Janet Yellen gave her semi-annual testimony before the Senate Banking Committee this week. In the Q&A time, Senator Pat Toomey criticized the Fed’s policy and suggested that it has only worked to “shift the timing of economic activity.” Tho Bishop briefly mentioned the exchange in his great post earlier this week, and I had to take a closer look.
Toomey also discussed in vague terms the “excess debt” and “excess capacity” firms undertake as a result of expansionary monetary policy. He said these are just some of “many distortions” caused by the Fed.
Of course, this is far from a full exposition of Austrian business cycle theory. But it’s great to hear even this much in a Senate Banking Committee meeting..
“Shifting the timing of economic activity”
The senator from Pennsylvania began his questioning this way:
Toomey: [Bernanke has said in that past] that accommodative monetary policy has the limit of being only stimulative in the sense that it brings economic activity forward in time. It doesn’t create new wealth, goods, or services, but it shifts the timing of economic activity. Do you agree with Chairman Bernanke in that respect?
Yellen gave the evasive response that this may be one effect of monetary policy. So Toomey pressed further:
Toomey: Isn’t it very likely the case that some of the economic activity that would be occurring today was dragged forward in years gone by and that it’s already occurred in the past?
Yellen: So, it’s very hard to know how large that effect is but I continue to think that our accommodative stance of policy–for example low mortgage rates–is continuing to boost activity in the housing sector. It hasn’t only pulled activity forward to suppress it now. […] Our analysis suggested that it is not only a matter of shifting the timing of economic activity but also stimulating investment in spending decisions on a long term and lasting basis.
Before moving on to his next question, Toomey fired a strong accusation.
Toomey: To the extent that that’s a significant effect, what you’re doing today is damaging economic growth going forward…
Technically, “bringing economic activity forward” is a little vague and misleading, but the idea is very much on track. It actually paints Fed policy as more innocuous than it really is. What he gets right is that the Fed does not produce any new real resources and that it does affect the timing of production efforts and consumption.
Expansionary monetary policy sets in motion a present consumption binge of resources in the economy, whereas these resources would have been consumed later or used in production processes the output of which would have been for future consumption. It also sets in motion widespread capital misallocation in production processes that are not in line with consumers’ time preferences.
So in this sense, the “shifting of the timing of economic activity” language is right on point. An incorrect interpretation of the same language would be to say that expansionary monetary policy just moves economic activity to the present exactly what would have happened in the future, with no other consequence.
Toomey’s next line of criticism centered on the boom caused by accommodative Fed policy.
Here, his use of the word “excess” was flimsy, but, just as before, the idea behind his questioning was great. He said that easy money policies create “excess capacity” in factories or whole industries. I cringed a bit when he said “excess commodities”.
There is no such thing as “excess commodities”. In terms of economic goods (as opposed to bads), there is no such thing as too much. If some good is in relative abundance, the price will fall and markets will clear.
“Excess capacity” can be interpreted in the same sort of incorrect way, but it can also refer to malinvested capital and labor. An entrepreneur can realize or anticipate that the current amounts of capital and labor employed in his production effort will not be profitable. In this sense alone we could say “excess capacity”. I think Toomey meant the term in this correct sense because he also called these excesses “distortionary”.
Toomey is no Ron Paul, but he could work his way there
When Ron Paul got the rare chance to question a Fed chair, he made it hard for them to wiggle their way out with a slippery response. Senator Toomey could pick up a book by Mises or Rothbard, and maybe check out other resources on mises.org, and he’d be well on his way to grilling Yellen with greater intensity next time.