Insurance in unexpected (for me) places

Just a place where I’ll keep some links 

The US military has a plan to make food from thin air. No really

https://on.ft.com/3pH4cGO

Veblen vs. the marginalists

In his biography of Thorstein Veblen, Charles Camic shows how, contrary to common belief, Thorstein Veblen debated questions of economic theory -- especially regarding wealth distribution -- from within the academy. Veblen is regarded as an iconoclast, and he was, but he was an iconoclast when iconoclasts were cool. Camic's arguent is convincing (Veblen was editor of the Journal of Political Economy for 11 years, after all) and the biography provides good context of the changes occurring in the American (and global) economy in the late 1800s / early 1900s.

What interested me most about the book was how important these arguments were to later developments in economic theory (and how thoroughly they seem to have been forgotten by many economists today).

In short, Veblen believed that economics should assume that (i) people exist in a social context, (ii) time exists and moves in one direction (the case for dynamic, evolutionary economics), and (iii) some contributions are productive (a worker building a chair) and others are predatory / pecuniary (an investor merging chair companies into a chair monopoly so he can extract rent through higher chair prices).

The people he was arguing against understood the distinction. For example "[John Bates] Clark instigated this movement [toward deductive theorizing], ironically, at the same moment he was breaking with the Older School over questions of value and distribution. For, to make this break, he reverted to using the same intellectual tools he had previously condemned in his critique of classical economics: namely, abstract, deductive theorizing designed to formulate universal scientific laws." (p. 288)

[much more here on the German historical school, Clark's reasoning, Veblen's experiences, etc.]

Introduction to the Theory of Employment

Joan Robinson published Introduction to the Theory of Employment in 1937 as a simplified account of the main principles of Keynes' General Theory. Speaking down to her audience, she prefaces the book by writing "I have done my best to resist the temptation to address my colleagues over the heads of the audience for which this book is properly intended."

The part of the book I focus on here is Robinson's description of the relation between savings and investment. It's a topic at the heart of a lot of debates still ongoing in economics. Robinson explains that 

"Saving depends upon income, and income depends upon the rate at which investment goods are being produced... Saving is equal to investment, because investment leads to a state of affairs in which people want to save. Investment causes incomes to be whatever is required to induce people to save at a rate equal to the rate of investment. The more willing people are to save, the lower is the level of income corresponding to a given rate of investment, and the smaller the increase in income brought about by a given increase in the rate of investment."

However, many mainstream economists disagree with this view (sometimes without realizing it -- we're implicitly taught a view that doesn't make sense when you think about it):

"Some writers appear to disagree with this view. Savings, they say, are devoted to buying securities, and if saving increases there is an increased demand for securities. New securities are issued in order to finance investment, and therefore an increase in saving leads to an increase in investment. This argument sinks at the first step, for, since an individual, by increasing his own savings, reduces the savings of others, he does not add to the rate of saving of the community, and therefore does not add to the demand for securities. But the initial error leads to a further complication. If saving directly caused investment, it would be very difficult to see how unemployment could possibly occur, and such writers, in order to provide an explanation of unemployment, usually fall back on the notion of "hoarding". If an individual saves, they say, and buys securities with his new wealth, investment automatically increases, but if he puts his new wealth into money, that is, hoards it, there is no corresponding investment. But this is simply an error. The saving of the individual is not a cause of investment in either case, and the distinction does not arise... The individual saver has no direct influence on the rate of investment, whether he buys securities or not."

More FIRE, less r?

Is the increase in financial services (FIRE- finance, insurance, real estate, and rentals) as a share of GDP another reason for low rates? The financial services share of value added has grown from 13% in the 1950s to 22% in 2019.

The FIRE sector uses a lower proportion of intermediate goods than most other sectors, so a $1 billion increase in FIRE sector wages or profits does not increase demand for other sectors' goods by as much as a $1 billion increase in manufacturing sector wages or profits. Despite comprising 22% of value added in GDP in 2019, FIRE used only 17% of overall intermediate goods -- and the majority of that went back into FIRE and to professional and business services.

Economists and national prosperity

In the 1960s and 1970s, American universities trained economists as free market ideologues to preach the virtues of free trade and unrestricted privatization to poorer countries. For countries where these ideas were imposed domestically, the resulting policies were generally bad for economic prosperity, political stability, and social cohesion. But when applied to other countries, the ideas ensured robust investment returns. The Pinochet / Anaconda, Kennecott, Phelps Dodge story is perhaps the best-known example. In recent decades, however, economists have started to take their doctrine seriously, and they now use it to advise American policymakers. It raises the question: are economists a threat to national prosperity? The rest of this post is a semi-satirical thought experiment.

If you were plotting the economic decline of the world’s leading power, you might try to convince its leaders to unknowingly and persistently make small errors. To that end, you could install agents, who for the purposes of this article I will refer to interchangeably as “economists” or “experts”, with three assignments. First, convince the power’s lawmakers to pursue free trade blindly while other nations become more strategic in trade relations, leading to an erosion of industrial competitive advantage. Second, support scholarship that is sanguine about inequality increasing to democracy-threatening levels. Extra anger and instability never hurt a campaign of subversion. Third, when the “expert” arguments stop being convincing, revert to classic reactionary rhetoric to oppose bold attempts to reverse the obviously dangerous trends. Here's a short summary of each and three examples of success: Paul Krugman, Larry Summers, and Olivier Blanchard.

Free trade

Free trade is usually better for rich than poor countries. If the copper mined with the labor of 100 people in a poor country can be exported in exchange for currency to buy the cars and appliances produced by the labor of 5 people in a rich country, the rich and poor countries will remain rich and poor.

It’s no coincidence that Adam Smith, writing as a Scottish professor when Great Britain led the world in manufacturing technology, extolled the virtues of supposedly free trade. It’s also unsurprising that Alexander Hamilton, a statesman for a poor and ambitious young America, said we should absolutely not blindly open our markets to free trade.

Through its bicentennial the US followed a generally pragmatic national development strategy, eventually becoming the world’s leading economy. This strategy included protecting American workers and industry with tariffs and supporting development with subsidies (bounties) and investments in infrastructure (internal improvements). The pragmatic package became known as the American System. When the American System faced threats from economists advocating the British colonial system (“free trade”), early American lawmakers saw through the arguments, recognizing the benefits of protecting domestic industry. In 1832 Henry Clay almost went so far as to call people writing in favor of free trade agents of foreign powers.

More recently American economic thought seems to have lost some of its pragmatism. In the 1991 Report of the Commission on Graduate Education in Economics, a group of the economic profession's prominent figures stated that they feared "that graduate programs may be turning out a generation with too many idiots savants, skilled in technique but innocent of real economic issues."

