There has been a lot of back and forth by academic economists on monetary policy. The reason is two-fold. First, during the so-called Great Moderation many economists increasingly looked to monetary over fiscal policy for countercyclical support. Second, even so, fiscal support is expected to wane, making some nervous about the durability of recovery.
I agree that the recovery’s durability should be questioned and the ECRI chart on real personal income is a major reason why. Meanwhile, as one would expect when income growth is weak, during this cyclical upturn, growth has waned in the second half of both 2010 and 2011. Quantitative easing and permanent zero came to the economy’s rescue each time by propping up asset prices and shifting sentiment to risk-on.
Those that want to keep the economy going via stimulus are asking for more, perhaps by raising the inflation target or targeting a higher rate of nominal GDP that comes via either inflation or real growth. Raghuram Rajan is telling these economists that the Fed has already one plenty. He says:
- First, it is not at all clear that traditional savers today will go out and spend. Moreover, low interest rates could push that saver or her pension fund to buy risky long-maturity bonds. Such a move might thus set her up for a fall when interest rates eventually rise. Indeed, we may well be in the process of adding a pension crisis to the unemployment problem.
- Second, household over-indebtedness in the US, as well as the fall in demand, is localized. Real interest rates are too blunt a stimulus tool, even if they work.
- Third, we have little idea about how the public forms expectations about the central bank’s future actions. If the Fed announces that it will tolerate 4% inflation, could the public think that the Fed is bluffing, or that, if an implicit inflation target can be broken once, it can be broken again?
- Fourth, it is not even clear that the zero lower bound is primarily responsible for high US unemployment.
His conclusion: With a savings rate of barely 4% of GDP, the average US household is unlikely to be over-saving. Sensible policy lies in improving the capabilities of the workforce across the country, so that they can get sustainable jobs with steady incomes. That takes time, but it might be the best option left.
Rajan got it right on the bubble and the crisis. Is he right now as well?
That’s it. Here are the links.
- Raghu Rajan polarizes with his essay – Marginal Revolution
- TheMoneyIllusion » It’s not about credit, it’s about NGDP
- LPL Chart – Business Insider
- Student Loans Continue to Drive Consumer Credit in March 2012 | Global Economic Intersection
- Japan to take over Tepco after Fukushima disaster | Reuters
- Stop beating up on Ben Bernanke | The A-List | Must-read views on today’s top news stories – FT.com – FT.com
- Euro Struggles Can Be Traced to Origins of Common Currency – SPIEGEL ONLINE
- Mozilla Slams CISPA, Breaking Silicon Valley’s Silence On Cybersecurity Bill – Forbes
- FT Alphaville » China’s post-stimulus metals demand growth could actually be flat
- Where does all of that iron ore go? – MacroBusiness
- Wells Fargo discloses potential discrimination suit – chicagotribune.com
- Argentine-Spanish trade row escalates after Telefonica fined – Telegraph
- "Argentina the Outcast" by Luiz F. Lampreia | Project Syndicate
- Chicago Booth Blog: Fault Lines by Raghuram Rajan – Central Bankers Under Siege
- Why Verizon Doesn’t Want You to Buy an iPhone | News & Opinion | PCMag.com
- The only solution to the eurozone crisis – FT.com
- Los expertos advierten que los ‘bancos malos’ necesitarán ayudas públicas | Economía | EL PAÍS
- France election: Germany rules out reworking EU’s ‘fiskalpakt’ – Telegraph
- Clinton warns India over Iranian oil – FT.com
- Ben Bernanke and what the Federal Reserve does next: Lonesome dove | The Economist
- Francois Hollande has ten weeks to avert a French bond crisis – Telegraph
- The euro alternative to Greek default and the drachma | Dean Baker | Comment is free | guardian.co.uk
- Woman Jailed For Trying To Fill A Prescription « CBS Dallas / Fort Worth
- Wells Fargo Fires Woman After Finding Out She Shoplifted 40 Years Ago – The Consumerist
- Android reclaims 61 percent of all U.S. smartphone sales | Internet & Media – CNET News
- Europe Needs to Reform Its Banking Sector – SPIEGEL ONLINE
- YPF: more like Norway’s Statoil | beyondbrics | News and views on emerging markets from the Financial Times – FT.com
- Argentina: cordially irritating | beyondbrics | News and views on emerging markets from the Financial Times – FT.com
- The Irish Economy » Is Ireland’s Fiscal Adjustment Failing?
- Chart of the day: Let’s go buy a house! | Felix Salmon
- FT Alphaville » The subpriming of commodities
- Paul Mason – Greekonomics (Blog Preview 8 May 2012)
- FT Alphaville » Oh, Greek moratoria
- New Election In Greece Looks Likely – WSJ.com
- More on Frontline’s Astonishing Whitewash of the Crisis « naked capitalism