SMP: The Macro Bifurcation

One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.

Continue reading at the Sound Money Project.


SMP: On the Delusions of Price Level Stability

One of the lessons that should have been learned after the 2008 crisis is that price level stability does not guarantee economic and financial stability. Rather, central bankers and policy makers understand that the lesson is there should be even more regulation.

In a recent column, William White explains how “major central banks’ vigilant pursuit of positive but low inflation has become a dangerous delusion.” The idea that price level stability is both, necessary and sufficient to achieve macroeconomic stability and growth should have been put to rest by the 2008 financial crisis. But conflicting narratives have enabled it to live on.

Since the crisis, the focus of many central bankers has turned to macroprudential policy. The objective is to manage financial risk. Regulatory efforts have increased as a result. On the monetary policy front, price level stability still reigns supreme. New tools have been developed to execute monetary policy, to be sure. But the overall objective has been more-or-less left intact.

Keep reading at Sound Money Project.

SMP: The War on Cash: What Do You Have to Hide?

The war on cash we see starting to take place in recent times has a dangerous component. Besides the technical arguments in favor (and against) the efficiency gains of a cash-less economy, politicians are putting forward the argument that only those who have something to hide would oppose to a cash-less economy.

The problem is that this rhetoric implies that any individual is guilty of something until proven innocent. The presumption of innocence, one of the most basic principles of a free society, is being dangerously inverted.

Some economists, including Harvard’s Ken Rogoff, want to minimize the circulation of cash. Such proposals are usually justified on the grounds that they would (1) reduce criminal activity and tax evasion while also (2) helping central banks execute monetary policy when interest rates are at the zero lower bound. Both arguments have been challenged on this blog (here, here, and here).

Continue reading at SMP.

SMP: Separating the Technology of Bitcoin from the Medium of Exchange

At the Sound Money Project I have a comment on the importance of distinguishing between the bitcoin technological innovation and its use as a means of exchange. A solid technological innovation does meant that bitcoin is necessarily properly coded to be a successful monetary experiment.

Bitcoin is back in the spotlight as its price has soared in recent weeks. The most enthusiastic advocates see its potential to become a major private currency. But it is important to remember bitcoin is a dual phenomenon: a technological innovation and a potentially useful medium of exchange. One might recognize the technology as a genuine innovation without accepting its usefulness as a medium of exchange.

Continue reading at SMP.

Sound Money Project Relaunch

The Sound Money Project has relaunched this November at the American Institute for Economic Research (AIER) under the direction of William J. Luther.

Other than Luther and myself, you’ll see regular posts by Scott Burns, James Caton, Alexander W. Salter, and Brian C. Albrecht.

Digging Deeper into Populism: A Short Reply to Derril Watson

Derril Watson offer some critical remarks on my short post about populism in Latin America. In short, Watson is arguing that (1) I’m stating something obvious (populism diminishes economic freedom) and (2) that I’m wrong when I say that populism fails to produce economic growth.

Seems I haven’t been quite clear, because I state none of the above. The intention of my post is not to show that populism decreases economic freedom, I think this is uncontroversial. The point of the post is to show, with a very simple calculation, how fast economic freedom is reduced. I might be wrong, but I have the impression that most individuals do not realize how fast they can loose their economic liberties under this type of government. This is the message carried in the title of the post “How fast does populism destroy economic freedom in Latin America?” rather than “Does populism destroy economic freedom in Latin America?”

With respect to the second point, my claim is not that under populism there is no growth of GDP, my claim is that “populist governments failed to increase GDP per capita consistently faster than the region.” My original post is just a small bite of a paper that is still work in progress and I’ll share in due time. I wasn’t expecting this claim to be controversial. Still, the figure below shows the ratio of GDP per capita (PPP) of each of he countries I observe with respect to Latin America. All countries are centered in year 0 as the first year of populism as defined in my original post. That’s the first dot in the graph. The second dot shows either the last data available or the end of populism. None of these countries show a consistent higher growth rate than the rest of the region.

Populism - Fig 1

It seems to me that Watson is confusing growth with recovery. The fact that economic growth produces a growth in GDP does not mean that a growth in GDP is due to economic growth. The recovery mentioned by Watson in Argentina happens after the largest crisis in the history of the country and the largest default worldwide at the time. As I mentioned in my post, Argentina hits stagflation in 2007. This suggests to me a rapid recovery with no significant growth and built upon an unsustainable policy (for instance, Argentina fails to improve its relative income with respect to the region, it rather stagnates in 2007 and starts to fall a few years after.) I can show a large increase in my personal GDP as measured by consumption by depleting my savings (consuming my capital stock at the country level). I wouldn’t call that personal economic growth. The Kirchner government, for instance, failed to reduce poverty below the levels seen in the 1990s. It does, of course, if that is compared with the poverty levels around the years of the crisis (which is what Watson’s table is doing.) It should also be kept in mind that official poverty measures in Argentine were hampered by the government.

There’s still another important issue regarding GDP measures of Argentina. As it became well known, GDP series were hampered by the government (also inflation and poverty rates were hampered.) By 2014 official GDP values were overestimating the size of the economy by 24%. Another sign is the evolution of real wages in Argentina, which hits a ceiling again in 2007 with a level similar to the one at the end of 2001 (just before the crisis). In 2008, 2009, and 2010 real wages decline.

As a final comment, I’m not sure to what comment of mine Watson refers to. I don’t see a comment entry of mine in my original post, nor I remember doing so. In any case, I don’t get into the definition of populism precisely for how difficult that task can be. The problem of defying populism is one of the areas covered in my yet unfinished paper.

On Nancy MacLean’s Thesis

Nancy MacLean’s Democracy in Chains continues to yield surprises. Just a few days ago, Phil Magness now shows a “typo” that plays a significant role in MacLean’s thesis.

Despite all these detailed scrutiny of her work, it is not clear that MacLean understand the type of error is being pointed out about her book. There are two types of errors regarding a thesis: (1) the thesis is correctly defined, but the proof is flawed, or (2) the thesis is incorrectly defined, in which case there is no need to test the thesis. What MacLean and her supporters don’t seem to realize is that Democracy in Chains is built on the second error, not on the first one. Instead of ignoring her critics, MacLean should be up to the academic game and engage accordingly. Her behavior is very telling. If her research is so solid, what’s the problem?

Consider he following example. Let’s say you find a book built on the thesis that Milton Friedman was a french communist who lived in the 18th century. You don’t need to read this book to know that the author is wrong on her argument. This book on Friedman is both factually (Friedman did not live in the 18th century and was not French) and theoretically (Friedman was not a communist) wrong. This is how wrong MacLean’s thesis on Buchanan is for anyone with some minimal exposure to his work and Public Choice.

There a few reasons why someone would still read Democracy in Chains. For instance, if the book is a preach to the choir To try to understand how such a misguided thesis can actually be supported by by an author with so little knowledge and expertise on Buchanan and Public Choice. Etc. But a reason why MacLean thinks that their critics are unwilling to consider her thesis is because she is unaware her error is the second one mentioned above. Her thesis is just wrong from the go.