Power to the printer?

With the constant talk of "stimulating" the economy - with tax cuts, tax overhauls, monetary policies, and the like - I wonder why no one has thought of giving power to the people - or printer? The Fed has recently launched a large campaign to educate the public about the introduction of the new $20 bill.

newtwenty.jpg

I don't think they've thought this through all the way. If "stimulating" the economy with dollars is so important, why discourage counterfeiting? Why not email JPEGs of the $20 bill, and ask people to print them up themselves?

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Good question Bill. On the

Good question Bill. On the one hand, there is the drive to 'stimulate' the economy by monetary inflation. Yet, the govt is adding even more counterfeit protection mechanisms to the new Federeal Reserve Notes. Seems to be a disconnect.

Not really. If the power of

Not really. If the power of seignorage was in everyone's hands, it would be in no-one's hands. And the government makes a lot of money off of... printing money. So the monopoly must stand (they just need to up their production...).

That is not what Bill is

That is not what Bill is saying. He is not asking, "What is the best action for govt to take in order to pursue its own interests?"

Rather, he is asking, "If it is so great for the economy to stimulate it through tax cuts and monetary inflation, why not maximize the process and let everyone print money?"

I was cutting to the chase.

I was cutting to the chase. His question is rhetorical, and the reason why government forbids counterfeiting while seemingly contradicting their dogma of "more cash in the hands of the people will stimulate the economy" is precisely because of the value printing money gives to the government.

Its also a function of political control. There is power in fiddling with the money supply, but if everyone could increase the money supply at trivial expense, monetary policy would be useless and the economy would go to the crapper (as the money being printed soon would be worthless).

Hence, "What is the best action for govt to take in order to pursue its own interests?" is exactly what Bill is asking. Unless we assume that we don't know the inevitable outcome of monetary inflation...

Hence, "What is the best

Hence, "What is the best action for govt to take in order to pursue its own interests?" is exactly what Bill is asking.

That might have been what he was implying, but that is not what he was asking.

What's the point in going

What's the point in going down a circular trail of a rhetorical argument who's conclusion is implied?

It isn't rhetorical to those

It isn't rhetorical to those who aren't familiar with Austrian theory, and since this was Bill's first post, I wanted to give some 'moral support' and try to spark discussion, so I responded to his post and laid my circular rhetorical trap on you.

And you stepped right into it.
Mwahahahahahahaha!

I know several economists at

I know several economists at the Richmond Fed, and this is a caricature of their views. You might be surprised to learn they are all radically libertarian, and some are even sympathetic with Austrian arguments about polycentric law and free banking. And all of them are very smart economists.

No one believes printing money leads to long-run economic growth. That's transparently stupid, and you're attacking a straw man here. If you talk to actual monetary economists, they'll tell you recessions are primarily a monetary phenomenon, and money has an impact on the real economy in the short run. So if you run the presses and boost the money supply, you will in fact get a stimulating boost in economic activity in the short run. Of course, that doesn't mean we SHOULD do that, because everyone agrees that in the long run that simply leads to inflation.

That's why the Fed doesn't target real GDP growth when setting monetary policy anymore. They target inflation. Sure, some non-economist politicians still buy this argument you're criticising, but the economists at the Fed haven't since the 1980s.

No one believes printing

No one believes printing money leads to long-run economic growth. That's transparently stupid, and you're attacking a straw man here. If you talk to actual monetary economists, they'll tell you recessions are primarily a monetary phenomenon, and money has an impact on the real economy in the short run. So if you run the presses and boost the money supply, you will in fact get a stimulating boost in economic activity in the short run. Of course, that doesn't mean we SHOULD do that, because everyone agrees that in the long run that simply leads to inflation.

How does boosting the money supply (inflation) benefit the economy in the short run but not the long run? Why are the two effects different?

If the result is more 'economic activity' in the short run, is that necessarily a good thing?

They target inflation. Sure, some non-economist politicians still buy this argument you're criticising, but the economists at the Fed haven't since the 1980s.

How can inflation target inflation?

How does boosting the money

How does boosting the money supply (inflation) benefit the economy in the short run but not the long run? Why are the two effects different?

For the same reason that fraud benefits a company in the short run but not the long run. If I sell cans of air and label them "peas," I might make a bundle of money in the short run (as air costs less than peas), but once people realize that I am a swindler, I won't get any return customers and will suffer in the long run. So too, before people realize that inflation has occured, the inflator has a great deal more money to spend, as do those who recieve the money second hand and third hand. But once people realize that inflation has taken place (and people don't even need to realize this consciously, as market mechanisms work simply by human action, not human design), in the long run, the economy will suffer.

