“That’s standard monetary policy”
Jared Pincin sent me a Charles Evans interview on CNBC. At one point Evans pointed out that the Fed tries to prevent any shift in fiscal policy from moving the economy (inflation/employment) away from the Fed’s target. He called that sort of monetary offset “standard monetary policy.”
If Congress had not done a fiscal stimulus in 2009, I presume the Fed would have done more. I have no idea whether NGDP would be higher or lower than it currently is, but it’s certainly the Fed’s view that offsetting fiscal policy is part of its job. That’s not to say a fiscal cliff would have no effect, I can imagine several possibilities:
1. The Fed might not act in time to offset the immediate impact of a large and sudden fiscal contraction.
2. The Fed may be reluctant to do what it takes to fully offset the impact.
3. Some parts of the fiscal cliff will affect aggregate supply (such as a tripling of the tax rate on dividends (which are already triple-taxed!), and a nearly 60% rise in the cap gains rate) and hence the Fed is not able to offset their impact.
Evans also said that he’d like to see higher interest rates for savers, but only if achieved via economic growth, not tighter money. I completely agree. He pointed out that tighter money would only temporarily raise rates, and that the economy would soon slow down, forcing the Fed to cut rates again. I agree, indeed that recently happened in both Japan and Europe, and also in America in 1937.
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1. October 2012 at 11:15
Scott,
How are dividends triple taxed?
1. October 2012 at 11:22
“If Congress had not done a fiscal stimulus in 2009, I presume the Fed would have done more.”
And since we know the Fed will hit the target, then arguments made the DeKrugman crowd that Fiscal works is wrong.
More importantly, it means that making big giant productivity gain cuts to public sector = MORE QE, if they actually slow down economy (and that is doubtful).
1. October 2012 at 11:55
Evans really botched that reply to the girl asking about rates. Which just goes to show that all the supposed advantages of interest rates as a communications device are in fact all weaknesses. It’s like the old adage about businesses being charged with anti-competitive pricing: If you lower rates you’re screwing saver, you raise rates and you’re putting homeowners unerwater; and you leave rates steady and you’re letting inflation get out of control.
NGDP targeting now, please.
Edward, corporations tax, dividend/capital gains tax, wage tax.
1. October 2012 at 12:44
Edward,
Triple taxation…
The first two are sort of obivous.
Dividends are corporate earnings that are passed on to investors. The earnings are taxed before dividends are paid. The dividends are taxed by the end recipient.
The remaining taxation may be considered tenuous by some, but is considered very real by others…. The money that was used to buy the shares that are currently receiving dividents was taxed when it was earned.
1. October 2012 at 12:58
He pointed out that tighter money would only temporarily raise rates, and that the economy would soon slow down, forcing the Fed to cut rates again. I agree,
If you can understand that tighter money would only temporarily raise rates, and that the economy would soon “slow down” (temporarily as well, but you did not mention this), then you should understand that looser money would only temporarily lower rates, and that the economy would “slow down” once rates rise again.
What higher and lower interest rates do is regulate the temporal structure of investments. If interest rates are made from higher to lower on the basis of monetary influences, then it will first trick investors into behaving as if more real savings are available, as they allocate more capital and labor to longer term, more capital intensive projects that will require more savings than are actually available.
When the lack of real savings becomes known by the marginal investors, then corrections take place, which we observe as recessions.
1. October 2012 at 13:05
I rather doubt whether the Fed could offset the fiscal cliff in the sense of obtaining the same whole future path for NGDP that the Fed would currently be expected to obtain if Congress were to undo the fiscal cliff. On the other hand, I’m confident that the Fed can alter medium-to-longer-run expectations in such a way that the short-run impact of the change is enough to offset the short-run impact of the fiscal cliff. However, I think the Fed is unlikely to do so, and I think Congress realizes this. Thus I think the Fed is unnecessarily setting up a scenario in which the only way to avoid a recession is for Congress bust the budget. In my blog I have argued that the Fed therefore bears some responsibility for the fiscal problems that the US is likely to have in the coming years.
1. October 2012 at 13:48
Edward, Check out Saturos and Doug.
Morgan, Yup, “DeKrugman” is (are?) wrong
Saturos, Good point.
Andy, That’s an excellent point, which I hadn’t thought of.
1. October 2012 at 14:23
Saturos – As a relatively young antitrust lawyer, let me just say: that old saw about pricing has never really been true (at least while I’ve been practicing).
There may have been bad old days when it was true, but not lately.
Of course, this is not legal advice, etc.
1. October 2012 at 15:20
The triple taxing occurs when a company owns dividend-paying stocks in other companies. http://www.investopedia.com/terms/d/dividendreceiveddeduction.asp#axzz285mTnqNg
1. October 2012 at 17:52
Major_Freedom isn’t that way too simplistic? In the last boom the structure of investments was being stretched in both directions as a great deal of those “investments” were financing consumption. How can anyone a prior know what loose money will do to the structure of investments?
1. October 2012 at 18:35
Head Stomp:
You’re absolutely right, it is way too simplistic. Yes, the structure can be stretched in both directions, and I agree that the last boom had an expansion in both higher order capital and consumption, leaving the middle capital stages deficient.
The boom I was referring to was the “traditional” one, where higher order capital expansion is encouraged by lower than market interest rates.
One could say that there has always been a higher order capital expansion with lower than market rates, as this chart visually explains, and there probably always will be, but to be more accurate, sometimes consumption can be expanded as well, and during the last boom, we saw credit expansion financed consumption (via home equity and consumer loans), thus stretching the economy in that direction as well.
Typically, I usually keep things more “superficial” on this blog, and if and when anyone wants to challenge it or address it or respond to it, then I go into more detail when appropriate. It’s good that you picked up on it.
1. October 2012 at 18:40
Yes MF, what both supporters and opponents of the Fed (even people who work there) miss is that the Fed doesn’t really “set interest rates” at all.
14. November 2012 at 13:55
Yes MF, what both supporters and opponents of the Fed (even people who work there) miss is that the Fed doesn’t really “set interest rates” at all.
They set them indirectly, by printing whatever quantity of money will convince banks to set the rate that the Fed wants them to set.