By Dan Kervick
The recent exchange on the nature of banking among Paul Krugman, Scott Fullwiler, Steve Keen and others has been feisty and instructive. But some readers might be left wondering whether the whole exercise is too wonky by half. The anatomical details of banking systems might be juicy and interesting for the academics who like to dissect those systems and dig deep into their entrails. But how significant are the details for practical questions of public policy? They are in fact very significant.
The functional details of institutions matter, and without understanding how the banking system actually works it is impossible to distinguish causes from effects in our attempts to guide that system toward the service of the public good. Conventional textbook models of banking and monetary systems are responsible for widespread commitment to the money multiplier and loanable funds models of the relationship between central bank reserves and the volume of bank lending. Relying on these models, some prominent economists and pundits have been telling us throughout our recent economic crisis that we can address the problems of a stagnating economy and persistently high unemployment with the reserve management tools of monetary policy alone.
Even worse, some monetary policy hyper-enthusiasts seem to view the Fed has having vast powers to manage the nation’s overall spending level and adjust the nation’s money supply up and down though mysterious and occult mechanisms that extend well beyond the grubby plumbing of the credit system. The Wizard of Fed, it seems, can control the economic minds of Americans though imperious pronouncements on his expectations for the future. Hundreds of millions of Americans, one is led to believe, pay close attention to the Beloved Leader and await his determinative dicta, and then adjust their own behavior accordingly. L’État, c’est Ben. The nation’s central banker is the glass of financial fashion and the caller of the economic tune.
Incongruously, this picture of an America enthralled under a slavish devotion to the oracular sayings of Chairman Ben is often brought forth as an instance of the “rational expectations” approach in economics. Allegedly, the lemming-like congruence of expectations precipitates its own self-generating rationality. Since we all know that we have all tacitly agreed to enslave ourselves to the nation’s central banker, when we then proceed to conform to the general goose-stepping we are behaving quite rationally.
Now I ask you: speak to several of your neighbors tonight and ask them who Ben Bernanke is and what he does, and then consider whether this precious conceit of the court theorists of the financierati has the slightest grounding in empirical reality. I have no doubt that this picture describes the attitudes of some relatively small number people. My guess is that most of the people in question watch CNBC and Bloomberg all day, and manically shuffle their money hither and thither in the asset markets as the tipsters tip and the news items roll in. But down on Main Street where the real economy lives, and where people are too busy working all day – or at least trying to get work – to spend time playing games in the markets? Does the average citizen’s step either quicken or slacken to the cadences called by the Fed chairman? Does the average consumer go to the store looking for a washing machine or an iPad on the Fed’s say-so? It’s doubtful.
This inordinate faith in and reverence for the power of the central bank and the Central Banker has had a profound effect on national policy over the past several decades. The US Congress has assigned to the Fed the “mandate” to achieve full employment, and many now routinely excoriate the Fed for failing to fulfill that mandate. And yet, while there may be more the Fed can do, there is little evidence that the Fed actually has any substantial degree of control over demand and employment in the real economy, at least in a circumstance in which interest rates have fallen as low as they can go. In fact, as various adventures in conventional and unconventional monetary policy have continued to fail, the evidence mounts that faith in monetary policy is misplaced, official mandates notwithstanding. We might as well assign to the Air Force a mandate to deliver pink ponies to every child in America. Just as there is no reason to think that Air Force brass and fighter pilots are particularly well-prepared for satisfying the equine needs of America’s eager tots, it seems increasingly clear that the Fed is not the agency of government best suited to parachuting real jobs down across America.
The problem in America is not bankers who won’t lend. Corporations are already sitting on record-setting amounts of profits and cash, but production and hiring are not booming. The problem is that ordinary people at the foundation of our economy, the people whose desires for goods and services drive the production that employs our resources, are lacking income. They do not want more credit and more debt. They want more income.
Yet it’s not as though we don’t know how to promote economic production, deliver income and boost unemployment when the private sector fails to deliver as much of these social goods as we need. As a monetarily sovereign country, the US government can finance an expansion in spending that does not require either new taxes or burdensome debts left to posterity. What people want the Fed to do – somehow push new, spendable monetary assets into the real economy – the political branches of the government can do better, and in a much more direct and effective way. What is called for is a renewed commitment to fiscal policy, not more exercises in conventional and unconventional central bank policy. We need to return fiscal policy to the front and center of our national discussion of economic policy.
