Curse of managerialism update

Managerialism (see my the curse of managerialism post) is not only a problem at Australian universities, it also infects US higher education:

Over the last 25 years the number of administrative employees at U.S. colleges and universities more than doubled, according to a joint study by the New England Center of Investigative Reporting and the American Institutes for Research. The ratio of nonacademic positions to faculty positions doubled at both public and private institutions. Overall, the industry has added an average of 87 administrative positions per day, a rate has scarcely slowed since the economic downturn, despite tuition increases.

Simplest argument for monetary explanations of the business cycle

In one of his many excellent posts, Scott Summer discusses how much difficulty folk have in accepting monetary explanations of major economic downturns, particularly when in the midst of them. One can see the underlying intuition -- money is just the stuff I use for transactions, it's just a tool of exchange, how can it matter so much? Real business cycle theorists just take this common intuition all the way. But the intuition is very widespread and has considerable power way beyond high level economic theorising.

I would turn it the other way: money is the stuff everyone uses for transactions in all industries, what else could be the key factor in downturns, particularly major ones? The notable thing about recessions is that there are simultaneous downturns in activities right across all (or almost all) industries. So, what could drive down activity in all (or almost all)  industries at the same time? Remembering that "driving down activity" means fewer and smaller transactions. And, in a monetised economy, what do we use in all (or almost all) transactions?

That would be money. Now, whether the medium of account or medium of exchange role of money is the crucial thing here is something that economists argue about. But money should be the first suspect, not the last (or no) suspect in explaining economic downturns. 

Marriage, procreation and the triumph of rhetoric and rationalisation over evidence

Arguments against same sex marriage (such as here and here) typically get marriage and procreation the wrong way round.  It is not that marriage is supported because it produces children -- the only common defining feature of marriage across cultures is that it connects kin groups, it creates in-laws. It is that a public commitment which binds two people together and connects their kin groups makes marriage a good institution for raising children. The characteristics of marriage make it good for child-raising, it is not that child-raising determines the characteristics of marriage. Which is why we don't ban infertile males or post-menopausal females from marrying. The characteristics of marriage give it value even without any prospect of children.

Nor is the reason for regulating marriage procreation: that will happen regardless of what the state does. Having the state regulate marriage reduces transaction costs -- that is why, for example, the landholding warlords of medieval Europe pressured the Latin Church to get into the business of marriage regulation; so there were common rules about what counted as a marriage and who was a legitimate heir. It is just so much more convenient if there is a standard, commonly recognised, marriage contract. For use of property, for standing for access, for inheritance, for ability to speak for another … Canon law taking over regulation of marriage did not stop procreation outside marriage, it just regulated the standing of such children. 

The "marriage is for, and matters for, procreation" arguments are classic examples of letting conclusions set the ambit of premises. Rationalisations of bigotry are rife which this rhetorical technique since they are based on letting a theory of the human, or of the social, or both, set the ambit of evidence, set the ambit of what aspirations and experiences count. (And yes, denying folk equal protection of the law is bigotry.) Bigotry is always a moral claim, it is always a claim about who has what standing in the moral community, including who is outside of it and to what degree; it is also always based on an impoverished epistemology which denies inconvenient human experience and aspirations status or standing.

So, one looks at the human experience of marriage and infers from that. One does not start with a theory of marriage and declare which experience counts.

[Cross-posted at Skepticlawyer.]

Snakes and pegs

If you follow the metaphor carefully, this is an excellent post on interest rates and monetary policy.

While this is an excellent post on the business cycle, focusing on the question of why booms feel good. It is remarkable how revealing the right question can be.

The Euro as artificial gold standard (for better and worse)

2011 Nobel memorial laureate Thomas Sargent said of the Euro in an interview that:

The euro is basically an artificial gold standard. 

The Euro is a fixed exchange rate system where member governments have no control over the supply of the medium of account -- the medium of account being:

… the ultimate standard of value; it could be gold or silver or copper or dollars or pounds. All prices for monetary exchange are quoted in terms of the medium of account.

Or, slightly more precisely:

The unit of account is the word used to quote prices, make contracts, and keep accounts.
Dollar is a unit of account.
The medium of account is a good (or bundle of goods) that is used to define the unit of account.
[If] A dollar is 1/20th of an ounce of gold. The dollar is the unit of account and gold is the medium of account.

In the Eurozone, the Euro is the medium of account and it is controlled by the European Central Bank (ECB), not the member governments. So, the Euro is indeed, in effect, an artificial gold standard. 

For worse
But the Euro is worse than the gold standard in two ways. First, it is a lot easier to leave the gold standard -- one simply stops pegging one's currency to a set quantity of gold. Leaving the Euro requires issuing an entire new currency. Which has been done (e.g. when states breaks up), but involves a lot more effort and transitional problems than simply announcing in a press release that one's currency is no longer redeemable for a given quantity of gold.

