Two cheap shots and a substantive criticism of Keynesianism
Cheap shot #1
I notice that Paul Krugman is now saying fiscal stimulus was never tried. That’s right; America didn’t do any fiscal stimulus. Funny, I seem to recall he argued that fiscal stimulus was responsible for the relatively fast RGDP growth of 2009:Q4. (BTW, people really ought to look at NGDP when evaluating stimulus, although on a quarterly basis the two measures are fairly closely correlated.)
Cheap shot #2:
I notice that Krugman defends his “no stimulus” argument with a graph showing government expenditures. I guess that’s OK, as in earlier posts he suggested that tax cuts weren’t very effective stimulus. On the other hand, Mark Thoma recently made the following claim:
It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast. It would be just as easy to point to the recent tax cuts that Congress (surprisingly) put into place and give those credit for recent employment gains.
Keynesians like to act like there is some sort of rigorously scientific model behind their calls for the government to waste hundreds of billions of dollars. Now we find that two of the top Keynesian commentators don’t even agree on whether tax cuts count as stimulus. If they don’t, Thoma’s point is flat out wrong. If they do, Krugman’s post is completely inaccurate.
[BTW, Thoma is doubly wrong about monetary lags. He confuses peak effect, often estimated at 6 to 18 months, with some effect, which occurs almost immediately after major monetary shocks. He also fails to mention that the effects should begin when the policy was expected (September/October 2010), not when it was announced (November.) And finally he ignores the fact that we know from TIPS market responses to rumors of QE2 that the policy does raise inflation expectations.]
Substantive criticism of Keynesianism:
In early 2009 Democrats had the sort of lopsided control of the federal government (House, Senate, and Presidency) that occurs only rarely (and that the GOP hasn’t seen since the 1920s.) Alex Tabarrok points out that (according to Krugman) this aligning of the political stars produced no fiscal stimulus at all. He suggests that Keynesian policies may not be politically feasible. Of course you could do counterfactuals and talk about how it would have been even worse under the GOP. I doubt it; I think the GOP would have done big tax cuts, which while not particularly effective, are (contra Krugman) slightly more effective than more spending.
But let’s put that issue aside. The bigger problem is that Krugman’s new argument makes it extremely likely that the $1.3 billion trillion stimulus package that he preferred, that the Keynesian models suggested was needed, would also have been a giant flop.
Let’s start from the fact that if we had no stimulus after Congress passed an $800 billion dollar package, it suggests a $1.3 trillion package would have produced an extra $500 billion stimulus, at best. But even this is an overstatement, as the federal government has trouble spending money quickly on shovel-ready projects. In all probability, some of the extra $500 passed by a pro-Keynesian Congress would have been tax cuts. And Krugman consistently argues that tax cuts aren’t very effective; indeed in the new post he implies they don’t count at all as stimulus.
But it’s even worse. The somewhat bigger stimulus (probably only an extra $200b to $300b in actual spending) surely would not have had a major effect on the unemployment rate, which was 9.8% when QE2 was announced in November. But Krugman has also argued that the effect of withdrawing stimulus is contractionary. So if we assume the extra stimulus was piled on to the existing stimulus in 2009 and 2010, output would have showed the same pattern, rising during months where there was more stimulus, and falling as the stimulus slowed down. The recovery would have been modestly stronger in 2009 (assuming fiscal stimulus works and isn’t neutralized by the Fed) but there would still have been a relapse in 2010 after the peak spending period, and thus it would have failed to make a major long term dent in unemployment. By November 2010 we’d have been pretty much where we actually were, with perhaps slightly lower unemployment.
Krugman likes to point to the “50 Little Hoovers,” but what he is really doing is pointing to 50 little flaws in the Keynesian model. If the cutbacks in state and local spending reflect declining revenues due to the recession, then the Keynesian model needs to treat them as endogenous, just as business investment falls endogenously due to weak sales and excess capacity. In order to be exogenous, it would have had to be under the control of the (Federal) policymakers who make the decisions about the size of the fiscal package. But Keynesians seemed to greet the news of huge S&L spending cutbacks with surprise and dismay. And then they used it as an excuse for the federal stimulus not working. That’s about as logical as blaming the failure of Federal stimulus on corporations cutting back on investment (something FDR did in the 1930s, showing that logic has never played much of a role in arguments over government stimulus.)
Krugman says that Obama’s stimulus package failed. He’s right. He says it was too small. Maybe. But what he doesn’t say is that if the Keynesians had gotten the $1.3 trillion package they asked for, it too would have failed. In the US it is politically difficult, maybe impossible, to enact the sort of fiscal stimulus that might have made a big difference.
My critics could point out that it is also politically difficult to get adequate monetary stimulus, after all, even Helicopter Ben wasn’t able to do very much. That’s a good argument. But there is one very important difference between monetary and fiscal stimulus. Even the most clumsy monetary stimulus (QE) has a relatively low expected cost (a possible capital loss on Treasury securities purchased by the Fed.) More effective types of stimulus such as lower IOR, higher inflation targets, level targeting, etc, don’t even have that cost. Fiscal stimulus is quite expensive, in terms of the deadweight cost of future taxes. From that perspective, monetary stimulus is the clear winner.
Are there any economists who still think doing more monetary stimulus in 2008, as NGDP was falling at the fastest rate since 1938, would have been a mistake? Several respected Austrian economists that I have spoken with suggest that in late 2008 more monetary stimulus would have been appropriate.
Next time we slide into a steep downturn, should we try an even bigger fiscal stimulus, or do monetary “level targeting?” I think the answer is obvious, now it’s all about convincing the profession as a whole.
PS. I define “cheap shot” as argument for which I know a good rebuttal.
PPS. The original version attributed a link to Tyler Cowen instead of Alex Tabarrok. My apologies to Alex.
Tags:
16. February 2011 at 10:26
Scott-
All the increases in money base are going into excess reserves. Even if your theory works in theory, how can it work in practice, if all the money creation is getting out into the broader economy, but instead is just a swap of bonds for cash which is parked at the Fed? Compare Money Base to Excess Reserves- they move in lockstep
http://tinyurl.com/4jufp8j
http://tinyurl.com/498q4s9
I support your call for level targeting, negative IOR, etc. all that. But the results of the Nth round of QE so far are very underwhelming.
Don’t you engage in some of the same arguments as Krugman? If things are going well, it’s because of QE, if things are not going well, it’s because we need level targeting. It fits any theory.
