George Selgin


George Selgin is a Professor of Economics at the University of Georgia's Terry College of Business. He is a senior fellow at the Cato Institute. His research covers a broad range of topics within the field of monetary economics, including monetary history, macroeconomic theory, and the history of monetary thought. He is the author of The Theory of Free Banking (Rowman & Littlefield, 1988), Bank Deregulation and Monetary Order (Routledge, 1996), Less Than Zero: The Case for a Falling Price Level in a Growing Economy (The Institute of Economic Affairs, 1997), and, most recently, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage (University of Michigan Press, 2008). He has written as well for numerous scholarly journals, including the British Numismatic Journal, The Economic Journal, the Economic History Review, the Journal of Economic Literature, and the Journal of Money, Credit, and Banking, and for popular outlets such as The Christian Science Monitor, The Financial Times, The Wall Street Journal, and other popular outlets. Professor Selgin is also, a co-editor of Econ Journal Watch, an electronic journal devoted to exposing “inappropriate assumptions, weak chains of argument, phony claims of relevance, and omissions of pertinent truths” in the writings of professional economists. He holds a B.A. in economics and zoology from Drew University, and a Ph.D. in economics from New York University.


Parliament to Scottish Nationalists: "Get Your Own B__y Money!"

by George Selgin November 27th, 2013 5:50 pm

There are, I'm sure, some parts of the Scottish National party's recent blueprint for an independent Scotland to which the British government might reasonably take umbrage.   But the plan's call for Scotland's continued use of the pound sterling, which has drawn the most criticism, isn't one of them.

The pound sterling has been Scotland's monetary unit since 1707, when the Act of Union led to its adoption in place of the Pound Scots.  Scotland's actual paper currency, on the other hand, has mainly consisted of sterling-denominated notes supplied by several of its own commercial banks.    The nationalists' proposal is therefore  largely (though not entirely) a call for adhering to the status quo, and a rejection of the alternatives of either adopting the Euro or having Scotland once again establish an independent monetary standard.

How has such a seemingly reasonable and innocuous plan managed to ruffle Parliament's feathers? According to The New York Times, the British government

says it is unlikely to agree to share the pound with an independent Scotland, citing the problems experienced by the 17-nation euro zone to illustrate the dangers of a common currency without political union. London says it would be difficult to have the Bank of England act as guarantor of the pound if Scotland had a different fiscal policy from Britain, for example. Nationalists hint that if Scotland cannot keep the pound, it will not accept its share of Britain’s debt.

Now I've no dog in the fight over Scottish independence, but it seems to me that the folks who are saying this hae git thair bums oot the windae. For starters, an independent Scotland would hardly need the British government's permission to go on using the pound sterling: it's hard to imagine how the U.K.-sans-Scotland could prevent Scottish citizens and banks from continuing to use the pound without resort to such Draconian legislation as would make U.S. money-laundering laws seem toothless in comparison. In both England and Scotland today, for example, it's perfectly legal for banks to offer foreign currency demand deposit accounts, not to mention other sorts of foreign currency services. Just how would a truncated British government contrive to prevent, and to justify preventing, an independent Scotland from continuing to enjoy the right to offer such services, while adding the pound sterling to the list of "foreign" currencies to which the right pertains?

If the Brits were really willing to play hardball, I suppose they could try placing an embargo on shipments of Bank of England currency to Scotland, like the one the U.S. imposed, as part of its effort to topple Manuel Noriega's government, on shipments of fresh Federal Reserve notes to Panama. But whereas Federal Reserve notes had long been the only form of paper currency known in Panama's dollarized economy, the Scots, as I've already observed, have long managed without Bank of England notes, and could easily continue doing so, especially once freed from British-imposed banking regulations. Settlements and redemptions of Scottish bank balances would presumably have to be done using London funds. But unless the Brits wanted to impose severe exchange controls, which besides being embarrassing would harm English citizens no less than Scottish ones, that option would pose no great difficulty.