Around the same time, Paul Krugman and a group of economists were incorrectly concluding that trade with labor-abundant economies was not a problem for American workers. They had to work hard to overturn the prevailing common-sense wisdom, which held that when a rich country signs a free trade agreement with a poor country without labor protections, workers in the rich country lose out in a big way. After reaching this conclusion, “academic interest in the possible adverse effects of trade … waned.” In 2019 Krugman acknowledged that the analysis in the 1990s was incorrect, has resulted in extensive suffering in American communities, and was “a major mistake”.

Looking forward, however, Krugman maintains that, although his analysis was wrong for the past three decades, he does not recommend shifting course now. There is no mention of a return to the American System, including support for domestic industry, tougher labor regulation requirements on our trading partners in exchange for a smaller increase in tariffs, or other measures that would begin to correct the negative effects of these economists' trade models. [I realize that I might be giving economists too much blame/credit. There are of course many other forces at work.]

Inequality

High levels of inequality are so clearly bad for a democracy that it’s hard to know how to explain it. Machiavelli stated the obvious: "a Princedom is impossible where equality prevails, and a Republic where it does not." Chris Rock too: “If poor people knew how rich rich people are, there would be riots.” We’re at Roaring (19)20s / Great Depression levels of inequality, and people get angry when they face food insecurity while others have hundreds of billions of dollars. It was no surprise that the wealth tax proposals of Elizabeth Warren and Bernie Sanders were pretty popular among voters.

Now, keeping our prosperity-destroying mission in mind, let’s see Larry Summers argue against wealth taxes and other common sense measures for reducing wealth inequality (his work with Natasha Sarin on wealth taxes is classic reactionary rhetoric, but I’m just focusing on his work on inequality here):

“Wealth inequality reflects many things that happen in a society. Suppose we successfully in the United States adopted a more generous and complete progressive social security system… I would assume that the lower half of the population would have much less need to accumulate or hold liquid assets because they were being properly insured. And so measuring the ratio of the wealth of the wealthy to the wealth of the less wealthy may reflect something about accumulation at the top or it may reflect something about the adequacy or inadequacy of social insurance arrangements.”

Summers smoothly counteracts the obvious point that high levels of inequality are bad for political stability and civil society by getting viewers stuck on a technically correct yet almost entirely unimportant point.

Reaction

To be regarded as an expert for several decades while using an economic framework that is consistently proven wrong (whether on trade, interest rates, or fiscal policy) is impressive. But at some point, economists face the risk that people begin to see through their arguments. At least people will begin to view economists as unscientific. This is the time to remember Albert Hirschman’s framework for the rhetoric of reaction: perversity, futility, jeopardy.

Most weeks bring another example of an economist beseeching politicians to renege on political promises in the name of fiscal responsibility, yet these arguments are viewed as increasingly unscientific. Recently the standouts have been Larry Summers and Olivier Blanchard. With the US and the world facing an uncertain exit and recovery from the coronavirus pandemic crisis, these economists claim to be worried that the $1.9 trillion proposed relief package “could overheat the economy so badly as to be counterproductive.” They use numbers to maintain credibility while acknowledging that the numbers they select might not mean much. In the words of Patrick on Twitter, “[Blanchard's] argument is literally just that the vibes are off.”

Effectively, S & B, and economists generally, are stating their feelings that bold policies are likely to (a) have perverse effects (e.g., make inequality worse), (b) be futile (e.g., stimulus might not be effective if spending multipliers are too low), or (c) risk jeopardizing other accomplishments (e.g., stable prices might be at risk if multipliers are too high).

Which brings us back to the original question -- are (mathematical) economists (without sufficient knowledge of historical context or a framework for dealing with uncertainty) a threat to national prosperity? 

The way (most) economists think about public debt is wrong

Imagine that federal government debt is 700% of GDP rather than 100%. Would that be bad? If the increase was distributed evenly and domestically, then each American would simply have an extra $400,000 to his or her name, most likely paying an interest rate around zero. Some economists will argue why that's a good thing, others will argue why it's a bad thing. Some will say inflation will remain too low, others too high. Some will explain how wealth will be more evenly distributed, others how resulting asset price bubbles will result in an even more feudal-esque system. The point is, no one knows and, at some level, it's beside the point.

What is government debt

Government debt is simply a numerical representation of policy choices interacting with the complex dynamics of the economy. In recent years, we have been running persistent budget deficits as the result of a (i) liberal trade, (ii) anti-American worker, and (iii) pro-plutocrat regime. The US dollar's status as global reserve currency coupled with the American financial system's inventiveness has enabled Americans to maintain living standards while wealth has pooled at the top [basically the Klein/Pettis argument]. Corporate profits have been maintained because consumption has been maintained, trade deficits have increased because production has not, and budget deficits have been persistent because there hasn't been an immediate need to tax the rich -- if they're not spending money inflation won't rise, so there's no immediate perceived need to do anything (and maybe you want to be on the good side of people who can get you a job on Wall Street after your legislative career).

The debt doesn't matter, but it tells us things about inequality and productive capacity that do

In short, the debt has grown as a byproduct of policies that have increased inequality and shifted America's industrial base, which is also why it's no surprise that interest rates have decreased concurrently: our economic engine is stale. Instead of worrying about the debt-to-GDP ratio, or even the more fashionable interest-to-GDP ratio recently advocated by Jason Furman and others, we should focus on what the debt tells us about our economy. 

For example, if debt increases as a result of deficits incurred by government transfers to underpaid workers (e.g., EITC in a monopsonistic labor market), then the increase in debt provides bondholders with a proportionally higher claim on future output for the purposes of maintaining aggregate demand today. To the extent that those bondholders buy less out of their income than future workers with less savings, aggregate demand would remain low in the future. In short, the debt increase to support consumption today increases inequality, and to the extent that the resulting wealth distribution decreases aggregate demand, interest rates probably go down commensurately. This is part of the reason why it is odd that some economists continue to be surprised that interest rates have dropped while debt has increased.

The situation is more complex (and probably more problematic) when we include the international context. The U.S. has run persistent trade deficits since the 1970s, increasing significantly in the 1990s.  If debt increases as a result of deficits incurred by transfers to underpaid or laid off workers and those transfers are spent on imported goods, then that increase represents an increase in foreign investors' claims on future US output, in many cases at the expense of American productive capacity. This harms resilience through a clearer mechanism than the higher inequality described in the previous paragraph: if the US becomes reliant on others for important necessities (food, energy, appliances, cars, computers, etc.), then maintaining a high standard of living today comes at the cost of becoming vulnerable to a future change in the foreign exchange balances.

