The problem with our economy is not that something bad happened to our productive capacity while the flow of nominal spending continued to blip along, it is that something bad happened to the flow of nominal spending and that carried real production and employment down with it. At the moment our flow of nominal spending at $14.7 trillion per year is some 12% below its pre-2008 trend. And in the absence of any 12% decline in prices and wages, that shortfall in spending has to produce our current macroeconomic distress: there is not enough "money" to support enough of a flow of spending to chase all the goods we could produce. We don't have a deficiency of real supply (for whatever reason). We have a deficiency of nominal demand.
That's what John Walter Bagehot would say. That's what Irving Fisher would say. That's what Jacob Viner would say. That's what Milton Friedman would say.
And they would say that it is a central bank's business to intervene in asset markets to boost the flow of nominal spending back to what everybody expected it to be and counted on it being
But now we have a bunch of economists and non-economists behaving very badly: saying not only that the government shouldn't boost its spending but that the central bank shouldn't buy bonds for cash either.
Paul Krugman does the intellectual garbage collection
Liquidationists of the World, Unite!: OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either. This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings... then declared in 2007 that there was no reason to worry about the credit market?
But the real question is, what is their model of the mess we’re in?... I know what my model is.... Obviously, these guys disagree. But what is their model? How do they think we got into a crisis that has depressed employment all around the advanced world? I don’t think they have an answer; I think all they have are wild stories about how Obama’s Sharia-law Marxism has unnerved business, or something, with the effects mysteriously spreading to Spain and Latvia.
And in the name of whatever it is they believe, they’re doing their best to ensure that the slump goes on.
Indeed. It is amazing.
Now Cliff Asness, Richard X. Bove, Jim Chanos, Nicole Gelinas, James Grant, Roger Hertog, Seth Klarman, William Kristol, David Malpass, Dan Senor, Amity Shlaes, Paul E. Singer, Peter J. Wallison, and Geoffrey Wood never bothered to learn the economics of Irving Fisher, Jacob Viner, and Milton Friedman, so they don't know any better,
But those who certainly do know better include Michael J. Boskin, Charles W. Calomiris, Kevin A. Hassett, Gregory Hess, Douglas Holtz-Eakin, Ronald I. McKinnon, and John Taylor certainly do know better.
And John F. Cogan and Niall Ferguson certainly ought to have learned enough by now to know better...