And the Eurozone comparison? A load of mince! The reason the Eurozone is a mess is because the Euro isn't the German mark--that is, because it's a multinational currency supplied through a multinational central bank, rather than a national currency that happens to be employed by several nations. Creditors to profligate Eurozone nations, or to irresponsible Eurozone banks, have therefore had reason to hope that the ECB might ultimately come to their aid, and especially so since the Growth and Stability Pact became a dead letter in 2003. Creditors to dollarized countries, on the other hand, have no reason to count on Fed bailouts. Were either Ecuador or El Salvador unable to service its debt, or were a Panamanian bank teetering at the brink of insolvency, it would be of no concern to the Fed, or the FDIC, or any other U.S. government agency. Dollarized or not, Ecuador, El Salvador and Panama have to manage on their own.

And how have those countries been doing despite having no lender of last resort to turn to in a crisis? Just dandy, as a matter of fact. Indeed, it seems that not having a lender of last resort has proved to be something of a boon to dollarized economies, because, by doing away with, or at least greatly limiting, any prospect of a bailout, it has caused creditors and banks to behave more prudently.

If the experience of dollarized countries can be relied upon, Scotland, besides not needing England's permission to go on using the British pound, would be better off not having such permission. It stands to benefit, in other words, by steering clear of any formal arrangements that might appear to make the Bank of England, or any other non-Scottish authority, responsible in any way for the safety and soundness of Scottish bank liabilities or government securities. Let the Scots follow the example of Ecuador and El Salvador, and "poundize" unilaterally. If the British Parliament refuses to cooperate, so much the better. Who knows: Scotland could even end up with a banking system as good as the one it had before 1845, when Parliament, which knew almost as little about currency then as it does now, began to bugger it up.


Four Old-Fashioned Monetarist Heresies

by George Selgin November 21st, 2013 10:30 am

1) For any given growth rate of aggregate spending, lower actual rates of price and wage inflation mean higher levels of output and employment;

2) For any given growth rate of aggregate spending, higher expected rates of price and wage inflation mean lower levels of output and employment;

3) An increase in the growth rate of aggregate spending is not the same as an increase in the equilibrium rate of inflation;

4) An increase in aggregate spending succeeds in raising the rate of inflation only in so far as it fails to increase output and employment.

I submit these old-fashioned monetarist heresies for the consideration of all those who think that an increased target rate of inflation will help us out of our present economic quagmire.


Déjà-Vu All Over Again

by George Selgin November 20th, 2013 9:29 pm

I must say I'm puzzled and frustrated by the many clueless responses, like this one by Dallas Fed President Richard Fisher, to those well-placed (mostly Keynesian) economists who have been insisting for some time that, with the unemployment rate still above 7%, and the latest (annual) inflation rate at just 1%, what the U.S. economy needs right now is a higher inflation target. Instead of 2%, they say, make it 4%, or even 6%. Those higher targets, they explain, can be be counted on to raise interest rates, rescuing us from the zero lower interest rate bound we've been stuck near, and thereby getting the unemployment rate back down to the Fed's current goal of 6.5%, if not lower.

Should we take their advice? Heck, yeah! After all, this isn't the first time that we've been in a situation like the present one. There was at least one other occasion when the U.S. economy, having been humming along nicely with the inflation rate of 2% and an unemployment rate between 5% and 6%, slid into a recession. Eventually the unemployment rate was 7%, the inflation rate was only 1%, and the federal funds rate was within a percentage point of the zero lower bound. Fortunately for the American public, some well-placed (mostly Keynesian) economists came to the rescue, by arguing that the way to get unemployment back down was to aim for a higher inflation rate: a rate of about 4% a year, they figured, should suffice to get the unemployment rate down to 4%--a much lower rate than anyone dares to hope for today.

I'm puzzled and frustrated because, that time around, the Fed took the experts' advice and it worked like a charm. The federal funds rate quickly achieved lift-off (within a year it had risen almost 100 basis points, from 1.17% to 2.15%). Before you could say "investment multiplier" the inflation and unemployment numbers were improving steadily. Within a few years inflation had reached 4%, and unemployment had declined to 4%--just as those (mostly Keynesian) experts had predicted.