The US dollar's status as the world's reserve currency is an "exorbitant privilege" in that it enables the US to alleviate short term pain, receiving real goods and services in exchange for Treasury balances representing future promises. But it can lead to a deterioration in the productive power of the economy.

Summary / future blog posts

To analyze what the debt tells us about the economy, it might help if we stop asking ourselves the strange, simplistic question how we feel about it. The debt to GDP ratio and interest rates are kind of irrelevant for US debt sustainability. Instead, we should pay attention to domestic factors, such as inequality and willingness to tax, and external dynamics / trade balance factors, especially in regards to food, energy, domestic manufacturing capabilities, and defense.

I will try to build this idea out, trying to figure out the most relevant data and factors (e.g., the effects of sanctions or internet chat forums on reducing the dollar's grip on reserve currency status) to propose a useful framework for thinking about the debt. There are also other components that I've touched on in previous posts, like the fact that the world is on a dollar (not gold, or gold exchange) standard and how that has implications that I think people don't always think through when thinking about US public debt. Comments and ideas welcome.

Excerpt from Schumacher's Public Finance - Its Relation to Full Employment (1945)

On the principles of Public Finance:

"The classical doctrine, it will be recalled, assumed that supply creates its own demand, from which it follows that there can never be more than frictional unemployment or more than sectional overproduction. Private enterprise, it was assumed, tended always to employ all available factors of production, provided that wages and prices were sufficiently flexible. It was by no means overlooked that one man's income depended on another man's outlay and that, if some people should refuse to spend a part of their income, this would automatically reduce some other people's income. But it was believed that this, in fact, could never arise: the real resources left over by the former would always and inevitably be used by some business man for the creation of additional capital equipment. 

"Today we know that this is far from inevitable. Some people may wish to save, with no one willing to use the resources left unused by them. Decisions to save are not linked by any automatic mechanism with decisions to invest; they are ruled by a different set of motives, and the rate of interest does not work as a coordinating force. 

"The logical corollary of orthodox economics is orthodox finance. If it is believed that all factors of production are normally and inevitably utilized by private business, it follows that the State can obtain the use of such factors only by preventing private business from using them. In financial terms this might mean two things: the State might use its prerogative of 'creating' money and compete with private business for the use of the available factors of production; the result would be that the prices of all factors would rise under the pressure of this additional demand;--in other words: inflation. Or the State might use its prerogative of commandeering a part of the income of the citizens by way of taxation, in which case its own expenditure--balanced by tax revenue--would no longer add to the total demand for productive factors but would simply be substituted for private expenditure. From this it follows that the first principle of 'sound' Public Finance is that the budget should be balanced."

E.F. Schumacher sums up the principles, based on the classical economic theory principle that private business automatically maintains full employment, as follows:

1. Keep the budget small.
2. Keep the budget balanced.
3. Tax consumption, i.e. mainly the poor, rather than saving, i.e. the rich.
4. If a deficit cannot be avoided, issue long-term bonds.
5. Borrow only for purposes of 'productive' investment. 

The money pyramid, inequality, and interest rates

Jason Furman and Larry Summers begin a recent paper with the sentence "The last generation has witnessed an epochal decline in real interest rates in the United States and around the world despite large buildups of government debt." Their paper provides many useful insights, such as the effects of longer retirements and lower productivity growth on interest rates, but I think they're getting one core idea wrong. It seems increasingly probable that interest rates have declined because of large buildups of government debt. Here's why.

In 1971 President Nixon suspended dollar convertibility to gold, placing fiat currency at the top of the money pyramid, and more specifically the US dollar at the top of the global money hierarchy. Whether for reasons of habit or pragmatism -- people still had tax bills coming due in dollars -- the switch was accepted and the dollar became, for many intents and purposes, gold. Before 1971, when the US government issued more debt, interest rates tended to rise because investors knew that there were more claims on the government's gold reserves. This increased the odds of default or a devaluation of the dollar with respect to the money at the top of the pyramid, gold. Today when the US government issues more debt, it is literally expanding the money at the top of the pyramid -- in a sense, it is creating more gold.

The effect on interest rates from an increase in money at the top of the pyramid is different from the effect from an increase in money one or two rungs down the pyramid. To illustrate, say the government gives $1,000 to every American, issuing $330 billion of debt to do it. Econ 101 will tell you that this increases the demand for loanable funds, thus raising the price of money (interest rates). What it sometimes forgets to mention is that there is now an additional $330 billion in people's bank accounts, as well as an additional $330 billion of bank reserves. The effect on interest rates depends on what people do with that money. They can leave the money in the account, pay down debt, or transfer it to someone else in exchange for goods, services, or assets.

To take a simple case, if everyone leaves the extra $1,000 in their account, interest rates will decrease. The government can simply offer the $330 billion of Treasuries to the banks, which have an extra $330 billion of reserves. As long as the Treasuries pay slightly more than the interest that the Federal Reserve pays on reserves, banks will take this deal (ignoring bank liquidity and reserve regulations, which don't change the key point and in the case of reserve requirements are now zero). The government sets the interest rate on reserves and, by extension, Treasuries. Of course, if everyone leaves the money in their account, policymakers will concurrently decrease rates in an attempt to stimulate the economy.

Now, not everyone will leave the money in the account. If it is used to pay off debt, interest rates will rise (repaying debt destroys money / decreases bank reserves). If it is used to buy something, the deposits created in one account are transferred to another and the overall amount of bank reserves remains the same. The pressure on interest rates then depends on whether the money is spent on goods and services or a financial asset. If it is used to buy goods or services, like a car or a cab ride, there will be upward pressure on rates -- policymakers won't have to cut rates if people are consuming, since this means businesses are profitable and probably investing with an optimistic eye to the future. If the money is used to buy a financial asset, like a share in a mutual fund, there will be downward pressure on rates -- money flowing around the financial system is good for people who receive crumbs from the slices being passed around but generally does not spur consumer confidence and business investment. On net, if money goes to people who need it for paying off loans or buying things, there will be upward pressure on rates. When money goes to people who don't use it on goods and services, there will be upward pressure on asset prices -- or, to say the same thing, downward pressure on interest rates -- as money sloshes around the financial system. In this case, high asset prices are less a sign of business dynamism and more a result of financial system dynamics. 