This is an analogy to the “50 Little Hoovers”- maybe we should call it “12 Little Plossers” for the FOMC committee.
Something to think about right?
“Krugman likes to point to the “50 Little Hoovers,” but what he is really doing is pointing to 50 little flaws in the Keynesian model. “
16. February 2011 at 10:27
Hmmm … OK. The UK already volunteered to demonstrate to the world the miracle of austerity. I can only hope the US submits itself to demonstrate to the world the magic of monetary “level targeting” as laid out by it’s prophet Scott Sumner. Only then I will put Keynes in the store room. For the time being I’m not convinced that a candle illuminates things better than a lighthouse.
16. February 2011 at 10:38
PS: “Several respected Austrian economists” is a nice oxymoron. Where did you find this rare species of Unicorns?
16. February 2011 at 10:49
Actually it was Alex not Tyler who made that MR post.
16. February 2011 at 11:08
Scott said: “Even the most clumsy monetary stimulus (QE) has a relatively low expected cost (a possible capital loss on Treasury securities purchased by the Fed.)”
This is probably scatter-brained, but the possibility of capital loss is arguably what gives QE some of its traction with market participants. In essence (at least in the New Keynesian framework), QE is a commitment to keep short rates low for longer. The mechanical part of that is buying long-term securities and selling short-term. So the Fed exposes itself to a larger loss the sooner rates start to rise. The hawks seem to be worrying that long rates will start to rise for reasons outside of the Fed’s control, the Fed will find itself unwilling to reverse out of the trade and inflation will somehow spiral out of control. Struggling to see the mechanism for this (maybe amplifying the risk of fiscal crisis?).
Viewed in this light, I guess QE1 was a little harder to interpret than QE2 (and corespondinlgy less effective at stoking inflationary expectations). MBS purchases aren’t as pure an interest rate play as Treasury purchases. With QE1 was the Fed trying to signal its intention to raise inflationary expectations or support housing and mortgage markets. I guess a bit of both…
16. February 2011 at 11:36
“And Krugman consistently argues that tax cuts aren’t very effective; indeed in the new post he implies they don’t count at all as stimulus.”
This is very inaccurate and is a ‘tell’ on the general quality of your anaysis.
16. February 2011 at 11:45
Perfectionism seems to serve the same purpose for Krugman that it does for dogmatic libertarians: it shelters their beliefs from the dread possibility of falsification. (Do they realize that they’re all huddled together under the same threadbare blanket– the one with “It’s never been tried!” embroidered on it?)
16. February 2011 at 12:04
@Zrimsek
My experience is that no one particularly likes having their beliefs falsified. Those with extreme beliefs seem no more likely to fall victim to this tendency.
@Sumner
“The bigger problem is that Krugman’s new argument makes it extremely likely that the $1.3 billion stimulus package that he preferred, that the Keynesian models suggested was needed, would also have been a giant flop. ”
That should be trillion not billion.
In general, I’m not sure what to make of multiplier estimates as a policy making tool. Even if you believe their results, they are the estimates from an exogenous spending increase. What does that tell you about the marginal value of an endogenous spending increase?
16. February 2011 at 12:40
So, Krugman made a claim about a single quarter, and another claim about the entire period of the recession and recovery, and you insist that the two claims have to be the same, or he’s contradicting himself? You cannot imagine fiscal policy being expansionary – in pure GDP accounting terms – in a single quarter but not being expansionary over a period of several quarters? Is that really how you want to approach this? Sheesh.
16. February 2011 at 13:03
Stephan, The Keynesian model predicts that austerity will produce very low inflation in the UK, if not deflation. How’s that prediction working out?
Stimulus is about NGDP. It’s not about RGDP and it’s not aboutr inflation, it’s about NGDP. I don’t know why people have so much trouble grasping that point.
dirk, Oops, I need to change that.
16. February 2011 at 13:14
thruth, Good point, It’s also true that the riskier assets that the Fed bought early on would tend to go up in value if there was a brisk recovery. That would encourage the Fed to persist.
Paul, Yes, but I have some sympathy for his original argument that it was too small. What I find so interesting about his recent argument is that it suggests that even the preferred $1.3 trillion would have been grossly inadequate.
Oneeyedman, The Keynesians assumed that the increase was exogenous, but they forget about the endogenous response of 50 little Hoovers. As far as the federal stimulus, the current level of AD already incorporates the expected fiscal stimulus. So there was never much chance that the actual stimulus would do much more.
kharris. Bingo! That’s why I said it was a cheap shot. I wondered whether people would notice.
16. February 2011 at 14:36
Don, You said;
“This is very inaccurate and is a ‘tell’ on the general quality of your anaysis.”
Heh, just because I do cheap shots doesn’t mean I allow them from my commenters. All I can say is you obviously didn’t read his new post. Look at the evidence he supplies for the lack of stimulus. It’s nothing more than a graph of government spending. If you read the post you will see that I am right. He’s implying tax cuts aren’t stimulus. If they are stimulus, then the data he provides to support his claim is worthless.
Justanothereconomist; You said;
“All the increases in money base are going into excess reserves. Even if your theory works in theory, how can it work in practice, if all the money creation is getting out into the broader economy, but instead is just a swap of bonds for cash which is parked at the Fed? Compare Money Base to Excess Reserves- they move in lockstep”
I must have 100 posts explaining that current changes in the base are meaningless. And here is one area where Krugman and I both agree 100%. We both agree that only permanent changes in the base can provide stimulus during a liquidity trap. (I say that’s also true when we aren’t in a liquidity trap.)
Krugman predicted that QE2 would probably not raise inflation expectations, but it was worth a shot. I predicted that it probably would raise inflation expectations, and was worth a shot. We were both right that it was worth a shot. I was more right about it raising inflation expectations. It did so (despite all the ERs) because markets took it as a Fed signal that they wanted easier money over time. This is also what people like Krugman and Eggertsson and Woodford insist monetary stimulus must do. So I’m hardly out of the mainstream here. I was more optimistic than the others, but regarding TIPS spreads my optimism was justified.
You said:
“I support your call for level targeting, negative IOR, etc. all that. But the results of the Nth round of QE so far are very underwhelming.”
