Do Monetarists Understand Their Own Models?

I have learned a lot from Nick Rowe.  For example, he wrote a great post where he pointed out a place where many Keynesians don’t understand their own models.  But the following section suggests that Nick doesn’t completely understand his own monetarist model either.

Keynesian unemployment only makes sense as a monetary phenomenon. What’s fiscal policy got to do with it? Fiscal policy is supposed to be about micro stuff, like providing the goods that the government is better at providing. Fiscal policy can’t do that micro stuff properly if it’s being asked to also do the job that monetary policy is supposed to be doing. …The trouble with Keynesians is that they aren’t radical enough. They need to look at their own models and see the root of the problem, and recommend policies to get at the root of the problem. The root of all Keynesian recessions is monetary.

The trouble with monetarists who don’t understand their own models is that both the Keynesian and the monetarist mechanism for solving recessions is one of redistribution of financial resources from hoarders to spenders.  As I wrote in an earlier post on this topic, monetary policy and fiscal policy both work the same way and if policymakers don’t understand how they work, they often attempt fiscal and monetary expansions that don’t work at all.  For example, if the Fed tries to expand the money supply by giving more money to the banks when they don’t want to use more money, then they will simply add it to their hoards and nothing will happen in the real economy.  Monetary policy only works if it redistributes some financial resources from hoarders to spenders.  This is generally what happens when the Fed successfully lowers interest rates, raises inflation, or how a “helicopter drop” would work if it directly distributed newly printed money to the spenders.  But a helicopter drop of money that goes to wealthy people like Bill Gates wouldn’t work because they are already spending about as fast as they can.  Similarly if the government performs Keynesian tax cuts by cutting taxes on people who are already hoarding money, they will probably just hoard the additional tax rebate too.  When the government increases the deficit, it tends to borrow some of the money that had been hoarded.  As long as the government redistributes that money from the hoarders to spenders, the economy will grow.  Government spending is always spent, so deficit-financed spending will always help even if some kinds of government spending have a higher multiplier than others.

One way that expansionary policy serves to redistribute resources is by changing the hoarders’ expectations about the future which induces them to spend.  A change in expectations is a change what they expect the future distribution to be and that causes them to voluntarily redistribute their own resources from hoardings to spending in the present.  For example, if the hoarders expect higher future inflation (an expected future redistribution away from the value of their hoard), they will want to spend more of their hoard or they will lend it to people who are willing to spend it and pay interest.

The only way fiscal and/or monetary policy can work to reduce a recession is if money is redistributed from the hoarders to the spenders.  The real difficulty with  ending recessions is political.  The hoarders are afraid of redistribution and they have the funds to buy influence.  That makes it difficult to find the political will to redistribute resources to the spenders.