Fiscal policy and the political branches of government are needed to do what the central bank can’t, and to restore our sick economy to health. But there is another reason that we need to rediscover the power and capabilities of fiscal policy. The incessant debates about the virtues of monetary policy tend to encourage people to take an excessively technocratic and abstract view of our nation’s economic policy needs, and to reduce those needs to the rubric of “macroeconomic stabilization.” But our nation doesn’t just need jobs in general; we have specific national needs for specific kinds of work. We don’t just need more production and spending in general; we need to produce and buy specific kinds of things to advance urgent public purposes. The macroeconomist sometimes views spending on a bridge or a school as spending in the abstract; spending that is justified by the mere fact that we need more spending of some kind. But the citizen sees these actions mainly as spending on a bridge or a school – something we do mainly to buy something we need. That’s why monetary policy is a lame substitute for engaged fiscal policy in a democracy. A central bank can, at best, only concern itself with the public purpose of managing the flow of money and credit in general; but the public has very specific purposes in mind.
We are faced with imposing national problems of social decay, public underinvestment, incoherent and feckless national purpose and unconscionable underemployment of people and resources. These are problems that can’t be fixed by Fed money management and expectations setting, and many of them are challenges of national scope that manifestly exceed what we can expect from the hurly-burly and hustle of private sector entrepreneurialism. Solving these problems is going to take an activist national government, and a politically engaged and committed public, directing serious resources toward unmet public purposes. We’re way beyond the point where the only macroeconomic policy we need from the national government is the limited kind of “stabilization” that can be provided by the Fed. Our country is broken and our future prosperity is in deep jeopardy. We need to define large goals, set challenging tasks and get to work. It is time to get people to stop looking to the Fed to do the jobs that can only be accomplished effectively by the American people acting with purpose through their legislative representatives. There is no pure monetary policy cure for what ails us.
One prominent current enthusiast for monetary policy is Scott Sumner, who uses his blog The Money Illusion to promote an approach to monetary policy called “market monetarism”. The core policy recommendation of market monetarism is that the Fed should target the aggregate level of dollar spending in the country, and maintain a stable rate of increase in that level, which includes engineering catch-up spending in subsequent years if spending in prior years false short. Sumner has no doubt at all that the Fed could hit this target if it truly sets its mind to it.
Sumner recently launched a blistering attack on a new paper by J. Bradford DeLong and Lawrence Summers. DeLong and Summers argue in that paper that “discretionary fiscal policy where there is room to pursue it has a major role to play in the context of severe downturns that take place in the aftermath of financial crises.” But Sumner is having none of it. Here is part of his tirade:
So let’s start over. The Fed is unwilling to provide enough monetary stimulus. OK, now what is the point of this paper? Is this to train our future econ PhD students? Are we trying to teach them the optimal policy regime? Obviously not. The optimal regime relies on monetary policy to steer the nominal economy, and fiscal policy to fix other problems. So we are going to defend the model how? A blueprint for failed states? For banana republics? Fair enough, but ask yourself the following question: In a failed state, which is more incompetent branch of government; the central bank or the legislature?
Yes, the Fed is bad. But Congress is downright ugly. Deep down most economists are technocrats. They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.” And how do economists view our Congress? The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain. So are we supposed to change our textbooks in such a way that the fiscal multiplier is no longer zero under an inflation targeting regime (as the new Keynesians had taught us for several decades?) And on what basis? Because the Fed might be so incompetent that we need Congress to rescue the economy? In what world does that policy regime actually work? If you have a culture that has its act together, such as Sweden or Australia, the central bank will do the right thing. If not, then all hope is lost.
I find Sumner’s assault on fiscal policy and Congressional action to be both economically misguided and politically disturbing.
First, it is hard to understand the practical difference between “steering the nominal economy” and “fixing other problems”. The economy consists in the production and exchange of things of value, and one can measure those values in various ways. One way is to measure goods and services by their current market values as expressed in dollars. But economists have also devised various methods of abstracting away from the fluctuating current dollar as a measurement standard, so as to get at some more stable measure of value that allows for meaningful comparisons across times and places. They thus distinguish between nominal and real measures of value. But while one can distinguish analytically between nominal and real measures of economic activity, there is no such thing as the “nominal economy” that can be separated out for the “other things” and steered independently of those other things. It’s all the same economy, whether its values are measured in nominal terms or real terms.