So why are these crazy inflation hawks trying to prevent us from resorting again to a policy that worked such wonders in the past? Do they just love seeing all those millions of workers without jobs? Or is it simply that they don't care about jobs at all, just so long as inflation is low? Whatever the reason, they certainly come across like a bunch of callous dunderheads.

Oh: I forgot to say what past recession I've been referring to. It was the recession of 1960-61. The desired numbers were achieved by 1967. I can't remember exactly what happened after that, though I'm sure it all went exactly as those clever theorists intended.

P.S.: I can already imagine Ken Rogoff's response to this post. Something to the effect, no doubt, of "This time is different."

P.P.S. (November 20): Of course it is different this time--but not, I submit, in ways that clearly favor the doves. One particular difference that comes to mind is that, whereas in the 60s policymakers (implicitly) gambled that an increase in the actual rate of inflation would not lead to a corresponding increase in the expected rate (and, hence, in the rate of upward or leftward movement of short run aggregate and labor supply schedules), those calling for a 4-6% inflation target today actually see it as a means for achieving a like increase in expected inflation, and so are (implicitly) gambling that such an increase in expected inflation will not result in any corresponding increase in the rate of upward or leftward movement of short-run aggregate and labor supply schedules.

I leave it to my readers to decide for themselves whether the new wager is more or less rash than the old one.


An Opinion of No Redeeming Value

by George Selgin November 11th, 2013 5:54 pm

An "idiot savant" is, according to my Webster's New Collegiate Dictionary, "a mentally defective person who exhibits exceptional skill or brilliance in some limited field." So what's the term for an otherwise intelligent person who exhibits exceptional idiocy in some limited field? Well, I don't know the correct general term, assuming one exists. But for the particular instance I have in mind, "Josh Barro" will do nicely.

In his column for today's Business Insider, Mr. Barro, finding himself miffed by the concurrent decision of Delta Airlines and Hyatt Hotels to reduce the award values of the frequent customer credits he'd been accumulating from them, elects to complain about it.

But it appears that Barro had misgivings about employing the Business Insider's scarce column inches (and, presumably, getting paid for doing so) for what was, after all, mere personal kvetching of the sort best reserved for the poor sap on the next bar stool, and then only after at least one drink too many. So Barro decided that he'd better justify putting his little tirade into print by drawing from it a far-reaching economic lesson guessed it: free banking!

Here, in full, is the lesson:

Libertarians often advocate for a system of "free banking" where monetary authority is shifted to private actors, who would theoretically be policed by consumers who demand stable currency values and protection from inflation. But as we can see, America already has a system of private monetary authorities, and they're an inflationary mess.

Airlines and hotel firms lock in loyal customers, only to pull the rug out from under them once they've run up significant asset balances. They cannot resist the urge to print. Can you imagine the disaster if we extended this system to ordinary currency.

Well, there you have it. No need to actually look into the long history of highly-reputable private currency suppliers in Scotland or Canada or the U.S. Suffolk System or a dozen other places. And so what if banks today have for some reason still not figured out that they might treat their customers' deposit credits like so many reward points, to be devalued at whim. ("So, Mr. Barro: you'd like to buy 100 Federal Reserve award dollars? No problem. That will be cost you $200 in deposit credits. What's that? Oh, I'm terribly sorry: didn't you receive our notice regarding the change in our award terms?) And never mind, finally, the actual record of the dollar's "devaluation," in terms either of goods generally or of gold--a record showing that only the Fed, among all past or present U.S. paper currency issuers, has ever managed to permanently devalue its paper with impunity.

Why bother, in short, referring to any facts at all, when all you need is a little analogy, served-up with a great dollop of unmerited self-assurance.


