Bruce Bartlett wants the Fed to target nominal GDP
This is a good video with Bruce Bartlett, an economist and former Reagan/Bush 41 official. He comes out in favor of stimulus, both on the monetary and the fiscal side.
Here’s his basic argument.
- The problem with the US economy in the main is not regulation. That is a canard used by corporations who are talking their own book and their boosters to get even less regulatory oversight than we already have.
- The problem is a lack of aggregate demand, meaning people are simply not increasing spending as they did before the credit crisis.
- You can boost demand by fiscal policy. Bartlett would like to see a large-scale public works program because he believes that the cost of debt is so low and the cost/benefit of these projects would be greater than zero. He realises this is blocked by political considerations.
- He also likes the Scott Sumner/David Beckworth idea of targeting nominal GDP. His view is that the interest rate channel is dead because of the zero lower bound. And that means, if you accept the Milton Friedman premise of buying assets, the Fed should just start buying stuff to boost aggregate demand.
Personally, I agree with Bartlett that dealing with Medicare for the long-term gives fiscal space politically for boosting demand now. That won’t happen though.
I also think Mohamed El-Erian is right when he intercedes, commenting that the Fed is considered to have done too much rather than too little. That will constrain the Fed. And they won’t buy a lot of assets until recession has taken hold.
So that leaves me predicting slowing without policy stimulus until recession hits, at which point the loss of demand will blow the deficit out even more. And then we will have to see what the political appetite for policy responses will be since the banking system and the economy will both be under enormous stress much as they were in 2008-2009.
The issue of if and when any fiscal action takes place depends on the election. If the recession hits before the election, nothing will get done, as the GOP try and stall things to make Obama look bad. I suspect that the only policy choice that will get through will be tax cuts funded by the deficit, which will suit the GOP but will not help the economy.
Aggregate demand is a slippery concept, even to some leading economists. Can’t we avoid that banana peel and all the allegedly Keynesian arguments by asking the simple question: can the government achieve positive ROI by borrowing at these interest rates? Yes, this is hard to quantify, but at least we can agree we’re not debating unicorns. Furthermore, it frees us to think about whether low nominal rates are telling us something about what range of ROI is realistic, to make informed comparisons between waves of spending on infrastructure and education–in our own past and in other countries–and to think harder about the positive externalities of creating jobs more directly–rather than as a trickle-down from confused industrial policies and dopey analogies with countries at different stages in their historical development.
Even if the ROI of a road or bridge project is nil because of the huge positive externalities it would still make sense. It lowers the costs for haulage companies which lowers prices for goods that they move or boosts profits and hence corporation tax assuming that they do not pay higher wages. It reduces carbon emissions and increases efficiency. The problem is that because it is hard to tell what the gains are for projects that even roads to nowhere get built in the frenzy to create local jobs.
I think that an end to some policies of globalisation might be more effective. Capital controls would stop the US dollar becoming so strong that the trade deficit cannot be reduced. It would also reduce the fiscal deficit. Capital controls would also catch out those in the carry trade. If the US along with the EU imposed a Tobin tax on financial products it would reduce the scale of the derivative market and make the banks actually small enough to save. It is the trillions of credit default swap liabilities that will destroy the economy if they try to save the banks again.
I’d call those desirable by-products of construction positive externalities, but you could estimate some of the value by considering what the market could bear for bridge tolls, provide it as a public good, and call the difference between the cost and this value micro-economic surplus. The problems with frenzy mode are several: the projects are worse, the execution is worse, the corruption is worse, and the jobs they create are more capital-intensive and fewer. Given the scale of our unemployment, disentangling our need for jobs and stuff like infrastructure is the antidote to these problems. Put simply, if we need stuff, we should build stuff. Building stuff as a jobs program will either tend to create fewer jobs or simply make our stuff more expensive. [This is the tragedy of the idea of green energy.] If we need jobs (I think we do), we have options like subsidizing earned income through the tax code and creating low-paying capital-light jobs with government money either directly or through businesses.
I am not so sure about tolls. They can be a problem in themselves with pressures to privatise tolls. This can mean having a temporary public toll becoming a private and permanent one that becomes a drain on the local economy.
A green energy program should be gradual so that it does not start to create shortages. Too many construction workers creates a new problem.
“can the government achieve positive ROI by borrowing at these interest rates?”
Excellent question!
