Download Business Cycles and the Bible

Business Cycles and the Bible
David Beckworth
Associate Professor of Economics
Western Kentucky University
[email protected]
Business Cycles
As noted earlier, the business cycle is the variation in economic activity over the short-tomedium run. It is characterized by economic expansions and contractions that occur around trend
economic growth. In terms of Figure 1, this is seen in the deviations of GDP per capita around
the dashed lines. Sometimes this process is called ‘boom-bust’ if the swings in economic activity
are large. For example, many observers see the Great Depression of the 1930s as part of a boombust cycle that started in the late 1920s. Similarly, others point to the Great Recession of 20072009 as the bust that followed the boom of the early-to-mid 2000s. Not all business cycles,
though, need be severe as evidenced by the mild nature of the 2001 recession.
[Insert Figure 1 around here]
So what does the Bible say about the business cycle? To answer this question we first have to
consider what causes the business cycle. The standard view is that it is caused by ‘economic
shocks’ that get propagated to the broader economy. Economic shocks are sudden and
unexpected economic developments that cause existing spending and investment plans to
become obsolete. For example, during the early-to-mid 2000s many households took on debt to
finance their homes based on a belief that incomes and housing prices would continue to grow.
The sharp collapse in 2008-2009 was a shock to these expectations and forced households to
default or begin a painful deleveraging process. This caused household spending to fall and, in
turn, firm spending to fall too. This decline in aggregate spending pushed economic activity
below its potential—the dashed line in Figure 1—and will keep it there until households are in a
better position to spend.1 When that happens the economy would be back at its full potential.
Shocks that cause the business cycle fall into two broad categories: aggregate supply (AS)
shocks and aggregate demand (AD) shocks. AS shocks are disturbances to the supply-side of the
economy. They include disruptions to resources like people, machines, and land and the
efficiency with which these resources get used. AD shocks are innovations to the demand side of
the economy and originate in changes to monetary conditions.
The Bible, interestingly, does provide some insights on these shocks. It is not a comprehensive
discussion and sometimes it is implicit, but there is enough material in the Bible from which one
can draw some lessons about how to deal with AS and AD shocks. In so doing, the Bible also
sheds some light on the current use of fiscal policy (the adjusting of government spending and
taxes) and monetary policy (the adjusting of monetary conditions by central banks) as a way to
dampen the business cycle. We consider these insights next.
1
Technically, there needs to be some rigidity that prevents markets from clearing during a recession. Since
markets clear by prices adjusting, the rigidity must in some way be preventing prices from adjusting. As we note
later, this can be seen as a failure of the price level to adjust or a failure of interest rates (the price of resources
across time) to adjust.
Aggregate Supply Shocks
AS shocks are often called ‘real’ shocks because they affect the productive capacity of the
economy. For example, a disruption to the flow of oil or a major computer virus that shuts down
operating systems would be a be a negative AS shock since they would reduce firms’ capacity to
produce. Likewise, an increase in technology or a decrease in the level of government corruption
would be a positive AS shock since it would imply more efficient use of resources in an
economy.
How important AS shocks are to the business cycle depends on whether the shock is permanent
or temporary and how developed is the affected economy. A permanent AS shock would have a
lasting effect on the economy. For example, new technology that permanently raises firm
productivity would raise the trend level of economic growth. Conversely, a war that significantly
reduces the labor force and destroys a lot of capital would lower the trend. Such developments
by themselves would not constitute a business cycle, but be a change in the economy’s potential
(i.e. a movement in the dashed line of Figure 1).2 These longer-lasting developments are
discussed in the next section on long-run economic growth.
A temporary AS shock, on the other hand, would not alter the trend path of the economy but
create a deviation around it and therefore be a contributor to the business cycle. Some observers
believe a good example is the oil crisis of 1973, when OPEC responded to the United States’
support of Israel during the Yom Kippur War by reducing oil production. It was followed by the
recession of 1973-1975, but not a change in the trend path of the economy.3 Another example of
an AS shock is the ‘Dust Bowl’ of the 1930s. This was a severe drought crisis that significantly
reduced US and Canadian farm production on the prairies during this time. It too had no lasting
influence on US economy.