For Walter

by George Selgin October 14th, 2013 10:48 pm


Dear Walter,

I meant to have this message to you appear with the other tributes Kurt posted on Saturday.  But thanks to a busy week in Madrid followed by a trip to Manhattan to tape a Stossel show segment, I sent it in a day late.  As it still hasn't been added to the others,* and I hate for you to think that I forgot your birthday, I'm posting it myself.

As I reflected upon how I first came to know you, I realized that had it not been for that encounter, my life would have been utterly different than it has been.  And I don’t merely mean that you changed my life in the sort of way that a Brazilian butterfly might change the weather in Texas.  Your influence was as certain as it was decisive.

It must have been in the late spring of 1981 that I came across that tiny ad in Reason.  It was from this place I’d never heard of called the Institute for Humane Studies, and it offered summer research grants.  I’d just begun working on a paper inspired by Hayek’s Denationalisation of Money, which I’d read earlier that spring, so I decided to apply.   I got the money, which was great.  But I also got to know you, which was far better.

You gave me all sorts of advice on the project, in letters and occasionally on the phone (of course we didn't have email back then).   It was all good, but I’m especially grateful for your having alerted me to the work of a UCLA grad student on the Scottish free banking episode.  His name was Larry White. You sent me drafts of Larry’s chapters, and I instantly became a Larry White fan.  Soon I was corresponding with him, asking all sorts of questions.  I remember one in particular.  It was, “Where do you plan to teach?”  I’d already decided to be his student.  That’s how I ended up at NYU.

Of course you and I stayed in touch, eventually meeting at the old IHS headquarters in Menlo Park—I think that was when Hans Eicholz showed up on his motorcycle, in full leather kit; he made me wonder whether I was tough enough to be a classical liberal!  When I’d finished my NYU coursework, you invited me to come back as an intern.  I leapt at the opportunity, thinking it would be a great one for writing my dissertation.

As it happened, from 9 to 5 you guys mostly had me slaving away on IHS stuff—planning seminars and organizing the contact list, among other things.  But from 7 until 9 every morning, and again from 6PM til midnight, I worked on “The Theory of Free Banking,” half the time at the (late, lamented) Printer’s Ink at Stanford, and half at the Prolific Oven in Palo Alto.  (Do you remember those half-moon cookies they had?  Mmm!)

Despite the hours the writing went better than I could have hoped.  And that was also mainly your doing, because every morning around 10:30 we walked over to Pete’s for coffee (Major Dickason’s—I still have the mug I bought there, white ceramic with red-brim), and then sat on a nearby park bench to discuss my progress over it.  So every idea I put into the dissertation—and plenty that, thank goodness, I didn’t put in—got a dry run.  If every doctoral student had someone like you to talk to, there’d be a lot fewer ABDs hanging around.

IHS and I moved to George Mason at the same time—I even got you guys to transport my little Honda Passport for me, only to end up ditching it after an Alexandria policeman politely informed me that Virginia, unlike California back then, insisted on my insuring it, acquiring a special motorcycle license, and wearing a helmet.  Miserable tyrants!   But at least I had a teaching job, which meant that, instead of just serving as a factotum at them, you actually let me lecture at IHS seminars.  I did that until 1995, when, along with all the old-guard faculty, I quit in protest over your leaving the Institute.  I know you didn’t want us to do that--the Institute always came first with you--but you shouldn’t blame us: so far as we were concerned, you were the Institute!   And though the place now has oodles more $$$ to toss around, I don’t imagine that it will ever replicate the  unique brand of intellectual inspiration and encouragement that you were able to give to students like me.  If classical liberal scholarship is thriving now, that’s in no small way thanks to you.

Happy Birthday,  ol’ buddy.   And many more.


*It has since been added, minus the picture (October 15, 2013).


Operation Twist-the-Truth

by George Selgin October 14th, 2013 2:07 pm

That's the title of a paper I'm writing for this year's Cato Monetary Conference (the subtitle is "How the Federal Reserve Misrepresents Monetary History"). For it, I'd be very grateful to anyone who can point me to examples (the more egregious the better) of untrue or misleading statements regarding U.S. monetary history in general, and the Fed's performance in particular, in official Fed publications or in lectures and speeches by Federal Reserve officials.



