Keynesian monetarists?!

Someone made the observation that the previous post about Austrian stupidity makes me sound like a monetarist. Yes, in general, yes, New Keynesians are mostly Friedman-style monetarists... until you hit the zero bounds / liquidity trap. At the zero bounds, any money that is simply issued -- or dropped out of helicopters -- basically disappears under mattresses. That's because there's no incentive to actually lend it since you cannot get any interest income from it, and everybody is expecting their money to be more valuable to them in the future so they are saving it rather than spending it. (Note that "saving" money in a bank at the zero bounds -- i.e., lending it to the bank -- is essentially the same as putting it under a mattress, since the bank, for the same reason, will not lend it out but will instead shove it under the Fed's virtual mattresses as reserves). Note that money under mattresses has essentially disappeared as money. It is no longer pegs out there in "the economy" to use to fill holes. Rather, it's lumpy mattress stuffing, having zero (0) effect upon economic activity happening in the economy.

The fundamental difference between Keynesian economics and monetarism thus occurs at the zero bounds. Until then both tend to have the same goal of printing enough money to match the amount of goods and services in the economy, and a little bit of extra (roughly 2% to 4%) to encourage people to move money out from under mattresses and into the economy (since inflation -- a decrease in the value of money under mattresses -- discourages people from shoving money under mattresses, duh). But hit the zero bounds, and the Keynesian observation about lumpy mattress stuffing holds -- there is simply no reason to move the money out from under your mattress at that point. The Keynesian then says, "well, given that having all these empty holes err unemployed people around is not good for social stability or the health or welfare of the people, which after all is what an economy is for, we can print the money err make this peg but *directly* put it into the hole via government purchasing decisions rather than just throwing it out of helicopter windows!" That is, are there slack resources in the economy? Is there insufficient money to put those resources to use? Well, print the money and have *government* put those resources to use!

But note that this is only an issue once you hit the zero bounds and have actual slack resources in the economy (as measurable by unemployment statistics). Which is why the stagflation of the 1970's is *not* an example of Keynesianism being "discredited", because that was straight monetarism -- we were nowhere near the zero bounds, and there were no slack resources in the economy, which was at 5% unemployment at the time. All that happens if you print more money (pegs) than you have goods (holes) is that you have leftover pegs... which then find holes to go into (i.e., prices rise).

Note that I mention slack resources, and specifically, unemployment. Which is another Austrian fail. While their holy Saint Mises admitted that the unemployed didn't want to be unemployed, most Austrians appear to agree more with their holy Saint Hayek, who claims that the unemployed aren't *really* slack resources (which don't exist in their religious philosophy) but, rather, are taking a long vacation voluntarily. Because, y'see, if they'd only drop their wage demands then they'd get jobs! That despite the fact that the latest statistics show five unemployed people for every one job opening in the U.S. economy... but oh wait, I forgot, there I go with those funny "number" thingies again, and math is hard. Alrighty, then!

- Badtux the Snarky Economics Penguin