About Me 0071: Start Making Money

This wasn’t the final vote on ratification, merely the vote to end debate, but if they’ve already got two-thirds in the bank for cloture, it’s a mortal lock that the treaty will pass.

The tax cuts deal, then DADT repeal, now this. Man, I’ll bet The One wishes every session could be a lame-duck session.

The New Start treaty was the last major challenge of the session for Mr. Obama, and in some ways the most emboldening for him. The tax-cut deal required the president to swallow a compromise that extended the expiring, lowered Bush-era tax rates even for the wealthy, costing him support within his own party. The overturning of the “don’t ask, don’t tell” military policy was driven as much by senators as by the White House.

But it was Mr. Obama who decided to make passing the treaty before the end of the year a high-profile test of his remaining clout. Despite bleak prospects for the treaty just a month ago, Mr. Obama mounted an unusually relentless campaign to win over enough Republican senators on his terms, enlisting former Republican luminaries, the nation’s military commanders and Eastern European leaders to knock down any objections…

The White House and Pentagon have insisted from the beginning that the treaty would do nothing to block American missile defense plans. On Monday, Mr. McCain unveiled a proposed amendment to the resolution of ratification that accompanies the treaty affirming that the United States will proceed with all four planned phases of missile defense in Europe by 2020 as Mr. Obama has committed to doing.

The growing support from Republicans suggested that the White House no longer needed Mr. McCain and it may choose to pocket what seems to be shaping up as a victory without making further accommodations. At the same time, it may decide to come to an agreement with Mr. McCain in the interest of building a stronger bipartisan vote for the treaty beyond the bare-minimum 66.

Here’s the roll. Eleven Republicans voted yes — Alexander, Bennett, Brown, Cochran, Collins, Corker, Isakson, Lugar, Murkowski, Snowe, and Voinovich. Those not voting included Evan Bayh, Judd Gregg, and the ailing Ron Wyden, all of whom are expected to back the treaty on the final vote, so Waffles is right for once that they might very well hit 70. And I’d bet cash money that if not for the prospect of a tea-party primary challenge next year, Hatch would have been lucky number 71.

As for the missile defense objections that Ed outlined earlier, that’s been an issue since the beginning. But I think The One’s given so many assurances by now about not letting Russia use the treaty as leverage to extract missile-shield concessions that he couldn’t cave to them without doing himself some serious political damage. The latest promise came just two days ago, in a formal, detailed letter to the Senate which Kerry took to reading aloud on the floor. Putting it in writing doesn’t guarantee that he won’t cave, but it does make things nice and easy for GOP attack ads about Democratic weakness on national security if he does. If he wants to break his promise to the public and help elect a Republican president in 2012 or 2016, whereupon the missile shield will be duly reinstated, hey.

Here’s Lindsey Graham, one of the 28 votes, sounding off at the presser afterwards. Apart from Kyl, he’s been the most vocal objector to the treaty on the Republican side lately; whether that’s a byproduct of his hawkishness or a bow to the reality of his own primary challenge down the road is anyone’s guess. Said DeMint at the same presser, “We join millions of Americans who are outraged,” which is true — there are millions who oppose it. But if you believe CNN’s latest poll, those millions are in a very small minority.

Nick Rowe asks me three questions in his Worthwhile Canadian Initiative: If cows were money (a response to Brad DeLong):

Nick: If cows were money, an increased demand for milk would cause a recession. People would stop spending their cows to buy goods and services, because if you spend your cows you don't have as much milk. Was the recession caused by an excess demand for milk, or an excess demand for money?

Me: If the Federal Cow Reserve conducted expansionary monetary policy by selling cows in exchange for promises to deliver milk, then its open market operations in cows would have no stimulative effect on the economy: the cows it sold would not enter the circulating medium but would instead be kept in reserve to replace the milk that the Federal Reserve had bought. Since open-market operations that boost the money stock are ineffective, it is clear that the recession was not caused by an excess demand for money but by an excess demand for milk.

Nick: If gold bars were money, an increased demand for bling would cause a recession. People would stop spending their gold bars to buy goods and services, because if you spend your gold bars you don't have as much bling. Was the recession caused by an excess demand for bling, or an excess demand for money?

Me: If the Federal Jewelry Reserve conducted expansionary monetary policy by selling gold in exchange for other forms of bling, then its open market operations in gold would have no stimulative effect on the economy: the gold it sold would not enter the circulating medium but would instead be used as bling replace the bling that the Federal Reserve had bought. Since open-market operations that boost the money stock are ineffective, it is clear that the recession was not caused by an excess demand for money but by an excess demand for bling.

