The Stockman’s Big Swinging Whip

by reader Matthew McCosker

I can credit two sources that have shaped my thinking on both economics, politics (I am quite apolitical these days), and finance. One is the Angry Bear blog, and the second is Warren Mosler.
On the bus this morning, I was glued to a post at Warren Mosler’s blog, where he responds to a David Stockman oped in the New York times:

The Stockman’s Big Swinging Whip

The Stockman piece along with Warren’s commentary paints quite a picture, and spans quite a bit of economic history. In some places he agrees, but many he does not. Here Stockman appears to blame the state’s interference in free markets, and Warren correctly notes that the “free” market is completely dependent on a simple, but important product produced by the government – our currency, which is not created by the “free” market at all, the free market is a user only:

[Stockman] Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

This dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to under produce jobs and economic output. The toll has been heavy.

[Mosler] The currency itself is a simply public monopoly, and the restriction of supply by a monopolist as previously described, is, in this case the cause of unemployment and excess capacity in general.
A particular area of interest for me has been the inflation of the Seventies. Mostly, because it has become American economic folklore akin to Weimar or Zimbabwe inflation, where Volcker the dragon slayer stepped in to stop it. I am not totally convinced of this storyline. For example, one observation is why does inflation appears to track the Fed Funds rate quite closely during the decade, and then diverges in the early 80′s, and then seems to track more closely again (see both FRED charts. So the lower the Fed Funds rate the lower the CPI? Were Volcker’s hikes even necessary? It is no coincidence that oil prices started going up when the Texas Railroad Commissioner began to lose control over the price they set for oil (yes oil prices were regulated for a long time prior to the 70’s and the TRC was OPEC before there was OPEC), and foreign embargos caused price shocks. Warren has a few exchanges around inflation in his piece, but oil prices being the main culprit in the 70′s:

[Stockman]  The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987.

[Mosler ]It was the Saudis hiking price, not the Fed. Note that similar ‘inflation’ hit every nation in the world, regardless of ‘monetary policy’. And it ended a few years after president Carter deregulated natural gas in 1978, which resulted in electric utilities switching out of oil to natural gas, and even OPEC’s cutting of 15 million barrels per day of production failing to stop the collapse of oil prices.
Quantitative easing, which seems to be the most misunderstood and feared operation being conducted by the Fed is covered with the following exchange:

[Stockman] Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion).
[Mosler] And also debited/reduced/removed an equal amount of $US from Fed securities accounts. The net ‘dollar printing’ is 0.

[Stockman] Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

[Mosler] Yes, and anyone who understood monetary operations knows exactly why QE did not add to sales/output/employment, as explained above.

The piece ends with agreement on banking regulation:

[Stockman] It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

[Mosler] I happen to fully agree with narrow banking, as per my proposals.

You can read Warrens banking proposal here:
In the end, there seem to be plenty of policy options. Unfortunately, there is a digging in of political heels
The Stockman piece is here:
Sundown in America

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