The Sage of Equipoise

by George Selgin October 5th, 2013 2:18 am

My review of Frank Prochaska's The Memoirs of Walter Bagehot.. (If the page is gated try a google search.) Other posts concerning Bagehot are here, here, and here.


What is a Bitcoin?

by George Selgin September 19th, 2013 10:50 am

That's the title of a live radio program I took part in this Tuesday on KCUR, Kansas City's NPR radio station. Josh Zerlan, COO of Butterfly Labs (which manufactures Bitcoin mining hardware) also took part in the segment, as did several persons who called in with questions. The program was very ably hosted by Brian Ellison.

When I first took a good look at Bitcoin about a year ago, it could claim only about 1000 registered bitcoin-accepting merchants. Today the figure is 10,000. I wouldn't be surprised if it reached 100,000 in another year.


Booms, etc.: Addendum

by George Selgin September 3rd, 2013 9:33 am

In case anyone might otherwise miss it, I have added an addendum to my last post, responding to Scott Sumnner's reply to it.


Booms, Bubbles, Busts, and Bogus Dichotomies

by George Selgin August 30th, 2013 6:55 pm

Having learned my monetary economics from both the great monetarist economists and their Austrian counterparts, I've always chafed at the tendency of people, including members of both schools, to treat their alternative explanations of recessions and depressions as being mutually exclusive or incompatible. According to this tendency, a downturn must be caused either by a deficient money supply, and consequent collapse of spending, or by previous, excessive monetary expansion, and consequent, unsustainable changes to an economy's structure of production.

During the 1930s and ever since, this dichotomy has split economists into two battling camps: those who have blamed the Fed only for having allowed spending to shrink after 1929, while insisting that it was doing a bang-up job until then, and those who have blamed the Fed for fueling an unsustainable boom during the latter 1920s, while treating the collapse of the thirties as a needed purging of prior "malinvestment." As everyone except Paul Krugman knows, the Austrian view, or something like it, had many adherents when the depression began. But since then, and partly owing (paradoxically enough) to the influence of Keynes's General Theory, with its treatment of deficient aggregate demand as the problem of modern capitalist economies, the monetarist position has become much more popular, at least among economists.

It is, of course, true that monetary policy cannot be both excessively easy and excessively tight at any one time. But one needn't imagine otherwise to see merit in both the Austrian and the monetarist stories. One might, first of all, believe that some historical cycles fit the Austrian view, while others fit the monetarist one. But one can also believe that both theories help to account for any one cycle, with excessively easy money causing an unsustainable boom, and excessively tight money adding to the severity of the consequent downturn. I put the matter to my undergraduates, who seem to have little trouble "getting" it, like this: A fellow has an unfortunate habit of occasionally going out on a late-night drinking binge, from which he staggers home, stupefied and nauseated. One night his wife, sick and tired of his boozing, beans him with a heavy frying pan as he stumbles, vomiting, into their apartment. A neighbor, awakened by the ruckus, pokes his head into the doorway, sees our drunkard lying unconscious, in a pool of puke, with a huge lump on his skull. "What the heck happened to him?," he asks. Must the correct answer be either "He's had too much to drink" or "I bashed his head"? Can't it be "He drank too much and then I bashed his head"? If it can, then why can't the correct answer to the question, "What laid the U.S. economy so low in the early 1930s?" be that it no sooner started to pay the inevitable price for having gone on an easy money binge when it got walloped by a great monetary contraction?

In insisting that one shouldn't have to blame a bust either on excessive or on deficient money, I do not mean to expose myself to the charge of making the opposite error. My position isn't that excessive and tight money must both play a part in every bust. Nor is it that, when both have played a part, each part must have been equally important. The question of the relative historical importance of the two explanations is an empirical one, concerning which intelligent and open-minded researchers may disagree. The point I seek to defend is that those who argue as if only one of the two theories can possibly have merit cannot do so on logical grounds. Instead, they must implicitly assume either that central banks tend to err in one direction only, or that, if they err in both, only their errors in one direction have important cyclical consequences.