The second problem is that, given central banks effectively control aggregate demand (i.e. the level of nominal -- i.e. money -- spending), the Euro can be managed to suit a particular economy rather than the Eurozone economy as a whole. Which is precisely what is happening. The ECB concentrates on managing German aggregate demand, and everyone else just has to cope -- so the more like the German economy yours is, the better Euro-aggregate-demand works for you. The less like the German economy yours is, the worse Euro-aggregate-demand works for you.

This is worse than the gold standard because central banks in the gold zone could set interest rates and, in extremis, change the currency/gold exchange rate to specifically tailor monetary policy to their circumstances. Moreover, since the currency was the medium of exchange but not the medium of account, notes could be issued to suit the demands of exchange without affecting the value of the medium of account (and so every transaction denominated in said medium). None of these options -- or any equivalent -- is open to members of the Eurozone. If the ECB decides that it will manage aggregate demand to suit Germany, then that is what happens and everyone else just has to accept the consequences.

For (mostly) better
There is one way that the Euro is better than the gold standard. The Euro operates under a inflation targeting monetary regime. Inflation targeting is less stable in the long run than the gold standard -- the compounding effects of (say) 2% inflation per annum are going to be much greater than the long run tendency of the gold standard to 0% inflation. It is, however, more stable in the short run than the gold standard. 

Under inflation targeting, the price level will change at about the inflation target -- typically, 2% pa. While gold production tends to be relatively stably a small proportion of gold supply (hence its long run stability), gold demand can shift dramatically -- particularly if a few central banks dominate gold stocks, as happened in the interwar period.  A big enough shift in gold demand can see dramatic changes in the price level in gold standard countries -- this is what happened in the Great Depression, where wholesale prices declined 30% in three years as the gold-hoarding policies of the Bank of France, with the acquiescence of the US Federal Reserve, drove up the demand for gold (the medium of account in gold zone countries). Driving up the value of the medium of account means driving up the value of money and so driving down the value of goods and services (i.e. the price level). 

That inflation targeting is more stable in the short run than the gold standard is why the Great Recession has not been as bad as the Great Depression. (Since if prices do not collapse to that extent, neither do incomes.)

Unless, of course, you are Greece, the Eurozone country whose economy is least like Germany's, where price (and so income) collapses are heading towards Great Depression levels. Leading to Great Depression politics. The way in which the Euro is better than the gold standard, for Greece, not so much.

The DM for everyone
The appeal of the Euro was that one could sign up for a Deutsche Mark for everyone (who joined). Just as the appeal of the gold standard in the 1870s was a pound sterling for everyone (who joined). It turns out that signing up for the Euro-as-inclusive-Deutsche-Mark also meant signing up for as-it-suits-Germany monetary policy. Not nearly so much fun.

People eventually bailed on the gold standard because signing up for being locked in with the insanity that was French monetary policy turned out to be a really bad idea. But countries could bail simply by issuing a press release. The Eurozone Deustche-Mark-for-everyone is a much harder shared-disaster to exit, if less of an actual disaster.

The managerialist curse

The ideology of managerialism (that societies are equivalent to the sum of the transactions made by the managements of organisations) must be just about the only case of an ideology whose key figure was an Australian. As Prof. James Hoopes tells it:

But the main genesis of managerialism lay in the human relations movement that took root at the Harvard Business School in the 1920s and 1930s under the guiding hand of Professor Elton Mayo. Mayo, an immigrant from Australia, saw democracy as divisive and lacking in community spirit. He looked to corporate managers to restore the social harmony that he believed the uprooting experiences of immigration and industrialization had destroyed and that democracy was incapable of repairing.

It is not all that surprising that an Australian expatriate might have such a view during the interwar period. This was, after all, the period that also produced F.W. Eggleston's minor classic State Socialism in Victoria (1932), an analysis of the use of statutory authorities to deliver a wide range of services.

State utilities
According to Murray Horn's analysis, this was a rational political response to unstable governments -- creating a statutory authority provided a stream of benefits to constituents that would outlast any particular (and likely temporary) parliamentary majority. It is notable that the string of long-serving Governments in Victoria in recent decades has seen the abolition of many of these statutory authorities and their absorption into public service departments under direct Ministerial control.

Not always an improvement for public policy -- one would well argue that water and transport were both better managed under the Melbourne and Metropolitan Board of Works than they have been subsequently. For example, if the 1969 Transport Plan had been followed, Melbourne would be significantly better supplied with both road and rail transport, rather than playing endless "catch up" due to the long infrastructure construction drought from the Hamer Government's retreat from the Doncaster rail line (under resident pressure) in 1976 to the Kennett Government's approval of CityLink in 1994. Similarly, the water infrastructure construction drought after the completion of the Thomson Dam (1976-83) did not stand Melbourne in good stead when actual drought hit.

The public servants in charge of such bodies do often seem to have had a genuine notion of custodianship, of performing a service for the citizens. That they were long-serving officials running organisations set up to have longer time horizons perhaps helped with that.

Utilitarian state 
The other reason why an Australian might foster managerialism is the pervasive utilitarianism of Australian political culture -- what Hugh Collins called Australia's Benthamite political culture. Australia being, in effect, the country where the Chartists won. [Incoming Human Rights Commissioner Tim Wilson's recent speech to the Liberal Democratic Party conference touches on this.]