I favor targeting expectations. Inflation expectations have risen from about 1.2% over 5 years to about 2.2%, although only about half of that is QE in my view. No one claimed that it would perform miracles, but NGDP growth expectations have risen substantially since QE2 was rumored. Actual growth may depend on lots of other factors.
Yes, you could say I’m also whining that money needed to be easier. But it’s much less costly to do extra monetary expansion. My point was not just that the fiscal stimulus was inadequate, but that it now looks like even $1.3 trillion wouldn’t have done the job.
16. February 2011 at 14:56
Uh, when the “UK’ goes to austerity then tell me about it. Right now, it has been all talk.
16. February 2011 at 16:36
2 quick points to make
1. UK dropped rates to 0 and its QE was a bigger as a percentage of GDP than in the US. Currency and structural issues aside, that’s why it has an inflation problem right now and not only has unemployment stayed sticky on the high side, but real earnings have fallen and will continue to fall as a result of MONETARY policy. Austerity as correctly pointed out by The Rage has not yet begun in the UK. Spending cuts will take effect from April onwards and these are NOT cuts in real terms yet to a bloated government budget/sector.
2. Scoot, u say that “Even the most clumsy monetary stimulus (QE) has a relatively low expected cost” … but you only mention the PNL aspect of the assets purchased to expand the monetary base. But what about the erosion of earnings in real terms? If people in the US are paying 20% for non discretionary items such as food and fuel is that not a cost? Have you actually run the numbers and figured out how many billions more people are paying for commodities in general? And please don’t give me some lame excuse that EVERY commodity has gone up to to temporary supply/demand imbalances.
And Scott, what about the millions of people pushed further into poverty or who can’t afford a meal world wide just for the sake of getting NGDP higher in the US? What about them? I guess they don’t count do they … “Our dollar, your problem” … indeed.
16. February 2011 at 16:37
2 quick points to make
1. UK dropped rates to 0 and its QE was a bigger as a percentage of GDP than in the US. Currency and structural issues aside, that’s why it has an inflation problem right now and not only has unemployment stayed sticky on the high side, but real earnings have fallen and will continue to fall as a result of MONETARY policy. Austerity as correctly pointed out by The Rage has not yet begun in the UK. Spending cuts will take effect from April onwards and these are NOT cuts in real terms yet to a bloated government budget/sector.
2. Scoot, u say that “Even the most clumsy monetary stimulus (QE) has a relatively low expected cost” … but you only mention the PNL aspect of the assets purchased to expand the monetary base. But what about the erosion of earnings in real terms? If people in the US are paying 20% for non discretionary items such as food and fuel is that not a cost? Have you actually run the numbers and figured out how many billions more people are paying for commodities in general? And please don’t give me some lame excuse that EVERY commodity has gone up to to temporary supply/demand imbalances.
And Scott, what about the millions of people pushed further into poverty or who can’t afford a meal world wide just for the sake of getting NGDP higher in the US? What about them? I guess they don’t count do they … “Our dollar, your problem” … indeed.
Sorry for the rant.
16. February 2011 at 16:57
…lopsided control of the federal government (House, Senate, and Presidency) that occurs only rarely (and that the GOP hasn’t seen since the 1920s.)
The GOP controlled all three from Nov 2000 until Nov 2006 increased spending, regulations, federal payroll & headcount like nothing seen in decades. Bush signed a $300b stimulus in 2008 and, of course, TARP. The 2001 EGTRRA was sold as a stimulus, too (hence the rebate checks).
Independents ditched the GOP starting in 2006 because Democrats promised more maturity on spending and ethics. Independents were so desperate for adults, that they ignored all the usual Democratic talk about environmnet, healthcare, green jobs, etc on the hope that it was the empty talk that Kerry, Clinton Gore, Tsongas etc fed to their left base.
16. February 2011 at 17:26
The Rage, I agree.
bertusmaximus, How does monetary policy in the US cause inflation in other countries? Don’t they have their own central banks. By the way, the media never reports on the fact that the poorest people in the third world are mostly farmers. How do you think they feel about the high food prices? Of course reporters focus on the urban poor.
As far as inflation in the UK, monetary policy controls NGDP growth directly, the split between inflation and real growth is dependent on the supply side of the economy. If Britain has high inflation and negative growth, then the problem is obviously AS, not AD.
If there is a model where monetary policy can cause inflation without raising NGDP, I’d love to see it. You seem to have something like that in mind, but I’ve never seen such a model.
bababooey, You said:
“The GOP controlled all three from Nov 2000 until Nov 2006 increased spending, regulations, federal payroll & headcount like nothing seen in decades. Bush signed a $300b stimulus in 2008 and, of course, TARP. The 2001 EGTRRA was sold as a stimulus, too (hence the rebate checks).
Independents ditched the GOP starting in 2006 because Democrats promised more maturity on spending and ethics. Independents were so desperate for adults, that they ignored all the usual Democratic talk about environmnet, healthcare, green jobs, etc on the hope that it was the empty talk that Kerry, Clinton Gore, Tsongas etc fed to their left base.”
I agree, but that in no way contradicts the quotation of mine that you provide. Never during my entire life has the GOP held the presidency plus roughly 60% of the House and Senate. That’s what lopsided means.
BTW, I don’t think they controlled the Senate for the full 6 years, but close enough.
16. February 2011 at 17:43
Scott,
You say fiscal stimulus doesn’t work. You also say there is a “desire” (i.e. political) issue with inflation or NGDP targeting.
Krugman agrees with you in a recent post that says, “But the same people denouncing Keynesianism are also screaming about inflation, and would never countenance a higher inflation target. So what can we do if that, too, is ruled out? Not much. If politics rules out all effective responses, there will be no effective responses.”
So the answer is obvious. Capital reserve ratios as a monetary policy tool. It would work much better than the existing tools plus no political opposition. Am I missing something?
16. February 2011 at 18:41
Scott,
Valid critique of Krugman and Thoma, of course. As to the monetary policy “alternative”, there is debate about what works (best). Texts are riddled with the word “belief”. We know that all kinds of things tried (or maybe not according to some aspects) in the past may disappoint. I strongly agree with your statement that monetary policy/stimulus is cheaper than fiscal policy/stimulus as a way of trying to influence the path of aggregate demand.
