Anti-Democratic Conspiracy in the Economics Profession
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.
- Economists have known for at least 30 years the FA (aka The Treasury) controls or at least impacts the inflation rate under reasonable assumptions.
- 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.