Earlier, historian Sir Keith Hancock had referred to the Australian view of the state as:

a vast public utility, whose duty is to provide the greatest happiness for the greatest number.

And such utilities have to be managed. Happiness and the public good becomes a management problem.

One doesn't have to completely endorse John Ralston Saul's Voltaire Bastards thesis (nicely discussed here) to see a problem here. Though Saul's contrast of leadership with management is spot on. Leadership is about inspiring people, management is about people as objects of input-output processes.

Soft managerialism
Hence we come to "soft" managerialism -- the belief that people, organisations and institutions are input-output problems, so the more they are managed, the better the output-for-input results. In many ways, we live in an age of managerialism. Corporations, non-government organisations (NGOs) and the public sector are all rife with such managerialism.

There are countervailing factors -- bankruptcy being the obvious one for corporations. Enron was a particularly egregious example of feral managerialism.  Institutions and organisations are the more vulnerable to managerialism the less the accountability constraints on them.

Which has made Australian universities particularly prone to the managerialist curse. As I explained years ago to a then colleague who wondered aloud why university administrations were so bad -- they have all the unfortunate incentives of the public service with almost none of the accountability constraints.

Which, since neither factor has changed significantly since, means that universities have become more overrun with managerialism rather than less. A friend tells me that it has been seriously proposed at the University of Melbourne to put academics in open plan offices -- a proposal that is so silly at so many levels, it is hard to know where to start. As my friend points out, no academic is going to bring their personal library into an open plan office. Nor will they be able to have private discussions with students, or shut out the world and quietly think and research. It is managerialism at its most overblown and most inane. Such managers "see" the input-output problem; they don't understand what matters, still less the human interactions which are the ultimate point.

The missing custodians
In the aforementioned interview, Saul states that:

when you have power, the most important responsibility is not to do damage to the thing you are in charge of.

And, talking further of Thomas Jefferson's approach to political responsibility and leadership,

a non-solution oriented approach … a doubt approach.

But managerialism feeds the managerial ego -- that they, the so-needed managers, are the problem solvers. Conversely, if and when people act otherwise than as managerially convenient, such people are not-acceping-management-problems to which more management (i.e. more of the heroic problem-solving managers and more of their problem-solving managerial power) is the solution.

Even worse, such managers are not custodians of anything except their own egos. History doesn't count because legacy is not a solution to input-output problems. If your only tool is a hammer, everything starts looking like a nail; and if your only role is to "manage", everything starts looking like your sort of management problem.

Now, having an intelligentsia in love with the idea of their own subversiveness leaves one open to such un-anchored-in-anything-but-ego "problem-solving". Not least because being "subversive" has to be good because our legacies are clearly a mass of problems. All connected to the disastrous notion of modernism -- that the new is always better. The cult of subversion and the cult of managerialism feed off each other nicely.

While it is true that oppression, privilege, power and exploitation are part of the selection processes of history, it also true that learning what works is part of the selection processes of history -- and what works with actual people, not pawns in input-output problems. So, while there is a rich irony in universities being such hothouses for the managerialist disease, it is not one for complacent satisfaction. Universities matter.

It has also not been helpful that the academics main direct experience of "economic reform" has been such managerialism. It provides a quite distorted perspective of the wider phenomenon of economic liberalisation. Which no doubt helped the academic success of Michael Pusey's fairly asinine book on "economic rationalism". The notion that the glue of the economic reform policy alliance was to create a sustainable welfare state just passes the analysis, and those who buy into it, by.

But the problems of managerialism extend much wider than distorting the perspectives of academics on a wave global policy reform. The input-output language of "clients", "customers", etc has invaded the realm of education (and public service generally) without actually providing a service anywhere up to the pretensions of its managers.

So, there needs to be more calling out of managerialism for what it is -- a distortion of understanding of people, organisations and institutions which serves the managerialist ego, income and empire-building but not the institutions upon which it is inflicted nor the wider societies, whose legacies are being corrupted and, in the end, profoundly mis-managed.

ADDENDA Managerialism is not only a problem at Australian universities, it also infects US higher education:

Over the last 25 years the number of administrative employees at U.S. colleges and universities more than doubled, according to a joint study by the New England Center of Investigative Reporting and the American Institutes for Research. The ratio of nonacademic positions to faculty positions doubled at both public and private institutions. Overall, the industry has added an average of 87 administrative positions per day, a rate has scarcely slowed since the economic downturn, despite tuition increases.

[Cross-posted at Skepticlawyer.] 

Language as framing

I have used the expression Abrahamic religions. After reading and listening to this presentation by the Rev. Dr Mark Durie, I do not think I will be doing that again.

Language frames how we think about things. Monotheistic religions have some common dynamics. They are, for example, prone to strong gender and sex taboos -- a tendency common to Judaism, Christianity, Islam and Zoroastrianism.

