Economics, Monetary Policy, Pethokoukis

5 market monetarism-QE questions in 5 days (Part 5): ‘Isn’t this all just a form of central planning?’

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Most folks who identify as market monetarists have been in favor of the Fed’s bond-buying, or “quantitative easing,” program. They don’t think it’s been executed perfectly, however. If the Fed’s actions had been accompanied by a stated intention to target the level of nominal GDP, there’s a strong case that QE could have been far smaller yet far more effective. Still, as I write in my new National Review column, QE has likely helped the economy and thus been worth doing.

Every day this week, I will present answers to some common QE criticisms from a market monetarist perspective. 

Question #1 on Monday: “QE is doing nothing since banks are just sitting on the money. Look at the huge increase in excess reserves! What’s the point? How is this boosting growth, exactly?”

Question #2 on Tuesday: “Maybe the Fed is having a positive economic impact, but isn’t it just a sugar high, papering over or propping up a bad economy with easy money?”

Question #3 on Wednesday: “Why hasn’t QE been inflationary?”

Question #4 on Thursday: “Does it matter if the Fed dials back its bond purchases if its balance sheet remains monstrously huge?

And here is the final question:

Isn’t this all just another form of central planning?

Scott Sumner, economist at Bentley University and blogger at The Money Illusion:

Right now resources are being misallocated because low nominal GDP combined with sticky wages lead to mass unemployment.  A good monetary policy should lead to a situation where the central bank appears invisible, and lets the market allocate resources.  To do that we need faster growth in nominal spending.  Fiscal stimulus is better described as central planning, as monetary policy merely affects nominal GDP, and lets the market decide how that nominal spending will be allocated between the various sectors.  You aren’t centrally planning the economy, rather you are planning the one thing you already control, money.  Given the Fed runs the monetary system, it’s better they do so in a way that doesn’t damage the economy, than a way that it does.  Consider this hypothetical: Suppose we currently had hyperinflation.  Would a Austrian economist oppose tighter money on the grounds it was “central planning?”  Why not?

Michael Darda, chief economist at MKM Partners:

Unless we are going to get rid of the Fed, which won’t and probably should not happen, having the Fed conduct policy in a way that provides nominal stability should be the goal. Scott Sumner’s proposal for a market-based NGDP level target is one way to do this. In this way the market guides policy and credibility prevents sustained nominal (monetary) shocks.

David Beckworth, economist at Western Kentucky University and blogger at Macro and Other Market Musings:

QE at its core is an imperfect attempt to respond to monetary disequilibrium. It is flawed because of its ad-hoc, make-it-up-as-we-go-along approach and until recently, not being tied to any explicit target.  So this erratic policy implementation is problematic and does place too much focus and thus power on what the Fed does. I wouldn’t call this central planning, but I would call bad policy making. Ideally, the Fed would go to a NGDP level target that would make its actions more rule-like and predictable.

Josh Hendrickson, economist at the University of Mississippi and blogger at The Everyday Economist:

I actually agree that Federal Reserve policy suffers from the same types information problems as central planning.  If one thinks of the Fed as trying to set the market interest rate equal to the natural rate of interest as David Beckworth and Mike Woodford prefer to think about it, then it is easy to see how difficult it is to solve this information problem.  HOWEVER, we have a central bank.  Thus, the question is what a central bank should do given that one exists.  I favor nominal income targeting because (1) I think that it minimizes the information and knowledge that central bankers must have to do their job and (2) because a nominal income target requires the money supply to adjust roughly in the same way as it would under a free banking system.  In other words, a nominal income target is as close as we can get a central bank to replicating what would happen if we had a free market for bank notes.

To argue that the Fed shouldn’t conduct QE because centrally planning is hard is an argument against a central bank, it is not an argument against QE.

11 thoughts on “5 market monetarism-QE questions in 5 days (Part 5): ‘Isn’t this all just a form of central planning?’

  1. Jim,
    Hendrickson says in your quote, “HOWEVER, we have a central bank. Thus, the question is what a central bank should do given that one exists.” That was basically Rand Paul’s point in the article a few weeks ago on NRO, that that was Friedman’s view, and that Friedman’s view on QE should be qualified. He may or may not have been right, but none of the critics I read, including you, addressed the issue in that light or responded to the points Paul quoted from the guy at Hillsdale, etc.
    Sumner’s point, “You aren’t centrally planning the economy, rather you are planning the one thing you already control, money,” is baffling. One of Ben’s stated goals early on was to make it so there was no ROI anywhere except the stock market, to keep the market up and provide ‘wealth effect.’ He may only be controlling the ‘money,’ but it has huge ramifications for everyone’s lives. He’s doing ‘central planning’ whether he controls all the economy or not. This has huge ramifications, as well, for Q#2 from Tuesday, but there’s another point to make first.
    Ben said last week that part of the reason he didn’t taper was that fiscal policy from Washington isn’t in order. I don’t think he just means there’s uncertainty because of politics. He knows, but won’t say, Obama policies are hurting growth in a huge way. I could be wrong about whether Ben thinks that, but it doesn’t matter. It’s a legit debate about whether the country would be better off without QE and forced to live with the consequences of fiscal policy or not, but that’s where the issue lies.
    In regard to question #2, what’s the definition of ‘sugar high’? I don’t disagree that inflation is tame, for now, and deflation is an issue. In that sense QE is an obvious success, it has kept the economy from tanking without high inflation. But you don’t need inflation for what I would call a ‘sugar high’. As mentioned above, Ben’s stated purpose was to make it so the stock market was the only place to put money. That means the money in the market is there as a contrivance. That gets back to central planning. Again, you’d have to say that based on his goal it’s been somewhat of a success, the market is up and company performance is ok. But savings rates are terrible, people on fixed incomes are hurt, and people remain oblivious to the effects Obama policy is having. Call it a ‘bubble’ or ‘sugar high market’ or whatever, but the stock market success has come at a big cost.
    The only way to fix it is getting back to policies consistent with strong economic growth (supply-side, for lack of a better term). In the meantime, QE is just enabling bad fiscal policy.

