Over the past few years, I’ve occasionally done some posts with titles like “Inflation of socialism?” It’s now clear that society has decided on socialism. So how did we get here?

I’ve recently listened to some excellent discussions in a Cato seminar on reforming the Fed. Many of the participants have suggested that the recent increase in activist credit and fiscal policies is an inevitable and/or desirable outcome, given the severity of the recession. Obviously I don’t agree, but just as obviously I’m in the minority.

By far the most important cause of the rise in credit/fiscal policies is the fact that interest rates have fallen to zero. This impacts policy in two unfortunate ways:

1. When rates fall to zero, most people (wrongly) assume that monetary policy is out of ammunition. As a result they advocate fiscal stimulus.

2. At zero interest rates there is a large increase in the demand for base money. As central bank balance sheets increase sharply, they begin accumulating a wide range of assets—shifting from pure monetary policy toward credit allocation.

The supreme irony here is that the tight money policies that put us into this situation are advocated by a variety of right-of-center types (traditional monetarists, Austrians, New Classicals, etc.) that almost universally abhor socialism. That’s right, it’s the Bob Murphys of the world that are unwittingly pushing us toward socialism.

And you can’t say I didn’t warn you. Ever since I began blogging in early 2009, I repeatedly warned that neoliberalism could only thrive under stable NGDP growth, and that falling NGDP growth always led to statist polices. People wrongly blamed the “free market” for problems that were actually caused by excessively tight money. (Because money didn’t “look tight”.)

That doesn’t necessarily mean we need a higher inflation target. It would be worthwhile to first try two other options:

1. Eliminate IOR

2. Switch to level targeting

Maybe these two options would be enough to get us out of the zero bound trap. But if they are not, then 3% inflation is far, far, far, far, far, far, far, far, far better than socialism.

Off topic: I recommend this excellent Noah Smith article on COVID-19. He puts the lockdowns in their proper perspective:

Together, this toolkit — masks, testing and tracing and targeted lockdown-lite — can control the virus until a treatment or vaccine arrives, while causing minimal damage to the economy.

I’d replace lockdown lite with “voluntary social distancing”, but otherwise almost entirely agree.

Unfortunately, the US has decided to go in a different direction.

PS. The recent data suggest that, at a global level, the COVID-19 pandemic has taken a turn for the worse. Hopefully it’s just a blip.