Moreover, Zoroastrianism is a bit the odd one out. Not only because it has no overlapping figures in its scriptures or prophetic history, but because it was for long more of a proto-monotheism, with the strongest dualist tendency and subordinate deities.

But as Mark Durie points out, using the term Abrahamic religions not only postulates more commonality between Judaism and Christianity on the one hand and Islam on the other than there is, it also buys into very specifically Muslim terminology and claims.

During the Cold War, certain phrasings and usages were very much loaded with ideological connections and significance. That is also true of the current contretemps with militant Islam.

Rating boomers

Notionally, baby-boomers are born between 1946 to 1964. Experentially, that is nonsense. If you entered the work force after the advent of mass unemployment, you are not a baby-boomer. At least, not in the full deal sense. Just as if the 1960s did not overlap with puberty, you are not a baby-boomer in the full-deal sense. 

The full-deal baby-boomers lived through the young family social focus 1950s as those young children society was focused on. They reached puberty in the 1960s to provide the numbers for the summer of love and the years after. They experienced a massive broadening of higher education and, if so inclined, could relatively easily aspire to jobs in academe. If not, entering the workforce was a pretty painless process. Long hair was fashionable when they were young, and shaved heads when they started balding. Comfortable retirement was almost a given expectation. The world arranged itself for their convenience more than any generation before and, in many ways, any cohort since.

These were not the experiences of those born later.

The New York Times has produced a "what type of boomer are you?" quiz. A related article points out the very different experiences of the two halves of the "baby boom". It is very US-focus, but it does point out how very different the collective experiences of the full and shadow baby-boomers were. 

Money, prices, assets and evasions of responsibility

Understanding the equation of exchange can help see what a massive evasion of institutional responsibility lies behind the Great Recession and the Eurozone crisis.

Economist Irving Fisher developed the original algebraic formulation of the equation of exchange, in his The Purchasing Power of Money (1911):

MV = PT
Money x Velocity = Prices x Transactions.

Fisher's use of the term velocity was rather unfortunate, as what he meant was turnover (the number of times money passed through different transactions in a given time period). As Fisher wrote:

the velocity of circulation, or rapidity of turnover ... this velocity of circulation for an entire community is a sort of average of the rates of turnover of money for different persons. Each person has his own rate of turnover which he can readily calculate by dividing the amount of money he expends per year by the average amount he carries (Chapter 2).

But his equation already had a 'T' in it, so velocity it was. Fisher was using the equation of exchange to state the quantity theory of money more precisely.

Milton Friedman restated the quantity theory of money in 1956 (pdf), leading to the updated equation of exchange:

MV = Py
Money x Velocity = Prices x output of goods and service.

y was originally rendered as Q for quantity (of goods and services), but y has become a common usage. This equation has no 'T', but the velocity usage was already well established (alas). Velocity has become the (output / goods and services / income) velocity of money.  Just as P has become the goods and services price level. (Fisher was an early developer of price indices.)

Aggregate demand

Taking the right side of the updated equation, Py = Prices x output = GDP in money terms, or NGDP. ('N' for nominal, or in money terms.)

Another name for this is aggregate demand (for goods and services). Just as with velocity, aggregate demand is not a clear usage, but it is the accepted one, so we are stuck using with it.

If there was some organisation--let's call it a central bank--that could control M and V, then aggregate demand will be whatever said central bank decides it will be.

That central banks control M is subject to some dispute, but let's take that as read. They are the monopoly providers of monetary base, after all. How could central banks also control V? The short answer is that, as they control M, they also control the future path of M. And expectations about the future path of M are very important in determining V. Hence aggregate demand is whatever the central bank decides it will be.

Which rather takes the bite out of fiscal policy. The central government can run as big a budget deficit as it likes, if the central bank decides to tighten monetary policy to maintain, say, its inflation target (i.e. the rate of change of P), then the effect on aggregate demand of said budget deficits will be effectively completely negated. How long can this keep going? Until public debt reaches whatever the debt-servicing limit of said country is. For an extremely reliable payer such as the government of Japan, this can go on for years until the gross public debt is over twice GDP.

Conversely, the central government can run a whole series of budget surpluses. If the central bank runs a compensating monetary policy, as the RBA did during the Howard Government surpluses, then aggregate demand will chug along just fine.

The impotence of fiscal policy in the face of a competent central bank is the Sumner critique:

the fiscal multiplier will always be zero if the central bank directly or indirectly targets aggregate demand.

An alternative formulation is:

under almost any conditions, fiscal policy cannot be effective if monetary policy is aiming at a policy objective that is inconsistent with that fiscal policy.

For fiscal policy to "work"--in the sense of affecting aggregate demand--the central bank has to either be not reacting to reach any inconsistent policy goals or be impotent--i.e. for some reason be unable to affect aggregate demand.

Enter the alleged liquidity trap, when nominal interest rates are at the zero lower bound (ZLB), so cannot be cut any further. This can be formulated as a problem either because a particular interest rate is the central bank's usual policy instrument or, more correctly, as expectations about future income being so dire that no amount of extra money injections will improve them--the famous "pushing on a string".