If the result is more 'economic activity' in the short run, is that necessarily a good thing?

It depends on who you talk to. Keynes famously remarked that we are all dead in the long run anyway. But then, Keynes isn't so popular among Austrians. ;)

How can inflation target inflation?

I think Andrew was talking about counter-inflationary policies.

For the same reason that

For the same reason that fraud benefits a company in the short run but not the long run. If I sell cans of air and label them "peas," I might make a bundle of money in the short run (as air costs less than peas), but once people realize that I am a swindler, I won't get any return customers and will suffer in the long run. So too, before people realize that inflation has occured, the inflator has a great deal more money to spend, as do those who recieve the money second hand and third hand. But once people realize that inflation has taken place (and people don't even need to realize this consciously, as market mechanisms work simply by human action, not human design), in the long run, the economy will suffer.

You have given used two separate objects in your analysis, which incidentally, I agree with completely.

My question was, "How does boosting the money supply (inflation) benefit the economy in the short run but not the long run? Why are the two effects different?"

You answered by saying that those who receive the new money first will benefit in the short run. True, by the question was: how does the economy benefit in the short run?

--How can inflation target inflation?--

I think Andrew was talking about counter-inflationary policies.

Yes, but Andrew characterized Bill's post as a 'strawman' argument, and I think before the debate goes even further, we should realize that Andrew has a different definition for "inflation" from Bill, hence my awkard follow-up question to Andrew.

In the Austrian realm, an increase in money supply is inflation, not an increase in the price of a basket of select goods, which is a secondary effect of said inflation. A difference in the definitions of words and concepts renders any discussion meaningless before it starts.

As someone who is less than

As someone who is less than satisfied with his Keynesian economic education, I'm fascinated by discussions such as this one.

Inflation is traditionally defined as a general increase in the level of prices and therefore a decline in the purchasing power of a unit of currency. So it's the prices that "inflate."

You're saying inflation is alternatively defined as simply an increase in the money supply, so that the total supply is what "inflates," and that price increases are an effect and not a cause. But doesn't this suggest on its own that there is a target inflation rate that is desirable (in a growing economy with a growing population)?

The CPI has always seemed a quite imperfect means for measuring [conventional] inflation to me. The GDP deflator is better, but CPI is what is most often quoted in the press (analogy: DJIA vs. S&P 500 or Wilshire 5000) and what is used (with many variations) by the Fed. I'm sure you remember the implication earlier this year by Greenspan that there IS a target inflation rate (greater than 0), the first time that has been hinted at officially.

My intermediate econ prof said that a relatively low anticipated inflation rate was generally helpful. One reason given for this was that it "greases the wheels" of the labor market; something about management being able to hand out raises that merely echo the inflation rate (which aren't actually raises at all) in order to appease the workers or some such...

Another mainstream economic concept is the "velocity" of money, or how often it changes hands. A higher velocity demands more liquidity (more quantity demanded).

I'm reminded of a story that appeared in the Accidental Tourist column a while back. It was about a babysitting consortium in Washington, DC. These government staffers, maybe twenty families in all, had a system for trading babysitting hours with each other. They used beads for their currency. But this small economy began to stagnate. No one was going out anymore. It was finally determined, once an outside economist was brought in, that the "money" supply was too low. They needed to provide more liquidity by increasing the money supply. I'm sure I oversimplified and left out many crucial details.

Of course, I'm also reminded of the episode of Ducktales where every time I bell rang, all the money within a certain radius duplicated itself spontaneously. Soon folks were carting around wheelbarrows full of cash just to buy a candy bar.

Kevin, "Inflation is

Kevin,

"Inflation is traditionally defined as a general increase in the level of prices and therefore a decline in the purchasing power of a unit of currency. So it's the prices that "inflate."..."

Your tradition doesn't go back far enough.

http://www.mises.org/humanaction/chap17sec6.asp

"...The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.

First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public when they want to question the expediency of issuing huge amounts of additional money. They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly.

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation--the rise in prices--are disguising their endeavors as a fight against inflation. [p. 424] While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse..."

Regards, Don

Kevin, "...I'm reminded of a

Kevin,

"...I'm reminded of a story that appeared in the Accidental Tourist column a while back. It was about a babysitting consortium in Washington, DC. These government staffers, maybe twenty families in all, had a system for trading babysitting hours with each other. They used beads for their currency. But this small economy began to stagnate. No one was going out anymore. It was finally determined, once an outside economist was brought in, that the "money" supply was too low. They needed to provide more liquidity by increasing the money supply. I'm sure I oversimplified and left out many crucial details...."