How important these AS shocks are to the business cycle depend to a large degree on how
advanced is an economy. For less developed economies, AS shocks are very important because
their economies are generally less diversified and more dependent on agriculture. That makes
them more susceptible to shocks like bad weather. India, for example in the 20th century went
from a largely agricultural-based economy that was very susceptible to droughts to one that is
now more diversified and less vulnerable to weather shocks. Today, some parts of Africa are still
very prone to such shocks since much of their economic production is subsistence farming . For
2
However, how a monetary policy responds to a permanent AS shock can contribute to the business cycle. For
example, Selgin et al. (2015) argues the Federal Reserve’s response to productivity boom of 2002-2004 contributed
to the housing boom during this time.
3
Some observers argue it was not the oil shock that caused the recession, but the Federal Reserve’s response to
the rise in inflation caused by the shock. For more on this point and other reasons why the oil shocks may not have
the 1973-1975 recession see Barsky and Lilian (2004).
advanced economies that are more diversified, AS shocks are less consequential to their business
cycles.
What Does the Bible Say About Aggregate Supply Shocks?
The economies during Bible times were largely agricultural-based which meant they were very
susceptible to weather-driven AS shocks. This fact is borne out by the numerous references in
the Bible to droughts and famines.4 Consequently, business cycles during Bible times were
usually caused by AS shocks. Probably the most famous example is found in Genesis 41. This is
the well-known story of Joseph interpreting Pharaoh dreams as meaning a 14-year business cycle
was coming to Egypt. During the first seven years the land would produce a “great plenty” (v.
29), so much so that the level of economic production became “immeasurable” (v.49). During
the last seven years a “famine will arise” and it would be so severe that that the years of “plenty
will be forgotten in the land of Egypt” (v. 30). It was to be a true boom-bust cycle.5
What is interesting about this story is that not only does it depict an entire business cycle, but
God provides counsel (via Joseph) as to how a government should prepare for it. Although most
business cycles in advanced economies today are not driven by large AS shocks, this advice
given to Pharaoh is still instructive for current times.6 The counsel is found in versus 33-36:
Now therefore, let Pharaoh select a discerning and wise man, and set him over the land
of Egypt. Let Pharaoh do this, and let him appoint officers over the land, to collect onefifth of the produce of the land of Egypt in the seven plentiful years. And let them gather
all the food of those good years that are coming, and store up grain under the authority
of Pharaoh, and let them keep food in the cities. Then that food shall be as a reserve for
the land for the seven years of famine which shall be in the land of Egypt, that the land
may not perish during the famine.”
The instructions, then, were for the government to tax during the plentiful years, save the
proceeds, and use them during the famine years.7 Today we call this is called countercyclical
fiscal policy. That is, the government should run budget surpluses (by cutting spending and/or
4
Examples include Genesis 12:10, 26:1, 41:53-57, Ruth 1:1, 2 Samuel 21:1, 1Kings 18:1-5, 2 Kings 4:38, 2 Kings
6:24-25, Isaiah 51:19, Jeremiah 14:1-6, Acts 11:28,
5
Farming in Egypt was dependent upon yearly flooding by the Nile River to irrigate the crops. The business cycle
was presumably caused by changes in the flooding cycle of the Nile River.
6
Economists who hold a real business cycle view would disagree with this assertion that AD shocks are the primary
driver of business cycles in advanced economies. However, this view is conventional for most macroeconomists.
7
The distribution of the food during the famine years was done by selling the crops to the people. First, it was sold
for money, then animals, and finally land. This means the distribution was not a pure fiscal policy transfer, but
more of an asset swap. However, to the extent the food become more valuable over time as the famine worsened,
it is likely that on the margin the money, animals, and land became less valuable than food. If so, then the food
distribution was to some extent—the amount the food was greater in value than the payment—a fiscal transfer.
raising taxes) during the years of economic expansion and run budget deficits (by increasing
government spending and/or cutting taxes) during recessions. This way the government provides
a stabilizing offset to the swings in the economy. It also means that over the entire business cycle
budget surpluses offset budget deficits so that there is not a buildup of government debt.
