Monday, September 21, 2015

Big Money Wants Hard Money, Take Two

The recent discussion between Paul Krugman, Brad DeLong and Dean Baker has got me thinking again about why wealthy people and the finance sector are so adamant in favor of hard money.  The reality is not in dispute—this is really their position, in every country and all the time—only the explanation.  The problem is that the components of wealth, mainly equities and bonds, do not always move in lockstep with hard money policies.  In particular, during periods of depressed demand expansionary fiscal and accommodative monetary policy can be good for profits and therefore equity investments.  In fact, this is exactly the political basis for Keynesianism, why it can be a viable political strategy and not just a theoretical curiosum.

Except that the Keynesian class compromise is quite dead.  Big money doesn’t want to hear about any kind of stimulus; it wants hard money, period.

But why?  Brad says big money is blind.  Paul says it’s really the special interest of banks, whose spreads fall during times of low interest rates.  Dean discounts the aggregate demand-profit link and lays the blame on the effect unexpected inflation has on real interest rates.

My scoring puts Brad and Dean slightly ahead.  There is no getting around the fact that much of the argumentation coming from the hard money crowd is simply tendentious and ill-informed.  That suggests an ideological process that interferes with rational, objective thinking.  So: ideology has to be part of the story.  Also, the hard money obsession is not just coming from banks; it seems to reflect the attitude of the very rich in general.  It’s not very convincing to argue, as Krugman does, that non-bank money hardeners get that way by talking too much with bankers.  Meanwhile, however, Baker’s (correct) point about the effect of changes in real interest rates on net creditors has to be put alongside consideration of aggregate demand and profits.  It’s not simple.

I have two hypotheses.  The first is that the Keynesian link between aggregate demand and profit has been attenuated by downward flexibility of the labor share of income.  Profits are doing rather well across the advanced capitalist world despite substandard growth for this very reason.  It isn’t certain that reflation would reverse the declining labor share, but it’s at least plausible that it could.  In that case there is less material basis for a Keynesian cross-class coalition in favor of expansionary policy.

The second is that ideology really is a factor, but that we need to have a somewhat more sophisticated theory of ideology than one usually finds.  The simplest view is that material interests directly drive beliefs, so hard money dogmatism should have its roots in an actual relationship between the value of portfolios and monetary policy.  This appears to be the underlying assumption in the current debate.  A somewhat more complex version, which I support, is that material interests give rise to characteristic problems, and that intellectual frameworks useful for addressing those problems are ideologically favored.  It’s the hammer and nail thing.  In this case, maintaining the value of portfolios, especially those with a significant component of bonds and money-like instruments, in the context of inflation is challenging.  A low-inflation environment is a lot less difficult for wealthy people to cope with.  (This also applies to the risk of devaluation if they have home country bias in their holdings.)  Thus the intellectual tools that are useful in clarifying and minimizing these risks have greater salience and crowd out ways of thinking that address other kinds of problems (like economic growth and employment).  Objectively, this can result in the sort of blindness DeLong describes, but it’s not randomly distributed across the population—it’s a big money thing.  On the other hand, it doesn’t depend on demonstrating that specific soft money policies would be necessarily value-undermining for current portfolios.

These are simply hypotheses.  Political economists should be devising clever ways to empirically test the various explanation.


I Will Never Accept The Terms of Service said...

Christian fundamentalism opposes fractional reserve banking. Factor that in.

Tom Hickey said...

They likely view hard money as deflationary, therefore favoring creditors and savers, which translates to the wealthy as well as financial institutions.

Backers of hard money are not interested in a bigger pie,only getting most of the pie, even if it is smaller and they get less in absolute terms. Astonishingly, many of them think chiefly in relative terms. I have tested this anecdotal and some are quite willing to admit it. For them it is not "rich" but "richer than."

Ayn Rand acolyte Alan Greenspan admitted that he acted as if the world were still on a gold standard while Fed chair, and most conventional economic thinking is based on sound finance rather than Lerner's functional finance (which Keynes rejected at first but apparently changed his mind on reflection).

It's (economic) liberal fundamentalism imposed on policy to the degree that they can, along with dominance of labor by capital.

Nathan Tankus said...

Good post. I'd add that I suspect a lot of hard money types believe the economy will eventually recover "no matter" what is done so investing "on the cheap" (ie when markets aren't growing much and thats reflected in capitalization) prepares for the time when the economy rebounds and those investments get a boost. this especially works out in places that see mass privatization during the recession. Indeed, those kind of assumptions are built into all sorts of forecasts including CBO ones.

Peter T said...

This position makes sense if you think of "wealth" not as real assets but as claims - essentially debts. It's not only inflation that threatens creditors, it's any ability on the part of debtors to soften terms, write off debts through bankruptcy or re-negotiation and so on. It's a political contest in which any move to recognition of softer money (or any other form of debtor power) threatens the basis of wealth.

jamzo said...

i did not understand the rise and success of neoliberal economic policies but as i read the conversation about hard money Milton Freidman keeps coming to mind and it seems to me the conversation is about business as usual

from wikipedia - monetarism

In monetary economics, monetarism is a school of thought that emphasises the role of governments in controlling the amount of money in circulation. Monetarists believe that variation in the money supply has major influences on national output in the short run and the price level over longer periods, and that objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy.[1]

"Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticise Keynes' theory of gluts using fiscal policy (government spending). Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued "inflation is always and everywhere a monetary phenomenon." Though he opposed the existence of the Federal Reserve,[2] Friedman advocated, given its existence, a central bank policy aimed at keeping the supply and demand for money at equilibrium, as measured by growth in productivity and demand."

Thornton Hall said...

Why don't you ask them?

greg said...

The wealthy do not want their mere disproportionate share of a nation's wealth. They want all a nation's wealth, even if, as a result of, um, their lack of restraint, that all becomes nothing.

While socially the wealthy may be the masters of the economy, in terms of running the real world economy, they are insane.

This cannot end well.

Denis Drew said...

Declining labor share in the US reflects declining labor share of economic bargaining power and the concomitant loss of political lobbying and campaign contributing power. Reason for: US legislation intended to establish labor collective bargaining is UNENFORCEABLE.

Simple answer: dentures.

The laws are in place; the issues presumably settled: simply make union busting a felony (invoking RICO for long term offenses).

That's all. :-) Have to start out in some progressive states (WA, OR, CA, NV, IL, NY?). Watch electorate next door wonder why they cannot freely join a labor union. Be great populist issue for pres candidate Dems.