Argentina offers an interesting lesson in the relative importance of monetary policy and structural reforms.  During the period from 1991-97 it grew very rapidly with neoliberal reforms.  Then in 1998-2001 the economy experienced deflation.  After 2002 a new left wing government came in and adopted a very inflationary monetary policy.  It also moved away from neoliberalism, adopting all sorts of statist economic policies.

So was real growth higher in the 1998-2001 period or the period since 2002?

It’s not even close.  The period from 1998-2001 was a disaster, one of the worst depressions of modern times.  And since 2002 the economy has seen fast growth, which led to the current government recently winning a landslide election victory.  

Conservatives in America have recently adopted the position that monetary stimulus doesn’t help, even when NGDP has fallen dramatically below trend.  They also believe in pro-market policies and oppose statism (unless they are actually in government of course.)  So it seems to me that Argentina discredits conservatism.  You have a country that got much higher growth from shifting from a deflationary monetary policy to an inflationary monetary policy.  And all this despite the adoption of horrible statist policies.

So are conservatives wrong about markets, or money?

The answer is simple.  They are right about markets and wrong about money.  Argentina shows just how important it is to get monetary policy right.  If you don’t, even the most misguided statist policies can look far better than anything the more pro-market party has to offer.

Even today Argentina is a “failed” economy by any reasonable standard.  It’s no longer one of the richest countries on Earth, as it was 100 years ago.  But it’s also much less “failed” than 10 years ago, an inconvenient truth for all the RBC-types who deny the importance of nominal shocks.

PS.  Nothing in this post should be construed as praising recent Argentine policies.  The monetary policy has been too expansionary, leading to high inflation.  The government has covered up the inflation.   I get all that.  But the depression of 1998-2001 was far worse.  Something the Argentine voters clearly understand.

I’m for Gary Johnson because I believe the War on Drug Using Americans is the greatest problem facing this country.  But he won’t win.  Of those who might I’m increasingly impressed with Mitt Romney.

1.  Romney doesn’t consider global warming to be a hoax.

2.  He refuses to join the other Republicans in criticizing fiat money and/or calling for tighter money.

3.  He understands that jobs are the big problem.

4.  He has Greg Mankiw advising him.

5.  He recently came out for UI personal accounts, a very Singaporean solution that even Singapore doesn’t have.

Yes, I’m sure you can find a few cases where he throws red meat to the populists, but mostly in areas that won’t tie his hands as President.  I’m not excited about the Mass health care reform, but at least he tried to solve a very real problem—45 million uninsured.  I don’t see many good alternative proposals coming out of the GOP.  And let’s not forget that lots of conservatives supported Romney’s bill, until Obama adopted the same idea.

Matt Yglesais mentioned the personal UI accounts idea, but then went off on a tangent that seemed, in my eyes, slightly misleading.  He cites empirical results that support Romney’s proposal, and yet I’d bet the average reader of Yglesias’s post thinks he’s criticizing it.  See what you think.  The research shows that unemployment insurance has one inefficient effect (discouraging employment due to potential loss of benefits), but perhaps an even bigger beneficial effect (encouraging optimal job search by making workers less liquidity constrained.)  Ronney’s proposal is presumably aimed at getting the best of both worlds.  No disincentive effects from a potential loss of UI benefits, but also a financial cushion to fall back on while you search.

Josh Hendrickson does a good job explaining why Romney was right in saying that corporations are composed of people.  Romney’s critics would argue that they are rich people, but that’s not at all clear.  What is clear is that corporations should not pay taxes (on capital income), rich people should pay taxes (on consumption.)

The best argument for Romney?  Look at the other GOP figures considered to be “major candidates.”

BTW, with Perry entering the race there’s a lot of debate about Texas.  Although I don’t like Perry, I do like the Texas model.  I did a post defending Texas a few weeks back; here are a few highlights:

1.  Of the 7 south central states between Georgian and Arizona, 6 are seeing population growth below the national average.  Texas has seen very fast population growth, for quite a long time.

2.  Other south central states like Louisiana, Oklahoma, New Mexico, etc, are energy rich.  Texas grew extremely rapidly when the energy industry was depressed in the 1980s and 1990s.

3.  All seven south central states have very cheap housing prices.

4.  Texas has no state income tax, the other 6 south central states have one.

5.  Lots of poor, middle class, and rich people move to Texas every year.  Revealed preference anyone?

Conclusion:  Paul Krugman is wrong and Tyler Cowen is right.

Here’s the Skeptic Lawyer introducing a guest post by Lorenzo:

[SL: there was a time, not so long ago, when conservatives and libertarians could afford to be smug about the intellectual miasma in which left-liberals and progressives had lost themselves. It is unfortunate–and does us little credit–that when a decent number of left-liberals reacted in horror to the colonisation of their political tradition by postmodernism and social constructivism, conservatives and libertarians stood on the side and giggled, forgetting that poisonous memes, once they kick off, have a nasty habit of spreading.

