Home > Main > Anti-Democratic Conspiracy in the Economics Profession

Anti-Democratic Conspiracy in the Economics Profession

April 22, 2011

Since 1967, it has been obvious to economists the dual mandate is BS.

It is difficult for me to write this post, but I suspect it is true.  There is an anti-democratic conspiracy in the economics profession.

“Sargent and Wallace published their classic “Some Unpleasant Monetarist Arithmetic” in the Minneapolis Fed’s Quarterly Review in 1981. Since that date, there has been a growing appreciation of the role of fiscal policy in the determination of the price level. The idea is a simple one. Consider a government that borrows only using non-indexed debt denominated in its own currency. There is an intertemporal government budget constraint that implies that the current real value of government liabilities — including the monetary base — must equal the present value of future real surpluses. Because the liabilities are nominal and non-indexed, the government budget constraint provides a linkage between the public’s assessment of future real tax collections and government spending and the current price level.More subtly, regardless of the FA’s solvency, sovereign debt issues can fail simply through a co-ordination failure among investors. If I, as an investor, don’t anticipate that others will buy into the debt issue, I won’t either. In this sense, sovereign debt issues may be susceptible to suboptimal “runs”. The CB can eliminate this possibility by ensuring the nominal promises of the FA whenever the FA is threatened with default.

Thus, I see trade-offs. On the one hand, the CB is known to be willing to intervene to keep the FA solvent, then inflation is necessarily shaped by fiscal considerations and by the short-run incentives of elected officials. We know from many years of theoretical and empirical research that this effect is not a desirable one. On the other hand, if the CB is fully committed to allow the FA to default if necessary, then even optimal debt management by the FA may end up exposing the country to troubling risks.

Let me wrap up. I’ve argued that even if the fiscal authority borrows exclusively in its country’s own currency, the central bank can have a large amount of control over the price level. But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default. Such a commitment may expose the country to risks of short-term and medium-term output losses. How this trade-off should best be resolved awaits future research. But I suspect that it may be optimal for central banks to guarantee fiscal authority debts in some situations. If so, we again have to think of price level determination as something that is done jointly by the fiscal authority and the central bank — just as Sargent and Wallace taught us 30 years ago.”

Read the quote from Kocherlakota carefully.

  1. Economists have known for at least 30 years the FA (aka The Treasury) controls or at least impacts the inflation rate under reasonable assumptions.
  2. They told people for decades that the MA controlled the inflation rate exclusively while badgering the FA to keep balanced budgets.

Then, go read the paper he references in his first line.  In the first paragraph of that paper, Milton Friedman is quoted as saying in 1967 that monetary policy cannot impact unemployment or aggregate demand.

Yes, there are huge risks in letting people know that they can always print money.  It is vastly dangerous.  There are risks in letting the Treasury control inflation and unemployment, because the Treasury is controlled by Congress.

It is also democratic to allow congress to control the Treasury. That’s what we agree to when we remain in the United States, instead of moving to a dictatorship where government spending is controlled by a central authority, or to a non-existant libertarian paradise where there is no Congress or government spending.

Basically, the entire economics profession mis-represented basic facts to non-insiders, so a non-elected cabal with a vague mandate and nearly zero accountability could try to control the fate of the world economy through an imperfect tool that only works if they are willing to let their friends and family suffer.

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  1. beowulf
    April 22, 2011 at 11:34 am

    The Federal Reserve– or any exercise of federal executive power not subject to President’s direct authority– is of dubious constitutionality. A peripheral issue I guess, more info at link for anyone interested.

    Congress could clear this up by passing a one page bill that amends two subsections of the US Code.
    1. Give Tsy power to create interest-free money for govt spending. This could be done by deleting subsection “b” of the US Notes statute (31 USC 5115), which limits US Notes in circulation to $300 million and their use as reserves .The remaining subsection “a” allows the Secretary to issue US currency notes in the form (so paper or electronic) and denomination he prescribes. It would allow Tsy (if President wished) to move to a no-bond system at any time.

    2. Amend Federal Reserve Act to squarely place Federal Reserve under the control of the Secretary of the Treasury, most easily by Congress striking from Sect. 10.6 (12 USC 246) the words between the asterisks:
    “any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent *** appears to conflict with the powers of the Secretary of the Treasury, such powers*** shall be exercised subject to the supervision and control of the Secretary.”

  2. January 19, 2012 at 3:21 am

    I believe in freedom of speech, the man can spout his oral diarrhea all over the place for all I care, but lately he seems to be getting more militant and along with the 9/11 truth movement, there seems to be a growing number of Americans who are anti-Obama and anti-government.

    In my opinion, the Alex Jones’s of the world simply do not understand the nature of Islam and have been using 9/11 as the frame of their treacherous conspiracy theories. Conspiracy theories were always prevalent, but not as much since the WTC attacks and the use of the internet to reach the masses.

    As Americans, I think we should be tough on those bastards and now is the time to really show our support for Obama, the government and our democratic way of life.


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