HuffPos Myth
#5 : The gold standard would make prices more stable.
Kavoussi writes, Rep. Ron Paul (R-Tex.) has claimed that bringing back the gold standard would make prices more stable. But prices actually were much less stable under the gold standard than they are today, as The Atlantics Matthew OBrien and Business Insiders Joe Weisenthal have noted.
Does our critic even read the things she links to? Her two authors blog posts depict a very brief period in the twentieth century, after the classical gold standard had already given way to the gold exchange standard. What is that supposed to prove?
So against Bonnie Kavoussis two blog posts that examine the gold exchange standard and only for a period of about 15 years at that, all we have in reply is only the most meticulous study of gold and its purchasing power ever written, Roy Jastrams The Golden Constant: The English and American Experience 1560-2007, which finds gold to be extraordinarily stable over four and a half centuries.
Even John Kenneth Galbraith, not exactly golds biggest fan, conceded that once someone had gold, there was little uncertainty about what he would be able to get with it. In the last [19th] century in the industrial countries there was much uncertainty as to whether a man could get money but very little as to what it would do for him once he had it. In this [20th] century the problem of getting money, though it remains considerable, has diminished. In its place has come a new uncertainty as to what money, however acquired and accumulated, will be worth. Once, to have an income reliably denominated in money was thought
to be very comfortable. Of late, to have a fixed income is to be thought liable to impoverishment that may not be slow. What has happened to money?
Of course, gold standard advocates, at least in the Austrian tradition, are not fixated on price stability in the first place.
HuffPos Myth
#6 : The Fed is causing food and gas prices to rise.
This cant be, Kavoussi says, since some sources deny it. Bob Murphy testified before Congress on this very issue. He thinks the Fed does play a role. Where is the flaw in his reasoning?
HuffPos Myth
#7 : Quantitative easing has not helped job growth.
How could we think such a thing? Why, we should be satisfied to know, as Bonnie Kavoussi assures us, that the Feds quantitative easing measures actually have saved or created more than 2 million jobs, according to the Feds economists. Gee, the Feds economists think the Fed contributes to job growth? How about that! On the same grounds, we might say there was no housing bubble in 2005 and that the fundamentals of real estate were sound after all, we could find a whole bunch of Fed economists who were saying just that.
In fact, these models build in the very assumptions about purchases helping the economy that they then spit out, just like with the ex post analysis of the Obama stimulus package. No matter what numbers one fed into such models, it would be impossible for them to say that QE (or the Obama stimulus) hindered economic growth; the worst they would show is a build-up of price inflation once full employment had been achieved.
HuffPos Myth
#8 : Tying the U.S. dollar to commodities would solve everything.
Whenever you hear a mocking writer like Bonnie Kavoussi say something like, My opponents think X would solve everything, you can be sure her opponents have said no such thing. Why, as a matter of simple courtesy, could she not simply have described this alleged myth as, Tying the U.S. dollar to commodities would improve the American monetary system? Because that might sound reasonable, and its Bonnie Kavoussis job to make her opponents sound like troglodytes.
Thats all we have to say about this myth, though, since we are not interested in tying the dollar to a basket of commodities. Here is our preferred monetary reform.
HuffPos Myth
#9 : Ending the Fed would make the financial system more stable.
Heres Bonnie Kavoussi: Rep. Ron Paul (R-Tex.) claims that ending the Federal Reserve and returning to the gold standard would make the U.S. financial system more stable. But the U.S. economy actually experienced longer and more frequent financial crises and recessions during the 19th century, when the U.S. was using the gold standard and did not have the Fed.
Categorically false. As wrong as wrong can be.
First, an excerpt from the 2011 Tom Woods book Rollback, whose chapter on the Fed spends some time on this claim. (We omit the notes here, but thanks go to George Selgin and Peter Klein for help with sources.)
When people raise questions about the utility of the Fed, they are usually lectured about how volatile the economy used to be and how much better it is now, thanks to the wise oversight of our central bank. Recent research has thrown cold water on this claim. Christina Romer finds that the numbers and dating used by the National Bureau of Economic Research (NBER, the largest economics research organization in the United States, founded in 1920) exaggerate both the number and the length of economic downturns prior to the creation of the Fed. In so doing, the NBER likewise overestimates the Feds contribution to economic stability. Recessions were in fact not more frequent in the pre-Fed than the post-Fed period.
But lets be real sports about it, and compare only the post-World War II period to the pre-Fed period, thereby excluding the Great Depression from the Feds record. In that case, we do find economic contractions to be somewhat more frequent in the period before the Fed, but as economist George Selgin explains, They were also almost three months shorter on average, and no more severe. Recoveries were also faster in the pre-Fed period, with the average time peak to bottom taking only 7.7 months as opposed to the 10.6 months of the post-World War II period. Extending our pre-Fed period to include 1796 to 1915, economist Joseph Davis finds no appreciable difference between the length and duration of recessions as compared to the period of the Fed.