Now there are many observers who are skeptical about the benefits of countercyclical fiscal
policy. Some point to the inefficiency and potential corruption often associated with large
government spending programs. Their critique is that most countries do not have leaders and
institutions with the wisdom and incorruptible character of Joseph.8 Others question the efficacy
of fiscal policy to spur economic growth. They see mixed empirical evidence on the effect of
fiscal policy or they believe that anything fiscal policy does is offset by monetary policy.9,10
Still, this passage does suggest at a minimum that countercyclical economic policy done properly
is sanctioned by God. The ideal set forth in Genesis 41 indicates that it should, one, truly dampen
the business cycle, and two, be done in a way that avoids a buildup of economic imbalances by
the government. In Joseph’s time it was done through fiscal policy. In modern times, it is usually
done by monetary policy.
The big question, then, is whether monetary policy has truly been dampening the business cycle
and preventing the buildup of economic imbalances as prescribed in the Bible. There have been
plenty of studies that find monetary policy, at least in the United States, has not always been a
stabilizing force for the economy.11 In the next section we consider why that has been case as we
take a closer look at AD shocks, the disturbances to which monetary policy is designed to
respond.
Aggregate Demand Shocks
As noted above, AD shocks are disturbances to the economy that originate in changes to
monetary conditions. That is, they originate in shocks to the demand for and supply of money.
Monetary shocks are a big deal because money is the only asset that is on every market. Every
transaction always has money on one side of the exchange. Consequently, a disruption of
monetary conditions has the potential to disrupt all markets and is at the heart of AD shocks.
Monetary disruptions come in two forms: excess money demand shocks and excess money
supply shocks. Consider first the case of excess money demand shocks. This occurs when
individuals suddenly decide that the amount of money they are holding as a percent of all their
wealth is not enough. This could happen, for example, when people fear a recession is imminent
8
And there has never been another economic forecaster as good as Joseph!
On the mixed empirical evidence point see Ramey (2011).
10
On the latter point the argument is that fiscal policy could matter but does not because it offset by monetary
policy. For example, an expansionary fiscal policy that causes inflation to rise will be offset by a contractionary
monetary policy to rein in inflation. For more on this point see Sumner (2013).
11
For example, see Selgin et al. (2012).
9
and want to hold fewer risky assets such as stocks, real estate, and commodities. People will
attempt to sell these assets and hold more of their wealth as money, a safe asset.12 This
rebalancing of their portfolios away from risky assets toward safer ones will be complemented
by a reduction on goods and services spending as an additional way to increase their money
holdings. Now if everyone begins selling off assets a fire sale will emerge and cause asset values
to plunge. This makes everyone poorer, further weakens the economic outlook, and reinforces
the desire to hold more money.
The reason this vicious spiral takes hold is that there is only a fixed supply of money in the shortrun. It is simply impossible to satiate a growing demand for money when its supply is limited.13
As long as money demand remains unmet, people will continue to strive for more money and in
so doing depress spending and asset prices. This is the excess money demand problem that is
behind AD-induced recessions.
Now excess money demand would not be a problem if all prices quickly adjusted to changes in
spending. Assume, for example, that households in their attempt to increase money holdings
suddenly cut back on goods and services spending on a scale large enough to reduce revenues
across all firms. Firms could respond by cutting the prices of their goods and services sold to
keep sales up. But this would only work if the decline in their sales prices were matched by
declines in their production costs. Otherwise, firm profitability would be squeezed, workers
would be laid off, and household will cut their spending even more.
