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 Post Posted: Fri Jan 30, 2009 10:56 am 
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Is it okay if Wyoming and Mexico only get two, though?

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 Post Posted: Fri Jan 30, 2009 12:16 pm 
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Well, OBVIOUSLY.

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 Post Posted: Fri Jan 30, 2009 12:48 pm 
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Kea wrote:
Monetary policy is when the Fed raises or lowers interest rates. This is not about government spending (the G in Grillick's equation). It's about adjusting the amount of money there is in circulation. To put things crudely, when there's more money sloshing about in the system, people are more willing to spend. When there's less money sloshing around, people will hold on to it instead. For the last thirty or forty years, messing around with the money supply has been successful in combating garden variety recessions (the present crisis excepted). It is widely accepted among economists as the first line of economic defence.

It's also instantaneous - no waiting around for government to send out cheques or start building roads. All the Fed (or National Bank) has to do is buy or sell bonds on the open market. (I can dig out my old econ textbook and explain how that works if anyone's interested but I don't want to go all Economics 101 without warning on the rest of you.)

Since we're chit-chatting about economics here, I guess I'll contribute to the tangent some more. Fiscal policy and monetary policy both can affect the economy in the short run, but only one can affect the economy in the long run. Unfortunately, both types of policy have their own types of lag. Fiscal policy is subject to internal lag, in that it is often difficult to enact legislation and get it implemented, but once it is implemented, its effects are almost immediate. Monetary policy is quickly enacted and implemented, due to the independent nature of most central banks, but it is subject to external lag, in that the effects of an increase in the money supply take time to be felt. Buying bonds injects money into the economy, but that money isn't always spent immediately, so it isn't distributed as rapidly as government spending, which by its nature is spent immediately.

Neither policy is an effect means of dealing with short-term changes in the business cycle. Fiscal policy to avert a recession will often be implemented as the recession is already ending, resulting in an accelerated period of economic growth which then necessitates another correction, sometimes harder than the last. Monetary policy to avert a recession will often have no substantial effect until the recession is already ending, resulting in an accelerated period of inflation, which leads to further economic troubles in the future.

As for monetary policy being widely accepted among economists as the first line of defense, citation needed. Economists seem to by and large reject government action as a legitimate means of affecting any specific recession (until they are given power over monetary policy, at any rate). Bernanke made his name academically arguing in favor of a targeted low rate of inflation, and greater transparency in the central bank, to give the market greater information about monetary policy to allow actors in the market to make more-informed decisions about spending/saving.

The first line of defense is fiscal policy enacted well in advance of any given recession. There are types of fiscal policy which inherently level off economic expansions and shore up economic slumps. These are government programs that automatically increase government spending when household consumption spending decreases, and vice versa. Examples of these policies are unemployment insurance and government-funding health programs. Unemployment claims increase as household spending decreases, and the reverse is true. MediCare and MedicAid claims increase as more people become ineligible for private health care, and decrease as more people are able to pay for their own health care.

In short, fiscal policy which makes recessions less painful for individuals also makes the recessions shallower, while also prolonging them. Fiscal policy which makes recessions less painful for individuals also makes expansions smaller, though it may also prolong them.

I personally would argue in favor of steady, predictable fiscal and monetary policy, with specific static institutions in place to catch the people who fall hardest. Full employment is an impossible goal, and programs that make unemployment less painful increase unemployment, but some of those programs, I think, are necessary to prevent the exploitation of the poor. I think a minimal level of government support (not quite enough to live comfortably, but enough to live) is a better way of ensuring the well-being of the average citizen than minimum wages, though.

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 Post Posted: Fri Jan 30, 2009 7:16 pm 
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And thusly, today I really like you.

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 Post Posted: Sat Jan 31, 2009 1:54 am 
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As for monetary policy being widely accepted among economists as the first line of defense, citation needed. Economists seem to by and large reject government action as a legitimate means of affecting any specific recession (until they are given power over monetary policy, at any rate).

Sorry, that was just some bad phrasing on my part. All I meant was that government economists usually adjust interest rates to try to stabilize the economy before they roll out the tax cuts or massive infrastructure spending. I don't know whether economists think that interest rate cuts can really soften a recession or whether they only do it to avoid things getting even worse. I know that small countries with pegged currencies are prone to going into deflation during recessions because they can't increase their own money supply. You make a good point about the automatic social safety nets, though.

My original point was that I don't think it's controversial that different places might require different monetary policies depending on local economic conditions, and for that reason a single world currency (under a single world government) would be a bad idea.

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 Post Posted: Sat Jan 31, 2009 3:03 am 
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I never said it was controversial. I said it was wrong.

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 Post Posted: Sat Jan 31, 2009 3:08 am 
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In what way do different countries not require different monetary policies?

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 Post Posted: Sat Jan 31, 2009 3:27 am 
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Insofar as there is one best monetary policy that is applicable in all cases, and the effects obtainable my monetary policy in the short-run are better effected by long-range fiscal policy, then individual monetary policies for individual countries are at best redundant and at worst counterproductive.