However, AD is is not the main thing most politicians care about. I guess many of those you would consider pragmatic/corrupt (i.e. the ones suitable for real political careers) understand that what they do in terms of macroecononc policy is ate best futile and often harmful. They only hope that whatever credit or punishment the public associates (via channels under control of generally biased media and rarely via people like yourself) with economic outcomes, is beneficial to their own interests (and of course the most direct way is spending close to home using funding raised elsewhere). Hence the ideal situation for the US is divided government and a Fed that does what it can. If they find a way to define and execute an NGDP management process along your lines, maybe we will find out if this works without too much ambiguity. But if it does, will that last?
16. February 2011 at 21:35
Scott said:
“We both agree that only permanent changes in the base can provide stimulus during a liquidity trap. (I say that’s also true when we aren’t in a liquidity trap.)”
This wasn’t really my point, but let’s discuss this. How long is permanent? If money base remain above 2 trillion for a decade is that permanent? Or does it require the Fed to declare a permanent increase in base, which of course we will never see in the real world?
Also, this wasn’t my point. Let’s start by assuming that your theory works, and an announcement of QE will work to increase NGDP. How can that work if all increases in money base become excess reserves? Choose any channel of Monetary policy to NGDP, expectations, portfolio balance, etc. This has to show up as money entering the economy, and this can’t be the case if all the base remains as excess reserves.
This has nothing to do with base expansion. Take this example- FED announces level targeting regime during a time with significant excess reserves, and this is credible despite no money base expansion. For this to work, the amount of excess reserves must decline one way or another, such that more money is getting into the economy.
To put it more clearly: For monetary policy to have a macroeconomic impact, you need some of the money base leaving excess reserves and entering the broader economy.
*This is not happening*
Therefore, I don’t see how QE can work (practically not theoretically).
17. February 2011 at 03:01
I think the weakest link in your arguement is the assumption that fiscal policy is more expensive. Inflation is another form of taxation, so maybe is just an arguement about one form of taxation versus another.
Corporate investment is very often wasteful as well (any big organizzation is), but we certainly don’t complain if corporations increase investment. Wealth transfers provide benefits even if you are not a recepient (maybe less than voluntary charity but still some).
While I agree that monetary policy should be our first port of call, I find your arguement against fiscal policy in all worlds unconvincing.
If a massive earthquake or major epidemic happened, would you argue against massive goverment intervention to soften some of the effects on the people affected? Would monetry policy be enough in that case with private organizzations in disarray?
I think the same applies to man made disasters and moral hazard be d*mned. Once it happened, it’s not the time to think about preventive measures…
17. February 2011 at 05:48
“Please respect FT.com’s ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article – http://www.ft.com/cms/s/0/e7218e76-3a8a-11e0-9c65-00144feabdc0.html#ixzz1EDvPgGBl
Among other things, the Treasury is considering giving the FPC the power to raise bank capital requirements if it feels the economy is overheating. The committee may also be able to impose new limits on overall bank borrowing, known as leverage, and change the way bank regulators weight different kinds of assets for risk to address troubled sectors.”
The British way to do things (not necessarily wi good effect on macro, though. It might contain the soft budget constraints (a sort of uncontrolled fiscal stimulus avail;able only to friends) inherent in poorly supervised banking systems. Apologies a bit too cynical..
17. February 2011 at 05:52
As I said days before, I agree with justanothereconomist: I don´t see any significant increase in monetary base or banks Reserve in FEd to talk about permanent effectc in inflation or GDp or NGDP expactations.
For the momment I just see an increae in real interest rate for both treasury bonds and Baa coprpotares. See “hard to explain as QE” in
http://cuadernodearenacom.blogspot.com/2011/02/hard-to-explain-as-quatitative-easing.html
17. February 2011 at 06:02
Scott, for the time being, the US dollar happens to be the currency in which all commodity contracts are priced in pretty much following the US dollar’s reserve status. When you print more US dollars, commodity prices go up in US dollar terms … as Carraro mentioned, its just another form of tax but at a global level rather than specific to the US.
The response you suggest, is that every other countries currency be allowed to rise versus the USD in order to maintain local prices constant. But if that’s the case then it seems more obvious (to me at least) that commodities should stop being priced in USD terms with the outcome that eventually the US dollar loses its reserve status … which I think is what will happen gradually if current US monetary policy persists.
Insofar as the UK is concerned, monetary policy may directly control NGDP but it doesn’t control the ratio of RGDP to NGDP … i.e. monetary inflation is dead easy to create, but real growth (or inflation to wages) is not controlled so there seems to be some other element in the policy mix required than just expanding the money base to create a healthy economy.
17. February 2011 at 06:21
And one other point … you don’t need to have any amount of increase in any of the monetary aggregates to increase price inflation or NGDP. All you need if for the central bank to change its policy from price stability and create the expectations that they are going to target an increase in asset prices by virtue of potentially increasing the money base ad infinitum … until everyone is rich.
17. February 2011 at 06:52
A. Carraro,
I used to think it too, but then ont he road to Detroit, I had an epiphany: At worst, Scott’s policy is what we use to provide cover to dismantling the Public Employee Unions. At best, he’s headed for the Federal Reserve.
If after it does its lowest level job, we want to re-examine its value, we can.
Unions = Sticky Wages
Public Employee Unions = Super Sticky Wages + Despised Government
Private Unions can drive a business to its death (no pun intended), but they experience the feedback loop – they know when they are about to lose the whole ball of wax.
Based on seemingly endless debt, unions cannot feel the same effects in the public sector.
Granted: If iPhones’s cost $1K there would be a much smaller market for iPhones, and a much slower adoption curve. Lower costs of production, not only brings scale, its fast growth awakens animal spirits.
Obvious: We have the kind of government labor, that would produce an $1K iPhone.
—–
Problem: Keynesians (Democrats) scream that making cuts to PE during recession is “bad” because it lowers AD. The same losers think then call keeping around the “$1K iPhone” (our new phrase) government labor is “stimulus.”
Answer: A monetary commitment from Ben guarantees that no matter how aggressive the GOP gets with cuts to Public Employees – the AD will not fall. Scott’s policy provides us the economic cover to destroy Public Employee Unions.
The virtuous cycle: All real economic growth comes from productivity gains that free up resources for other endeavors. This includes GOV2.0. And as GOV1.0 is the most bloated wasteful sector of our economy, it has been averaging ONLY 1% productivity gains since the mid 1960’s, we have a lot of fat to recover.
I put the number at $400-500B in ANNUAL savings in the near term, and we should seek to reduce public employee compensation at F, S & L level by $1T per year in the mid term against trend.