Quickly falling prices would also solve the original excess money demand problem because as
prices declined the purchasing power of money would rise and at some point be enough to satiate
the demand for more money. Unfortunately, not all prices are equally flexible and thus able to
quickly adjust. For example, workers may be reluctant to take pay a cut and see their incomes
decline. Firms, as a result, would not be able to lower their production costs in unison with cuts
to their sales prices and be forced to lay off workers.14 Some prices may even run up against laws
and institutional constraints that prevent them from reaching their market clearing levels.15 So in
12
Their increased money holdings can take the form of cash, checking and saving accounts, money market mutual
funds, and treasury securities. All of these assets are considered safe and highly liquid and the demand for them
typically rises during recessions.
13
The money supply will actually begin to fall if this process continues unchecked. Too see why, note that most
money is created by banks and other financial firms when they make loans. A bank, for example, may make a loan
to its customer to buy a vehicle. The bank puts newly created money into the customer’s account or directly into
the seller’s checking account. Either way, the amount of money has increased. During a recession banks will call in
loans and cut back on new loans. The money supply will therefore decline.
14
If, however, workers believed that all prices would decline simultaneously—grocery prices, rent, energy costs,
etc.—then they would be more apt to taking a wage cut since the purchasing power of their incomes would remain
intact.
15
An important institutional constraint that prevents a certain type of price from clearing is the zero lower bound
(ZLB). It prevents interest rates, a price on how value resources across time, from reaching their market clearing
value when they turns negative. Normally, the market clearing level of interest rates do not turn negative, but in
severe crises like the Great Depression or the Great Recession they can as the demand for credit collapses and
saving surges. The problem with negative interest rates is that creditors would rather hold money at zero percent
than lend it out at a negative interest rate. This creates a big problem, because market clearing depends on
interest rates' adjusting to reflect changes in the economy. For example, firms sitting on cash would start investing
their funds in tools, machines, and factories if interest rates fell low enough to make the expected return on such
practice, prices on average tend to adjust gradually and, as a result, large excess money demand
shocks generally take some time to unwind. This leads to a slowdown in economic activity.
Large excess money demand shocks were present both in the Great Depression of the 1930s and
the Great Recession of 2007-2009. In both cases, economic uncertainty early on in the crises
prompted folks to increase their holdings of money assets. This increased demand for money was
initially manifested in runs on retail banking in the 1930 and runs on institutional banking in the
2007-2009.16 These bank runs crippled financial intermediation which meant less money was
being created by financial firms.17 Excess money demand, then, was created both by the initial
increase in real money demand and later by the decline in the available supply of money.
This pattern can be seen in Figure 2 which provides an estimate of desired money holding and
actual money holdings.18,19 In the both crises excess money demand—the gap between desired
and actual money holdings—increases initially because of a rise in money demand. This rise
weakens the economy and disrupts financial intermediation causing the money supply to fall.
The decline of the money supply adds to excess money demand problem which only gradually
unwinds. These figures support the notion that AD-induced recessions are always and
everywhere a monetary phenomenon.
[Insert Figure 2 around here]
There are alternative explanations for adverse AD shocks, but even these ultimately can be
traced to excess money demand. A popular one for the Great Recession of 2007-2009 is that the
housing bust severely impaired household balance sheets and forced them to start paying down
their debt. This deleveraging meant a sharp drop in household spending that in turn spurred the
worsening of the recession.20 This view, however, is incomplete. To see why, recall that for
investments exceed the expected return to holding money. Even if the weak economy means the expected return
to holding capital is low, falling interest rates at some point would still make it more profitable to invest in capital
than to hold money. Similarly, households holding large amounts of money assets would start spending more if the
return on holding money fell low enough to make household spending worthwhile. This is a natural market-healing
process that occurs all the time. It breaks down when interest rates need to fall below zero percent to clear
markets. See Beckworth and Ramesh (2015) for more on the ZLB.
16
The bank runs in the 1930 are better known than the ones in the 2007-2009 period. This is because the former
was a run on banks by retail investors or ordinary people. The bank runs in 2007-2009 were by institutional
investors like corporate treasurers, pension managers, and money market mutual fund managers. They ran on
institutional or “shadow” banking. For more on this comparison see Gorton (2007).
