The tripling of the money supply, or, there’s a reason they pay Dick Morris the big bucks, right?

by Andrew Gelman on April 14, 2009 · 7 comments

in Political Economy

Bill Peterson at Chance News reports that Dick Morris writes:

In the last five months, according to the Federal Reserve Board, the money supply in the United States has increased by 271 percent. It has almost tripled.

As Morris notes, the economy has hardly tripled during that time, so where did the money come from? I was thinking maybe the Fed improved its data collection procedures and started counting the quarters behind the cushions in couches and under car seats, But, no, it’s nothing so fun as that. Peterson did a little web searching and writes:

Here is a link to the March 5 Federal Reserve Statistical Release that was current at the time of Morris’s posting. At the bottom of the first table there, we read that for the 3 Months from October 2008 to January 2009 the M1 money stock grew at a seasonally adjusted annualized rate of 27.1 percent.

What it means, that the money supply has been going up (or whether we should focus on M1 at all), that’s another story, to which I’ll defer to macroeconomic experts. To put this more plainly, Morris discredits his cause by making ridiculous, mockable statements. I can only imagine that it also reduces his ability to get hired as a political consultant, but maybe it makes him in more demand as a speaker and an author.

Near the end of this column, Morris writes:

None of this [problem with the growth of the money supply] should come as any news to Obama. He likely knows all this. But he is determined to pass his agenda of bigger government, nationalized healthcare and vastly greater spending even at the price of inflation and subsequent recession. He puts ideology first and the economy a distant second.

I don’t think so. Obama’s #1 economic priority has got to be for the economy to improve in the year 2012, at which time a presidential election is coming up. You could very well argue that he might not care about the long term (i.e., after 2016), but the conventional wisdom (which I believe, and I expect Obama and his advisors believe too) is that he needs the economy to improve so as to get reelected. I suppose Morris might be arguing that Obama’s policies will be stimulative up to 2012 and then lead to a recession around 2014, but that’s a bit too extrapolative for my taste.

It might be that Obama’s ideology is blinding him to the potential adverse consequences of his policies—just as it might be that Morris’s ideology or professional interests are blinding him—but, if anybody has an interest in the economy improving, it’s Obama, Summers, and the rest. Again, by labeling Obama as an ideological extremist, Morris is forfeiting his chance to make a more substantive point about economic policy.

If you don’t think Obama’s policy is going to work, is your best argument really to make the implausible claim that Obama knows his policy won’t work but is just so ideological that he’ll do it anyway? I think it would make more sense to argue that Obama is well-meaning but mistaken. Although presumably not so mistaken as to think that a 27.1% annualized growth is the same as 271% over five months.

P.S. Could I get my very own column in The Hill? I promise not to get any numbers off by a factor of 24 . Also, I promise not to write columns saying Sarah Palin saved GOP from landslide defeat.

{ 7 comments }

aceckhouse April 14, 2009 at 7:32 pm

Also, increasing the money supply by 271% would be an almost quadrupling, not an almost tripling. Just to add to the stupid.

Daniel Habtemariam April 15, 2009 at 1:43 am

Not to be cynical, but typically Dick Morris’ readers aren’t the type of methodological purists who’d cry foul at someone confusing the numbers…even by a factor of 24.

He’s not an academic. He’s a media personality.

Unlike you, Dr. Gelman, his message is grossly oversimplified and intended to affirm (not confirm) specific prejudices that’ve been planted by him (and others like him) in the past.

And you’re exactly right when it comes to Obama’s economic policies. We have before us a grand experiment (albeit a verifiably flawed one). President Bush enacted one set of economic policies, and we have substantial data on the outcomes of that. And Obama’s policies will no doubt bear out consequences that will be vindication to some and censored by others.

anon April 15, 2009 at 2:05 am

Dick Morris was referring to the Federal Reserve Adjusted Monetary Base which did, in fact, grow by a multiple between 2.5x-3x in the five months spanning October, 2008 through March, 2009. A simple Google search will confirm this. Here’s a link to one website which published a graph of the AMB from the St. Louis Fed:

http://www.coyoteblog.com/coyote_blog/2009/03/holy.html

Bernanke’s growth in the monetary base was covered extensively in the financial press and on every major finance blog and website, earning him the nickname “Helicopter Ben” Bernanke. If this is news to you then one can only assume that you don’t read financial news.

