his failure to assert the right kinds of policies has helped bring us to where we are - to the point where he believes he can actually make a case for this getting-our-fiscal-house-in-order baloney; he actually sees that as what he has to sell.

    Worse, there has been so little pushback from the Democratic caucus - the few voices that have been raised in opposition to this insanity have been - surprise - marginalized and cut out of the process.  There seems to be more opposition now, but we've seen that play before, and it always ends the same way: they had no choice if the Republic was to be saved; they will have done "the best they could."

    The media, of course, has joined in the sales job, and done little to educate the public, choosing instead to propagandize for the administration.

    Seriously, it's Iraq all over again, and I have the same sick feeling that there's no stopping this, either: the fix is in.


    At the moment the Murdoch and (none / 0) (#15)
    by oculus on Fri Jul 15, 2011 at 05:43:44 PM EST
    incandescent light bulb issues are at the top of the headlines.  

    Great letter (none / 0) (#5)
    by rdandrea on Fri Jul 15, 2011 at 03:36:09 PM EST
    Thanks for posting the link.

    QE2 was doing nothing but printing money (none / 0) (#6)
    by Militarytracy on Fri Jul 15, 2011 at 04:21:48 PM EST
    It ended June 30,but it was still going on during the entire month of June, and May, and April as things continued to slide farther and farther South for real people....the little people.  Printing money at this point will not help, they are doing it to prevent deflation and it is causing commodities to rise and that is making things even worse for real people....the little people.

    Everything Obama is doing is more destructive to what is left of the economy.  He never wanted to be the next FDR though.  Remember, New Deal economics doesn't work anymore according to him.

    I'd like to print some money to get into the (5.00 / 2) (#7)
    by jeffinalabama on Fri Jul 15, 2011 at 04:30:06 PM EST
    economy, but I think the T-Men would come after me pretty quickly.

    Or I'll print JEffBucks. After people begin to believe in them, they'll be an alternative currency. After all, who doesn't have full faith and credit in Jeffinalabama? Other than the ex-Jeffinalabama...


    There were some folks making their (none / 0) (#9)
    by Militarytracy on Fri Jul 15, 2011 at 04:34:41 PM EST
    own currency recently, they got a visit :)

    A very interesting take on (none / 0) (#8)
    by Militarytracy on Fri Jul 15, 2011 at 04:33:49 PM EST
    the current failure of quantitative easing and a very feasible outcome that should be a little bit frightening to the Fed because as they head into QE3 and buying longer maturity bonds...it is on its last leg in what it can do and it is creating a perfect storm for a larger disaster than 2008 ever thought of being.

    Not a puzzle (none / 0) (#20)
    by cal1942 on Sat Jul 16, 2011 at 01:40:52 PM EST
    President Obama has unlearned the lesson of 1938.

    Obama's example of transformative has always been Reagan.  Roosevelt was transformative; arguably more than Lincoln but we never hear that from Obama.  

    He may have said something decent about FDR but if he did I can't remember.

    He's even assaulting FDR's Social Security.

    The whole "something big" that Obama goes on about is his ego revealed.  I believe he really thinks that slashing government is important and wants that to be his legacy.  Just like St. Ronnie.