17
Most money is not created by the central bank, but by financial firms like banks. They create liabilities on their
balance sheets, like bank deposits, that are used as money. These liabilities are created when banks extend loans
to their clients. However, in panics, banks are less likely to extend loans—and may even call in some—and this
causes the money supply to decline.
18
For the Great Depression the M2 money supply is used since most money back then was retail money assets. For
the Great Recession the M4 Divisia money supply is used which includes both retail money assets plus institutional
money assets. This measure is more appropriate for more recent times as institutional money assets have grown in
importance. See Beckworth and Hendrickson (2015) for more on this point.
19
Following Belongia and Ireland (2014), we estimate the desired money supply by taking the equation of
exchange, MV=PY and plugging in full employment levels for PY and actual velocity. This allows us to solve for the
amount money needed to keep the economy at fully employment while accounting for changes in the velocity of
money. We use this measure as our proxy for desired money balances.
20
See Mian and Sufi (2014) for a good example of this view.
every debtor there is a creditor. That is, for every debtor who is cutting back on spending to pay
down debt, there is a creditor receiving more funds. The creditors could in principle provide an
increase in spending to offset the decrease in debtors' spending.
During the Great Recession, however, creditors they did not play this role. Instead, households
and non-financial firms that were creditors increased their holdings of safe, liquid assets. This
increased the demand for money and money-like assets. This excess money demand problem
was exacerbated by the actions of banks and other financial firms. When a debtor paid down a
loan owed to a bank, both loans and deposits fell. Since there were fewer new loans being made
during this time, there was a net decline in deposits which are a part of the money supply. This is
the decline seen in Figure 2 and reveals that debt crisis was really a monetary one. What would
have satiated the creditors demand for money—and kept them spending—was a sharp and quick
drop in prices.21
The second monetary disruption is an excess money supply shock. It occurs when actual money
holdings suddenly exceed desired money holdings and, in turn, causes folks to rebalance their
portfolios away from low-yielding liquid assets to risky high-yielding ones. It works, therefore,
in the other direction with individuals trying to unload their money holdings by buying other
financial assets. But as everyone tries to get rid of money its expected value falls. This rise in
expected inflation, in turn, causes the sellers of the financial assets who received the money to
now want to unload it. They may spend it on physical assets like land. Next, the land seller may
spend the money on goods and services. This process continues until the price level—the
average of all prices—rises to a point that equates actual to desired money holdings.
Excess money supply, in short, creates expectations of higher prices that in turn makes everyone
want to get rid of the money. Money becomes a “hot potato” of sorts and stays one until prices
rise enough such that people want to hang on to their money balances. That is, at some point
goods and services will become expensive enough that individuals will need the excess money
they were holding just to maintain their purchasing power. Since many prices are inflexible, it
can take some time for this process to work out. In the meantime, the rise in spending will cause
real economic activity to rise. If the excess money supply shock is large enough, it will cause a
temporary economic boom.
What Does the Bible Say About AD Shocks?
Business cycles caused by AD shocks, then, are the consequence of sudden changes to money
demand and money supply. The Bible has some things to say about such innovations to monetary
conditions. In particular, Jesus admonitions in his parable of the talents can be seen, beyond its
spiritual implications, as a warning against contributing to an excess money demand problem.
Money and credit were an integral part of the Roman Empire by the time of Christ.22 Not only
did they facilitate exchange in local markets, they also were important to the international trade
21
This includes a drop in interest rates, the price of resources across time. See footnote 14 on why interest rates
did not adjust down to their market-clearing level and thus prolonged the Great Recession.