Perhaps what Sumner has in mind is not dollars as a nominal measure of value, but as a medium of exchange. We live in a monetary economy, and dollars are one of the things that are produced and exchanged in that economy. So the proposal might be that it should be left to the central bank to steer the part of the economy involved in the production and exchange of dollars, and leave it to fiscal policy to steer the part of the economy in which other things are produced and exchanged. But the fact is that almost every transaction that takes place in the United States takes place in dollars. The dollar economy is the real economy, and the real economy is the dollar economy. The economic system which consists of both money and the things money buys is an organic whole of integrated human activity. There is no plausible way of regulating or managing one without regulating or managing the other.
Nor is there a real-world way of institutionally separating the macroeconomic stabilization functions of government from public investment and redistributive operations of government. It’s all part of the same job.
But what is really disturbing about Sumner’s attitude is his haughty and unembarrassed contempt for democratic processes. Sumner actually believes the US should be seen as a failed state and banana republic if it fails to devolve responsibility for it economic fate onto the shoulders of an unelected, elite-governed and autocratic central bank, and away from its stupid and incompetent elected representatives. But my guess is that most Americans, schooled in reverence for democratic traditions and citizen responsibility of self-government, would view things from quite the opposite perspective.
Members of Congress might be corrupt, bungling and in some cases outright incompetent – and these three traits make their sorry presence felt in some eras more than others. But as democratic citizens we know where our obligation lies in such circumstances: Throw the bums out, get a better Congress and then hold their feet to the fire to serve the public interest. If we simply pack it in instead, neglect our obligations, and dispose of our democratic institutions when they are not functioning properly, and then hand everything over to cadres of arrogant and aloof technocrats with minimal democratic accountability, we will have lost more than a few jobs.
Lately, in their zeal to defend to powers of the central bank, we have been getting some truly radical, and frankly dangerous, calls from central bank enthusiasts to allow the Fed to appropriate to itself all sorts of broad spending powers that every American schoolchild has learned are the prerogative of the United States Congress and the people who elect them. And sure, if we allow the central bank to become a second, unelected Congress that can conduct a second channel of fiscal policy by crediting bank accounts and buying things, without any direct democratic accountability or debate over its spending decisions, then it can no doubt have the same kind of macroeconomic impact that an unleashed Congress and Treasury could have. But if we do cross that Rubicon and go down that authoritarian road, turning the Fed into some kind of neo-Soviet Stroibank empowered to spend and command real national resources outside the normal democratic process at the behest of a technocratic elite, we will probably never get our democracy back.
People frequently rail against the pork barrel spending and earmarks that result from the legislative process. But the pork barrels don’t worry me nearly as much as handing our economy over to another generation of theory-addled elitists like Alan Greenspan. As part of the democratic process, representatives come from all over the country to look for the resources to deliver the things their constituents want and need. They wrangle and haggle. And yes, in the process they land a few “bridges to nowhere.” But most of what they get are bridges to somewhere. The people in New Hampshire might not like the way the people in Georgia use their share of our national resources, and the people in Georgia might feel the same way about the people in Oregon. But the end result is that things get built; people are hired; public goods are created; national and local needs are met; things get done.
My sense is that Americans are dead tired of a corrupt and aimless government that can’t or won’t do anything important anymore; that works energetically to deliver resources to its masters in the plutocracy, but then holds up its hands and says “Sorry, out of money!” when suggestions for the pursuit of major public purposes are advanced. It doesn’t have to be this way. America hasn’t always had a Congress full of can’t-do seat-warmers, small thinkers and penny pinchers determined to castrate the national government and let bankers and CEOs run the world. There have been times in our history when we have actually managed to organize our vast resources to accomplish important things and invest public resources in our future.
We have an election this year. I suggest we use it to ditch the empty suits, the plutocratic shills and the small minds, and fill their spots with people ready to act.
How can you change and improve the economic policies of the US government when :
* The only choice you have is either going to be a Republican or a Democrat. Remember Bush’s Glorious Term and are we feeling Obama’s economic leadership yet — after 4 years of painful recession ?
* The Democratic Process itself is rotten to the core. Both Houses are bought and fully corporate-driven by special interests now with little regard for citizens wishes, needs or interests. This is completely unacceptable and is an insult to the ordinary US citizen.
* This situation cannot and will not change. How can it change when all House votes are already bought and owned by special interests like Big Oil, Wall Street and Big Pharma ?
What’s left to respect?
If you are going to respect a group, institution or person then you must expect some respect in return.
…Or is it to be “the audacity of hope and change” and trick or treat all over again ?
What’s the alternative, Bill?