Nowadays, the issue with more government debt isn't higher interest rates, it's a question of what people are doing with their money. The decline in rates since the 1980s is not so much a sign of an aging population and slower technological growth as it is the result of vast amounts of money lying dormant in a few bank accounts. Low rates are not necessarily bad in themselves, but their symptoms, such as increased financial risk-taking, and causes, such as democracy-fraying levels of inequality, are real concerns. Trying to fix the symptoms without addressing the causes would be dangerous.

The non-normative case for Jeff Bezos to buy 460 yachts per year

U.S. household wealth is $112 trillion, and Americans spend $14 trillion per year -- one eighth of our wealth -- on goods and services. One person's spending is another's income, so people who spend more than one eighth of their wealth per year on goods and services are boosting economic growth and the vitality of American capitalism.*

As a serious economist, I will not offer a normative assessment of whether I believe more growth is better than less growth, or whether buying useful things is better than buying wasteful things.** I just look at the numbers. If you're spending more than 1/8 of your wealth per year on goods and services, you're pulling economic growth up. If you're spending less, you're pulling growth, business investment, and interest rates down.

Here's a little arithmetic.

If your net worth is $18,500 and you're spending more than $2,300 per year, you're boosting economic growth.

If your net worth is $1.85 million and you're spending more than $230,000 per year, you're boosting economic growth.

If your net worth is $185 billion and you're spending more than $23 billion per year, you're boosting economic growth. It makes no difference to me as an economist whether you get to this number by buying 460 $50 million yachts per year or only 80 yachts plus school lunches for every American kid who needs help.

Capitalism is all about buyers and sellers. Sellers won't invest if buyers won't buy. When aggregate demand is scarce, buyers boost growth.

Excerpts from Whatever Happened to the Cambridge Capital Theory Controversies?

In 2003 Avi Cohen and G. C. Harcourt wrote a retrospective about the Cambridge capital controversy. American economists like to forget about these capital theory controversies that took place from the 1950s through the 1970s. They're probably a big deal because they call into question the entire theoretical framework we teach ourselves.

"Did the Cambridge controversies identify "sloppy habits of thought" that have been handed down to yet another generation, or were they a teapot tempest of concern now only to historians of economics? In this article, our aim is to put into perspective what was at stake and to argue that the controversies were but the latest in a series of still-unresolved controversies over three deep issues. The first is the meaning and, as a corollary, the measurement of the concept of capital in the analysis of industrial capitalist societies. The second is Joan Robinson's complaint that equilibrium was not the outcome of an economic process and therefore an inadequate tool for analyzing processes of capital accumulation and growth. The third issue is the role of ideology and vision in fuelling controversy when the results of simple models are not robust."

...

"While neoclassical economics envisions the lifetime utility-maximizing consumption decisions of individuals as the driving force of economic activity, with the allocation of given, scarce resources as the fundamental economic problem, the "English" Cantabrigians argue for a return to a classical political economy vision. There, profit-making decisions of capitalist firms are the driving force, with the fundamental economic problem being the allocation of surplus output to ensure reproduction and growth (Walsh and Gram, 1980). Because individuals depend on the market for their livelihoods, social class (their position within the division of labor) becomes the fundamental unit of analysis. The potential rate of profits on capital arises from differing power and social relationships in production, and the realization of profits is brought about by effective demand associated with saving and spending behaviors of the different classes and the "animal spirits" of capitalists. The rate of profits is thus an outcome of the accumulation process. Robinson argued--citing Veblen (1908) and raising the specter of Marx--that the meaning of capital lay in the property owned by the capitalist class, which confers on capitalists the legal right and economic authority to take a share of the surplus created by the production process [sounds like Pistor's The Code of Capital]."

...

"The Cambridge controversies were the last of three great twentieth-century capital theory controversies. Earlier controversies occurred at the turn of that century among Böhm-Bawerk, J. B. Clark, Irving Fisher and Veblen and then in the 1930s among Knight, Hayek and Kaldor...

"At the turn of the century, J. B. Clark and Böhm-Bawerk were consciously countering Marx's theory that the return to capital involved exploitation of labor. Clark's response, that wages and interest were simply prices stemming from the respective marginal products of labor and capital, is best expressed in his famous claim that "what a social class gets is, under natural law, what it contributes to the general output of industry" (Clark, 1891, p. 312). Veblen disputed Clark's marginal productivity theory, arguing instead that profit was institutionally grounded in the social power of the capitalists that enabled them to appropriate the technological achievements of the society as a whole. Irving Fisher (1907) believed that the interest rate could be viewed as the equilibrium outcome of simultaneous equations. Böhm-Bawerk ... sought a one-way explanation tracing interest determination back to the original physical factors of labor and land."

Clearly the Brits and Veblen talking the most sense here.

Excerpt from Trade Wars Are Class Wars

Matthew Klein and Michael Pettis explain what the US should do to address its extreme inequality, degraded infrastructure, and (because of the dollar's role as reserve currency and US financial system inventiveness) current account deficit:

"In the short term, America's first objective should be to shift the burden of absorbing unwanted financial inflows from the U.S. private sector to the federal government. American households and companies should not be pushed to borrow more than they can afford out of misguided concerns about the budget deficit or the level of government spending. As we have shown, the fact that the United States must absorb a permanent financial account surplus means that the only way to prevent rising American unemployment is with some combination of higher private borrowing and higher government borrowing. That is why, in the near term, U.S. Treasury debt should be issued as needed to accommodate the desires of foreign savers. Lower payroll taxes, larger standard deductions on income taxes, and a better social safety net, particularly for health expenses, would all help generate the necessary budget deficits while simultaneously ameliorating the unequal distribution of income.

"It would be even better if the federal government absorbed foreign financial flows by directly or indirectly increasing investment in much-needed American infrastructure, particularly public transit and green energy... Federal spending could also help sustain demand for American manufactures even if the domestic market remained swamped by gluts from abroad... the United States should also find a way to accommodate the legitimate desires of certain governments to protect themselves from crises without having those governments accumulate emergency savings denominated in dollars... These measures, however, are mainly short-term stopgaps. They are not enough to resolve the underlying problems in the global economy. The United States would still remain the world's dumping ground for the world's excess savings and the surplus production that comes with it. The open global trading system will remain under threat as long as elites in the major surplus economies remain committed to a system that continuously squeezes the purchasing power of their workers and retirees.

"If we want to end the trade wars before they further damage the global economy and undermine international peace, we must therefore address the twin problems of income inequality and the world's unhealthy dependence on the U.S. financial system." 

Treasuries are gold

United States government debt is gold. I mean this almost literally.

Would you rather have a bar of metal worth $10,000 or a Treasury security worth $20,000?

