CFR’s Benn Steil Doesn’t Know the Velocity of Money is a Variable
Amity Shlaes got fired from The Financial Times for being incompetent and went on to write a book about the New Deal that (a) is riddled with errors of fact and interpretation and (b) reached conclusions about economics that conservatives like. Since (b) is all that’s required in the contemporary United States to enjoy a prosperous career as a high-profile public intellectual it doesn’t surprise me in the least that she is enjoying just such a career. Nor is it surprising that a slipshod book would become congressional conservatives’ bible as they ponder Barack Obama’s economic recovery proposals.
I was, however, initially surprised to see that she’s not hanging her shingle at AEI or Heritage or Cato or the like but instead at the Council on Foreign Relations which one thinks of an outfit more likely to be guilty of being soporifically dull than batshit rightwing.
It seems, however, that Shlaes is not alone. A chap named Benn Steil is director of international economics at the Council on Foreign Relations. He also, as Brad DeLong points out, doesn’t seem to know that the velocity of money is a variable. In other words, cash and cash-like monetary instruments can circulate through the economy more or less quickly. This is a really basic error, but the terminology and the concept are going to be a bit obscure to a lot of people. It would be nice if we had institutions like the CFR around to help explain them to a broader public. Instead, we have institutions like the CFR sowing confusion.
24 Responses to “CFR’s Benn Steil Doesn’t Know the Velocity of Money is a Variable”
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February 7th, 2009 at 9:04 am
But (a) still helps, right? I mean, if you’ve got (b).
February 7th, 2009 at 9:46 am
I am interested in Shlaes’ scholarship on a variety of other topics, including incorporating gravity into an understanding of fundamental forces, records keeping in the Songhai Empire, and compression efficiencies for high definition video packages.
February 7th, 2009 at 9:54 am
Re “I was, however, initially surprised to see that she’s not hanging her shingle at AEI or Heritage or Cato or the like but instead at the Council on Foreign Relations which one thinks of an outfit more likely to be guilty of being soporifically dull than batshit rightwing.”
———-
Why? After all, CFR has been publishing Daniel Drezner’s bullshit for years — and continued doing so even after U of Chicago decided to not grant Drezner tenure.
In my opinion, the Council on Foreign Relations has about as much respect for the truth and intellectual integrity as the New York Times. I.e., none.
February 7th, 2009 at 9:58 am
You want to a bit careful here. The fact that Steil uses a simple stripped down cash-in-advance model to illustrate that the monetary-financial-fiscal system is an institutional arrangement that enforces a set of trade-offs in resource use, where making one spending choice will affect future spending choices of oneself and of others in the future and that the welfare consequences of these future spending choices matter for welfare considerations as much as the welfare consequence of the initial spending choice, doesn’t mean that it is legitimate to toss aside these issues by claiming that ‘well, the actual monetary/financial/fiscal system is not a simple cash-in-advance constraint’. Sure, it is much more complicated that that, but these welfare trade-offs don’t go away, they are simply harder to understand.
For example, if we use a model with lump-sum taxation, then spending today that employs resources that are unemployed due to contracting failures and financed by future tax increases is clearly welfare improving. And this pretty much might be the approximately right story for the situation we face today. Or it might not be, depending on the path of future tax and gov spending streams and what sort of distortions future gov. debt levels and the taxes required to support them create (i.e. the stuff conservative economists worry about).
Both sides of this debate are making pretty strong assumptions in their economic models and presenting them as ‘obviously true’ or hiding them as so obvious that they need not even be mentioned. In reality we have a situation where the price-wage-setting-monetary-financial-fiscal institutions currently allow resources to be inefficiently underutilized (or not? maybe at least some of this is part of an efficient adjustment to a new resource utilization pattern) and where the system gives private actors the wrong incentives for spending while nevertheless institutionalizing real constraints that affect what can be done in the future if policy actions are taken to address this current inefficient underutilization of resources.
We need a serious credible yet simple enough model to focus only to the relevant issues. Preferably off the shelf. So much more the failure of econ academia to deliver (so far).