The history of persistent if not severe inflation on one hand and of infrequent but severe deflations on the other surely allows us to reject the first possibility. What grounds are there, then, for believing that money is roughly "neutral" when its nominal quantity grows more rapidly than the real demand for it, but not when its quantity grows less rapidly than that demand, as some monetarists maintain, or for believing precisely the opposite, as some Austrian's do? New Classical economists, whatever their other faults, are at least consistent in assuming that money prices are perfectly flexible both upwards and downwards, leaving no scope for any sort of monetary innovations to affect real economic activity except to the extent that people observe price changes imperfectly and therefore confuse general changes with relative ones. Both old-fashioned and "market" monetarists, on the other hand, argue as if the economy has to "grope" its way slowly and painfully toward a lowered set of equilibrium prices only, while adjusting to a raised set of equilibrium prices as swiftly and painlessly as it might were a Walrasian auctioneer in charge. Many Austrians, on the other hand, insist that monetary expansion necessarily distorts relative prices, and interest rates especially, in the short-run, while also arguing as if actual prices have no trouble keeping pace with their theoretical market-clearing values even as those values collapse.

Of these two equally one-sided treatments of monetary non-neutrality, the monetarist alternative seems to me somewhat more understandable. For monetarists, like New Keynesians, attribute the non-neutral effects of monetary change to nominal price rigidities. They can thus argue, in defense of their one sided view, that it follows logically from the fact that certain prices, and wage rates especially, are less rigid upward than downward. That's the thinking behind Milton Friedman's "plucking" model, according to which potential GNP is a relatively taught string, and actual GNP is the same string yanked downward here and there by money shortages, and his corresponding denial of the existence of business "cycles." But "less rigid" isn't the same as "perfectly flexible" or "continuously market clearing." So although Friedman's perspective might justify his holding that a given percentage reduction in the money stock will have greater real consequences than a similar increase, other things equal, it alone doesn't suffice to sustain the view that excessively easy monetary policy is entirely incapable of causing booms. What's more, as Roger Garrison has pointed out, the fact that real output appears to fit the "plucking" story doesn't itself rule out the presence of unsustainable booms, which (if the Austrian theory of them is correct) involve not so much an expansion of total output as a change in its composition.

Austrians, in contrast, tend to attribute money's non-neutrality, not to general price rigidities, but to so-called "injection" effects. In a modern monetary system such effects result from the tendency of changes in the nominal quantity of money to be linked to like changes in nominal lending, and particularly to changes in the nominal quantity of funds being channeled by central banks into markets for government securities and bank reserves. The influence of monetary innovations will therefore be disproportionately felt in particular loan markets before radiating from them to the rest of the economy. It is not easy to see why monetary "siphoning" effects, to coin a term for them, should not be just as non-neutral and important as injection effects of like magnitude. To the extent that the monetary transmission mechanism relies upon a credit channel, that channel flows both ways.

A division of economists resembling that concerning the role of monetary policy in the Great Depression has developed as well in the wake of the recent boom-bust cycle. Only this time, oddly enough, several prominent monetarists and fellow travelers (among them, Anna Schwartz, Allan Meltzer, and John Taylor) have actually joined ranks with Austrians in holding excessively easy monetary policy in the wake of the dot-com crash to have been at least partly responsible for both the housing boom and the consequent bust. With so many old-school monetarists switching sides, the challenge of denying that monetary policy ever causes unsustainable booms, and of claiming, with regard to the most recent cycle, that the Fed was doing a fine job until until house prices started falling, has instead been taken up by Scott Sumner and some of his fellow Market Monetarists.

