Squaring off against former IMF chief economist and MIT professor, Simon Johnson, Ed Conard persuaded 60% of the undecided audience members (to Johnson’s 15%) that the $3 trillion printed by the Federal Reserve has had little if any stimulatory effect on the post-crisis recovery. Last year, Ed also defeated the motion “Income Inequality Impairs the American Dream of Upward Mobility” in another landslide.
Watch Ed’s opening and closing statements
Don’t let our opponents hijack this debate. This is not a debate about whether the Fed should act as a lender of last resort in a run on the banks. We all agree on this point.
This debate is about radical monetary policy that tried to print money in order to stimulate growth in the recession after the bank run. This is not a debate about QE1. This is debate about what followed.
It’s easiest to understand monetary policy by considering a simple corn economy. We can plant the corn—that’s investment; eat it—that’s consumption; or store the corn in silos in exchange for a piece of paper that says “IOU a bushel of corn”—that’s money.
Recessions occur when people get scared and start storing corn instead of eating or planting it. Growth slows, and unemployment rises.
It’s important to recognize that the Fed doesn’t grow corn. Nor can the Fed violate the laws of physics and teleport corn back from the future for use today. All it can do is print IOUs.
By printing more IOUs, monetary policy tries to change your behavior today. It motivates you to stop saving and start spending again. It does this by threatening the value of your savings with price inflation in the future. With more IOUs outstanding, you should logically run to the silo to withdraw your corn and use it before the economy recovers, people start exchanging their IOUs for corn, and the silos run short of corn—i.e., when prices rise and a dollar is worth less.
But here’s the rub: the Fed increased the monetary base from $800 billion to $4 trillion dollars—an unprecedented five-fold increase—and it had no effect on anyone’s fear of inflation whatsoever. No one ran to the banks to spend their savings. The money sits unused neither lent nor borrowed, creating neither growth nor inflation.
Why? Because the Fed has promised to prevent inflation by contracting the money supply before the economy recovers and people start exchanging IOUs for corn. With hard-fought decades of successfully defeating price inflation, the Fed has earned its credibility. And with Republicans threatening the Fed’s independence if it doesn’t fight inflation, the Fed’s promise has even more credibility.
Advocates of Quantitative Easing pretend we can have our cake and eat it to—that we can scare savers into spending by printing money without needing to inflict the cost of inflation on the economy after it recovers. But it didn’t worked when we needed stimulus.
Even Ben Bernanke now admits that QE will only works if it’s permanent—if it’s guaranteed to inflict inflation on the economy. But nowhere does he advocate making QE permanent because of the damage inflation inflicts.
And the Fed increased the monetary base while the government was pumping $6 trillion of fiscal stimulus into the economy—increasing debt from 30% to 70% of GDP.
That’s 6-times more than the trillion-dollar stimulus Krugman initially complained was too small. Even with aggressive fiscal stimulus, which advocates of stimulus contend is far more powerful than monetary stimulus, we saw no bounce back in growth whatsoever. Instead, we have seen tepid growth off a permanently lower base for 6 years and counting.
It’s true the U.S. has recovered faster than Europe, but the U.S. has been growing faster than Europe for decades because of Silicon Valley and entrepreneurial risk-taking.
And for 3 decades and counting, Japan has tried the same thing—large fiscal deficits and near-zero interest rates—with nothing but slow growth to show for it.
Now advocates of monetary inflation insist that, if the Fed recklessly throws the steering wheel out the window and balloons the monetary base to $9 trillion that will scare everyone into spending. Perhaps it will. But the truth has been revealed. It takes a massive amount of monetary inflation to produce a minuscule increase in demand—enormous risk for little, if any, benefit. No mainstream economists take these reckless proposals seriously.
Our opponents will ignore these risks and claim only that lower interest rates and wealth effects stimulate investment despite Ben Bernanke’s admission that “quantitative easing works in practice, just not in theory.”
But the economists in the audience know that after decades of research, there is no consensus whether interest rates, especially short-term overnight borrowing rates, affect real long-term investment. Why? Because unused corn lowers interest rates and makes investment cheaper, not more paper IOUs.