22
See Eagleton and Williams (2007) for an accessible survey of money in the Roman Empire. Harris (2006) makes
the case that the Roman monetary system was not only highly developed financially, but that its money was more
than just coins.
taking place across the empire.23 Finance was so developed in the Roman Empire that it was
susceptible to the same financial panics that plague modern economies. One occurred in A.D. 33
that was severe enough to require the bailout of debtors by the emperor Tiberius’ treasury. 24 It
was triggered, ironically, by the emperor’s decision to enforce an existing law from 49 B.C. that
required two-thirds of one’s wealth be invested in lands. Much of the aristocrats’ wealth had
been invested in the money market and was therefore important to the creation of loans and
therefore the amount of money in circulation. Tiberius decision to enforce the law meant that
loans had to be called in and debts retired. This increased the demand for money by the lenders
as well as destroying money created through lending.25 Tiberius actions, therefore, effectively
created an excess money demand shock that ravaged Rome’s economy.
What this all means is that the New Testament authors existed in a world where finance was an
important part of daily life.26 That is why Paul can say in 1 Timothy 6:10 that the “love of money
is a root of all evil” or in Hebrews 13:5 that your “life should be free from the love of money”
and it be understood by his readers of his letters. Similarly, when Christ said in Luke 16:13-15
“you cannot serve God and money” it was understood by his listeners.
Although these text talk about money, they are really referring to the love of wealth which
happens to be transacted in money.27 Jesus, however, speaks more directly to money as a
transaction asset in the parable of the talents in Matthew 25 and in the similar parable of the
minas in Luke 19. The talents and minas, which are money, are a given to three servants to
manage while their master or king is away. Here is Jesus telling the parable in Luke 19:12-15,
A certain nobleman went into a far country to receive for himself a kingdom and to
return. So he called ten of his servants, delivered to them ten minas, and said to them,
‘Do business till I come.’… And so it was that when he returned… he then commanded
these servants to whom he had given the money to, to be called to him, that he might
know how much every man had gained by trading.
So the servants were to take the money and ‘do business’ with it until the nobleman returned.
Spiritually, this challenges us to actively use our talents for God’s kingdom until he returns. It
also, however, speaks to proper use of money. For by using this analogy, Christ is implicitly
endorsing the notion that money should not be hoarded. This inference is supported later in the
23
International trade and the finance supporting it was so developed that price differentials on wheat across the
empire were arbitraged away to the point of transportation costs. See Temin (2013) for more on this remarkable
accomplishment.
24
Rodewald (1976) and Allen (1887) cover the crisis. Harris (2006) provides a more current view of the crisis. This
panic was significant enough to be recorded by the ancient historians Tacitus, Suetonis, and Cassius.
25
Since there was fractional reserve banking at this time, as shown by Harris (2006), the reduction in loans meant a
decline in money that larger than the funds lent to the money market by the aristocrats.
26
Another example of a financial crisis occurred 85 AD. There was a banking panic in Ephesus severe enough that
that the bankers there were given forbearance of ten years to pay back their depositors (Harris, 2006).
27
This is an important distinction that many overlook. For example, when someone says “I want to make lots of
money” it means he wants to make a lot of income. Similarly, when one says “I want lots of money” it means he
wants lots of wealth. Money is a transaction asset that facilitates exchange. In a money economy, income and
wealth are denominated in money terms and thus this confusion arises.
parable when the nobleman responds to the timid servant who did hoard the money (verses 2324):
‘Why then did you not put my money in the bank, that at my coming I might have
collected it with interest?’ And he said to those who stood by, ‘Take the mina from him
and give it to him who has ten minas.’
If the money had been put into a bank it would have supported the extension of loans to others
who could then invest in productive ventures. By creating more loans, it also would have
expanded the supply of money. The failure of the servant to deposit the money in the bank meant
the additional growth in the economy and in the money supply never happened. Instead the
money was hoarded. The nobleman was not happy with this. Even more telling is that the
nobleman took the mina and gave it to someone who would put the money to use.
Now we need to be careful with reading too much into this parable, but if we apply the reasoning
in this parable across all individuals handling money it sums up to an admonition for monetary
stability. It is, in other words, a microcosm of our earlier discussion of the problems of excess
money demand. Hoarding money is not only about missed opportunities it also about
destabilizing an economy if done by enough individuals. The implicit admonition for monetary
stability in this parable would have served Tiberius well in 33 A.D.