Your reliance on M1 money supply statistics is simply wrong, and frankly it exposes your ignorance on this topic. M1 money supply is just one subset of the complete money supply. Here’s a like to the Wikipedia page on money supply for some remedial reading, which you evidently need:
http://en.wikipedia.org/wiki/Money_supply

In short, Dick Morris is right and you are wrong. I believe it is called a cruel irony when you publicly mock someone’s intelligence only to find out subsequently that they are correct and you, well, you stepped in it.

Will you be publishing your retraction and apology tomorrow?

Andrew April 15, 2009 at 9:13 am

Anonymous:

Thanks for the info. I agree about the cruel irony part, except that this happens to me all the time! I even published a false theorem once in a statistics journal and had to retract it several years later. So, sure, I’d be happy to retract and apologize if appropriate.

As you can see from the linked blog post, I claim no expertise on macroeconomics, and I’m sure I would indeed learn a lot from the Wikipedia page on money supply. I referred to M1 only because that was what was referred to by Bill Peterson in the Chance News article that led me to Dick Morris’s column in the first place.

I followed your suggestion and looked at the Money Supply page on wikipedia but could not find the term “adjusted monetary base.” I did find “monetary base,” which is used in the U.K. to refer to M0. Searching the web on “adjusted monetary base” led me to the St. Louis Fed webpage and the graph that you had pointed to. I pulled out the numbers:

2008-08-13 874.264
2008-08-27 876.001
2008-09-10 873.833
2008-09-24 949.847
2008-10-08 1016.694
2008-10-22 1182.387
2008-11-05 1264.992
2008-11-19 1505.035
2008-12-03 1493.915
2008-12-17 1671.248
2008-12-31 1690.915
2009-01-14 1770.323
2009-01-28 1749.868
2009-02-11 1551.341
2009-02-25 1621.121
2009-03-11 1565.933
2009-03-25 1725.736
2009-04-08 1749.164

I agree that these have grown a lot–again, I’ll defer to the experts in macroeconomics as to whether we should be worried about it–but I don’t see where Morris could’ve gotten the 271% figure from. His column was published on March 3, so the latest figure he could’ve been using was the 1621.121 number from Feb 25. Going back five months from there gives the Sep 24 number of 949.847. But 1621.121/949.847 = 1.706718, which is a 71% increase. A huge increase for five months, yes, but only about 1/4 as much of an increase as the claimed 271%.

Or you could look at the monthly numbers, which increased from 1142 to 1665 in the five months from October 1 to March 1: again, an increase much less than 271%.

The St. Louis Fed website also has some “continuously compounded annual rate of change” numbers based on biweeky data, which jump around all over the place: -313% on Feb 11, +114% on Feb 25, -90% on Mar 11, etc. (I think these are percentages, I can’t quite tell from the graph or table.) Or the continuously compounded annual rate of change based on monthly data, which was recorded as -102% on Feb 1 and +58% on Mar 1 (again, I’m assuming these numbers are percentages, I can’t quite tell).

Again, I’m happy to be proved wrong on this. If you can tell me where the 271% comes from, I’d be happy to post it on the blog.

P.S. In any case, I still think Morris’s comments on Obama not caring about the economy (and his aside about Sarah Palin) are silly.

ZBicyclist April 15, 2009 at 10:11 am

Andrew: pretty complete response to an anonymous commenter who vaguely refers to another site.

Morris is a PR guy. I once managed a corporate research group reporting to a VP whose original discipline was PR. You learn how to use numbers in PR, but not in the same way a statistician does.

Robert Waldmann April 16, 2009 at 12:43 am

Morris reminds me of a great statesman — Winston Churchill — who called decimal places “those damned dots.”

I think I understand how he missed the damned dot, overlooked the concept of “annualised” *and* decided to call a 271% increase “tripling” not “almost quadrupling”.

He mixed up H and M1. The monetary base has roughly tripled I think (and if I’m wrong well Morris is ignorant too).

If he didn’t know about money multipliers, the money supply process, fractional reserve banking and my mother’s maiden name (all equally certain) he might think this meant the money supply tripled. So he sends his long suffering research assistant to find the proof that the money supply tripled. The poor unfortunate guy came back with the number which Morris miss read due to the fact that”He puts ideology first and the [dada] a distant second.”

Monty April 16, 2009 at 1:50 am

anon = Dick Morris

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