And here’s a quotation from Lorenzo’s excellent essay:

Attitude uber alles
One answer for conservatives was being socially conservative: but that proved to have some difficulties, particularly in alienating the youth vote. There was an alternative answer available: simply turn ‘conservative’ into a ‘hurrah’ word where attitude is everything.

There was even a model for this: for it is exactly what the collapse of the socialist ideal had led progressivist politics to. That is, post-modernism: where attitude is everything, for truth is a dispensable convention and concern for consequences passé as it got in the way of displaying one’s virtue. (Stephen Hicks’ analysis traces the origins and patterns of post-modernism.)

Enter, stage right, the PoMo conservatives: mindless, obsessive and should-know-better opponents of inflation and tellers of economic history (fiction?) seeking to (or actually) sabotaging intelligent monetary policies (some of which is tangled up in macro-economics’ lack of a common analytical language); law-and-order conservatives endorsing torture (relabelled, in true PoMo style, as ‘enhanced interrogation techniques’) thereby rejecting one of the deepest traditions of the common law; business-and-growth spruikers ignoring issues of ethics, transparency and consequences in the systematic destruction of prudence. People without any sense of the heritage they are allegedly in favour of conserving reducing ‘conservatism’ to a set of attitudes, departure from which is heresy and whose consequences undermine a heritage of which they clearly have no understanding.

Read the whole thing (it’s not too long.)

Bill Woolsey has long advocated a 3% NGDP growth target.  Recently he looked at a 1.9% target for per capita NGDP.  Both policies would tend to keep prices fairly stable over time, although you’d have small price level increases during adverse supply shocks, offset by mild deflation during booms caused by more AS (like 1999-2000.)  The US inflation rate would be closer to what we observe in Japan, than to the 2% inflation in the US during recent decades.

If you asked mainstream conservative economists to endorse this idea in late 2007, I think there would have been one of two reactions:

1.  Good idea; I prefer that to the recent 5% NGDP growth trend. Let’s do it now.

2.  Good idea, but the economy’s rather fragile right now (the subprime crash), so let’s gradually move toward lower NGDP growth over the next few years, with 3% as our long run target.

But Woolsey shows that actual monetary policy has been far more contractionary than the policy that would have produced a 3% NGDP growth path.  We are still far below a 3% trend line (or 1.9% for per capita NGDP) drawn from late 2007.  So why haven’t conservatives like John Taylor been clamoring for easier money over the past three years?  Why have they complained that money is too easy?

Milton Friedman helped revive capitalism when he showed that the Great Depression didn’t show capitalism was unstable, but rather that monetary policy had been unstable.  Some critics argue he actually was a closet interventionist, as he thought capitalism required active stabilization policy.  Perhaps, but one could also argue that he was saying “as long as the government runs our monetary regime, they need to do it well.”  Sort of like a libertarian arguing that if governments build our bridges, they should build them so that they don’t collapse.

In any case, conservatives later started to drift away from the Friedman/Schwartz view of the Great Depression, and became increasingly disdainful of “demand shock” explanations of the business cycle.  This created a huge problem in 2008, as conservatives had great difficulty defending the free market, which seemed to have once again failed us.

To be sure, they did find some important policy failures; from the GSEs to deposit insurance to the regulation of the ratings agencies to the moral hazard created by “Too-Big-to-Fail.”  Nevertheless, given all the bad loans that were made without government pressure, by private banks, to middle class borrowers, it was pretty hard to completely absolve the private sector.

I believe that abandoning the Friedman/Schwartz view of the business cycle was a big mistake.  It’s not that this view would have magically absolved the private sector from any role in the sub-prime fiasco, I’m somewhere in the middle on this issue, believing both regulators and private actors made huge mistakes.  Rather the F/S view would have absolved the financial crash from being the primary cause of the Great Recession.  It would be much easier to live with the occasional financial fiasco if it didn’t lead to a Great Recession.  Remember 1987?

If RGDP hadn’t fallen sharply in 2009 then the banking crisis would have been resolved much more easily, with far less public money.  For that to have happened we would have needed to prevent NGDP growth from turning negative.  And that would have required that conservatives accept the F/S view of the Great Depression, instead of drifting toward “real” theories of business cycles.

Why focus on conservatives, weren’t liberals also clueless about monetary stimulus?  If people like Fisher, Plosser, and Hoenig had warned that aggressive monetary stimulus was needed to prevent a severe slump; does anyone really believe the doves at the Fed would have stood in the way?

In 1930-33 the policies advocated by Friedman and Schwartz would have been viewed as being highly progressive.  Later Friedman moved away from steady monetary growth toward policies that would offset velocity shocks—even more progressive.  It’s a pity that so few liberal and conservative economists picked up the torch when Friedman died in 2006.  What is “the torch?”

1.  Demand shocks drive the business cycle.

2.  Monetary policy is the best tool for demand stabilization.

3.  Monetary policy is very powerful at the zero bound.

How many economists believed all three in October 2008?