On the other part of the cycle, we are paying down debt, which is important because with a AD backstop from Ben, the cost of debt interest is going to explode as rates rise.
——
Finally, the morality argument: cheating philosophers.
It is immoral for economists to claim sticky wages as the reason for printing money, IF they are not doing everything they can possibly do to end all policies that promote sticky wages.
So en total, it goes like this….
“DeKrugman, there will be no Fiscal Stimulus. And since you have convinced us that sticky wages may be real, we will grant you Sumner’s QE and GUARANTEE there will be no fall in AD, but in return, you must support ending all policies that encourage sticky wages. Accordingly, we will be disbanding public unions, ending Davis-Bacon, and instituting Morgan’s Guaranteed Income plan.”
This is a bullet-proof argument. With it we are invincible. It is our magic lasso, our goat-horned headdress, and our Jojo Ba.
17. February 2011 at 09:45
I´d like remember you the words of Friedman on Japan´s deflation:
“The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.”
Bernanke is not increasing the HPM in circulation…
17. February 2011 at 09:58
Keep plugging level (n)gDp. It is probably the only political correct solution. Talking about (n)gDp’s fall in the last part of 2008 has to be an embarrassment to the administration. No doubt they’re thinking about it, even if they don’t acknowledge their error.
I think that Bernanke got confused with the speculative fever driving the commodity markets. It was just the inevitable transfer of speculative funds from the collapsing housing market (which found an outlet in raw materials).
17. February 2011 at 09:59
Scott,
Thoma countered by taking a cheap shot at your “cheap shot”. At least you were open in labeling yours as such. I took the liberty of countering his “points” on your behalf.
http://economistsview.typepad.com/economistsview/2011/02/cheap-shots-that-miss.html#comment-6a00d83451b33869e2014e8622e7b1970d
17. February 2011 at 11:47
Luis-
Me gusta mucho su blog. Should have checked it out before- maybe it’s less prominent because it’s in Spanish?
High Powered Money is definitely the metric to look at. Keep it up.
17. February 2011 at 13:27
Here’s a nugget from the man himself…
In 1940, Keynes concluded that war might be the only way that politicians in democratic nations could rationalize spending enough to bring about full employment. “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case “” except in war conditions,” he wrote in The New Republic.”
from: http://old.nationalreview.com/nrof_bartlett/bartlett200412220847.asp
17. February 2011 at 15:31
dtoh, That won’t be enough to solve the problem. And if it was enough, it’d be just as controversial as lower IOR.
Rien, You said;
“Texts are riddled with the word “belief”. We know that all kinds of things tried (or maybe not according to some aspects) in the past may disappoint.”
Keep in mind that Fed policy has been a success in their own terms. They say they want to avoid 3% inflation, and they have succeeded. They say they don’t want to target NGDP, and they’ve succeeded. They say they don’t want level targeting, and they’ve succeeded. Bernanke says he has all the tools he needs, but simply doesn’t think the economy needs more stimulus at this point. So any “failure” is not a technical lapse, it’s a failure to even try to raise NGDP at the sort of rate that would allow a robust recovery. It’s a failure of imagination. There is no technical fix for that.
justanothereconomist, You asked;
“This wasn’t really my point, but let’s discuss this. How long is permanent?”
In the Krugman model it’s at least until after the economy exits the liquidity trap. Most people believe that will be a year or two from now. It’s more complicated than that, but that’s a ballpark estimate of the minimum time. And that assumes the Fed doesn’t raise IOR.
No, monetary stimulus does not require more money to go out into circulation. Many types of stimulus operate by lowering the demand for cash, not raising the supply.
You said;
*This is not happening*
I’m not sure that is correct. I thought the cash in circulation had grown over the past few years.
A. Carraro, You said;
“I think the weakest link in your arguement is the assumption that fiscal policy is more expensive. Inflation is another form of taxation, so maybe is just an arguement about one form of taxation versus another.”
I don’t follow. Even if inflation is a tax, that’s true for inflation created through monetary or fiscal stimulus. But the other costs of fiscal stimulus are far higher. The inflation tax cost of the current monetary stimulus is trivial.
You said;
“If a massive earthquake or major epidemic happened, would you argue against massive goverment intervention to soften some of the effects on the people affected? Would monetry policy be enough in that case with private organizzations in disarray?”
Isn’t that a supply shock? Why would you think I believe monetary policy could address that issue?
Rien, Is that addressed to dtoh?
Luis, You are looking at the wrong variable. The monetary base is not informative right now. You want to look at inflation expectations. Or NGDP growth expectations. Real interest rates will rise if the economy is expected to recovery more quickly–that could be good news.
bertusmaximus, You said;
“Scott, for the time being, the US dollar happens to be the currency in which all commodity contracts are priced in pretty much following the US dollar’s reserve status.”
That’s irrelevant. The Chinese yuan price of commodities would rise at exactly the same rate whether prices of commodities were quoted in dollars or some other currency.
And even if you were right, any country could prevent inflation by simply appreciating its currency.
You said;
“Insofar as the UK is concerned, monetary policy may directly control NGDP but it doesn’t control the ratio of RGDP to NGDP … i.e. monetary inflation is dead easy to create, but real growth (or inflation to wages) is not controlled so there seems to be some other element in the policy mix required than just expanding the money base to create a healthy economy.”
Yes, exactly my view. BUT IT CAN’T BE ANOTHER DEMAND-SIDE POLICY, LIKE FISCAL STIMULUS. You need supply-side reforms in the UK.
I agree with your second comment.
Luis, I think Friedman may be wrong. The money supply may not rise.
Thanks flow5.
Mark, Thanks, I’ll take a look.
John, A low point in Keynes’s career.
17. February 2011 at 16:25
Scott,
A low point, or merely a summary? This proposition is in the general theory. It’s every Keynesian’s go-to. If this is grotesque, and it is, it is the face of Keynesian “economics”. He should have quit at The Evonomic Consequences of the Peace. We’d have been better off and so would his legacy.
17. February 2011 at 16:46
Scott,
Tell me this: do you believe it is inaccurate to consider Keynesian macro to, in fact, not represent economics at all? Your monetary theory involves a specify good for which there are actual markets: money. Human beings can choose purposefully to increase their demand for money. Keynesianism offers no such thing. It’s all human less aggregates whose interactions are merely asserted out of tautology as if the ex-post summary of activity can offer an explanation for why that activity occured.