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 Post Posted: Sat Jan 31, 2009 6:31 am 
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But even holding inflation stable (as Bernanke advocates) involves jiggling around with the interest rates doesn't it? We're pegged to the US dollar over here so we can't change our own interest rates, and as a result we sometimes get inflation significantly worse than in the US (and can't do much about it) or we get actual honest-to-god deflation (and can't do much about it). If the whole world was on the US dollar, wouldn't you get the same problem everywhere? Admittedly our government's unusual stinginess makes the use of large-scale fiscal policy (apart from infrastructure spending) a little problematic here, but I'm still sceptical of the ability of automatic fiscal measures like unemployment insurance and medicare to pull an economy out of deflation. Once deflation sets in, it tends to get stuck.

There are also other effects of monetary policy besides simply having more money sloshing around in the system to encourage more spending. Lower interest rates encourage more lending and investment (not to give Alan Greenspan a free pass), and depreciate the currency, boosting exports. Have you also accounted for these effects in your dismissal of monetary policy as a useful tool?

If you give up monetary policy, and by extension, floating exchange rates, then don't you end up being stuck with most of the same problems economies used to have when they were still on the gold standard?

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 Post Posted: Sat Jan 31, 2009 7:04 am 
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Kea wrote:
Lower interest rates encourage more lending and investment (not to give Alan Greenspan a free pass), and depreciate the currency, boosting exports.


Speaking of which, if everybody is part of the same country, can you even be said to have exports anymore?

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 Post Posted: Sat Jan 31, 2009 11:20 am 
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Kea wrote:
But even holding inflation stable (as Bernanke advocates) involves jiggling around with the interest rates doesn't it? We're pegged to the US dollar over here so we can't change our own interest rates, and as a result we sometimes get inflation significantly worse than in the US (and can't do much about it) or we get actual honest-to-god deflation (and can't do much about it). If the whole world was on the US dollar, wouldn't you get the same problem everywhere? Admittedly our government's unusual stinginess makes the use of large-scale fiscal policy (apart from infrastructure spending) a little problematic here, but I'm still sceptical of the ability of automatic fiscal measures like unemployment insurance and medicare to pull an economy out of deflation. Once deflation sets in, it tends to get stuck.

There are also other effects of monetary policy besides simply having more money sloshing around in the system to encourage more spending. Lower interest rates encourage more lending and investment (not to give Alan Greenspan a free pass), and depreciate the currency, boosting exports. Have you also accounted for these effects in your dismissal of monetary policy as a useful tool?

If you give up monetary policy, and by extension, floating exchange rates, then don't you end up being stuck with most of the same problems economies used to have when they were still on the gold standard?

Being pegged to the dollar isn't the same thing as using the dollar. It's similar, but it is not the same. Even in the United States, we see variations in local economies at the state level and sometimes lower, but overall, standards of living, productivity, and real incomes have been increasing. Monetary policy can have effects on the economy, but those effects won't be uniform throughout the economy. Some areas will feel it more than others. Having a more diverse economy over which to control monetary policy would almost necessitate simple, straightforward rules that are knowable in advance. Certain localities will have it harder than others at times, but overall, standards of living, productivity, and real incomes will rise.

Inflation and deflation are entirely correlated to the money supply, so it is ludicrous to speak of one part of an economy experiencing deflation while another part of that same economy experiences inflation. Each nation making its own monetary policy seems to be what causes this to happen.

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 Post Posted: Sat Jan 31, 2009 12:53 pm 
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Hold on, isn't the reason that living standards and productivity in the US tend to rise together because the US economy is pretty integrated in the first place? Florida's economy interacts more with Indiana's than with say, Slovakia's. The states share a transportation infrastructure, a financial system, a bunch of big companies that operate nationally, and a labour force. The labour force is probably the most important one. There are no legal barriers for people moving from state to state in search of work. That's why it was important to grant the same freedom to EU citizens when European countries switched to the Euro. Are Americans prepared to pull down all their immigration barriers, even if it means admitting anybody from countries so poor that $3 a day seems like a lavish wage?

And also, isn't it possible for inflation to be worse in some locales of a country than in others - for the cost of living to rise faster in New York City than in Montana? Or for prices to rise in one place while falling in another?

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 Post Posted: Sat Jan 31, 2009 1:01 pm 
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One imagines that if Social Security were suddenly extended to wide new areas, there would be fine wages to be made in the various new states doing stuff for old people.

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 Post Posted: Sat Jan 31, 2009 1:09 pm 
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If the entire world becomes united as one nation, the concept of "immigration" and "foreigners" would legally be moot. So I'd say yes, Americans would be willing to, if they were willing to enter into a United States of the World, anyway.

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 Post Posted: Sat Jan 31, 2009 1:36 pm 
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They might balk once they had a look at the economic conditions in the countries-formerly-known-as-abroad. It's why South Koreans are less than keen on reuniting with the North, even if Kim Jong-il took a hike off a pier into shark-infested waters wearing bacon pants.

(And if you extended Social Security around the world - along with the requisite payroll taxes - you'd be paying it out at their wage scale, not yours.)

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