The former formulation of the liquidity trap assumes that interest rates are a central bank's only reliably effective policy instrument, which is quite false (but can have a profound effect on policy and expectations if central bankers believe it). Regarding either formulation, economist and central banker Lars Svensson published his "foolproof way" of escaping from a liquidity trap in 2003; there is no excuse for treating the ZLB as a genuine constraint on monetary policy. Indeed, the US Federal Reserve's use of Quantitative Easing (QE) shows there is no such constraint. The Fed's use of such "unconventional" (i.e. not-interest-rate) monetary policy explains the superior economic trajectory of the US economy over that of the Eurozone.

Inconvenient responsibility

But notice the scary implication of aggregate demand being whatever the central bank decides it will be. If recessions are generally due to falls in aggregate demand, then central banks are responsible for the business cycle (or most of it). Even if there is a supply shock, the central bank can shift aggregate demand to compensate. Whenever the economy gets plucked off (pdf) its normal growth trend, it is due to central bank failure--either something they did, or something they failed to do.

So, if unemployment surges, if economic conditions stay flat (compared to trend), it is the central bank's fault. That is a scarily responsible place to be. It is hardly surprising that the original public use of the "pushing on a string" metaphor was agreed to with such alacrity by the then Chairman of the US Federal Reserve. Or that the ECB is very happy for people to blame Greece, the PIIGS countries generally, or fiscal austerity, or anyone but them, for the Eurozone crisis.

M.S.Eccles: Fed Chairman 1934-1951

Holding the central bank responsible for aggregate demand, and thus the business cycle, is however, also not very congenial for the proponents of activist government. It being politically much harder to cut public spending than increase it, activist fiscal policy is a great basis for ever-increasing government. (In theory, budgetary deficits could be run by simply cutting taxes; in practice, increased spending is a normal element in fiscal stimulus.)

In the case of the Eurozone, if the Euro is a political project to promote ever-greater-union (i.e. the creation of a European superstate), then proponents are really not going to want the ECB, and by implication the Euro, being held responsible for the Eurozone crisis. Or, even worse, the Great Recession generally. (That is assuming people even notice monetary policy at all.)

Which is all very well, but leaves some questions unanswered: why leave out previously produced goods from the reformulated equation of exchange?; how can the expected future path of M affect V? and why is an interest rate the normal policy instrument of central banks? It turns out, these are related questions. For they are much about time.

Assets and time

Fisher's original formulation of the equation of exchange included all transactions, including for previously produced goods--i.e purchases of existing assets and second-hand goods. The restated version quarantines off anything not part of current output. (Though services involved in selling existing assets or second-hand goods are part of current output, as are services in maintaining or managing existing assets.)  It thus includes all output connected to income and permits the national accounts statistics to be used.

As for the relationship between the future path of M and V, that is about income and assets. An asset is an asset because it is expected to provide benefits in future time periods. (So, second-hand goods with scarcity value--such as antiques--are assets.) For our purposes, these can be treated as either a stream of income or as a store of wealth or (more commonly) both.  Bonds (a congealed stream of income) are at one end, since their only value is the stream of income, and gold (which provides no income) is at the other. The ultimate point in holding any of these assets being access to good and services, to (current and past) output.

Treating assets as things whose benefits can be expressed in monetary terms, the prices of assets will therefore tend to be interconnected, depending as they do on expectations about future value. When expectations about future income are high, then income-producing assets will be at a premium. When expectations about future income are low, then assets deemed as reliable stores of wealth will tend to be at a premium. And money itself is an asset.

But money is an asset whose current and future supply the central bank controls. Thus, if one expects that money will increase in value (i.e. M is on a low path compared to y), then people will tend to hold it rather than spend it. Which means V (the rate of turnover of money) will fall, so (for any given level of M) Py (i.e spending) will fall. If spending falls, income also falls as one person's spending is another person's income.  Expectations about the future path of M lead to changes in V, lead to changes in aggregate demand.

Another way to consider this is the reciprocal of V, or k:

k = 1/V

Substituting in (by dividing both sides of the adjusted equation of exchange by V) gives us the famous Cambridge equation:

M = kPy

k is the propensity to hold money.  So the more people hold money, the lower Py will be for any level of M. To put it another way, the more desirable money is as an asset, the lower the level of spending for any level of M. If any rise in M will just leads to a rise in k, then the central bank is "pushing on a string" and the liquidity trap is operating. 

But the value of money as an asset depends on the future path of M, so it will matter a great deal whether people expect the increases in M to be temporary or permanent. Thus, Lars Svensson's "foolproof way" out of the liquidity trap uses currency depreciation to signal central bank commitment to a higher future price level. That is, the increases in M are permanent, ensuring a depreciation in the value of money as an asset relative to output, leading to people moving out of holding money and into buying goods and services (plus the higher price level improves income expectations).