Sumner, like Milton Friedman, forthrightly denies that there's such a thing as booms, or at least of booms caused by easy money, to the point of taking exception to a recent statement by President Obama to the effect that, among its other responsibilities, the Fed should guard against "bubbles." But here, and unlike Friedman, Sumner basis his position, not merely on the claim that prices are more flexible upwards than downwards, but on a dichotomy erected in the literature on asset price movements, according to which upward movements are either sustainable consequences of improvements in economic "fundamentals," or are "bubbles" in the strict sense of the term, inflated by what Alan Greenspan called speculators' "irrational exuberance," and therefore capable of bursting at any time. Since monetary policy isn't the source of either improvements in economic fundamentals or outbreaks of irrational exuberance, the fundamentals-vs-bubbles dichotomy implies that monetary policy is never to blame for changes in real asset prices, whether those changes are sustainable or not. If the dichotomy is valid, Sumner, Friedman, and the rest of the "monetary policymakers shouldn't be concerned about booms" crowd are right, and the Austrians, Schwartz, Taylor, and others, including Obama and his advisors, who would hold the Fed responsible for avoiding booms, are full of baloney.

But it isn't the Austrian view, but the bubbles-vs-fundamentals dichotomy itself, that's full of baloney. That dichotomy simply overlooks the possibility that speculators might respond rationally to interest rate reductions that look like changes to "fundamental" asset-price determinants, that is, to relatively "deep" economic parameters, but are actually monetary policy-inspired downward deviations of actual rates from their genuinely fundamental ("natural") levels. Because actual rates must inevitably return to their natural levels, real asset price movements inspired by "unnatural" interest rate movements, though perfectly rationale, are also unsustainable. Yet to rule such asset price movements out one would have to claim either that monetary policy isn't capable of influencing real interest rates, even in the short-run, or that the temporary interest-rate effects of monetary policy can have no bearing upon the discount factors that implicitly inform the valuation of amy durable asset. Here again, the burden seems too great for mere a priori reasoning to bear, and we are left waiting to set our eyes upon such empirical studies as are capable of bearing it.

In the meantime, it seems to me that there is a good reasons for not buying into Friedman's view that there is no such thing as a business cycle, or Sumner's equivalent claim that there is no such thing as a monetary-policy-induced boom. The reason is that there is too much anecdotal evidence suggesting that doing so would be imprudent. The terms "business cycle" and "boom," together with "bubble" and "mania," came into widespread use because they were, and still are, convenient if inaccurate names for actual economic phenomena. The expression "business cycle," in particular, owes its popularity to the impression many persons have formed that booms and busts are frequently connected to one another, with the former proceeding the latter; and it was that impression that inspired Mises and Hayek do develop their "cycle" or boom-bust theory rather than a mere theory of busts, and that has inspired Minsky, Kindleberger, and many others to describe and to theorize about recurring episodes of "Mania, Panic, and Crash." Nor is the connection intuitively hard to grasp: the most severe downturns do indeed, as monetarists rightly emphasis, involve severe monetary shortages. But such severe shortages are themselves connected to financial crashes, which connect, or at least appear to connect, to prior booms, if not to "manias." That the nature of the connections in question, and the role monetary policy plays in them, remains poorly understood is undoubtedly true. But our ignorance of these details hardly justifies proceeding as if booms never happened, or as if monetary policymakers should never take steps to avoid fueling them. On the contrary: the non-trivial possibility that an ounce of boom prevention is worth a pound of quantitative easing makes worrying about booms very prudent indeed, and prudent even for those who believe that monetary shortages are by far the most important proximate cause of recessions and depressions.