If our politicians are rotten then we need new politicians. If you think the political situation is so hopeless that it cannot and will not change, then there is not much point in economic policy blogs, political organization, protesters in the street, citizen campaigns or anything else.
People don’t have to believe success is either assured or probable to work for change when the only alternative is decline or apocalypse
The alternative is to realize that corporations are actually a superior form of government and we’ve all been putting our democratic energies in the wrong places.
As one who works for a corporation myself, I have to say ….
Well, I’ll be quiet. The company laptop has ears. 🙂
America is a republic not a democracy. Unless Plato was an idiot one cannot have a democratic republic as he designed the republic to be the diametric opposite of democracy. A democracy is run by and for the benefit of the majority of citizens, while a republic by design is run by and for the benefit of elites – in our case wealthy elites. One cannot have a government run by both wealthy elites and the majority of voters at the same time – its either one or the other. In the case of America it is a republic with a lot of elections whose government is designed to be stalemated and in which money means more than citizenship and we don’t even count all of the votes.
We are the most powerful country in the history of earth and we cannot run an election in which all of the votes are counted and politically connected judges decide who is going to be the President!? What does this say about the likelihood we have a real democracy in America??
Sumner just assumes one has to use the monetary policy first and fiscal policy only as a last resort. Why? He has no sensible arguments. He just thinks monetary policy is “cool” and fiscal is “ugly”, but he cannot be taken seriously on this because he has severe problems distinguishing the fiscal components in the monetary policies he proposes. Sadly, he doesn’t understand the monetary policy either, the mechanisms he thinks are expansionary are contractionary (negaive IOR) and the “hot potato effect”, his silver bullet, most likely cannot exist in the present system (Fullwiller say so and he knows his stuff otherwise, I would rather trust him than Sumner who is clueless when it comes to the workings of the banking system and yet proposes policies that work… thru the banking system. Gotta trust him that they would work. Yeah right)
Dan, Nice post. My comments are thus.
1. I suggest that bridges, schools and public underinvestment should not be dragged into the argument. It may very well be that the US needs more of the latter public sector stuff, but the decisions as to what proportion of GDP is allocated to the public sector and how that money is split as between education, infrastructure, etc. (political decisions) are entirely separate from your main point (which I agree with) namely that monetary policy is a feeble job creator compared to fiscal.
I’m pedantic: I like considering one point at a time.
2. Another absurdity of having central banks cut interest rates with a view to stimulus is that we’ve just had a credit crunch caused by excessive and irresponsible borrowing. To encourage more borrowing via low interest rates in these circumstances is barmy.
3. As regards what institutional set up we need to put your ideas into practice, I think we need fiscal committees composed of economists and with real powers over total fiscal spending. These are actually coming into being in some countries. Those committees would try to determine the optimum amount of fiscal stimulus, with the above mentioned strictly political decisions remaining in the hands of politicians.
There is a Prof. of economics at Oxford in the UK who argues for fiscal committees with real powers. See:
http://www.economics.ox.ac.uk/members/simon.wren-lewis/docs/nier_final.pdf
4. There is a UK journalist, Simon Jenkins, who puts pretty much your argument:
http://www.guardian.co.uk/commentisfree/2011/sep/06/economic-recovery-britain-chancellor
Thanks Ralph. I’ll check out those links.
Regarding your first point, I think bridges, schools and public underinvestment are fundamentally at the center of this argument. If the monetarists were right, then their manipulations of the interest rate would work to provide those things through private enterprise. The point is that because we (in the sense of our masters in the government) are focused on the operations of the central bank in managing the economy, we’re ignoring the things we could be doing to really improve the economy. And I would argue that the presence of projects of rehabilitating and renewing old infrastructure, building and adequately staffing and supplying new schools, and building new forms of infrastructure, whether publicly or privately financed, are more fundamental signs of a healthy economy than a decrease in the surveyed unemployed, or an increase in an estimated number adjusted by a different estimated number (real GDP).
Yes, although I would also support spending that simply put money in people’s pockets, one reason I think we need to re-orient toward fiscal policy is that we have specific national needs; not just a need for more spending in general.
One thing that I take away from the whole discussion, which I feel is sometimes circled but never seem to come right out and stated, is that the “shape” of aggregate demand matters at least a much for the health of an economy as does its size. What I mean by “shape” is where spending occurs, what it bought and who does the spending. Central banks, at best can control the size, but the policies they use aren’t really even very effective for that in the environment we find ourselves, though they may be better in more normal times. Instead, by trying to increase the size of aggregate demand through indirect effects on money and credit markets, they distort aggregate spending to favor rentiers.