Am I being shrill in my dismissal? Sure. Is it unkind to these Keynesian macro “economists” who’ve devoted their lives to studying the phlogiston theory fire? Maybe. It’s not personal. Still, the phlogiston theory of fire was a waste of time, just like Keynesianism, and missed the basically elementary components of it’s subject (human action and choice in a world of scarcity), just like Keynesianism.
17. February 2011 at 18:00
Scott,
Respectfully I disagree. The ability to set and adjust capital reserve ratios would give the Fed absolute control over money supply and credit. Assume you wanted to expand credit. You would simply raise the reserve ratio on Fed deposits, treasury securities, repos, cash, etc., and set a negative ratio on any net increase in business and consumer loans. You would have instantaneous and total control over credit. No need for expectations.
17. February 2011 at 18:38
Scott,
Isn’t the real low point in Keynes’ career this:
“Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.” – Preface to German edition of The General Theory in 1936(ish).
17. February 2011 at 18:46
[…] not fiscal stimulus? Several Keynesians have made that argument in my comment sections. Then I went on to make a light-hearted joke about how Krugman doesn’t believe tax cuts are fiscal stimulus […]
17. February 2011 at 20:49
[…] spending only compensated for it, without actually increasing total spending (although he usefully doesn’t count the tax cuts as part of the stimulus, which sounds a lot like cooking the numbers to me). Given the exorbitant […]
17. February 2011 at 23:33
Scott,
you said:
“Rien, Is that addressed to dtoh?”
Yes,I should have indicated that.
18. February 2011 at 00:50
Thanks, justanothereconomist. Sometimes I do in english, but english is not easy followed here. In
http://miguelnavascues.wordpress.com/ I have some article in english, with not very much fortune.
18. February 2011 at 05:11
@dtoh,
In a crisis, it’s quite likely that many financial institutions are insolvent if honest accounting is used. How does a capital reserve ratio work when there isn’t any capital?
18. February 2011 at 07:55
Jeff,
So there are a bunch of ways in which the reserve requirement works.
1) During good times, the capital reserve requirement serves as a break on excessive leverage and speculation so you are less like to get monetary shocks and to have banks suffer large losses of capital.
2) Even after the Lehman Shock, which was quite severe, the problem wasn’t no capital, it was a reduction in capital. A flexible reserve ratio regime would allow the Fed to deal with the this by reducing capital reserve ratio.
3) A lot of the losses in the system after Lehman, were mark to market losses, which were primarily due to a lack of liquidity (massive widening of the bid-offer spread) and which were never going to be realized. The Fed could certainly set up the accounting for capital reserve ratios based on realized loses and gains rather than market to market accounting.
4) As I have suggested the program should be done in conjunction with an explicit Fed guarantee program for participating institutions. Inadequate capital plays IMO a relatively minor role in the contraction of credit. What plays a major role are a) concerns about the credit worthiness or market price of the assets held by banks, and b) banks concerns about their own (non-equity) funding and therefore drives them to shift to more liquid assets. A fed guarantee gets rid of a lot of the funding concerns.
5) In downturn what you want is an expansion of credit. You don’t really care how much or how little capital the banks have so in a downturn the Fed sets that reserve ratio based on the actual capital position of banks in a way which forces an expansion of credit.
For example, by having wide discretion on how the ratios are set, the Fed can force credit expansion regardless of the capital position of the banks. Suppose for an example that a bank only has 10 cents worth of equity left. Then the Fed implements a policy change to the ratio requirement with a zero rate on the amount of assets held prior to the time of the policy change and a negative rate on any net increase in assets after the policy change. Whamo… the banks have to increase their assets (lending).
I hate to keep harping on this, but this would be an incredibly effective policy tool and one which would face relatively little opposition (except from the banks).
18. February 2011 at 19:23
John, That’s pretty bad about Germany. I guess I’d heard that but forgot.
Old Keynesian economics isn’t really econ, I agree with you there. I tries to explain NGDP, but has no model of the value of the medium of account. New Keynesianism is better.
dtoh, I don’t want control over credit, the market should determine that. I want control over NGDP expectations.
18. February 2011 at 20:49
Scott
But you only want control over NDGP expectations in order to influence credit/money supply. Are you being disingenuous or am I missing something?
19. February 2011 at 15:31
dtoh, You are missing something. I want to control NGDP because I think it will produce more macro stability, a smoother business cycle.
You shouldn’t say “credit/money” as if they are the same thing, they are completely different entities. You can have credit without money, and vice versa.
19. February 2011 at 18:12
Scott,
Thanks for the response. Could you let me know if I understand this correctly. I think it’s easy to see how you can expand credit without increasing the money supply (e.g. trade credit, etc.), but what is less clear to me is how you expand money supply in a way that impacts the the economy, (i.e. doesn’t just result in an increase in vault cash or Fed deposits) other than through some expansion in credit. I think there are two mechanisms for this to happen other than through increased credit; one is if the Treasury simply prints cash to meets it’s obligation, which the U.S. doesn’t do. The other is if businesses or individuals exchange other assets with the banks for money. What I don’t understand is how important this latter mechanism is for economic (NDGP) expansion as compared to banks increasing credit to businesses and consumers.
Also, why should the market control credit, but the market not control the business cycle.
19. February 2011 at 19:33
@dtoh:
“but what is less clear to me is how you expand money supply in a way that impacts the the economy, (i.e. doesn’t just result in an increase in vault cash or Fed deposits) other than through some expansion in credit”
One way is to buy assets with new money. For example over the last few years, the Federal Reserve bought the Red Roof Inn (among other businesses, land, etc) with new money. The NY Fed really more of a Hedge Fund than a central banks nowadays though.
19. February 2011 at 21:12
Doc,
I guess I understand that. I don’t know the numbers but I suspect the hedge fund activities are pretty small. It would seem to me that mostly what happens is that the Fed buy assets from banks (mostly treasuries) and then the banks buys assets from the individuals and business (an exchange of money for non-money assets). What induces businesses or individuals to do this is either a) the wealth effect of an increase in asset prices where asset prices rise because of expectations of looser money or higher economic growth leading to higher corporate profits or b) expectations of higher income/cash flow from an improving economy which gives business and individuals more confidence to liquidate assets and spend the money even absent any increase in asset values.
