Still no free lunch
By Scott Sumner
Here’s Matt Yglesias:
Here’s the thing about the federal government — it can print dollars, a highly profitable activity. You can’t print dollars. I can’t print dollars. Vox Media can’t print dollars. The state of Tennessee can’t print dollars. These are the kind of entities that need to worry about whether their activities generate more dollars than they cost, because they need to worry about lack of dollars. Of course there are lots of things to worry about with loan guarantees and bailouts and other things, but profits and losses is never the issue. The government always could make arbitrary amounts of profit if it wasn’t to.
(I think he meant, “wanted to”)
I often agree with Yglesias on monetary policy, but I think this is the wrong way to think about cost. During normal times the Federal government raises enough revenue from printing money to pay for roughly 1% of its spending. The Fed’s profit has been higher in recent years, but that’s probably a temporary blip due to the heavy purchases of securities in the QE programs.
Yglesias is right that there is a sort of something for nothing quality about printing money. Even a government that targeted inflation at zero would make substantial profits on currency creation, if the real economy were expanding. But the key point is that this profit doesn’t become larger just because the fiscal authorities spend more money on a particular project. The central bank should and will target some sort of macro variable, such as inflation or NGDP. If they do so then the money printing profits are determined by the money creation needed to hit that target. Since seignorage only pays for one percent of spending, the cost of any additional spending, at the margin, is related to the marginal cost of raising taxes through ordinary methods, which involve deadweight costs of reduced economic efficiency.
One of the costs of the US tax regime is that Americans have become about as popular with overseas financial institutions as the Ebola virus. Many are sending letters to American investors telling them that they no longer want to do business with Americans, and that their accounts will be terminated. International business publications like The Economist are aghast at the way the Treasury tries to over-regulate financial activities that occur in other countries.
Recently I’ve been working with some people in New Zealand, trying to create a nominal GDP futures market. (You can read about it here.) I was reminded of the overreach of our Treasury when Eric Crampton sent me the following note, which he allowed me to reprint:
Even if you could convince the Fed that NZ’s stock market regulators view iPredict as an exempt futures exchange rather than as a gambling platform, pointing to the regulation in The Gazette that allows iPredict to operate, then there’d be no more problem with Americans trading on it than there is with their trading on foreign stock exchanges or their having foreign bank accounts. By which I mean, it would be impossible because American “know your customer” anti money laundering nonsense would immediately be applied to iPredict and we’d still be in a spot where it’s too dangerous to let Americans trade. Sorry, Scott, you just don’t live in a free country and it is dangerous to trade with people from America.
When I travel I’m hearing the same thing from people all over the world that work in the financial sector.