Only fiscal policy can target and meet not just the desired size of aggregate spending, but the desired shape. By trying to leave the what fiscal policy will be spending the money on out of the equation, the argument that shape matters is abdicated. If that’s the case, then it shouldn’t matter whether aggregate spending is increased by central bank stimulation of credit and money markets that may or may not be effective, or by Congressional fiscal appropriation that may or may not be efficient. But as history shows us, it makes a big difference.
Yes! Monetary policy is a very blunt tool.
Thank you for pointing out the crucial nature of the WHAT in fiscal policy=the funding should go for worthwhile policies. Obviously this does not include funding used in blowing down wedding receptions in Afghanistan or lobbing depleted uranium weapons into Iraqi urban centers.
http://news.bbc.co.uk/2/hi/2860759.stm
http://www.guardian.co.uk/world/2008/jul/11/afghanistan.usa
I strongly believe one neglected ‘what’ is missed opportunities to support artists, playwrights, composers, musicians, and producers and publishers inside of those cultural venues. We are withering on the vine as a people because our dreams are not being fed. Not surprising then that we are led by visionless leaders who keep us in the deserts of their own tyranny.
Nathan, I didn’t mean to deny that fiscal stimulus is needed. The point I was trying to make was that the EXACT FORM that fiscal stimulus takes is a strictly POLITICAL decision. I.e. if politicians and the electorate want fiscal stimulus to take the form of tax cuts, then so be it. And The Dan Kervicks and Ralph Musgraves of this world don’t have a right to object to that decision. Likewise, if the electorate want all addition fiscal spending to go on the military and law enforcement, rather than bridges, then so be it.
In contrast, deciding the TOTAL SIZE of fiscal stimulus is very much a decision for experts (i.e. economists) and not a decision for politicians or the electorate. The total size of monetary stimulus is already in the hands of experts (at the central bank), not politicians. Same principle should apply to fiscal stimulus.
Dan, I agree that we have no alternative but more effective and more democracy. But I’m afraid that it’s more complicated than this:
“We have an election this year. I suggest we use it to ditch the empty suits, the plutocratic shills and the small minds, and fill their spots with people ready to act.”
That is, how do we identify “the empty suits, the plutocratic shills and the small minds. . . ” and how do we ensure that there are people running who are ready to act in a better way?
Here’s a solution, but it’s still in development:
http://www.correntewire.com/a_meta_layer_for_restoring_democracy_and_open_society_part_one_conceptual_foundations
http://www.correntewire.com/a_meta_layer_for_restoring_democracy_and_open_society_part_two_meta_layer_requirements
http://www.correntewire.com/a_meta_layer_for_restoring_democracy_and_open_society_part_three_the_ivcs
These are good ideas, Joe. If democracy was actually part of anybody’s agenda we would probably have this stuff already. Do you have examples of similar technologies that have been used on a smaller scale?
There are dozens of members of the Congressional Progressive Caucus who have mostly the right ideas, and haven’t been bought. We just need more of those kinds of people. One district at a time instead of top down.
Were you replying to this conversation? I was asking about how technology can or has already improved direct, participatory democracy within an organization. I know that IRV, for instance, has long been a part of the progressive agenda, but Joe is talking more about open, self-identifying processes which I think would tend to undermine the very existence of congress.
Chicago recently imported participatory democracy from Brazil and it has generated a lot of enthusiasm, but that is a low tech, town hall style process and they are still stuck within the wards of the city, which are neither open nor self-identifying.
I think using technology to improve basic democratic processes would be much easier in an organization with a little more freedom and dexterity, like, say, a corporation.
Sorry Jerry I spaced out and my comment was off topic.
Hi Jerry, IVCS has a patent on the Legislative options/priorities databases in a networking context, so no one’s used that before. Other technologies that are part of the platform all exist in other settings, but the combination of them hasn’t been seen before at any level of scale I’m aware of.
Monetary and fiscal policy are both pushing on the same string against a wall of land speculation. If you manage to get through it, any progress is immediately absorbed by the FIRE sector until you hit another wall of land speculation that paralyzes labor and capital once again. In over 200 years, this cycle has only been interrupted by a handful of major wars.
The Root Cause of Recessions
So we could definitely use some fiscal reform, but not the kind that you’re thinking of.
President Obama should propose a large tax cut for individual and household incomes below $100k. The Republicans will want to oppose this, but how could they do so and not take a huge hit politically?