Sorry for the ramble…
February 7th, 2009 at 10:01 am
Any economic analysis that involves the term “velocity of money” is as batshit crazy as any right-wing batshit crazy stuff. The quantity theory of money (ie the home of the concept “velocity of money”) like many of the embarrassing things in economics that just won’t die, is a “theory” (aka assertion) of the form X=Y*Z. When you say how come? You are told because Y is defined as the ratio of X to Z. Then you say “but that’s a useless tautology” you are told “no it is an empirical assertion because Y turns out to be a constant.” When you measure the ratio of X to Z and find out that it is not a constant, you re told “ok it is a variable but usually stable.” So Y is constant enough to defend the theory against the charge of vacuousness and variable enough to resist falsification! Overall, the Brad Delong observation that the velocity of money is a variable has about as much merit as the Shlaes-Steil assertion that it is a constant.
Outside policy discussions people tend not to do this sort of nonsense in economics anymore. But there are quite a few examples of this sort of thing in (the history of) economics: Somebody pulls an equation out of nowhere and fudges a defense (look it is an identity, i mean empirical law, both, neither whatever). When the variables are so obscure that they cannot be measured you end up with schools of thought (those who say that the law holds and those who say it doesn’t.) When the variables can be measured and the law is revealed to be nonsense people start talking about the stability/shifting of the constant/curve.
February 7th, 2009 at 10:39 am
Ablong, I don’t follow your complaint. In physics I could define velocity as the ratio of distance traveled to time (actually it’s the derivative of distance with respect to time, but that’s not important), and then d=vt would be tautologous but not useless, and we could have a useful discussion over whether the velocity of something was constant.
Let’s say we define the velocity of money as GDP divided by monetary supply, as DeLong seems to be doing. Isn’t it an empirical question whether that’s constant? If it’s variable, what’s the problem with a theory that says it’s variable?
And honestly the claim (which Steil mocks) that money being spent isn’t idle, and money sitting in the bank is idle, doesn’t seem that unintuitive to me. If I’m sitting on a lot of money in my savings account (because I’m afraid I might lose my job, say), then I’m not spending that money at a store that employs someone and buys from suppliers, and those employees and suppliers aren’t getting money that they can spend in turn (because if they have jobs they’re afraid they’ll lose them), etc. etc. Whereas, if I keep my money in the bank, the bank isn’t lending it out (that’s why the Fed had to cut rates to zero), so it isn’t being used productively — and it isn’t changing hands as often. So there isn’t as much economic activity as there would be if I put my money in circulation. Which is to say that too low velocity of money can decrease the amount of productive economic activity that takes place. Is that wrong?
Also, Steil seems to have a theological faith that business can put money to more productive use than government. Did he not notice what the banking business just did to the economy?
February 7th, 2009 at 11:48 am
If you know algebra, you can justify or attack almost any policy based on an accounting identity like MV=PQ. That is why they are both useless and dangerous as anything other than a model for understanding what has happened. Right now, you see everybody doing it, and the more simple the model, the larger the number of people with the requisite math skills to obscure reality with it.
February 7th, 2009 at 12:02 pm
So, how long ’til CFR hires Joe The Plumber to sit in the office next to Shlaes and gin up more economic policy analysis?
I mean, if they want to be a source of conservative fact-averse spin and bullshit, why stop with her?
February 7th, 2009 at 12:25 pm
Matt Weiner:
The point is that there is no independent way of measuring the “variable” except through the equation in question. Suppose X is the aggregate price index, Z is the number of cars in the USA and Y is the ratio of the price index to the number of cars. Then as X=Y*Z is a tautology. It becomes a “theory” if you assert that Y is a constant. If you make Y variable then you are like the sports guys on television who say that the most important thing in football is momentum and that the last team to score has momentum.
February 7th, 2009 at 12:48 pm
Well, he’s got me beat. I didn’t know money had velocity.
February 7th, 2009 at 12:48 pm
But that sounds like a pure win for the people who are saying “velocity of money is a variable, so a theory that presupposes that it’s constant.” The DeLong observation is just plain right.
February 7th, 2009 at 2:19 pm
Before reading this post the only thing I knew about Shlaes was that I saw her on the Daily Show one time, and everything she said was pretty innocuous, leastwise enough so that I can’t remember anything about it, while Stewart, who always gives the impression of having read whatever books his guests are plugging, gave no indication that she was anything resembling a right-wing hack. So now I know, I guess. No thanks to Jon.
February 8th, 2009 at 7:00 am
When Amity Shlaes wasn’t otherwise occupied defending Phil Gramm’s assertion that we are a “nation of whiners” and there was no recession, she spent some time and energy revealing that she did not know what a Recession was.
Amazing
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