I'm glad to see that Olivier Blanchard and Yanis Varoufakis have come out in favor of my plan for People's QE.
The following passage is from How the Economy Works, (HTEW) page 151.
The following passage is from How the Economy Works, (HTEW) page 151.
Economists are famous for hedging their bets. A typical response to the question of how to run fiscal policy might be: “On the one hand we should raise taxes but on the other we should balance the budget”. President Harry Truman who instituted the Council of Economic Advisors famously quipped; “give me a one-armed economist.”Here's what I said about fiscal stimulus in HTEW.
A large fiscal stimulus may or may not be an important component of a recovery plan. My own view is that there is a better alternative to fiscal policy that I explain in [How the Economy Works, Chaper 11]. But if a fiscal policy is used it should take the form of a transfer payment to every domestic resident; not an increase in government expenditure.Well ok, I didn't call it peoples QE. "Peoples QE", was coined by a speech writer for Jeremy Corbyn, the new leader of the Labour Party in the UK and its one of the less crazy parts of the Corbyn platform. Why do I believe that? Because I also believe something that may seem contradictory. Its time to get interest rates into positive territory. SOON. Quoting again from an impeccable source (HTEW page 152).
Here are my views on monetary policy. Short term interest rates should be increased as soon as feasible, because a positive interest rate is needed if a national central bank is effectively to control inflation. In future, central banks should use the interest rate for this purpose and not to prevent recessions.Why do I favor a fiscal transfer, rather than currently popular bandwagon of infrastructure expenditure? Two reasons.
- Because the work of Christina and David Romer suggests that tax multipliers (and by implication, transfer multipliers) are big.
- Because I trust markets to decide how to allocate a fiscal stimulus more than I trust the government.
So: Raising interest rates is necessary to eventually raise inflation. I'm with the "neo-Fisherians" here. But an interest rate hike must be offset by some other expansionary policy to prevent the normalization of rates from creating a new recession. Here's what I said about that in HTEW.
But if a central bank raises the domestic interest rate without independently managing confidence, the result will be a drop in the value of the national stock market and a further deterioration in the real economy. To prevent this from happening, central banks need a second instrument.So: Janet, Mark, Mario: yes: raise rates. Please. But give us QE too.
Roger,
ReplyDeleteIn my view, the type of QE you propose would lead to nominal interest rates rising all on their own (through the Fisher equation). Naturally, the Fed would follow these rates up as inflation ramps up. So, in my view, raising FFR now can wait until there is clear evidence of inflation (more preferably, the price-level) returning to "normal."
Unfortunately, the type of QE you propose is not presently outside the jurisdiction of the Fed. Janet is not legally permitted to write us all cheques. We need the fiscal authority to perform this action (via an increased pace of bond issuance).
In terms of infrastructure spending, I'm more agnostic along this dimension that you are. I see no reason why government agencies cannot be trusted to manage public infrastructure projects. They have had some measure of success in the past, no? Moreover, allocating funds to such projects has a political benefit in that your proposal will garner support from those who want to increase G.
For the life of me, I do not understand how a coalition that favors a cut in T and an increase in G cannot dominate a coalition that wants to cut (G-T).
I meant to write "the type of QE you propose *is* presently outside the jurisdiction of the Fed."
DeleteI should add another thing. I'm no fan of "big central government." And I would not necessarily advocate this policy for most economies. But the US is "special" in that the USD and USTs are so highly valued in the world as a safe asset. This much is reflected in present bond yields. So there is still room to expand the deficit--financial markets are still starving for high-grade debt, as collateral, and as a safe store of value. It will, of course, be critical for the fiscal authority to manage its debt wisely over time.
DeleteI think it's this last point that "austerians" are concerned with. Well, I'd be concerned too. But if legislators actually understood the economics (i.e., this is the U.S., not Zimbabwe), then we could all be more comfortable in relying on their good judgement as to when to scale back the deficit.
David
ReplyDelete"In my view, the type of QE you propose would lead to nominal interest rates rising all on their own (through the Fisher equation)."
I agree with that.
"Unfortunately, the type of QE you propose is not presently outside the jurisdiction of the Fed. Janet is not legally permitted to write us all cheques. We need the fiscal authority to perform this action (via an increased pace of bond issuance)."
