JW Mason:
Monday, December 8, 2014
The Future of Monetary Policy, according to Paul Krugman, Elizabeth Warren and Me
I will be speaking at this event tomorrow. I'll post video if/when it becomes available.
The Future of Monetary Policy, according to Paul Krugman, Elizabeth Warren and Me
I will be speaking at this event tomorrow. I'll post video if/when it becomes available.
Pretty good company, that. The link takes you to the Economic Policy Institute, EPI. The "event" is Managing the Economy: Main Street, Wall Street and the Federal Reserve. Here's the blurb:
Today, pressure is building on the Federal Reserve to use monetary policy to raise short-term interest rates, a move that could short-circuit a still far from complete economic recovery. Proponents of this move argue it is needed to avert wage and price inflation and prevent excessive risk-taking in the financial sector. But there are serious questions about this argument, and there are new tools available to the Fed to influence Wall Street and the wider economy. These tools and better economic analysis could allow the Fed to better target specific concerns regarding Wall Street financial risk-taking while minimizing unnecessary drag on the Main Street economy.
Stop, dammit. Don't take a side. Work out the problem.
Let's say the blurb is right: pressure is building on the Federal Reserve to use monetary policy to raise short-term interest rates, a move that could short-circuit a still far from complete economic recovery.
Let's say we don't short-circuit the StillFarFromCompleteEconomicRecovery by raising short-term interest rates. So then, presumably, the expansion of credit-use continues. And economic growth continues gaining momentum. And the growth of accumulated total debt continues gaining momentum...
See the problem?
If an excessive accumulation of debt hinders economic growth, then the expansion of credit-use (which boosts economic growth) undermines economic growth because accumulated total debt remains at an excessive level -- and increases even more.
More from the blurb:
Proponents of this move argue it is needed to avert wage and price inflation and prevent excessive risk-taking in the financial sector.
Let's say we set those concerns aside. Let's say we think a little more inflation might be a good thing. (I don't think that, but let's say.) And let's say we for some reason are not concerned about ExcessiveRiskTakingInTheFinancialSector. Let's set these concerns aside. Are we then free to leave interest rates low, encouraging growth by encouraging credit use?
We are not free to do so, because encouraging credit use in our experience leads to the growth of accumulated debt, leads to growing financial cost, undermines our standard of living, undermines profit and productivity, and destroys economic vigor.
The history of our economy in the last 60 years is a history of encouraging credit use. Our policies encourage the use of credit and accelerate the accumulation of debt. Our policies fail to accelerate the repayment of debt. As a result, private sector debt grew to unprecedented levels; and as a result of that, public sector debt grew enormously.
The EPI blurb mispresents our options clearly: Shall we keep interest rates low to promote growth? Or shall we raise interest rates to prevent inflation and excessive risk?
No.
The interest rate discussion is a discussion about positions on the Phillips Curve. But the Phillips Curve has moved from a good place to a bad place. There are no more good places on the Phillips Curve. It is pointless to fight over our place on the Phillips Curve when there is no good place to be had. The better fight, the better discussion is to point out that it was the growing accumulation of debt that pushed the Phillips Curve to a bad place... that by reducing the accumulation of private sector debt we can bring the Phillips Curve to a better place... that we can reduce the growth and accumulation of debt simply by creating policies that encourage the repayment of debt... and that accelerating the repayment of debt is a way to prevent inflation and reduce risk.
Accelerated repayment of debt is an alternative to raising interest rates. A policy that accelerates the repayment of debt will allow us to keep interest rates low enough to get the economic growth we need.
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2 comments:
Accelerated repayment of debt is different than raising interest rates, in this way:
Raising interest rates affects everyone -- those who have already borrowed, and those who have not.
Accelerated repayment of debt affects only those who have borrowed. It is like having high interest rates for those who have borrowed more than their share... and low interest rates for those who have borrowed less than their share.
Obviously, the way things are now (after 60 years of encouraging credit use and accumulation of debt) we cannot simply impose high taxes on debtors. That much is obvious. So, let's design the Accelerated Repayment Tax (ART) so that it helps people pay down debt.
After debt falls to sustainable levels (in 20 years maybe) we could make it a punitive tax, it you're really into that.
The trouble with raising interest rates is that it affects everyone. That is the wrong approach.
If we take a simplified view and look at TCMDO at FRED for the last 20 years, we will see that it tracks very closely with real GDP growth:
https://research.stlouisfed.org/fred2/graph/?graph_id=190384&category_id=
Which makes sense as more money creation leads to more spending as people dont take out loans (and the Govt doesnt deficit spend) to save.
And over this 20 year period, the Govt's contribution to the money supply (at least before the GFC) growth as been modest. Clinton and Bush II both averaged very small deficits throughout their presidencies as a % of GDP.
But there is no reason at all for us to rely on the private sector creating 90%+ of the new "money" that drives GDP growth every year. Macroprudential regulation on lending and securities issuance can restrain greatly the growth in private sector money supply. And in its place, we can have the Govt create 90% of the new money creation each year through deficits. This would allow for continued money supply and GDP growth while at the same time allowing for a net reduction in private debt as a % of GDP.
This is precisely the same thing as happened during WWII when the Govt averaged deficits of 25% of GDP for 4 years and we basically reset our private debt levels relative to the size of the economy.
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