If the problem seems to be one in which the money supply is too low, the REAL problem is that prices are fixed so that a bead is always pegged to a specific number of hours of babysitting, say one bead for one hour, for example. If babysitters are allowed to bid two or three hours of babysitting for one bead, voluntary exchanges will be re-enabled at some point and a market exchange rate will emerge.

This precise problem is covered by Gene Callahan in 'Economics for Real People, An Introduction to the Austrian School', on pages 143-144.

Regards, Don

Defining inflation as "an

Defining inflation as "an increase in the money supply" rather than "a rise in average prices" is not useful at all.

Example: If real GDP grows 3% a year, and the money supply also grows at 3%, standard monetary models predict zero inflation -- defined here as "a rise in average prices."

So in this case, you'd say "there is 3% inflation", even though prices are stationary? That's just, well, nuts.

Austrians have good ideas. They should start mainstreaming themselves, and speaking the actual language of economics, so people will actually listen to them. If not, they risk being dismissed out of hand by smart economists who don't have the patience to argue semantics and redefine basic economic terms like "inflation".

I hate to reference Paul

I hate to reference Paul Krugman on anything, but here's a link to a great discussion of the "recession in the babysitter's collective". I suggest anyone interested in the impact of monetary policy on recessions read the actual 1978 paper he discusses:

http://web.mit.edu/krugman/www/babysit.html

Andrew, your previous point

Andrew, your previous point about inflation begs the question.

Example: If real GDP grows 3% a year, and the money supply also grows at 3%, standard monetary models predict zero inflation -- defined here as "a rise in average prices."

So in this case, you'd say "there is 3% inflation", even though prices are stationary? That's just, well, nuts.

If inflation is defined as a rise in average prices, you're correct in saying that there is inflation without rise in average prices would be nuts.

But that objection is mooted if you use the austrian definition of inflation, which is money supply inflation and not price increases.

So saying that it's nuts to call money supply "inflation" because other folk call general price increases "inflation" assumes that the proper definition of inflation is "price level increase".

General price increases don't tell us much about the underlying economy, or what kind of distortions may be going on, or what production will look like in the future- because a constellation of things can affect prices. Focusing on increases in money supply, however, tell us vital information (if you believe in/subscribe to the Austrian Business Cycle Theory). An increase in money supply will have X effects while a decrease will have Y effects, which may or may not be immediately reflected in prices (due to the particular distortion of the latest inflation).

I'm with Andrew on this one.

I'm with Andrew on this one. Even if it is the case that the Austrian definition of inflation is "better" than the mainstream definition, the point is moot. Definitions are based entirely on usage, and if the vast majority of people understand a term to mean a certain thing, it is pointless to try to argue against that tradition. Perhaps over time, and with enough argument and explanation, Austrians can change definitions, but until that happens, they might as well cut their losses and find another word.

The same is true with regard to the modern usage of the term "liberal." Although liberalism is, historically, a much better description of what we currently call libertarianism (and also moderate welfare statism), it is now synonymous with leftism of both the moderate welfare statist and social democratic varieties.

If Austrians and libertarians were a sizable portion of the population, such that half the people who use these terms use them one way and half the other, then I could see a point in arguing over usage. But when both groups are so marginal to begin with, our time is better spent trying to inject our ideas into mainstream discourse rather than trying to compete with it.

Micha, It is not simply a

Micha,

It is not simply a semantic question. It is the underlying concept that is in question.

One thing that Austrian and neoclassical economists disagree on is the effect of increases in the money supply.

When Bill made this post, Andrew responded by calling his argument a 'strawman' argument because "everyone agrees" that it is bad for the economy in the long term because it results in inflation, but can be beneficial in the short term. Further, Andrew argues that the Fed targets its monetary policies via inflation.

Why is this not just a matter of semantics? Perhaps the biggest way that Austrian macroeconomics differs from neoclassical is its focus on the detrimental effects of increases in the money supply.

If the Austrian definition of inflation is used, then an increase in the money supply won't just result in inflation in the long term, but rather is inflation by definition. Thus, any sort of argument that an increase in the money supply is beneficial to the economy in the short term is incongruent with the premise that inflation is bad.

Further, it makes little sense to say (under the Austrian definition) that the Fed targets the amount of inflation it creates via inflation itselt.

This is more than a semantic argument. There is an underlying concept that is in question, and using it one way might very well lead one to believe that Bill's argument is a "strawman" argument, but viewed another way, would help understand Bill's argument better.