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She probably will continue, perhaps even longer than the departing Ben Bernanke would, the “quantitative easing” that is “trickle-down economics” as practiced by progressives:
Very low interest rates drive investors into equities in search of higher yields. This supposedly produces a “wealth effect” whereby the 10 percent of Americans who own about 80 percent of stocks will feel flush enough to spend and invest, causing prosperity to trickle down to the other 90 percent. The fact that the recovery, now in its fifth year, is still limping in spite of quantitative easing is, of course, considered proof of the need for more such medicine.
Easing serves two Obama goals. It enables the growth of government by deferring its costs with cheap borrowing. And it redistributes wealth: By punishing savers, it effectively transfers wealth from them to borrowers. .. The Fed seems to be evolving into a central economic planner with a roving commission to right social wrongs such as unemployment.
1.) What is the counterfactual? What would the US economy look like today if the Fed were neither buying bonds nor promising keep the federal funds rate very low for a very long time? What would it look like with the tight money Will apparently wants?
Well, we have the natural experiment of two advanced economies that have both been practicing fiscal austerity: the euro zone (passive central bank, double-double digit unemployment, double-dip recession, looming deflation) and the US (active central bank, falling unemployment, slow economic growth) but with very different results.
2.) If you are looking for something more mathematical, there is this scary QE counterfactual from Political Calculations. According to PC’s model, the fiscal drag from spending cuts and tax hikes should have put the US economy into a deep recession this year. Instead of nominal GDP rising by 2% from late 2012 through the first half of this year, it would have fallen by 2%. So the Fed efforts may well have prevented a double-dip recession of the sort Europe (and the stand-pat ECB) has experienced where unemployment is over 12%. In the US, the U-3 jobless rate might have made a return trip back near 10%.
Noting the 2012 US economy seems no better than the 2013 US economy misses this counterfactual.
3.) Is the Fed exacerbating income inequality as Will suggests? Here is JPMorgan economist Michael Feroli on why it is not — particularly when income is measured as disposable income:
… the well-off earn more interest income than average, and pay less interest expense than average, and so their disposable income is relatively harmed by lower interest rates. The converse holds true for lower-income households. The second reason is that as an empirical matter wage inequality is reduced when the economy is operating closer to full employment. To the extent Fed policy has been stimulating economic activity and closing the output gap, it is serving to narrow wage disparities—or at least offset other longer-run forces that have been contributing the growing wage inequality.
4.) And as for Will’s point about punishing savers with low interest rates … well, I will let Scott Sumner handle this one:
— Tight money does not raise interest rates, at least over the relevant time frame for welfare considerations. Interest rates in the eurozone today (0.5%) are almost certainly lower than they would have been had the ECB not adopted a tight money policy in 2011, raising rates from 0.75% to 1.25%. That policy drove the eurozone deeper into recession, pushing rates even lower. The same thing happened in America in 1937-40. That’s right, low rates can reflect tight money. Even low real rates. The low real rates in America today partly reflect the recent recession, which was caused by ultra-tight monetary policy in 2008-09.
— Tight money hurts saving nations in other ways. For instance, the ECB policy that caused eurozone NGDP to grow by 2.7% over the past 5 years (instead of the normal 22%), has dramatically worsened the sovereign debt crisis. As a result of this crisis, savers and taxpayers in high saving countries like Germany will suffer enormous losses.
— Thus the central bank should not help virtuous savers, nor should it try to help non-virtuous savers. But the tax authorities should help both groups, by eliminating all taxes on investment income.
5.) I can hardly believe that Will seems still to be unaware of the market monetarist take on Fed policy, especially since he is familiar with Milton Friedman monetarism. In fact, I don’t believe it. Look, the Fed should try and provide nominal stability, while fiscal policy focuses on supply-side factors. Is this central planning? Is Will proposing to end the Fed? If not, then the goal should be to figure out the best way the Fed should conduct monetary policy given Hayekian knowledge limits. Economist John Hendrickson:
… the question is what a central bank should do given that one exists. I favor nominal income targeting because (1) I think that it minimizes the information and knowledge that central bankers must have to do their job and (2) because a nominal income target requires the money supply to adjust roughly in the same way as it would under a free banking system. In other words, a nominal income target is as close as we can get a central bank to replicating what would happen if we had a free market for bank notes. To argue that the Fed shouldn’t conduct QE because centrally planning is hard is an argument against a central bank, it is not an argument against QE.
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