Tomorrow, after the government has issued a few billion dollars more debt, would you rather have a bar of metal worth $10,000 or a Treasury security worth $20,000?

Ostensibly serious economists will say I am missing a critical point here. If the government issues too much debt, the value of that debt will fall. This is true, but what is too much debt? If we think about Treasuries as gold, it changes the nature of the question. Is $20 trillion of gold too much? $40 trillion? Who's to say.

Complaining about the US national debt is like a 17th century Spanish king whining about how much gold he has given his subjects. The fix is either to mine more gold (create more debt) or, if your subjects have so much gold that they don't value it anymore, demand some of it back (raise taxes).

Pretending to fret about the amount of gold in the economy is a distraction from real reform. If teachers, doctors and nurses, construction workers, and others are willing to work for gold, and we can magically mine gold, we have the option to give it to them. We are wealthy and powerful enough to provide affordable education, healthcare, and modern infrastructure to ourselves, if we want to.

Of course, we should be wary of a time when there is so much gold that people don't value it anymore. When this happens, we can demand some of it back and bury it or put it to better use.

Economic narratives, politics, and historical processes

Economics is a moral science with a powerful ability to shape minds and policy. From the conservative suppression of Lorie Tarshis’ Keynesian economics textbook in 1946 through the assumptions baked into the Congressional Budget Office’s models today, economics is not (and cannot possibly be) non-normative. When it’s wrong, the results can be devastating.

A tale of two narratives

Deeply conservative assumptions and obstacles to reform are embedded in neoliberal economic models and budget scores. These models, which are used to devastating effect at places like the CBO, make passage of progressive legislation hard if not impossible. As David Dayen has explained in The American Prospect, “Republicans like to talk about “cost-benefit analysis,” but Congress has created a structure to simply run the costs without the benefits. That mentality must change if we’re to have a decent conversation about the role of government.” Knowing the assumptions used by official scorekeepers and identifying where they are unrealistic is critical for promoting good policy.

Two economic narratives can be used when modeling the economic effects of policy. Let's take student debt cancellation as an example.

CBO's narrative is based on the assumptions of scarcity and rational expectations. This narrative says that cancelling student debt means that the economy might shrink because companies will invest less and people will consume less today because they feel poorer because they expect their taxes to go up in 20 years when the government shrinks the deficit. This is the same economic thinking that imposed crippling austerity on Europe: if governments cut spending and lay off workers, the economy will grow because people will rush to buy furniture today because they feel richer because they expect their taxes to go down in 20 years. The assumptions are ludicrous and the results are devastating.

A second narrative is based on the facts of abundance and uncertainty. Cancelling someone’s student loan enables that person to consume more, which boosts investment and employment, raising other people’s incomes in a virtuous cycle. Debt cancellation could even give more people the opportunity to start a business, which might further increase the productive capacity of the economy. This has all been modeled, it just needs to be modeled in the right way by the official scorekeepers.

We face the same hurdles with free public college, universal healthcare, green investment, wealth taxes, more generous Social Security benefits, and so on. When the state fulfills its role of mitigating unknowable risks in an uncertain world, it allows all Americans to prosper and creates additional economic growth as a positive side effect. But there is a real risk that legacy economists continue to prevent necessary change based on a neoliberal ideology dressed up with a façade of hard science and talk of trade-offs and crowding out. These theories were much more legitimate for the 18th century world on which economics is based.

Politics and messaging

For centuries America has successfully spoken the rhetoric of Jefferson and implemented the policies of Hamilton. We enacted tariffs and industrial policy to help develop northeastern manufacturing, issued land grants to railroads to support the development of the west, and invested in the research that created virtually every significant Silicon Valley technology and many of the pharmaceutical products that we use today. We accomplished all of this while somehow preaching the Randian gospel of self-sufficiency. Implementing progressive policy will be very difficult if the messaging doesn’t change to better reflect the symbiotic relationship between the public and private sectors.

Of course, some of the difficulty in implementing reform is cultural – there’s the quip that socialism never took root in America because the poor don’t see themselves as an exploited working class but rather as temporarily embarrassed millionaires. Rural communities don’t see Democrats as the party of the working class. Democrats need to reach out to these communities more effectively. We won't succeed if we continue to ignore the historical and economic forces that create tremendously wealthy cities at the expense of rural economies. 

Nothing new under the sun

When workers are not paid for their productive output, money is transferred to the wealthiest citizens who cannot possibly use their expanded consuming power. Consumption stagnates, and investment stagnates because it is consumption that produces yields on capital. In countries like the US where consumption has not gone down, it is only because debt has gone up. Avoiding the problem does not solve it. This process of increasing inequality results in a cycle of economic stagnation and democratic dysfunction. The cycle is not new, and there is no easy fix. 

In the (very) old days, debt would build up to socially unsustainable levels, leading to revolutions in which all the clay tablets recording debts were burned, among worse things. This destructive process of debt accumulation and rising inequality might be why the Old Testament mentions a debt jubilee as necessary policy. The Mesopotamian kings eventually realized that peaceful redistribution was a better policy for virtually everyone involved. We’re seeing a version of these dynamics today, going back to 2008 and before. In places with high inequality, almost everyone can become better off -- and the economy can grow faster and be more resilient -- through thoughtful transfers to the working class and poor, whether those transfers come in the form of debt forgiveness, a decent minimum wage, cash, childcare, education, or other reforms.

The last four years have reinforced the notion that a great society’s decline is not something that can just happen in the distant past. To succeed and prosper as a nation, we need less Milton Friedman and more William Jennings Bryan, Henry Wallace, and Ken Galbraith in our economic policy.

The politics of central bank independence

There has been a consensus among doctrinaire economists that central bank independence is a good thing. On the surface it makes a lot of sense for price stability. Independence increases credibility and credibility reduces the cost of keeping inflation down. These assumptions are taken so much for granted that the IMF published a blog post in 2019 saying

"Independence surely remains a key principle in ensuring the sound operation of central banks—in particular, from the perspective of their price-stability objective. However, central banks will need to step up their game. Transparency about their multifaceted decisions and actions needs to be strengthened, and clear communication with the public is paramount. 

"Only by simultaneously enhancing central banks’ governance, transparency, and accountability can their long-term independence be assured. This is the surest step to help rebuild public confidence in central banks as reliable defenders of non-inflationary, job-creating economic policies."

But independence is not really needed for price stability. In The Death of the Central Bank Myth, Adam Tooze explains how

"The assumptions about politics and economics that anchored the model of the independent central bank in 1980s and 1990s were never more than a partial interpretation of the reality of late 20th-century political economy. In truth, the alarmist vision they conjured was not so much a description of reality as a means to advance the push for market discipline, away from both elected politicians and organized labor."