Roger speculates QE may account for an additional third-of-a-percentage point reduction in the interest rate. Who believes a reduction in the interest rate, especially a measly third-of-a-percentage-point, determines how fast Apple develops the next-generation IPhone? Like all companies, Apple can’t afford not to innovate and invest as fast as it can, no matter the interest rate.
Real increases in wealth might stimulate investment. But nobody is fooled by equity prices inflated by low interest rates and an increased risk of inflation.
If the Fed does nothing more than prints IOUs, who here believes that increases wealth? Phony IOUs increase risk. Risk reduces wealth.
The economy may not be perfectly rational, but business leaders who create prosperity aren’t stupid either. They surely don’t increase investment and risk-taking in the face of increased government spending and the risk of inflation. They dial back.
There is simply no compelling evidence that fiscal and monetary stimulus increases real business investment. If anything, the evidence shows the opposite—a dial back in business investment in the face of risky stimulus.
And no surprise, in the wake of nearly $3 trillion of monetary stimulus and $6 trillion of fiscal stimulus, lackluster business investment and unusually slow productivity growth have been a chief reason for the slow recovery.
Financial speculators, many who borrow short to buy long-term financial assets, may be sensitive to short term rates—doubly so given the amplifying effects of herd mentality—but financial arbitrage is a zero-sum game that does nothing to grow the economy.
Quantitative easing doesn’t work in theory. That’s why it doesn’t work in practice either.
After $4 trillion of quantitative easing, Bernanke has reconsidered his beliefs. Last month in the Wall Street Journal he admitted, “The Fed cannot print its way to prosperity” because “the Fed has…no control over long-term economic fundamentals.”
Don’t let these guys fool you. There’s no free lunch. Don’t give reckless monetary policy a mandate. Only hard work, investment, innovation, and successful risk-taking create prosperity. Side with Ben Bernanke and vote against the motion: central banks can print prosperity.
And don’t let these guys hijack the debate and make it a debate about whether the Fed should have bailed out the banking system. I was on TV last week telling everybody that the Fed needed to bail out the banking system. There isn’t a serious economist on the
planet that disagrees.
The reason why our opponents have taken the debate there is because quantitative easing during the six years after the bailout didn’t work, and they know it. Vote against the motion that quantitative easing creates prosperity. It has not created prosperity.
- Closing Statement
Liberal Berkeley economist, Brad Delong, recently described each side of the motion we are debating. About our opponents’ view he said, “Even though the Fed…printed much more money than economists would have thought necessary to offset the impact of the financial crisis [—a five-fold increase in the monetary base from $800 billion to $4 trillion] … it wasn’t enough. [Bernanke] balked at taking the next leap: more than doubling the monetary base to $9 trillion.”
Roger has publicly described a far-more modest U.K. proposal as “dangerous” and “delusional” arguing that, “sometimes a sovereign has no alternative to inflationary finance. But this always has a significant cost. And it’s never the place to start or end.”
On our view of monetary policy, Berkley’s Delong said, “[Larry Summers and Paul Krugman]…argue that there is little evidence that monetary policy will ever restore full prosperity.”
Delong admits: He doesn’t know which of these views is correct.
Why doesn’t DeLong know which view is correct? Because $3 trillion of printing has produce no discernable effect on the economy. If it had, DeLong would have seen it and he would be urging more.
Our opponents haven’t brought any more evidence to the debate that central banks can print their way to prosperity than what Summers, Krugman, and Delong have already considered. If the evidence hasn’t persuaded even these ardent advocates of stimulus, why should it persuade you?
Bernanke now flat out admits, “Central banks can’t print their way to prosperity.”
Our opponents have the burden of proving the motion true—a very tough burden in this case. They haven’t made a convincing argument because no one can make a convincing argument on this issue.
I urge you to vote against the far-fetched motion: central banks can print their way to prosperity.
Learn more about Intelligence Squared and debate participants Simon Johnson, Andrew Huszar, and Roger Bootle at IntelligenceSquaredUS.org.