Ahem. Cantillon effects anyone? I was just perusing JP Koning's site and came across this link of his that lists a very large number of posts by various economic bloggers on a debate we had over Cantillon effects back in December 2012. I do remember the initial debate. Here is his link.
JP Koning's list of Cantillon Effect posts
http://jpkoning.blogspot.com/search/label/Richard%20Cantillon
I was very interested as Cantillon effects are still something I don't feel like I've gotten a handle on. I recall leaving the debate not entirely sure who is right. JP certainly gives you the resources to look at the debate in depth.
If memory serves me, I tended to think that there could be something to C effects but on the other hand I did find the arguments of Sumner, Nick Rowe etc. somewhat compelling. On the other hand I'm not sure I find this argument by Bob Murphy for C effects so compelling:
"I have a deal for JP Koning, Scott Sumner, and Nick Rowe (since I think they would agree with him):
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/12/cantillon-effects-and-non-super-neutrality.html
I'm not sure what Nick's punchline is actually. I mean he surely doesn't deny that fiscal policy matters, yet he also clearly thinks the injection point of money does matter.
I'm not even getting into the fact that proponents of endogenous money would argue that as banks don't not reserve constrained to lend money-as most money is created by banks in extending credit-they would see this very differently.
Anyway, I have to hand it to JP for compiling such a great collage of work on C effects. If I had to make a choice, I admit that I find it hard to believe it has no impact. If you were to divide up $1 trillion dollars and sent out each taxpayer say a check for $1,000 each surely this would have a different effect than if the Fed simply parked the money in the banks-even understanding Nick's point that these millions of taxpayers would up and park it all in the banks anyway.
In fact the reason I think this it totally related to the question of whether fiscal policy matters-obviously it does.
JP Koning's list of Cantillon Effect posts
http://jpkoning.blogspot.com/search/label/Richard%20Cantillon
I was very interested as Cantillon effects are still something I don't feel like I've gotten a handle on. I recall leaving the debate not entirely sure who is right. JP certainly gives you the resources to look at the debate in depth.
If memory serves me, I tended to think that there could be something to C effects but on the other hand I did find the arguments of Sumner, Nick Rowe etc. somewhat compelling. On the other hand I'm not sure I find this argument by Bob Murphy for C effects so compelling:
"I have a deal for JP Koning, Scott Sumner, and Nick Rowe (since I think they would agree with him):
You guys convince the government to give me a printing press. I’ll store it in my basement with a lot of security to make sure nobody else uses it. I promise I will give all of you a full month to get ready whenever I’m going to create new money. For example: In January, I’m going to print up $1 billion, and I will spend $500 million on gold bullion and the other $500 million on buying into the S&P500."
"Do whatever you guys need to, to get ready. Blog about my plans, set up a Facebook page, whatever. Get Glenn Beck to warn his listeners to call Goldline in December."
"Now: Does anybody deny that it matters to me that I’m going to have that $1 billion in January? Are you guys saying you wouldn’t want the printing press, so that you could buy the assets instead? Do you really mean to say these “injection effects” are completely irrelevant, so long as the price of gold and shares of stock can adjust before I enter the market?"
"The true irony in all of this discussion is that everybody concedes as a matter of course that the governmentbenefits from having the printing press, i.e. from being the first person in line to get the newly created money. But gee Sheldon Richman and you other Austrians, that doesn’t count as an injection effect mattering! That’s what we call “seignoriage.” So I guess the term for what the monetary authority earns, by creating new money, is actually “fiscal policy”?
I'm not sure this is the best argument for C effects. Yes, it matters to me if the $1 billion comes in my mailbox or it goes to the banks. Still, the anti C argument is that is doesn't matter for the macroeconomy. JP suggests that the reason that people like Sumner don't think the injection point of new money matters is because he believes in Rational Expectations. Murphy quotes JP:
"While we don’t have to agree with Cantillon’s ordering of effects, it seems uncontroversial to assume that if expectations only adapt slowly, then there will be some sort of distributional effect during the adjustment period to an unanticipated change in the money supply. There can certainly be debate over the size and consistency of this effect. Austrians, for instance, build a business cycle theory out of it. Others consider the effect to be ephemeral."
"On the other hand, if rational expectations are assumed from the start, then the location of gold’s injection point is moot since everyone perfectly anticipates the repercussions and adjusts. In talking about injection points under rational expectations, it seems to me that market monetarists are having a totally different conversation than Austrians, who are interested in injection points under imperfect expectations. Is this just a debate over the nature of expectations? [Bold added.]"
Nick Rowe argued that while it matters a lot to you if the Fed sends the $1 billion to your house rather than mine or it goes all t Chevron, it has no macro effects at least as in each case the person who receives the $1 billion parks it in the bank so that the effect is the same as if the Fed had gave it directly to the bank first-as what does usually happen in money injections.
However, it's thiis other piece of Nick's that I find interesting: he says the question about C effects is the same thing as asking if fiscal policy matters.
"Sorry. What was the question again? Was it: "Do Cantillon effects matter?" Or was it "Does fiscal policy matter?" I can't tell the difference. There is no difference. "Cantillon effects" are just another name for "the effects of fiscal policy".