Does my saying that Scott and others err in suggesting that monetary policymakers ought not to worry about stoking booms mean that I also disagree with Scott's arguments favoring the targeting NGDP? Not at all. I'm merely insisting that a sound monetary policy or monetary system is one that avoids upward departures of NGDP from target just as surely as it does downward ones. Nor do I imagine that Scott himself would disagree, since his preferred NGDP targeting mechanism would automatically achieve this very result. But I worry that other NGDP targeting proponents have allowed themselves to become so wrapped up in recent experience, and so inclined thereby to counter arguments for monetary restraint, that they have allowed themselves either to forget that a time will come, if it hasn't come yet, when such restraint will be just the thing needed to keep NGDP on target, or to treat Scott's boom-denialism as grounds for holding that, while there can be too little NGDP, there can't really be too much. (Or, what is almost as bad, that there can't be too much so long as the inflation rate isn't increasing, which amounts to tacitly abandoning NGDP targeting in favor of inflation targeting whenever the the latter policy is the looser of the two.) I urge such "monetarists" to recall the damage Keynes did by taking such a short-term view, while disparaging those who worried about the long run. "Keynesiansim" thus became what Keynes himself never intended it to be, which is to say, a set of arguments for putting up with inflation. Let's not let Market Monetarism become perverted into set of arguments for putting up with unsustainable booms.

Addendum: Scott has responded, claiming that I am wrong in portraying him as a money-induced unsustainable boom denialist. I appreciate his attempts to reassure me, and yet can't help thinking that he has nevertheless supplied some reasons for my having characterized his thinking as I did. For example, when Scott writes that "asset prices should reflect fundamentals. Interest rates are one of the fundamental factors that ought to be reflected in asset prices. When rates are low, holding the expected future stream of profits constant, asset prices should be high. Bubbles are usually defined as a period when asset prices exceed their fundamental value. If asset prices accurately reflect the fact that rates are low, then that’s obviously not a bubble," he certainly seems to accept the bubbles-vs.fundamentals dichotomy about which I complain above, with its implicit exclusion of the possibility of a boom based on lending rates that have been driven by "unnaturally" low by means of excessively easy money. Scott only reinforces this interpretation by further observing, in the same post, that "[i]t’s not clear what people mean when they talk of “artificially” low interest rates. The government doesn’t put a legal cap on rates in the private markets, in the way that the city of New York caps rents." Now if that isn't sweeping aside the whole Wicksellian apparatus, with its distinction between "natural" and "actual" interest rates, then I don't know what is.

Also, while Scott protests that he does not deny a possible role for easy money in fueling booms, it's far from evident that he considers this something other than a merely theoretical possibility. He denies (appealing again to the bubbles-vs.-fundamentals dichotomy), that monetary policy played any part in the Roaring Twenties (while asserting that NGDP per capita fell during that decade, though that isn't my understanding*); and he denies that it played any part in the recent housing boom. With respect to the latter boom he observes, in response to a commentator, that "a housing boom is just as likely to occur with 3% trend NGDP growth as 5% NGDP growth. Money is approximately superneutral. I completely reject the notion that Fed policy is mostly to blame for the housing bubble–it was bad public (regulatory) policies plus stupid decisions by private actors. I’m not saying Fed policy had no effect, but it was a minor factor." Scott's claim here, though not altogether wrong as a claim about comparitive steady states, might nonetheless be taken to suggest that there's little reason to be concerned about adverse effects, apart from inflation, of faster than usual NGDP growth. And this view in turn encourages people to think that, when NGDP grows more rapidly than usual, there's no harm in sitting back and enjoying it so long as it doesn't raise the inflation rate much. That is, it encourages them to favor replenishing the punchbowl whenever the party get's dull, but not removing it when the party starts getting wild.**

Regarded as empirical claims only, Scott's assertions may of course be valid. But I think the evidence from these and other quotes from him suggests that, while he clearly believes that easy money can influence interest rates, he does not believe, as a matter of theory, and based largely on his acceptance of the bubble-fundamentals dichotomy along with the EMS, as well as his related inclination to brush-aside Wicksell's arguments as to the possibility as well as the unsustainability of "unnatural" changes in interest rates, that by doing so it can contribute to an unsustainable asset boom.

*Here, for what it's worth, is the plot I get when I divide nominal NGDP (millions) by population (thousands) using stats from FRED's macrohistory data base:


**Previously I put the matter here in stronger terms that I now see were unjustified. Sorry, Scott! (Added 10/3/2013 at 9:36PM).

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