Debt-deflation and safe assets

Japan-resident economist Richard Koo has advanced the notion of Japan (and later other major market economies) as being in a "balance sheet recession" (pdf) where the creation of safe assets (Japanese public debt bonds) is a necessary response to the massive rise in bad debts in the Japanese financial system due to the bursting of the "bubble economy". Koo is adapting Fisher's Debt-Deflation theory of the Great Depression. (Fisher's original publication is here [pdf].)

The problem is that Koo gets the debt part but not the deflation part. Expectations about future income are crucial to the burden of debt. That was Fisher's point. If consumer prices drop by about 25% in three years, as they did in the US in 1929-1932, then incomes and income expectations also drop. The ability to service debts collapses and the wave of bad debts surges, profoundly destabilising the financial system.

Koo's problem is that he does not understand the Great Depression. A crucial feature of the 1929-1932 story is that all the major market economies were operating on the gold standard. Since gold set the value of money, rises in the value of gold caused the value of money to rise and the price level to fall. But that just means we can put the equation of exchange in gold terms (adapted from here):

G = kPy
Where G = gold stock and k = gold hoarding.

Since G is essentially fixed (as new production of gold is persistently a small ratio to existing supply, so G is relatively stable in its ratio to total output, to y) then shifts in k can have a major effect on the price level. Which is precisely what happened in 1929-32. The Bank of France enormously increased its gold holdings, the US Federal Reserve (the major holder of gold) failed to compensate; so the value of gold (and thus money in goldzone countries) soared so P collapsed in all the goldzone countries, leading to massive falls in income, spending (Py) and production (y).

FDR took the US out of the Great Depression by massively depreciating the US$ against gold, creating strong expectations of rising prices (and thus incomes) leading to the sharpest economic recovery in US economic history.* He then brought economic recovery to a screeching halt by a high wage policy and other disastrous supply-side policies. 

Pushing up aggregate demand is not much good if you then push down aggregate supply.

So, expectations about the future path of M affect V (k) which drives Py, so central banks set the level of aggregate demand.

At which point, it is clear that no simple story about M is a satisfactory explanation for asset prices. They depend crucially on expectations about future income, Py. If expectations about Py are poor, then no amount of extra M that fails to shift those expectations is going to increase asset prices. The job of a central bank is all about expectations, because it is not simply the level of M that counts, but expectations about the future path of M. Money itself is an asset, and if people are confident that money will retain its value--because, for example, the central bank is persistently undershooting its low inflation target--but have poor expectations about income, then k can get very high indeed while the value of other assets remains flat. Both the Great Depression and Great Recession have been marked by huge increases in M with flat or falling asset prices.

Income expectations

The difference between the RBA and the BoJ, the Fed or ECB is that while all four central banks have inflation targets, the RBA also has an implicit income target. That is, the expectations are that the RBA will keep Py relatively stable (i.e. tolerate a higher rise in P if y is flat and vice versa) since its inflation target is an average over the business cycle. The varying antipodean responses to the 1997 Asian crisis and resultant exchange-rate shock provide a nice contrast between the RBA taking a broad view/aggregate demand/income expectations policy and another central bank (the RBNZ) taking a narrower inflation-target approach with the RBA policy leading to no recession and the RBNZ approach leading to a recession.

Another way to look at that is to say the RBA is effectively operating an export price norm. (Which leads us back to Lars Svensson's "fool proof" way out of a liquidity trap.) If income expectations do not collapse, there is not a flight to safe assets (such as money in a low inflation environment) and so spending does not collapse.

The huge failure of inflation targeting is the failure to realise the importance of managing income expectations when strong central bank credibility on inflation means money can be a safe asset. (And if you suspect that is something like the failure of the gold standard central banks to realise the importance of managing income expectations when fixed gold convertibility means money can be a safe asset, you would be correct.) Both inflation targeting and the gold standard permitted central banks to evade responsibility for aggregate demand while they were, nevertheless, driving aggregate demand.

Now or later

So far, I have talked about monetary policy without mentioning interest rates very much. A difficulty with interest rates and monetary policy is the importance of the difference between level and direction of movement of interest rates.

Interest rates are about choices between time periods. Interest rates consist of three basic components:

1. "the risk free cost of capital".
2. the risks specific to the asset in question. (Rated at 0 for government bonds for which there is no expected default risk.)
3. expected inflation.

If expected inflation (rate of change of P) is high, interest rates will be high. If expected inflation is low, interest rates will be low. (If weird things are happening with the other two components, that would not necessarily be true, but we can ignore that.) High inflation is loose money (lots of money being spent for a given level of output; the future path of M is expected to be high compared to output) and low inflation is tight money (not so much money being spent for a given level of output; the future path of M is expected to be low compared to output). Hence Milton Friedman’s comment that:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. … After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

But interest rates are the cost of credit. If people borrow more, they spend more (in particular, they invest more); hence lowering interest rates is deemed to be stimulatory (encouraging more borrowing and investing) and raising interest rates is deemed to be restrictive (discouraging borrowing and investing). Moreover, if people have loans with floating interest rates, then lowering rates frees up some of their income (encouraging spending), raising rates absorbs more of their income (discouraging spending).

