2013-12-17

All Accelerator, No Brakes

Although a search for the relevant comment didn't turn up at The Money Illusion, I once asked Scott Sumner in a comment under one of his posts if he thought monetary policy was always either expansionary or contractionary. I wanted to find out whether he felt there was any situation in which a central bank could take essentially a neutral position. Again, I can't dig up the relevant blog post in this case, so you'll just have to take my word for it that he said no. In a Sumnerian universe, all monetary policy is either expansionary or contractionary - it is never neutral.

This has an implication that is a little uncomfortable for me: If you're not expanding the money supply, you're contracting it. To be sure, it is a position that makes sense according to the Market Monetarist paradigm. Market Monetarism is, at the end of the day, an argument for a constant and predictable increase in the money supply. Thus, if you're not expanding NGDP, then you're contracting RGDP.

To me, it's a lot like driving an automobile that doesn't have a brake, only an accelerator. The driver can control the level of acceleration, but cannot decelerate. Perhaps more accurately, it's like driving a car with a bomb connected to the brake: the driver can control the rate of acceleration or decide to coast, but if the driver attempts to brake, the car explodes. Similarly, under Market Monetarism, every contraction is a bad one. At least, that's how I understand it.

I thought about all of this in light of Daniel Kuehn's unsavory comments to me under yesterday's "Some Links" post. Setting aside all the distasteful personal stuff Kuehn elected to bring into the discussion, we can focus entirely on his answer to my question. My question was what an acceptable (subjectively speaking) decrease in government spending might look like. Here's his reply (emphases mine):
I've said any decline in spending can be described as a "collapse" - but I suppose you attach more significance to the word "collapse" than I do. I'll add that no decline in spending is appropriate right now.
Long story short: Every reduction in government spending is a collapse, no reduction in spending is appropriate.

To be clear: I'm not going to say that Kuehn is wrong about this. First of all, I consider it a matter of opinion. Second of all, the issue to me isn't really a matter of right-and-wrong. What's interesting to me is that there simply isn't room in the paradigm for a spending decrease. That's just an objective fact about the paradigm, not a judgement about whether or not their should be room in the paradigm for a spending decrease.

By now, it should be clear that these two examples share a common thread. There is only room in the Sumnerian paradigm for positive increases in the money supply. There is only room in the (I'll call it) "Liberal New Keynesian" paradigm (I do not mean that label to be derogatory in the slightest) for a decrease in government spending.

That is important because it defines the parameters of the discussion. If Louis L. Libertarian wants to reduce the size and scope of government, Kenny K. Keynesian feels that doing so will cause serious detrimental economic effects. If Audie A. Austrian thinks that expanding the money supply is distorting the market and causing detrimental effects, Manny M. Market Monetarist feels that doing anything other than expanding the money supply is an act of economic contraction!

There simply isn't enough space in either the Market Monetarist or "Liberal New Keynesian" viewpoints to allow for common ground to be built with competing theories. I'm not here to declare that they should expand their range of acceptable viewpoints, I'm just here to make a simple prognosis: It is probably not possible for the opposing viewpoints to communicate productively, given the narrow range of allowable opinions the various sides are willing to consider.

So the Market Monetarists can talk among themselves about whether 4% or 5% is a better NGDP target, the Liberal New Keynesians can talk among themselves about how to keep government expenditures as high as they need to be without increasing military spending too much, the Austrians can talk among themselves about whether free banking is possible under anarcho-capitalism, and nobody will ever have to worry about cross-contamination with the other groups.

Not good.