The Economist can be very good on monetary policy. For instance, they’ve endorsed NGDP targeting. And then there are other times. Check out the subtitle of their new cover story on living in a low rate world:
Central banks have been doing their best to pep up demand. Now they need help
Actually, they have not been doing their best, and it’s not even debatable:
1. The Fed raised rates last December, and just a week ago indicated that it is likely to raise rates again later this year. Is that doing your best to inflate?
2. The ECB and the BOJ have mostly disappointed markets this year, offering up one announcement after another that was less expansionary than markets expected.
So no, they are not doing their best. If at some point they do in fact do their best, and still come up short, then by all means given them help.
And what should that “help” look like? Simple, give them more policy tools. I.e. a higher target, or the right to buy more kinds of assets. Whatever help they need.
And then there is this:
To live safely in a low-rate world, it is time to move beyond a reliance on central banks. Structural reforms to increase underlying growth rates have a vital role. But their effects materialise only slowly and economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments.
Actually, the Japanese have already shown that enlisting fiscal policy does not help. In fact, Japanese NGDP growth has picked up a bit since 2013, despite the fact that fiscal policy has become tighter. Instead of resigning ourselves to a low rate world, why not have central banks create a higher rate world, by raising their NGDP/inflation target? And tell the banks to actually hit their targets. A low rate world is a choice, not some inevitable fate sent down to us by the gods.
To their credit, they realize that infrastructure spending cannot stabilize a modern economy:
But infrastructure spending is not the best way to prop up weak demand. Ambitious capital projects cannot be turned on and off to fine-tune the economy. They are a nightmare to plan, take ages to deliver and risk becoming bogged down in politics. To be effective as a countercyclical tool, fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require.
But then suggest something even less effective:
Politicians will not—and should not—hand over big budget decisions to technocrats. Yet there are ways to make fiscal policy less politicised and more responsive. Independent fiscal councils, like Britain’s Office for Budget Responsibility, can help depoliticise public-spending decisions, but they do nothing to speed up fiscal action. For that, more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example.
Actually, a number of studies show that extended unemployment benefits make unemployment even higher. When President Bush made unemployment benefits more generous during the 2008 recession, Brad DeLong correctly predicted that it would push unemployment 50 basis points higher by Election Day. Another example occurred in 2014, when we saw job creation accelerate by about 700,000 (from 2.3 million in 2013 to over 3 million in 2014), after the extended benefits were eliminated. Exactly the opposite of what Keynesians like Paul Krugman expected.
I have a better idea; have the BoE adopt a more expansionary monetary policy. Their governors will warn that this will push inflation above target. OK, but make up your mind—do you want more demand, or not?