"OK. I suppose that Austrian economists believe that fiscal policy matters. I suppose it does. And monetary policy has fiscal implications, because a faster growth rate of the money supply will mean bigger seigniorage profits for the government (as long as we stay on the left side of the Laffer Curve)."
"But the size of those fiscal implications depends on the ratio of the monetary base to nominal GDP."
"In Canada, non-interest paying currency is currently around 4% of nominal GDP. An increase in the inflation target from the current 2% to 12% would mean a 10 ppt increase in the growth rate of the money supply. That would be a very big change in monetary policy. Even if the currency/NGDP ratio stayed the same at 4% (it would fall), the fiscal implications of that very big monetary policy change would be 0.4% of GDP."
"What do you think would be the bigger deal: increasing the inflation target from 2% to 12%, or changing taxes or government spending by 0.4% of GDP?
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/12/cantillon-effects-and-non-super-neutrality.html
I'm not sure what Nick's punchline is actually. I mean he surely doesn't deny that fiscal policy matters, yet he also clearly thinks the injection point of money does matter.
I'm not even getting into the fact that proponents of endogenous money would argue that as banks don't not reserve constrained to lend money-as most money is created by banks in extending credit-they would see this very differently.
Anyway, I have to hand it to JP for compiling such a great collage of work on C effects. If I had to make a choice, I admit that I find it hard to believe it has no impact. If you were to divide up $1 trillion dollars and sent out each taxpayer say a check for $1,000 each surely this would have a different effect than if the Fed simply parked the money in the banks-even understanding Nick's point that these millions of taxpayers would up and park it all in the banks anyway.
In fact the reason I think this it totally related to the question of whether fiscal policy matters-obviously it does.
"If you were to divide up $1 trillion dollars and sent out each taxpayer say a check for $1,000 each surely this would have a different effect than if the Fed simply parked the money in the banks-even understanding Nick's point that these millions of taxpayers would up and park it all in the banks anyway."
ReplyDeleteNick seems confused about banking. To say they would park it all in banks is just silly. Other than a small amount held as currency all money is parked in banks. There is nowhere else to park it. Nick seems to be like some of my work colleagues who when talking about their 401 k say things like. "Cramer says we need to get our cash off the sidelines and into the market" as if all of us directing more of our money market money to buying a stock will reduce the amount of money in money markets and raise the amount in stock markets. Thats just absurd. When I buy a stock with my money market money someone else is selling for the same money market money. The macro affect on the money market is no change and the price of the stock rises by the amount I paid for it. Thats all. There is no "money" in the stock market. Money goes through it, just like when I buy an apple, money goes through the farmers market form my bank account to the sellers and I get to eat an apple.
There is only two places to park money, As cash under your mattress (very small percentage in total) or in a bank account.
I dont really think there needs to be some fancy effect attributed to the notion that if I get some money, either as new money form a printing press or if I manage to steal 1 trillion of already printed money, that I will be able to buy something I previously couldnt and that I will have an affect on prices if I put it all in one place. The more interesting question I think is what would be the best way to get what you wanted? If what you wanted was as much gold as you could get for as little money possible, would you announce you want to buy 400,000,000 oz of gold or would you just go out knowing you could spend all you want(you have the press you know) and just go to each gold owner and say Ill buy all you have for x$/oz (pick a price slightly below current market price). An announcement to buy a quantity would probably cost more per oz than an announcement to pay a price and take everything you could get at that price. And there would obviously be a different affect on gold prices between the two strategies.
From a policy position however, Greg what's the optimum choice? When the government does $700 billion in fiscal stimulus-through the Treasury-what is different from when the Fed puts the same amount through QE? The MMers claim that the difference is that only when the Treasury does it there's more debt.
ReplyDeleteI don't agree with this but what is the real difference between these two operations-yes of course I understand the theory of raising consumer demand by putting money in people's pockets.
Of course, money can only sit under your matress or in the bank but they're claiming that the stimulating factor is the money in the bank.
ReplyDeleteMoney in a bank is not stimulating in and of itself. Money changing between bank accounts is stimulating. Treasury buying something is stimulating in that it generates a "sale" for a price. The price paid is the "stimulation" if you will. Add up all the prices of all the sales in your economy and you get your NGDP. If Treasury contributed 700 billion of that then so be it. What the recipients of the Treasury purchase do with their revenue is unpredictable but its safe to assume many will buy something else,many will pay down an old debt and many will simply save it an account. The fact that it adds to debt is mostly irrelevant in regards to its stimulatory affect. The debt simply represents the saving that resulted from the investment spending. Issuing the debt is not necessary, its just a rule we place on ourselves.
ReplyDeleteMonetary policy via QE is not really buying anything which directly adds to GDP so any affects of the repurchase of bonds is due to the seller taking his bond, trading it for cash and then figuring what he wishes to do with that cash. Think about what you would do if your bank took your savings account with 10,000 at 2% and offered you 10,100 in a checking account right now. Would you necessarily spend the money now? You were saving it to begin with. Likely you will try to find some other vehicle for your saving. So this conversion did nothing of note to add to sales of goods and services in the economy.
So the optimal policy, if you want more sales and more GDP, it seems to me is to directly affect sales. Dont just make someone decide again what to do with their savings.