Sunday, July 15, 2012

Yet Another Reason Wall Street Journal Op-Eds Suck

Via Paul Krugman I learn that Allan Meltzer, Professor of Economics at Carnegie Mellon, wrote an op-ed in the Wall Street Journal the other day. You already can tell where this is going, can't you? All I had to say was "Wall Street Journal op-ed" and you knew that this was going to be scathing.

Most of the op-ed is spent saying that monetary policy is ineffective, so the Fed should stop trying to print more money. He also says that the Fed's policy is going to be wildly inflationary at some point in the future (wooooo, scaaaaary!). He bases this off of the idea that the risk premium (basically the minimum returns people are willing to accept on a riskier asset) on inflation-indexed Treasury bonds is increasing. I don't think that's true:

But anyways, if you want to read about why his inflation predictions are likely wrong, read Krugman's post. I want to deal with the other part of his post, in which he says that America's problems right now are fiscal and budgetary.

He says, predictably (this is the Wall Street Journal, after all) that the only way for our economy to recover is for us to balance the budget and reform entitlement programs. Sigh. Sometimes I get the feeling that I'm trying to talk to an army of mindless robots that only know about three catchphrases. "The problem is demand," I say. The response to that is usually one of these phrases:

  • "Regulatory uncertainty is making businesses not want to hire people! We have to get rid of all of these regulations so they start hiring again!!"
  • "High taxes are making businesses not want to hire people! We must cut taxes so they start hiring again!!"
  • "The budget deficit is making businesses not want to hire people! We must balance the budget so they start hiring again!!"
Sure enough, here's a line from Meltzer's piece:
"Business investment is held back by uncertainty."
No. Remember these charts?

Business investment is being held back by poor sales, Professor Meltzer. There isn't much more I can say besides that. You can't seriously expect us to believe that cutting spending right now or in the near future would be stimulative to the economy. Don't believe me? Well, you can ask the IMF what they think of fiscal contraction without monetary policy offsetting it, since you seem to think that the Fed shouldn't do anything else.

Okay, yes, as I've said before, we do need entitlement reform at some point in the future, but we've got bigger issues right now. Moreover, solving those issues isn't going to help the economy get out of this slump. The economy needs stimulus, be it fiscal or monetary, to get hiring going again at a faster pace. It continues to amaze me that people still refuse to believe that our problem is not enough demand. 

Keep up the good work, WSJ Op-ed section. You keep me in business over here.