Bernanke’s errors are glaring. Bernanke ignored the deceleration in nominal & real gDp beginning in the 2nd qtr 2006. Bernanke turned his back on Bear Sterns warning when the Hedge Funds filed for bankruptcy on July 31 2007. Bernanke continued with the “tight” money policy he initiated in FEB 2006 (which ended the housing bubble) dispite an outright fall in nominal & real gDp in the 3rd qtr of 2007.
Bernanke continued to drain liquidity despite its 7 reductions in the FFR (which began on 9/18/07). Monetary flows (our means-of-payment money X’s its transactions rate-of-turnover), declined continuously (were actually negative), for 29 consectutive months. I.e., the FED maintained its “tight” money policy (i.e., credit easing (lowering interest rates), not quantitative easing(open market operations of the buying type) until Lehman Brothers declared bankruptcy.
In if Bernanke would have targeted nominal gDp the economy wouldn’t be in as bad as shape.
There’s a certain irony, perhaps evolution, in the Reagan adviser Bartlett adopting Keynesianism and pushing fiscal and monetary stimulus.
Me thought Ed sufficiently in the know to understand that under the debt-based money system, coupled with having long ago reached the Biz-Gov debt-saturation point, that neither can do much, if any, good right now.
Especially, debt-based monetarism.
The Fed can only QE into the M3 for the most part, supposedly with purchase of bank-corporate financial instruments.
There the new money sits while the bankcorps await the crash. Nice try, Fed. (Or, is THAT the Bartlett plan?)
No aggregate demand push there.
With debt-based money, fiscal stimulus requires additional deficit spending.
Thus, without additional borrowing authority, sorry, not possible.
The solution is for the government to recognize the need for both monetary and fiscal stimulus to proceed, and to actually affect aggregate demand, we need to end the debt-based money system.
As called for in the Kucinich full-employment bill.
https://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf
It’s time to stop pretending there’s another solution.
Medium term debts, especially private debts need to be reduced. To avoid future crises like this one again a cap on overall private debt needs to be set up. A cap and collar on interest rates will keep interest rates manageable, even as they climb. This will reduce the risks of a bank collapse, as it will limit the risks of individuals defaulting, and push responsibility back to governments to boost jobs, or to kill demand through taxes. Monetary policy is a very blunt tool to control inflation and the only way it achieves it is by maintaining a large pool of unemployed. In the past nations had unemployment below 1%. That was full employment not the 6% or now 9% as the new norm. If society wants this level of unemployment then it will have to pay for it with permanent unemployment benefits. This is the best automatic stabiliser of all.
Mainstream economics has been wrong for the last thirty years and this is the outcome.
Upward & downward price flexibility is the hallmark of a healthy economy. That analogy should be applied to all interest rates too, including usurious credit-card interest rates.
Why should one sector of the economy be protected over another. The FED is lowering long-term Governments, long-term mortgage rates, etc. but lowering the one sector that might boost consumer’s balance sheets the most is taboo.
Do you honestly believe the markets are accurate measures of a healthy economy? Take US stocks these are over valued simply because companies use company funds to buyback stock to boost the value because executive bonuses are based on stock prices. Then outside that you have high frequency trading that skims off a piece of action on every trade by driving prices slightly higher or lower. Wages are not set by the market but what they can get away with. Do some executives deserve $45 million a year? Ask bank stockholders that. With Fed policy to keep unemployment high to keep inflation low it means that a true market in wages would mean offering wages below the minimum wage if they could. In fact the minimum wage actually helps maintain aggregate demand overall. Same with credit risk if a person or company is a risk then do not lend. If you lend at extortionate rates then default is an inevitability, just look at Greece as proof.
No I didn’t lie.
Tweaking interest rates to boost overall demand. Though with private consumers overwhelmed with debt that will not work. Falling asset prices might be a sign of a market of sorts but it does mean that the consumers main asset, their home is collapsing in value while the debt remains the same. Wages are falling so the debt burden for them is not much better.
The problem is that Greenspan was a fool to think that you cannot spot bubbles and you should clear up the mess when they burst. It was a precursor to the credit crunch. Banks knew that they would be bailed out. It is better to avoid the bubbles in the first place. It eliminates misallocation of assets and losses for the banks.
Yeah, Greenspan was a mess but so is Bernanke. The calculations for lowering credit card rates to 12%-15% on consumers balance sheets has already been done. It is meaningful.
It is impossible for monetary policy to stabilize prices without inducing intolerable levels of unemployment, given the pervasive extent of monopolistic pricing practices of our product markets. It is axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility. Credit card companies are monopolistic.
Winterspeak has a recent post on this https://www.winterspeak.com/2011/08/unconventional-monetary-policy.html