Nick: If dollars were money, an increased demand for savings would cause a recession. People would stop spending their dollars to buy goods and services, because if you spend your dollars you don't have as much savings. Was the recession caused by an excess demand for savings, or an excess demand for money?

Me: If the Federal Reserve conducted expansionary monetary policy by selling dollars in exchange for other savings vehicles like bonds, then its open market operations in dollars and bonds would have no stimulative effect on the economy: the dollars it sold would not enter the circulating medium but would instead be used as savings vehicles to replace the bonds that the Federal Reserve had bought. Since open-market operations that boost the money stock are ineffective, it is clear that the recession was not caused by an excess demand for money but by an excess demand for savings vehicles.

Now that that is clear, let me say that Nick's post is very good. He goes on:

It has almost come down to a semantic dispute.... e are arguing about the referential opacity of demand functions. If I demand milk, can I be said to demand the medium of exchange, if, as a contingent fact, the medium of exchange just happens to provide milk, and I want the medium of exchange only for its milk?

But it matters. Because the way you frame the cause of the recession may influence where you look for a cure.

If you say that the recession is caused by an excess demand for milk, you start looking for ways to either increase the supply of milk or reduce the demand. Can the government breed some goats, and increase the supply of milk that way? But if you see the recession as being caused by an excess demand for cows, you also start to think of other solutions. Perhaps the government could tax ownership of cows? Even, as a last ditch policy, make the cows stop giving milk? If you think of the recession as being caused by a shortage of milk, then taxing cows, or making the cows stop giving milk, look like totally daft solutions. They wouldn't cure the shortage of milk. But they would cure the recession. With a tax on cows, or if cows stopped giving milk, people would start spending their cows again.

But I also see the point of looking at it from Brad's perspective. An open market operation of cows for goats, where the government imports cows, uses them buy goats, and exports the goats, may not work. The total supply of milk is the same, and if cow's milk and goat's milk are perfect substitutes, people have no additional incentive to get rid of their cows to buy the goods and services that are in excess supply. If, at the margin, the demand for cows is a demand for milk only, the demand for cows will increase one-for-one with the increased supply of cows, if that increased supply of cows is the result of an open market purchase of goats. But why did the demand for cow's milk increase in the first place? Was it that all the goats went dry? Or might the increased demand for milk be a consequence of the recession, and so a consequence of the excess demand for cows? "I had better hang on to my cows, because I won't be able to sell my labour to buy milk in this recession!"

I don't know whether Brad is right about the shortage of other safe savings vehicles being the cause of the increased demand for money qua second best savings vehicle. But, even if he is wrong, this is something that might happen.... orrectly diagnosing the proximate cause of the recession as an excess demand for the good that happens to be the medium of exchange, even if that excess demand is not a demand for that good qua medium of exchange, lets us start thinking about radical solutions.

And we need to start thinking about radical solutions, because as history teaches us, and as this recession reminds us (and judging by the Eurozone we are going to be reminded again) stuff happens. Things go wrong. Safe assets become unsafe. Goats stop giving milk. And we need a monetary system that is robust in the face of human stuff-ups. A shortage of milk is a problem, but it didn't ought to cause a recession too. A shortage of safe assets is a problem, but it didn't ought to cause a recession too. And if it didn't cause an excess demand for the medium of exchange, as a contingent side-effect, it wouldn't cause a recession to compound the original problem. And it's just because those side-effects are contingent, and don't follow of necessity, that I insist on my way of framing the problem. A shortage of safe assets may cause an excess demand for money. An excess demand for money will cause a recession. We can break that first link in the causal chain, because it's only a contingent link. The second link follows of metaphysical necessity, unless we switch to barter.

What's the solution that could prevent an excess demand for the medium of exchange, and so prevent general gluts? Silvio Gessell? Barter on Ebay? Funny money systems where you can't hold a positive balance? God only knows. But we ought to start thinking about it. Quasi-monetarism (which is really Keynesianism too, if you are the sort of Keynesian that recognises that Keynesian economics doesn't make any sense in a barter economy) can be a radical approach.

The one thing this left out, I think, is that "money" becomes a first-rate savings vehicle and store of safe value only when nominal interest rates hit their zero lower bound.

Actually, it left out something else: in comments to Nick, Andrew Harless starts musing about money not just as a medium of exchange and a store of value but a unit of account...

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About Me 0071

Thursday, December 23, 2010

Start Making Money

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