    Just some thoughts.

    • Market Monetarists do not agree with Bernanke’s stated rationale for QE. Market Monetarists favor quantitative easing because it increases the quantity of money. Market Monetarists favor increasing the quantity of money at this time, because it increases spending on output, and spending on output is too low at this time. If you read the economists quoted here, you can see that Market Monetarists believe that the reason spending on output is low at this time is because the demand to hold money is very high at this time. Market Monetarists favor quantitative easing is too accommodate that high demand to hold money and allow spending on output to recover as well.

      • I think there’s a typo in your last sentence, if I understand you correctly. How does QE “accommodate that high demand to hold money?” It punishes holding on to money with negative real rates of return. Isn’t it artificially directing money to the stock market? Doesn’t it mean that the market is in essence a bubble, a lot higher than it would be without QE, everything else being equal? I’m not saying QE hasn’t been a partial success, but it hasn’t done anything to deliver a robust economy. It can’t. All it can do is temper the effects of fiscal insanity. But for how long?

        • You are right. There was a typo.

          Market Monetarists favor quantitative easing to accommodate the unusually high demand to hold money.

          Failure to increase the quantity of money enough to accommodate this unusually high demand to hold money results in excessively low spending on output.

          I don’t agree with your claim that quantitative easing “artificially” raises the value of stocks by lowering interest rates. How do you know what interest rates should be? How do you know what the value of stocks should be?

          • Part of the reason we know interest rates are not where they should/would be is they are where they are as part of an admitted contrivance on Big Ben’s part to create “wealth effect.” The market isn’t determining interest rates or stock value, a technocrat is. He seems like a smart technocrat, but how do we know he has the golden answer?

            I don’t know if we’d be better off with or without QE, but we have to call it what it is. It’s central planning by a technocrat, and it is clouding the effects of really bad fiscal policy.

  2. Superb blogging, the whole series. Pethokoukis is to be commended.

    Why the right-wing (my normal roost) has gone off the rails on monetary policy is an interesting sociological question. Thank goodness that AEI, the National Review, Ludlow, Cato Institute and several others have been pointing the way to a good monetary policy.

    There is something about gold, and currency that just perverts the right-wing, and any hint of inflation.

    You know, back when we were fighting the “commies” and “containing communism” the current peevish fixation on “controlling inflation” was not as pronounced.

    Deep in the right-wing soul is an authoritarian streak, and the need to “control” or “contain” something— communism, drug use, dirty magazines or movies (remember Reagan’s AG Ed Meese?) inflation, liberal morals—a stance often at odds with the libertarian side of the right-wing.

    The modern economy functions best with mild inflation, like it or not. It is just a practical reality. In a perfect world, maybe we would not have inflation…though I wonder if rising real incomes always leads to some property inflation for desirable locations, thus one cannot have prosperity without some inflation. If you try to kill the inflation, you will kill the prosperity too.

    That’s how i worked out in Japan. anyway. No inflation and no prosperity either.

    • I’m not in favor of going back to the gold standard, but how do you arrive at the conclusion that the right wing wants to control the economy by reverting to such standard? Seems to be it’s the Left that wants to tell everyone how much they can earn. Where they can work. What they can buy. And those radical right wing Germans with all of their safety nets are terrified of inflation based on their history.

      The problem with the idea of running just a little more inflation is that a little more can easily turn into a lot more. The initial high feels pretty good and getting inflation back under control is a real bummer. I admit that QE hasn’t resulted in inflation yet. It’s possible that it won’t. But can you honestly say that expanding M1 by trillions of dollars doesn’t leave you just a little nervous? Remember, the Fed claimed that a nationwide fall in real estate couldn’t happen, and we weren’t in a bubble. We clearly missed that signal, so isn’t there just the tiniest of chances that we’ll miss this one too?

      • Even in the most expansive period of Fed expansionism (1970s) inflation barely got into double digits. Since then single digits and recently lower than that in spots.
        The economy today is far less inflation prone than the 1970s…much more competitive…I worry about perma-recession not inflation.

  3. “Consider this hypothetical: Suppose we currently had hyperinflation. Would a Austrian economist oppose tighter money on the grounds it was “central planning?” Why not?”

    Ah, another “when did you stop beating your wife” hypothetical. I think an Austrian would say that if we allowed interest rates to actually signal properly –something that the Fed has expressly disallowed this century– that as inflation picked up interest rates would naturally rise and correct it. There’s a false choice that simply because we have the Fed imposed as a boundary condition that we have true Austrian options available.

  4. It is true though…right-wingers ever cavil about artificially low interest rates. Rates are never artificially high…and what is artificial if everything is artificial?

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