Today’s Must-Must-Read: Eric Lonergan: The Pigou Effect Is Smarter than You Think

Morning Must-Must-Read: Eric Lonergan: The Pigou Effect Is Smarter than You Think: “Friedman’s 1968 AER presidential address… interesting for its perspective on Keynes…

…presenting a much more interesting perspective than that of today’s ‘New Keynesians’…. ‘Keynes offered simultaneously an explanation for the presumed impotence of monetary policy to stem the depression, a non-monetary interpretation of the depression, and an alternative to monetary policy for meeting the depression and his offering was avidly accepted. If liquidity preference is absolute or nearly so… interest rates cannot be lowered by monetary measures. If investment and consumption are little affected by interest rates… lower interest rates… would do little good. Monetary policy is twice damned…. But there was available an alternative — fiscal policy….
‘This revival [of belief in the potency of interest rates] was strongly fostered among economists by… a channel — namely, changes in wealth — whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates…. When liquidity preference is absolute… usual monetary operations involve simply substituting money for other assets without changing total wealth [i.e. QE]. But they did show how changes in the quantity of money produced in other ways could affect total spending….’
Now what does ‘produced in other ways’ mean?… [Haberler:] ‘Suppose the quantity of money is increased by tax reduction or government transfer payments, government expenditures remaining unchanged and the resulting deficit being financed by borrowing from the central bank or simply printing money [he adds a footnote, which Friedman lifted without direct attribution: ‘Open market operations are different, because they result merely in a substitution of one type of asset for another.’]… Consumption and investment expenditure will increase when the quantity of money grows.’… What Haberler is describing is either tax cuts or cash transfers financed by base money — and Mark Blyth and I thought we were on to something new!… I am increasingly convinced that the academic discussion of monetary and fiscal policy from 1930 to 1970 was far more useful, interesting and subtle than most of what I read currently….
What we need to do faced with a shortfall in global demand is in fact blindingly obvious — global tax cuts, or better still cash transfers, financed by central banks. Friedman thought so, and so it appears did Gottfried Haberler…. Could someone please whisper this in Ben Bernanke’s ear… he would have something much more interesting to blog about.

Originally published at