Yes: we need legislation. Also to allow Fed to purchase risky assets
:n terms of infrastructure spending, I'm more agnostic along this dimension that you are. I see no reason why government agencies cannot be trusted to manage public infrastructure projects. They have had some measure of success in the past, no? Moreover, allocating funds to such projects has a political benefit in that your proposal will garner support from those who want to increase G. "
I'm ok with that. But the cost-benefit analysis required to decide what projects to pursue should be kept distinct from stimulus.
I was under the impression that your plan was a form of People's QE, but with the caveat that the people had to have a large share portfolio to benefit. A People's QE to support the stock market.
ReplyDeleteI am not sure this was what Varoufakis and Blanchard were agreeing with.
Ari
DeleteMy main point was that if there is to ba additional fiscal stimulus, it should take the form of a direct cash transfer to consumers. Better to keep full employment policy separate from public infrastructure investment. I'm also not sure that Varoufakis and Blanchard would agree with this.
Roger, I proposed individual accounts at Fed, credited with Fed profits as they accrue, held in escrow till needed for stimulus, and elimination of FDIC here:
ReplyDeletehttp://rajivsethi.blogspot.com/2013/11/the-payments-system-and-monetary.html
Would be interested in your thoughts.
Rajiv
DeleteI like this idea a lot. Does it need to be run as a Fed institution or could the operational details be contracted out to private banks and ring fenced from other operations?
Roger, I am sympathetic to this idea but fear it could only work if tied to a level target. Otherwise, it suffers from the 'Penske Truck' problem: http://macromarketmusings.blogspot.com/2015/06/the-penske-view-of-macroeconomic-policy.html
ReplyDeleteNice post David. Here Is a clickable link. My main issue with existing monetary policy is that it is one dimensional. We need inflation targeting AND nominal GDP targeting, one operating through interest rate control and the other through changes in the portfolio composition of the Fed. I'm eclectic about what should be traded. Nominal GDP futures would work. So would trading a stock market ETF.
DeleteI very much agree, but only on the grounds of the second claim -- the cost-benefit analysis behind spending should be kept separate from stimulus. I very much doubt the claim that the Romer-Romer multipliers apply to these transfers.
ReplyDeleteThe policies behind those estimates were mostly if not entirely tax-rate changes expected to endure. That means A) they represented permanent rather than transitory income changes, thus having higher multipliers and B) they had supply-side impacts as well, with increases reducing work incentives. And if you want to take the rational expectations path all the way to the end -- and I know you do! -- the supply-side impact of a tax cut will increase expected real growth, thus expected permanent income, and become a second positive demand shock.
So we should expect a smaller multiplier from a People's QE. However, since this is just money creation in a context where we do not fear inflation, that is no argument against the idea -- there is zero cost, so if the benefits per dollar are smaller than you hinted, the cost-benefit ratio is still zero. But we don't want to choose the quantities with the wrong multiplier.
Michael
DeleteI don't know if the Romer Romer numbers would apply to transfers. I am skeptical of theoretical arguments based on the apparent permanence or non permanence of a given policy change, particularly when the argument is based on the forward calculation of a rational consumer in the context of a rational expectations model with a unique equilibrium. In my view, people form expectations by extrapolating from the past. They adjust their rules for extrapolating and, if the world doesn't change too often, eventually those rules converge to rational expectations. I seriously doubt that learning algorithms are sophisticated enough to distinguish apparent permanent changes in policy from apparent temporary changes.
Great Article,
ReplyDeleteI would agree "if a central bank raises the domestic interest rate without independently managing confidence, the result will be a drop in the value of the national stock market and a further deterioration in the real economy".
The U.S recently experienced this when Janet Yellen spoke. It always amazes me how the market reacts to such positive news. I do believe the interest rate should be raised when able so that we may prevent both income and price effects, ultimately inflation.
Dean Kazamias
I also thought it was a good read, many interesting ideas. Janet Yellen has an incredible amount of influence on financial markets, I also saw the market react in a way that I believe it shouldn't. What do you specifically mean when talking about the income/price effect ? I have an idea but would like to get some insight ?!
Delete