More in the Pick-Up Internet Symposium: Why the Love of Hard Money?

UPDATE: And there are four more contributions worth reading on the Equitable Growth: Pick-Up Symposium: Why the Love of Hard Money?: Wednesday Focus for September 3, 2014:

Paul Krugman sums up what he thinks he knows and doesn’t know:

Paul Krugman: The Deflation Caucus: “Europe… is…

… in the grip of a deflationary vortex… [Its] central bank understands that. But its epiphany may have come too late…. And there but for the grace of Bernanke go we…. We seem (at least for now) to have steered clear of the kind of trap facing Europe. Why?… The Federal Reserve started doing the right thing years ago, buying trillions of dollars’ worth of bonds…. The Fed should have done even more. But Fed officials have faced fierce attacks all the way…. The predicted surge in inflation has never arrived, but despite being wrong year after year, hardly any of the critics have admitted being wrong, or even changed their tune. And the question I’ve been trying to answer is why. What is it that makes a powerful faction in our body politic–call it the deflation caucus–demand tight money even in a depressed, low-inflation economy?

One thing is clear: Like so much else these days, monetary policy has become very much a partisan issue…. Inflation paranoia has, to a remarkable extent, become a matter of conservative political correctness, so that even economists who should know better have joined in the chorus…. Leading politicians get their monetary theory from Ayn Rand novels…. Class interest. Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors…. You could argue that big investors should like the Fed’s expansionary policies, which have been very good for the stock market. But the wealthy may not trust that connection, in part because the inflationary ’70s were very bad for stocks….

The dominance of creditor interests on both sides of the Atlantic, supported by false but viscerally appealing economic doctrines, has had tragic consequences. Our economies have been dragged down by the woes of debtors, who have been forced to slash spending. To avoid a deep, prolonged slump, we needed policies to offset this drag. What we got instead was an obsession with the evils of budget deficits and paranoia over inflation–and a slump that has gone on and on.

Simon Wren-Lewis does the full Michel Kalecki:

Simon Wren Lewis: Class Interests: “[That] the wealthy want to raise interest rates, even when the economy remains depressed…

…is not just a US phenomenon. In the UK the right wing Institute for Economic Affairs set up what they call the ‘shadow MPC’, and they were voting for higher interest rates before the recovery began! The highly influential FT journalist Chris Giles, who has become a bellwether for right wing interests, has been championing the cause of an early rise in rates for many months…. Is it any wonder… that the ‘1%’ who started to become much richer in the 1980s should see tight money as an essential condition of their new found wealth? But what about the ‘interests of capital’: surely the owners of business should see that firms will be less prosperous if demand is kept too low through tight money? Here I can only quote Michal Kalecki: ‘But “discipline in the factories” and “political stability” are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the “normal” capitalist system.’…

This sets up two areas of political tension between the interests of the wealthy and, of all people, academic macroeconomists. First academic macroeconomists… see monetary policy as a means of achieving the natural unemployment rate and steady inflation. The wealthy see monetary policy as a means of maintaining a degree of unemployment that reduces the political threat to their wealth. Second, when monetary policy stops working in a liquidity trap, most academic macroeconomists want to use fiscal policy to take its place. To the wealthy this… seems unnecessary… [and] calls into question their ideology about the failure of pre-neoliberal times….

The aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%. I remember saying shortly after the crisis that the neoliberal position that government regulation was always bad and unregulated markets always good had been blown out of the water by the crisis. This was politically naive, in part because a crisis caused by unregulated markets was morphed by the right into a crisis caused by too much government debt, or too many immigrants. But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. For the 1%, these are very dangerous times, and they want to be on favourable territory for the battles ahead.

Nick Rowe dodges the question–which is why do the arguments for austerity have so much more traction than they deserve to, and why are the austerians so allergic to in any way marking their beliefs to market?

Nick Rowe: How to destroy the “neoliberal consensus”: “C’mon guys. If you are going to put forward a lefty conspiracy theory…

…to explain why monetary policy is tighter than you (and I) think it should be, you at least need to get your story straight. How many times have I heard the lefty argument that it was ‘Keynesian policies”‘… that saved capitalism from itself [in the 1930s]?… Or just look at those Eurozone countries which have very high unemployment today. Which political parties have gained votes? The communists and near-communists; and the fascists and near-fascists. Not the neoliberals, or near-neoliberals….

<sarc> Right. So the aftermath of the financial crisis is an especially dangerous time for the “neoliberal consensus”. OK. So to save the neoliberal consensus, let’s make unemployment temporarily even higher to make it even more dangerous for the neoliberal consensus??? </sarc> This makes no sense whatsoever. If you are trying to avoid having an accident, while keeping your average speed the same, you don’t increase your speed on the dangerous bits of the road, and slow down on the safer bits….

Look. We think that monetary policy is too tight. And some other people disagree with us. You don’t need to cook up some daft conspiracy theory to explain why people disagree with us. They just do. They have their reasons for thinking they are right, just like we have our reasons for thinking we are right. They are wrong and we are right (I think), but they don’t know that. Those disagreements are what happen all the time in a free society. Get over it. Conspiracy theories are a cop-out.