What I don’t really understand is the relative importance of this monetary expansion, which is not related to increased credit, versus the importance of the expansion of credit.
I have a hard time believing there is much wealth effect for businesses except maybe to the extent that it impacts their pension obligations.
20. February 2011 at 09:17
dtoh, You asked;
“Also, why should the market control credit, but the market not control the business cycle.”
The market doesn’t control the money supply, so they have no way of controlling the business cycle. If the government cuts money in half and creates a depression, the market can’t “control” that.
The Fed can simply create cash and buy assets. That pumps up NGDP, without directly affecting credit.
20. February 2011 at 14:52
Scott,
The Fed can create cash by buying assets, but if they are only buying from banks which are exchanging Treasuries for vault cash or deposits with the Fed, I don’t see how this has any economic impact. The only way it can have an impact is if the Fed buys assets directly from businesses or consumers or if the banks turn around and buy assets from businesses and individuals, or the banks supply additional credit to businesses and individuals.
So the two questions, I have are:
If businesses and individuals aren’t selling assets (primarily Treasuries) before the Fed action, what is the motivation to do so in response to Fed action? Just the small price premium which the Fed pays on the assets?
Second, given that there are two mechanisms at work (business and individuals converting assets into cash and banks providing more credit). What is the relative importance of the two mechanisms?
21. February 2011 at 08:38
Scott,
You wrote: “By the way, the media never reports on the fact that the poorest people in the third world are mostly farmers. How do you think they feel about the high food prices?”
1 – Net-sellers of food like the new higher prices, but more than 75% and in some cases more than 90% of the farmers in many countries purchase more food than they sell. Most of them were hit hard during the last food crisis.
2 – Food prices is an aggregate. What matters are individual food prices because “farmers” don’t produce food baskets, but individual commodities. Last time around it was staple foods that saw most of the movement, this time it’s meat and sugar that are moving fastest. They have different impacts on the poorest.
Put those fun facts together and it gets really complicated. Yes, the media can’t handle that. Here is what I wrote about QE2 and food prices a couple weeks ago. Another post on the new peak in food prices from last month.
21. February 2011 at 12:54
dtoh, if you set cash reserves too low you’ll get a wave of bank runs that will wipe out the money supply anyway. Let’s say you adapted Scott’s “auction” plan for NGDP targeting to reserve ratios instead of monetary base. Then, if you asked me what my net NGDP position would be at a reserve ratio of 30%, it would be very short. 20%, somewhat short. 10%, all-square. 1%? MEGA SHORT.
21. February 2011 at 18:01
dtoh, You asked.
“If businesses and individuals aren’t selling assets (primarily Treasuries) before the Fed action, what is the motivation to do so in response to Fed action? Just the small price premium which the Fed pays on the assets?”
Yes, just the small price premium, as in any other market.
On your second question, the excess cash balance effect is the key, the credit impact is minor.
D. Watson, You said;
“Net-sellers of food like the new higher prices, but more than 75% and in some cases more than 90% of the farmers in many countries purchase more food than they sell. Most of them were hit hard during the last food crisis.”
Doesn’t that mean city dwellers sell more food than they buy? That seems very odd. Where do farmers get the income to buy food, if not from selling food?
BTW, I’d include commodities such as cotton, which are also soaring in price.
21. February 2011 at 19:45
Richard,
I’m not talking about cash reserves. I’m talking about capital reserve ratios. Also, my suggestion was that the reserve requirement also be tied in with an explicit Fed guarantee so you wouldn’t need to worry about bank runs.
21. February 2011 at 20:05
Scott,
You respond,
“If businesses and individuals aren’t selling assets (primarily Treasuries) before the Fed action, what is the motivation to do so in response to Fed action? Just the small price premium which the Fed pays on the assets?”
Yes, just the small price premium, as in any other market.
On your second question, the excess cash balance effect is the key, the credit impact is minor.
I have a little experience in corporate management and individual wealth management and I have a hard time seeing this.
First, as a corporation unless you’re Ford Motor Credit, a small change in yield on Treasuries is not going to induce you to exchange Treasuries for cash. Second, even if you exchange Treasuries for cash, CDs, commercial paper or some or other money or near-money asset, it’s not going to have one iota of impact on your spending so unless it results in an expansion in credit by the banks, it will have not have any economic impact.
Second, for individuals, a drop in Treasury yields may push up share prices and have some wealth effect impact on demand but otherwise I have a hard time believing there are enough individuals with Treasury portfolios to have much of an effect.
Bottom line, looking at the individual actions of economic players, I have a hard time seeing where an exchange of assets (especially Treasuries) into money has a significant impact on demand except through the mechanism of an expansion of credit (or through expectations).
22. February 2011 at 13:33
“Doesn’t that mean city dwellers sell more food than they buy? That seems very odd. Where do farmers get the income to buy food, if not from selling food?”
Large farmers can sell a great deal to feed both the urban and rural. Don’t forget also the large farmers from the US who are so graciously subsidized so they can sell or have food aid sent to the poorer populations.
I quote from a CGIAR draft publication from 2008:
“Rural households in East/South Africa spend a higher proportion of their income (45-75%) on food compared with urban households (34-58%) …. Households that are buyers of staple grains are generally poorer and have smaller farm sizes and asset holdings than the median rural households. … Only about 5-15% of the rural population buys and sells the main staple commodity in the same year. They comprise both relatively large farms that sell grain and buy back small quantities of processed meal, as well as relatively poor households that make distress sales of grain after harvest only to buy back larger quantities later in the season.”
As to where they get the money, most of these people have multiple sources of income. It’s asset diversification to deal with shocks. That fact also keeps their investment in any one income source low, which similarly keeps average incomes low. While a rational response to prevent negative income shocks, it slows growth significantly. Then, because I need cash Now to pay debts and loans, I have to sell what little I have produced at the harvest time when everyone else is selling and prices are low only to buy more food (usually other kinds of food) later in the season when prices are higher. Again, I can sell more maize than I buy, but buy more food than I sell.
22. February 2011 at 17:18
[…] broach a subject I’ve been trying to figure out how to post on for some time. The first is a post by Scott Sumner noting the failure of Keynesianism first as policy but even more importantly in political terms. […]
23. February 2011 at 15:59
dtoh, I’m puzzled by your comment. If someone walks off the street and buys some stocks or bonds, where do you think those stocks or bonds come from? What induces those people to sell to you? If you disagree with my response we must be talking past each other, as I am not saying anything controversial.