I was surprised to find out that even the The Economist was questioning the consensus (which it was/is a part of) on the benefits of central bank independence in 1999: Born Free. This article points to papers published in the 1998 Oxford Economic Papers that show how the intellectual consensus on central bank independence isn't really based on evidence. I skimmed through two papers in that edition -- "Central bank independence and disinflationary credibility -- a missing link" by Adam Posen, and "Central bank independence -- conceptual clarifications and interim assessment" by James Forder. A couple excerpts-

Forder:

"Support for central bank independence - usually derived from concern over problems of time inconsistent policy - became widespread in the late 1980s. This may be due to the wide publicisation by Alesina (1988, 1989) of the empirical work of Parkin and Bade (1980) combined with the theoretical analysis of Rogoff (1985). But whatever the academic influence on the process, the idea caught a highly favourable political wind. In Europe, the Delors Report and subsequently the Maastricht Treaty made the independence of the European Central Bank the centerpiece of the institutional design of monetary union ...

"Almost without exception, at least amongst professional economists, the advocacy of independence is presented as a solution to a perceived credibility problem...

"The nature of the problem that central bank independence is said to solve has caused a certain degree of confusion. There are first of all, two separate issues which are sometimes not clearly separated in the literature. One relates to the problem called 'the time inconsistency of optimal plans' by Kydland and Prescott (1977) and another to the credibility of policy announcements...

"Time consistency is a problem of policymakers acting with discretion to optimise policy on the assumption (which in a rational expectations framework is incorrect) that the future behaviour of the private sector will be affected by the policy they observe, but not by what it understands to be the implicit rule by which policy is formed.

Posen:

"This convergence upon a particular institutional fix for inflation stems from the wide acceptance of the analysis of two stylized macroeconomic facts in the papers of Kydland and Prescott (1977) and Barro and Gordon (1983): that the long-run Phillips curve is vertical - that is, inflation has no permanent effect on real outcomes; and that governments nonetheless have an incentive to spring inflationary surprises upon the public. As a result, these papers argued, a primary cause of inflation was government's inability in the eyes of the public to commit credibly to a low inflation policy. One could remove the time-inconsistency problem by making government unable to renege upon a commitment to low inflation. In Rogoff (1985), the appointment of a conservative central banker was shown to be one means to that end... 

"A direct link between central bank independence and disinflationary credibility is not supported by this paper's results. Disinflation appears to be consistently more costly and no more rapid in countries with independent central banks."

My (initial) understanding of the papers that are the intellectual framework is

• Kydland and Prescott (1977) said "even with well-intentioned policymakers sometimes there are inflation surprises, and when the private sector incorporates them in an average inflation estimate when setting wages it leads to an inflation spiral"
•  Barro and Gordon (1983) introduced the credibility problem by saying "why would a monetary rule be followed after it's been announced, instead you could just announce the rule to reduce inflation expectations and then break your promise if that helps you optimize."
• Rogoff (1985) ran with the assumption of the credibility problem and said "if we take the credibility problem as fact, the solution is a conservative, independent central banker."

Also- Alan Blinder wrote about What Central Bankers Could Learn from Academics--and Vice Versa in 1997. He argued that academic economists were barking up the wrong tree and proposed other directions for research. These directions did not include a review of central bank independence.

"theorists have lavished vastly too much attention on a nonexistent time-inconsistency problem while ignoring a much more real problem that arises when central bankers "follow the markets" too closely. Academic economists could also be more helpful to practical policymakers if they would develop an empirically coherent analysis of the term structure of interest rates, model the central bank as a committee, investigate the robustness of Brainard's conservatism principle, and study the conditions that make either "opportunistic" or "deliberate" disinflation the preferred strategy."

Debt and Deficit and Other Illusions

Occasionally people say that government debt represents borrowing from our collective economic futures. This is usually wrong. Michael Pettis has a nice thread explaining why.

In the following excerpt from The Economics of Imperfect Competition and Employment, Robert Eisner uses a neoclassical framework to explain why an extra dollar of government debt today is not a dollar taken from the pockets of our grandchildren. If we're at full employment, prices will rise proportionally with new debt, so the actual burden of the debt is not greater. If we're not at full employment, output will rise with new debt, as tax cuts or increased government spending put more money in the hands of workers and entrepreneurs, so the nominally larger debt actually shrinks as a proportion of the economy. Good for us, good for the grandkids.

"But once we get entangled in a world of government debt and changing price levels, the going gets treacherous. A number of widely held positions prove untenable. And many of the usual assertions about the effect of public debt and deficits become misleading at best and, at worst, particularly in presumed policy applications, egregiously wrong. Take the notion, for prime example, that an increase in the public debt will involve a transfer of wealth from the current to a future 'generation'. But surely, this proposition, if true, must relate to an increase in the real value of the public debt. Under what circumstances will government budget deficits lead to increases in the real value of the debt?

"Assume again a market-clearing, full-employment equilibrium. Then have the government cut taxes, thus producing a budget deficit which is financed by a mixture of interest-bearing debt and fiat money in the same proportions as the already existing value of government interest-bearing debt and money. In this situation, we should expect a new equilibrium -- with rational expectations, an immediate new equilibrium -- in which the general level of prices had increased in the same proportion as interest-bearing debt and money. There would hence be no increase in the real public debt or the real quantity of money and no change in any real magnitudes. And, of course, with no change in the real value of public debt, there is no transfer from one generation to another.

"Now assume, in good Keynesian fashion that, for whatever reason, markets are not clearing and that there is an excess supply of labor so that output is below its 'natural' rate. The cut in taxes and resultant budget deficit, again financed by a mixture of interest-bearing debt and money in the same proportions as the existing debt and money, will increase effective demand. Output will rise so that prices will rise less than in proportion to the increase in interest-bearing debt and money. Indeed, the increase in wealth that agents in the private sector perceive in the form of their government bonds and money may be viewed, in good neoclassical fashion (cf. Haberler, 1941; Pigou, 1943, 1947) as the forces increasing demand and output.

"But with increased output, we can expect more current consumption as a consequence of the increased wealth of households and also plans for more future consumption in accordance with the life-cycle hypothesis (Modigliani and Brumberg, 1954). Then in accordance with a conventional, neoclassical production function and rational expectations, there should be more current investment as well, as agents undertake to acquire the capital to be used in producing the goods and services to meet the expanded future consumption demand.

"We find therefore that the deficit and increase in the public debt result in an increase in capital and the provision of more output both currently and in the future. We are not increasing current consumption at the expense of the future generation. We are rather increasing consumption for both generations."