But perhaps the Fed has helped to stabilize real output (the total amount of goods and services an economy produces in a given period of time, adjusted to remove the effects of inflation), thereby decreasing economic volatility. Not so. Some recent research finds the two periods (pre- and post-Fed) to be approximately equal in volatility, and some finds the post-Fed period in fact to be more volatile, once faulty data are corrected for. The ups and downs in output that did exist before the creation of the Fed were not attributable to the lack of a central bank. Output volatility before the Fed was caused almost entirely by supply shocks that tend to affect an agricultural society (harvest failures and such), while output volatility after the Fed is to a much greater extend the fault of the monetary system.
When we look back at the nineteenth century, we discover that the monetary and banking instability that existed then were not caused by the absence of a government-established agency issuing unbacked paper money. According to Richard Timberlake, a well-known economist and historian of American monetary and banking history, As monetary histories confirm
most of the monetary turbulence bank panics and suspensions in the nineteenth century resulted from excessive issues of legal-tender paper money, and they were abated by the working gold standards of the times. In a nutshell, we are faced once again with the faults of interventionism being blamed on the free market.
From here, we recommend Toms article Life with the Fed: Sunshine and Lollipops? and his resource page Economic Cycles Before the Fed.
HuffPos Myth
#10 : The Fed cant do anything else to help job growth.
Bonnie Kavoussi: Many commentators have claimed that there simply arent any tools left in the Feds toolkit to be able to help job growth. But some economists have noted that the Fed could target a higher inflation rate to stimulate job growth.
So were back to the old Phillips Curve analysis, which posited an inverse relationship between inflation and unemployment. You can get low unemployment, the argument went, but the price will be high inflation.
Time has not been kind to the Phillips Curve. As economist Jeff Herbener told an interviewer:
The theory was that there was a trade-off between unemployment and inflation. But if you go back to the original article by Phillips, he never demonstrates that such a thing exists in the real world. He manipulated and maneuvered the data around to make it look as if there was one. Once his errors are swept away, and the data broken down, the Phillips Curve vanishes as any kind of long-run pattern. It didnt take stagflation to teach us that. It was always untrue.
This raises a much more interesting question. How did the idea ever come to dominate the macroeconomic literature in the first place? Heres my theory. Recall that Keynesian theory suggests there are no downsides to manipulating aggregate demand through fiscal and monetary policy. If you created full employment, it would stay there and wed all live happily ever after. It seems paradoxical, then, that Keynesians would embrace a theory that suggests that creating full employment risks generating inflation. Keynes never said that, but people like Paul Samuelson did
.
It became fairly well recognized, even in the 1950s, that there could be such things as inflationary recessions. That put orthodox Keynesians in big trouble. In order to cover themselves, Samuelson and Solow adopted the Phillips Curve as a model. It served as the means to save themselves from the realization that Keynesianism was fundamentally flawed.
When inflation and unemployment increase, they dont have to throw in the towel on Keynesian theory; they merely claim that the Phillips Curve has shifted outwards. They are saveduntil of course the outward and inward shifts of the whole curve dominate movement along the curve. That means the supposed trade-off itself has disappeared. Thats exactly what happened. Many people see that the curve is now discredited. But in fact, it never did stand up. It was an escape hatch built by Keynesians that no longer allows them an escape.
For the systematic takedown of the Phillips Curve if only Bonnie Kavoussi could recognize a real myth when she saw one, instead of just repeating what she learned in Ec 10 at Harvard see chapter 3 of Dissent on Keynes.
HuffPos Myth
#11 : The Fed cant easily unwind all of this stimulus.
Kavoussi: Some commentators have claimed that the Fed cant safely unwind its quantitative easing measures. But the Feds program involves buying some of the most heavily traded and owned securities in the world, Treasury and government-backed mortgage bonds. The Fed will likely have little problem finding buyers for these securities, all of which will eventually expire even if the Fed does nothing. But economists have noted that once the Fed decides its time to unwind the stimulus, the economy will have improved to such an extent that this wont be an issue.
Nobody is denying that the Fed could find a buyer for its assets. The issues are: (1) at what price will the Fed be able to unload those assets, and (2) what happens to the financial sector when the reserves are destroyed in the act of selling off these assets? The Fed could dump its entire holdings of Treasury securities tomorrow, but the critics are worried that this would send interest rates soaring and would cripple the banks which would no longer have excess reserves.
Look closely at what Kavoussi is saying: If the economy begins to recover before price inflation becomes a problem, then the Fed will be able to sit back and let its stimulus unwind naturally. Yes, great, but what if the economy is still in the toilet when price inflation heats up? Then, as Bob Murphy argues, all of the Feds ballyhooed exit strategies will seem pretty useless.
In short, its safe to say that there are indeed plenty of myths about the Fed, and that Bonnie Kavoussi believes pretty much all of them.
thoughts?