D. Watson, You may be right, but is this typical of the third world, or just that part of Africa? In China the agricultural system is dominated by small farmers, unless things have radically changed in recent years. I would think that China is more typical of the developing world, but am not certain.
24. February 2011 at 07:04
Scott,
It depends on whether it’s done in the primary market (new issuance) or the secondary market. If it’s a new issuance it results in an expansion of credit. If it’s in the secondary market, the net effect might just be an asset substitution. I buy your bonds in exchange for my stocks. No net effect. Or I might reduce my deposits with the bank and buy bonds from them shrinking the bank’s balance sheet. Conversely, if I sell bonds to the bank, it increases the bank’s balance sheet. If the banks makes a new loan, it will impact the economy by causing the borrower to spend more (increase demand). If the bank flips the bonds to the Fed and increases it’s deposits with the Fed, it will have no impact on demand.
What I am trying to understand is how monetary policy (other than through expectations) impacts demand. Changes in asset prices might cause businesses or consumers to shift from stocks or bonds into cash, but that alone will not stimulate demand except through a wealth effect.
Ultimately, unless monetary policy can effect demand (in either the short or long term), it won’t be able to effect expectations.
It seems to me that what impacts demand is that increases in the money supply results in an increase in credit which results in increased corporate and individual spending (demand). Simply causing corporations to shift assets into cash has only a very minor impact on demand.
24. February 2011 at 08:00
I can’t speak for Scott but hasn’t he made the point before that if you think all printed money will just be added to reserves with no effect on the price level, why wouldn’t you just print enough money to pay off the entire national debt in one go?
24. February 2011 at 13:24
China has small farmers who are primarily net-sellers. The important factor is not small vs. large, but productivity and what good is being sold. (Although, a “small” holder in Africa has less than 2 hectares and a “small” holder in Brazil has 10, so your mileage may vary.) Most Asian economies, particularly the big ones, made significant investments in the 60s-80s that increased productivity in a major way.
But the “poorest people in the world” are not primarily the Chinese farmers. 3/4 of the people earning less than $0.50/day come from Sub-Saharan Africa (121mil), one sixth as many are in South Asia (19.7) and less than half of THAT is East Asia (8.8).
If you want to go up to less than $2/day poverty, there are still more poor people in SSA than China (556 mil to 474), even after the most recent revision increased our estimate of Chinese poverty.
(Sources: Ahmed et al, 2007; Chen and Ravallion, 2008 — discussed in my textbook on global food policy, due out October)
On a related, but different subject, I’ve been pondering food prices and inflation. A lot of the reports I read like talking about what percent of overall inflation comes from food prices. The thing is, the food price increases are largely due to food sector factors, not particularly to monetary policy; the same for oil price increases. The Mises Institute writers keep getting confused between changes in relative prices and general inflation caused by monetary policy.
Food price changes do eventually cause inflation as increases in the cost of living shift labor supply curves leading firms to increase wages which increase costs which increase other prices … but that’s a long process and one-time.
Whenever you next have fun deconstructing the term inflation, how about pondering a way to tease apart Friedman’s monetary-inflation from relative price changes? My best guess right now is to perform a factor analysis on the basket of goods. The common factor among them all is monetary inflation. Is that a useful construct? Or is all we care about the change in the cost of a fixed basket of goods? For evaluating monetary policy, I can’t believe so, but I’d welcome your thoughts before I write up the post.
24. February 2011 at 18:33
dtoh, I’m afraid you are way off base here. In order to understand how money affects AD you MUST start by considering an economy without any credit markets. How would extra money then boost AD? The answer is that people prefer to hold a certain share of their income in the form of cash. If you add cash, people temporarily have more cash than they want. They try to get rid of it, but cannot do so (in aggregate) as the money simply gets passed on to others. But the attempt to get rid of excess cash balances gradually increases spending, until NGDP rises enough so that people are again holding their preferred ratio of money to income.
Now you are free to add credit markets if you wish, but it won’t change anything important.
D. Watson, That’s important information. I guess we’d also need to know the effects on South Asia, in order to know the effect at the world level. Asia has so many more poor people than Africa, although as you say the poorest of the poor are often in SSA.
Since Africa is a big commodity exporter, and since African GDP has also grown much faster than usual in the past decade, we’d also want to know how the commodity boom has affected the non-farming job opportunities of the poor in SSA. My hunch is that the effect would have been positive.
24. February 2011 at 19:00
D. Watson,
I just noticed your comments on global poverty. I’m teaching a course in Development Economics this semester and I’m trying to keep my students abreast of recent trends (as it turns out to no avail, but that’s another matter). I consider your comments useful information (especially concerning SSA).
24. February 2011 at 19:29
50 hoovers?
um… Hoover started some of the largest Keynesian stimulus and infrastructure building the US has ever seen.
24. February 2011 at 19:48
Doc Merlin,
This is a very long comment thread. Who said anything about “50 Hoovers”? It’s helpful just from a comprehension perspective.
24. February 2011 at 19:57
@Mark:
Scott did in his post.
‘Krugman likes to point to the “50 Little Hoovers,” but what he is really doing is pointing to 50 little flaws in the Keynesian model’
24. February 2011 at 20:02
Oops. Thanks. I appreciate the clarification.
24. February 2011 at 21:49
Scott,
In a simple economy if you just dump cash onto a village out of a helicopter, it will have the prescribed effect, but in the US economy, cash infusions are effected either through the purchase of assets or the provision of credit. Fresh credit is almost as good as a helicopter dump, but asset purchases simply cause economic players to treat the cash as a replacement store of value for the asset sold rather than an increase in the medium of exchange. Treasuries out cash in.
The problem I have is that in spite of some not inconsiderable observation and understanding of how individuals and businesses behave, I have a hard time seeing the circumstances in which inducing an asset substitution of Treasuries for cash will lead to increased spending. Businesses and individuals simply do not operate this way.
26. February 2011 at 11:28
dtoh, You said;
Fresh credit is almost as good as a helicopter dump, but asset purchases simply cause economic players to treat the cash as a replacement store of value for the asset sold rather than an increase in the medium of exchange. Treasuries out cash in.
No, these aren’t close substitutes at all, as cash doesn’t earn interest.
28. February 2011 at 12:51
Mark, Glad to help.