What, people are still buying that low interest rates = loose monetary policy nonsense?

Increased spending will raise output or prices (depending on what supply-side [i.e. capacity] constraints are operating). But the central bank changing the base interest rate is movement from a given spot (i.e. it is a directional movement at a given level). It can only change the overall looseness or tightness of money if it changes inflationary expectations. And the impact of the interest rate change will vary depending on how inflationary expectations are running; so keeping interest rates unchanged as inflationary expectations drop is contractionary, as the non-inflationary cost of credit will rise.

If you are already in your target inflation range, the ideal outcome is you encourage output without significantly changing the general trend of money “tightness”. In other words, it is the movement of money into or out of spending, and the consequent effect on output, which matters. So, somewhat paradoxically, low interest rates are a sign of monetary tightness but lowering interest rates are a signal for monetary easing.

Hence, and this is where the two collide, the concern about the Zero Bound or liquidity trap; when you cannot cut interest rates any further (you are at 0%p.a.) but folk still aren’t spending. The infamous “pushing on a string”. Which is where the low-interest-rates-are-loose-money fallacy comes from, I suspect. People know that cutting interest rates is intended to be stimulatory, so it is “obvious” that low interest rates mean loose money. Yes, cutting interest rates is intended to be stimulatory but, no, low interest rates are not a sign of loose money but its opposite. Because interest rates are the price of credit, a price which incorporates inflationary expectations (the expected path of M compared to y), and the tightness or looseness of money depends on the level of spending for a given level of output.

Another way to think of this is interest rates as (in part) the difference between the value of money now and the value of money later. If the path of M is expected to be low compared to output, then money will retain its value as an asset over time and interest rates will tend to be low. If the path of M is expected to be high compared to output, then money will tend to lose its value as an asset over time, and interest rates will tend to be high.

Hence Quantitative Easing--a way to have a stimulatory effect without cutting interest rates. Of course, if you are the Fed and meanwhile making it clear that you are sticking to your inflation target, then the shift in the expected future value of money (and so the price level and so incomes) is going to be, shall we say, somewhat ameliorated.

Which is back to the problem with inflation targeting--like the gold standard, it permits central banks to evade responsibility for aggregate demand while setting it (disastrously low).

And if central banks determine aggregate demand, the only way to hold them genuinely responsible for what they actually do is for them to explicitly and directly target it: also known as NGDP targeting.

*See Lars Svensson's "foolproof way" of exiting a liquidity trap.

[An earlier version was posted at Skepticlawyer.]

Moving along the emancipation sequence

Christina Odone, former deputy editor of The New Statesman, in the course of arguing that religious believers are being pushed out of public life by a new intolerance, drew attention to the Law Society revoking permission for a conference on traditional marriage to be held on its premises.

Suppose it had been a conference on the need to reinstate traditional legal prohibitions on Jews. Or Catholics. Would it then have been unreasonable for the Law Society to say that you can not hold such a conference on our premises?

Suppose it was a conference on the need to revoke voting rights for women? Or re-impose coverture marriage?  (Which was, after all, for centuries the "traditional" form of marriage under English law.) For what group does opposition to equal protection of the law become an acceptable conference subject matter for the Law Society to provide a venue for? Would Ms Odone care to specify?

What used to be called the Old Commonwealth countries -- UK, Canada, Australia, New Zealand (we can leave aside South Africa as a different case) -- have been moving along the Emancipation Sequence: abolishing the slave trade, then slavery, then Catholic emancipation, then Jewish emancipation, female emancipation (in its various waves), now queer emancipation. 

"Emancipation" being used here to mean more than just the right to vote but to enjoy the equal protection of the law in the widest sense. One can tell how far along the Emancipation Sequence we are by how much, and in what spheres, equal protection of the law is taken as effectively a settled issue. It is for Jews and Catholics, it mostly is for women and it is still somewhat contested for queers but is clearly heading in that direction.

Almost certainly, it does not occur to Ms Odone that there is any parallel with coverture marriage, or the controversy over Jewish emancipation, etc. But, of course, that is precisely what is going on.  Indeed, the fight over queer emancipation is almost completely a re-run of the fight over Jewish emancipation, with exactly the same arguments being run -- they are offensive to God, giving them legal equality goes against the authority of Scripture and Western tradition, they will corrupt any institution they are allowed into, they prey on minors, they are predatory recruiters, they spread disease -- and almost exactly the same fault lines showing up in social debate.

The Catholic Church, in particular, is behaving in exactly the same role; keen to foster as much persecution of a vulnerable minority as it can get away with to display its credentials as gatekeeper of righteousness. With said vulnerable minority being a useful scapegoat for the stresses of modernity.

The parallel is even stronger, given how much of the Emancipation Sequence was about de-Christianising the law. Hence equal marriage is, indeed, a rejection of traditional Christian teachings and authority. But so was giving equal rights for Jews. 

Or, for that matter, much of the process of providing equal protection of the law for women. Particularly the fight over giving women control over their fertility, which the traditional Christian package of no contraception, no abortion, no divorce and no rape within marriage almost entirely stripped women of.