The national debt: Hamilton vs. Jefferson

Alexander Hamilton and Thomas Jefferson were the first prominent American rivals in a debate that continues today. Here's a summary of Hamilton's Report on Public Credit and the debate around it.

For today's discussion, see Debt and its Discontents.

Moore (1979) The endogenous money stock

Does money supply determine inflation or does inflation determine money supply?

In The endogenous money stock, Basil Moore makes the case that the quantity of money is determined more by bank credit responding to cost and price increases than vice versa. He divides the inflation problem into two questions: (1) what is the relation between monetary growth and inflation? and (2) What is the source of change in the money stock? The data shows clear correlation between money supply and inflation, so the bigger focus is on question 2.

Moore first lays out the monetarist argument:

"The essence of monetarism can be expressed in two central propositions: a) Monetary changes are the dominant cause of changes in nominal income, swamping the temporary and minor influence of fiscal changes. b) There is no long-run, stable trade-off between inflation and unemployment; that is, the natural rate of unemployment hypothesis is valid. Changes in the rate of monetary growth cannot cause the rate of unemployment to diverge permanently from its "natural rate," except under conditions of continuously accelerating inflation."

Monetarists recommend monetary restriction to fight inflation. Their recommendation did not change when the evidence in the early 1970s (sluggish downward response of wage rates to high unemployment) proved their prescription to be painful and ineffective. Tobin has written that "Distinctively monetarist policy recommendations stem less from theoretical or even empirical findings than from distinctive value judgments. The preferences revealed consistently in those recommendations are for minimising the public sector and for paying a high cost in unemployment to stabilise prices."

One of the main sources of doubt about the monetarist argument is the question of causality.

"While the monetarists have made a case for the exogeneity of money in terms of the ability of the central bank ultimately to control the money stock, in their empirical work they unfortunately have confused the issues of causality and exogeneity. The money stock is indeed exogenous in the sense that it is ultimately under the control of the central bank. But, in econometrics, exogeneity is used in another sense: to say that a variable is exogenous is to regard it as independent of the influence of the variable whose value it seeks to explain. ... [However] the Federal Reserve and other central banks characteristically have accommodated the needs of business and the Treasury, and have operated to maintain orderly conditions in the bond markets and stabilize market interest rates."

Moore uses the relationship between prices and wage increases to show that 

"if the monetary authorities do not permit the money stock to accommodate to the rate of increase in money wages, monetary demand will not be sufficient to maintain existing employment output. Financial disorder will result if contractual obligations cannot be met, leading to downward pressure on the growth of real income and an accompanying rise in unemployment ... to the extent the authorities follow an accommodating monetary policy in order to prevent financial instability and enable real income to follow its trend path, the nominal rate of growth in the money stock will be determined by the rate of growth of money wages." 

Sort of reiterating that point, with a view of the whole economy:

"In modern economies, production costs are normally incurred and paid prior to the receipt of sales revenue. These costs represent a working-capital investment to the firm. If current production flow costs duplicate the following period, the proceeds from past sales will exactly finance current working capital costs. When wage increases raise production costs, however, even unchanged production schedules will require more working capital in money terms. Accordingly, firms must increase their borrowing from banks to finance these higher production costs for each level of output. In this manner, increases in money wage rates which exceed productivity increments and so raise unit labor costs will lead to an endogenous increase in the demand for credit, even if the aggregate production flow remains unchanged.

"Whenever the central bank accommodates this increased demand for credit, there will be a high statistical correlation between increases in the money stock and increases in prices, with the former preceding the latter."

Of course, the world is uncertain and not in equilibrium:

"The pervasive uncertainty of the real world means that decision makers seek to hold buffer stocks -- that is, inventories -- as a mechanism for absorbing unforeseen shocks ... The buffer stock par excellence is money. This suggests that individuals do not immediately adjust their money balances to a unique desired equilibrium level, but allow their holdings to fluctuate up or down, until some ceiling or floor limit is reached, before making the adjustment. To the extent that the above analysis is correct, supply-side changes (credit) largely determine short-term monetary growth. If money is supply determined in the short run, it follows that the demand for money is in short-run disequilibrium. Evidence for this is the fact that changes in real money balances [the amount of stuff a given amount of money can buy] are largely independent, and real money balances typically rise initially when the nominal money stock expands sharply. Only over the longer term is the price level determined by restoration of the equilibrium demand for money function.

In summary:

"Economists have mistakenly accepted the high-powered base approach to the determinants of monetary growth. Bank lending is the proximate and predominant source of monetary change. With lagged reserve requirements, once the deposits have been created the central bank has no choice but to make the required reserves available."

Arrow on Rawls

I'm curious about the contradictions between the utilitarian Pareto-optimal principle used by most economists and the difference principle / maximin / "veil of ignorance" principle ignored by most economists.

Vilfredo Pareto argued that a policy could only be efficient if it makes no one worse off. Cynically one could say that was a convenient theory for an Italian of noble blood to propose. John Rawls, on the other hand, argued that we should focus more on maximizing the well-being of the worst-off member of society. He called it the difference principle, economists call it maximin. To make this theory salient, Rawls proposed a "veil of ignorance": if you are about to enter the world but do not know who you will be, what kind of society do you want to enter?

Kenneth Arrow's critical review of Rawls' A Theory of Justice helped to convince me that Rawls' veil of ignorance is a useful social justice principle and that economists should bring it into decision-making. That is not the point Arrow was trying to make.

I'm no moral or political philosopher so maybe Arrow's arguments are more valid than I give them credit for, but I found them to be (1) a bit irrelevant since he immediately took things to their logical extreme instead of seriously considering the veil of ignorance as a useful decision making mechanism, and (2) a bit contradictory.

1. Logical extremes

One example of an argument employed by Arrow is that, as Pareto and Irving Fisher have argued, "there is no quantitative meaning for utility for an individual" -- it's an ordinalist position. "If the utility of an individual is not measurable, then a fortiori the comparison of utilities of different individuals is not meaningful ... Consider an individual who is incapable of deriving much pleasure from anything, whether because of psychological or physical limitations. He may well be the worst-off individual and, therefore, be the touchstone of distribution policy, even though he derives little satisfaction from the additional income." ... oversimplifying, I interpret this as: why house the homeless if one guy remains depressed? IMO Arrow is missing the point here.

2. Contradictions

Where Arrow is slightly contradictory he is at his most interesting. He was of course brilliant so there is a lot of good info even when I doubt the validity of his argument.