What this implies for today is that monetary policy should be done in a way that minimizes the
possibility of shocks to money demand or money supply. Or if they occur, monetary policy
should respond in a way that minimizes how much damage these shocks can do to the economy.
In other words, monetary policy should be conducted in a way that keeps the use of money stable
over time. This suggests that monetary authorities should aim to stabilize the growth of total
dollar spending as the economy grows.
A number of observes have proposed central banks do just that.28 They note several advantages
for doing so. First, by targeting a stable growth path for total dollar spending monetary
authorities will automatically be responding to money supply and money demand shocks without
actually having to measure them.29 Second, by focusing on total dollar spending growth
monetary authorities need not worry about AS shocks that affect the productive side of the
economy. This allows them to ignore changes in relative prices. Prices, in other words, are
28
29
See Sumner (2011), Woodford (2012), Beckworth and Ponnuru (2014).
This can be illustrated by invoking the equation of exchange:
MxV = PxY
Where M is the money supply, V is the velocity of money (i.e. how often money is spent), P is the price level (i.e.
the average price of all goods and services), and Y is real GDP. Money supply shocks change M while money
demand shocks change V. To target total dollar spending is to target the growth of MxV. Since this is equal by
definition to the dollar value of all goods and services sold (PxY), the task of targeting total dollar spending growth
boils down to keeping the growth of PxY or nominal GDP stable. By focusing on a stable growth path for nominal
GDP target, monetary policy will by design be automatically offsetting money supply shocks to M and money
demand shocks to V. There is, therefore, no need to measure or follow M or V.
allowed to reflect real changes in scarcity and technology without being distorted by changes in
money. This way money remains neutral.30
Unfortunately, monetary policy has not always kept money neutral. Contrary to policy
implications of Genesis 41 and Luke 19, central banks have often conducted monetary policy in
a destabilizing manner. In the United States, the Federal Reserve under its watch allowed total
dollar spending to collapse in the Great Depression of the 1930s and the Great Recession of
2007-2009. It also enabled an unsustainable surge in money spending in between the mid-1960s
and the early 1980s that that ushered in double digit inflation and economic stagnation. Some
observers also attribute the housing boom in the early-to-mid 2000s as the result of too rapid
money spending growth.31 This poor performance is why some observers want the Federal
Reserve to adopt a nominal GDP target. Others have suggested alternatives to central banking
altogether such as a ‘free banking system’ or a return to a gold standard.32 The key is to find a
system that stabilizes the growth path of total dollar spending.
Conclusion
Business cycles are a real phenomenon that every society faces. The Bible provides some
guidance on how to deal with them. First, it condones in general the use of countercyclical
economic policy as seen in Genesis 41. Second, it specifically sanctions the use of
countercyclical fiscal policy. That is, it allows for changes in government spending and taxes to
offset the business cycle, but only in a manner that prevents a sustained buildup of debt. Third,
Christ’s parable of talents or minas points to the importance of monetary stability. This suggests
that monetary policy be conducted in a way that stabilizes total dollar spending. In short, the
Bible allows for the use of countercyclical policy if used in a stabilizing manner.
30
This means for a given targeted growth rate of PxY, monetary authorities are indifferent as to whether P or Y
changes. For example, if oil becomes scarcer it will lower real production, Y, and cause prices, P, to rise.
Conversely, a technological boom that lowers production costs will increase real output, Y, and decrease prices, P.
31
See Selgin et al. (2015).
32
See White et al. (2015).
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Economic Perspectives, Volume 18, Number 4—Fall 2004—Pages 115–134
Beckworth, David and Josh Hendrickson (2015). “Money Still Matters,” Working Paper.
Beckworth, David and Ramesh Ponnuru (2014). “The Right Goal for Central Banks: When the
Target is Nominal the Results are Phenomenal,” National Review. June 2, 36-38.
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