The role of gatekeeper of righteousness is deeply entwined with outcasting and moral exclusion. As the legal support of moral exclusion unravels, that entails the unravelling of legal support for traditional religious social gatekeeping.

Ms Odone wants to defend the advocacy of moral exclusion; of moral exclusion extending to denial of equal protection of the law. Moral exclusion always involves an impoverished epistemology, since it denies the experience and perspective of the excluded any standing.

The Law Society has decided that queer folk are full humans, entitled to equal protection of the law. Ms Odone wants the right to use other people's property to publicly advocate that that, really, they are not full and proper versions of the human and so not entitled to equal protection of the law. (For if queer folk are full and proper manifestations of the human, then equal protection of the law just follows.)

At the heart of the Emancipation Sequence is the dictum of Terence:

Homo sum, humani nihil a me alienum puto (I am a human being, I consider nothing that is human alien to me).

The Rabbinical tradition was that the cities of the plain were destroyed for breaching the principle enunciated in Exodus 22: 21-27 of protecting the outsider and the vulnerable. That they were not merely immoral, but anti-moral, punishing those who helped the vulnerable. (The notion of their sin being of hostility to the outsider -- and specifically the messengers of God -- is the usage Jesus invoked, in his preaching.)

Moral exclusion, by contrast, declares that which is different to be alien, to be not fit for full membership of the moral community or equal protection of the law. Hence Philo of Alexandria's adoption of natural law reasoning to re-target the wrath of God in Genesis 19 against the vulnerable queer minority. Using the rhetoric of Athens in the name of Jerusalem to fight the Jewish-Greek kulturkampf which was such a feature of the Hellenistic East from the time of Alexander the Great onwards, and which was particularly intense in Alexander's most important eponymous city. Philo was being a good Jewish culture-warrior, contrasting Jewish "according to nature" sexuality and strict gender divisions against vile, flagrant pagan Greek "against nature" sexuality and gender fluidity.

The term "traditional" is so often a way of hiding from history, rather than understanding and learning from it.

In a sense we are seeing the return to past debates, of the return of things deliberately written out of the history that "counted". One can discern a pattern familiar from present clashes when Philo writes:

At all events one may see men-women continually strutting through the market place at midday, and leading the processions in festivals; and, impious men as they are, having received by lot the charge of the temple, and beginning the sacred and initiating rites, and concerned even in the holy mysteries of Ceres. And some of these persons have even carried their admiration of these delicate pleasures of youth so far that they have desired wholly to change their condition for that of women, and have castrated themselves and have clothed themselves in purple robes, like those who, having been the cause of great blessings to their native land, walk about attended by body-guards, pushing down every one whom they meet.

Parading pride

The Sydney Mardi Gras and other Pride Marches invoke the great pagan festivals and street parades, just as Philo is the archetypal monotheist denouncer of the same. These culture wars are millennia old.

Ms Odone is on the losing side of the Emancipation Sequence. But, of course, she would have to see queer folk as full people with fully legitimate aspirations whose experiences count to see that. Which she doesn't, so she doesn't. Thereby manifesting the impoverished epistemology inherent in moral exclusion.

The irony is that advocates of moral exclusion always believe they see more than their opponents, not less. For they see what a threat to moral and social order the excluded group "really" is.

As was said at every stage by opponents of the Emancipation Sequence. How do such claims look now?

Pagan dates

The Emancipation Sequence has been about expanding social possibilities for previously legally restricted classes of people. Moral exclusion is about narrowing social possibilities, and narrowing them for other people. Based on understanding what a threat to order they "really" are. One suspects that sense of superior understanding and moral purpose is part of the appeal.

Ms Odone claims that traditional religious believers are being subject to moral exclusion, to having their social possibilities narrowed. And she takes her stand on the right of religious believers to seek to block the expanding of social possibilities for others.

Clearly, the irony is entirely lost on her. But that is, of course, the problem of moral exclusion. Once you set the game in motion, you have no control over where it will end up. Perhaps a game not to play, then?

It was, after all, the Jews who taught the Christians to pick on queers and to pick on pagans. And the Christians who taught the Muslims to pick on the Jews. How did that work out for them?

On the wider point that moral exclusion is not a game to play, Ms Odone is entirely correct. But that is not where she wants to make her stand, thereby demonstrating that she misses the point rather more thoroughly than those she is complaining about.

[Cross-posted at Skepticlawyer.]

UPDATE: To clarify, and in a response to a comment at Skepticlawyer, by moral exclusion I mean unilateral denial of moral protections. Exclusion that does not protect people, or the relations between them, yet still strips people of moral protections. It may instance a theory of human nature or social order, but it is a theory that denies moral protections to people, or the relations between them.

Also, while Muslim Jew-hatred was grounded in experiences in Medina and Muhammad's anger at the Jews for rejecting his prophetic mission, the legal restrictions on dhimmis were clearly based on the restrictions imposed on Jews in the Christian Eastern Roman ("Byzantine") Empire.