To take a step back, Rawls' argument that society should maximize the utility of the worst-off has two parts. First, in the original position where the quality of your entire life is at stake, it's reasonable to have high degree of risk aversion, and being concerned with worst possible outcome is an extreme form of risk aversion. Second, probabilities are in fact ill defined and should not be employed in such a calculation. Here Arrow points out:

"The second point is a version of a recurrent and unresolved controversy in the theory of behavior under uncertainty: are all uncertainties expressible by probabilities? The view that they are has a long history and has been given axiomatic justification by Ramsey and by L. J. Savage. The contrary view has been upheld by F. H. Knight and by many writers who have held to an objective view of probability; the maximin theory of rational decision-making under uncertainty was set forth by A. Wald specifically in the latter context. Among economists, G. L. S. Shackle has been a noted advocate of a more general theory which includes maximin as a special case. L. Hurwicz and I have given a set of axioms which imply that choice will be based on some function of the maximum and the minimum utility."

 And a few pages later, in defense of a utilitarian approach:

"As Ramsey and von Neumann and Morgenstern have shown, if one considers choice among risky alternatives, there is a sense in which a quantitative utility can be given meaning. Specifically, if choice among probability distributions satisfies certain apparently natural rationality conditions, then it can be shown that there is a utility function (unique up to a positive linear transformation) on the outcomes such that probability distributions of outcomes are ordered in accordance with the mathematical expectation of the utility of the outcome."

Near the end, explaining why there might not be a meaningful universal concept of justice:

"One problem is that any actual individual must necessarily have limited information about the world, and different individuals have different information."

Arrow casts doubt on Rawls' theory by saying that we can express decision making under uncertainty as a set of probabilities of futures outcomes. A few pages later he says we of course have limited information about the world, in other words it is impossible to express the future as a set of probabilities.

Maybe I'm misreading the argument, but it seems contradictory. In any event I need to read Rawls' book before I write more on this. Arrow's review is worth reading for his summary of decision making under uncertainty and his views on utilitarianism.

Inflation and Wicksell, by Leijonhufvud

The Federal Reserve does not have a working theory of inflation. That is a big deal because price stability is half its mandate.

The Phillips curve relationship -- a negative correlation between unemployment and inflation, identified by A.W. Phillips in data for the UK between 1861 and 1957 -- has been weak. Possible reasons include (i) people expect lower inflation and it's a self-fulfilling prophesy, (ii) labor unions are weaker so wage gains are weaker so corporate costs increase more slowly, (iii) the rise of e-commerce has created more competition between retailers, and (iv) shifting factories to lower-cost producers like China has kept costs down. Any/all of these factors might be keeping inflation down.

For a large part of the past 40 years, policymakers operated from a Quantity Theory of money view, summarized by Milton Friedman's "inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." This sounds legitimate but was always a bit dubious. It became openly indefensible after the huge increase in the money supply after 2008 did not result in inflation. Since the mid 1990s inflation has almost always been lower than the increase in M2. But knowing that the Quantity Theory is not right does not answer the question of what actually causes inflation.

Axel Leijonhufvud (1997) points out that Knut Wicksell made some good points on this in 1898 (as well as on "the hypothesis of intertemporal disequilibrium as the key to the understanding of business cycles"), which many economists have ignored to the detriment of macroeconomics and monetary theory as we understand it today.

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.404.5867&rep=rep1&type=pdf.

Here are three questions Leijonhfvud's article helps to answer 

1. Why is the Quantity Theory suspect?

David Ricardo's quantity theory of the price level is "completely sound and correct" for a pure "cash economy". We live however in a mostly credit economy.

"Bank money was credit money and, unlike metallic money, could not be in excess supply, Tooke maintained. An overissue by the banks would simply produce a "reflux" of notes in repayment of loans. If expansions and contractions of the banks drove the price level, rising prices should be associated with low interest rates and vice versa. But the evidence ... was just the opposite."  

2. Why not just adopt the alternative theory?

Thomas Tooke's anti-quantity theoretical conclusion is that the price level determines the stock of money. This may be true, "but it left one with no tenable theory of the price level at all."

Wicksell concluded that "the Quantity Theory cannot just be thrown overboard ... The Quantity Theory was the only monetary theory with any claim to scientific status. But it left out the influence on the price level of credit-financed demand." This omission becomes major when bank credit reduces the role of metallic money in the economy. 

"Wicksell presented a pure credit system model as "a precise antithesis to the equally imaginary case of a pure cash system, in which credit plays no part whatever ... The strategy for developing applied monetary theory, he suggested, was to regard actual monetary systems

"as combinations of these two extreme types. If we can obtain a clear picture of the causes responsible for the value of money in both of these imaginary cases, we shall, I think, have found the right key to a solution of the complications which monetary phenomena exhibit in practice."

3. What's the right combination?

There's the rub.

Wicksell's suggestion "is a stroke of genius ... But it is by the same token deeply problematic, for Wicksell has very little to tell us about how to go about fashioning a viable synthesis from his two antithetical models."

"This lack of an outline of the suggested synthesis has been unfortunate in that the Ricardian thesis and Tookean antithesis have been carried down to the present day as mutually exclusive theories with Monetarists denying the relevance of credit and Credit theorists still lacking a theory of the price level. Thus Milton Friedman turned the evolutionary argument against Credit theories: monetary theory should focus on the banking system's liabilities and not on their assets which evolution had reduced to a minor component of total credit. More recently, monetary general equilibrium theorists have generally been content simply to brush credit under the Modigliani-Miller rug. On the other side, the Tookean tradition has its most persuasive advocate today in Basil Moore."

The instability that Wicksell foresaw was postponed when in the early 20th century governments monopolized note issue and imposed reserve requirements on banks, which "gave the Quantity Theory a new lease of life." In recent decades, however, the expanded use of "smart cards" (credit cards) and the elimination of reserve requirements (which happened officially on March 15, 2020, but effectively years ago) have probably all but ended any stable relationship between aggregate demand and the "vanishingly small" monetary base.

"The newest generation of jet fighter planes ... are inherently unstable in the air and depend on extremely fast feedback-based electronic control (In fact, they cannot be flown by human pilots).

"Price level stabilization by Wicksellian bank rate policy may become similarly challenging before very long. Perhaps it is fortunate that we will be able to entrust it to a Nintendo-trained generation."

The world keeps changing and monetary policymakers need to keep adapting. 

Final note: this article is worth (re) reading, it's short and there's much in that I don't cover here.

Did the Fed save stocks?

Yes. The Federal Reserve's balance sheet expanded by $3 trillion in April and May while S&P 500 market capitalization increased by $4 trillion.