Robert McNamara’s first lesson on war: empathize with your enemy. The Republicans will know that opposing a tax cut for 90 percent of Americans will keep them from the White House, so they will support it because it is in their self-interest.
The tax cut would be good, Tyler. But unless we keep working to change the whole national conversation and understanding on taxes, debts and deficits, the result of the tax cut will likely be renewed bipartisan calls for decreased spending to “pay for” the tax cuts.
The government, as the issuer of the currency and not a mere user of the currency, has the unique power to run what I called in a previous post a “pure deficit”: unlike a household or a business, it can simply spend more than it receives in revenue, without adding any debt to finance the gap. The decision to issue debt to offset or “fund” government spending is a voluntary governmental choice. We don’t need to do it. Congress could determine that it wants to run a pure deficit of any size of its choosing – the gap between its targeted tax revenues and targeted spending – and could then order the Fed to credit the Treasury Department’s account by that quantity. End of story. The only constraints on this activity are price stability considerations. We have to get people to understand that this option lies within Congressional powers.
The good news is that President Obama was able to maneuver an extension of the payroll tax cut without conceding to GOP demands for spending cuts. If he can do this once, he can do it again. Additionally, there probably is a solid chance that a middle-class tax cut would more than pay for itself.
A major problem is that Obama’s political advisors (Plouffe, Axelrod, etc.) tell him he cannot win certain arguments. This is why we see him on national television essentially yelling, “Drill, baby, drill!” It’s cowardice.
“The alternative is to realize that corporations are actually a superior form of government and we’ve all been putting our democratic energies in the wrong places.”
Probably the most appallingly brainless post I have ever read on this blog. What is it about so many Americans? Pathetic!
Pretty sure that was sarcasm, Jim.
No, I meant that quite literally — not sarcastic in any way.
Jim, if corporations are so appallingly brainless, why are they the dominant institutions of our time? How is it that they have effectively bought off the government?
Corporations, unlike territorial governments, are entirely voluntary organizations that can assume any shape, expand and contract as needed and overlap infinitely; they write their own rules and are not limited to gathering support from within a static territory. Perhaps most importantly, they actually provide people with value.
Now, what is stopping your government from competing with that?
Historically, at least, serious change only comes after blood flows. As Mao said: “power comes from the barrel of a gun.” The occupy movement is stopped by police with guns. The powers that be will let all the steam out up to a point, then it brings out the tanks and guns. Americans missed their chance a long time ago, when then the writing on the wall was already clear that their country had been hijacked. Too busy arguing, too busy watching “the game,” too busy watching “the tube,” too busy “shopping,” too prone to wishful thinking and having recourse to simplistic solutions and jingoism, too fervently faithful to their absurd myths, too ignorant but always loudly opinionated, too confused, too incoherent, too distracted and, in short, too easily manipulated.
“Now I ask you: speak to several of your neighbors tonight and ask them who Ben Bernanke is and what he does, …”
Possibly, it might be far more important to ask them if they know what and who the Group of Thirty is, and who its members just happen to be?
http://www.group30.org/members.shtml
From look at it’s membership list I see Paul Krugman, Martin Feldstein, Jacob Frenkel, E. Gerald Corrigan, Mario Draghi, William Dudley, and everyone’s fave, Larry Summers (of the “women can’t do science fame” — please ignore Marie Curie, winner of TWO Nobel prizes — one for physics, one for chem — of course, she was a REAL Nobel prize recipient, unlike the constantly misnamed Paul Krugman, and company, who are in reality recipients of the Swedish Central Bank Prize in Economic Sciences in memory of Alfred Nobel — created under pressure from the Rockefeller family to lend credibility to its first recipient, Milton Friedman, for his looney tunes economic ideas, who was on the faculty of the University of Rockefeller, oopsy, I mean University of Chicago).
Possibly, being aware of who those who work for, and answer to, the economic elites and transnational capitalist class, such as those members of the Group of 30, the Peterson Institute, the Bretton Woods Committee (brettonwoods.org), the Trilateral Commission and the Council on Foreign Relations, and the pertinent fact that overlapping memberships in those outfits appears to be the rule of the day, is conceivably at least equally important as to who the rather mediocre Bernanke is, as the former chairman and vice chairman of the Fed (Greenspan and Mishkin) have already established themselves as on-the-record liars and dissemblers.
Excellent post, Dan. I’ve never understood the attitude that a lot of conservatives have that says government doesn’t work so we should make it smaller. It’s always been my contention that if government isn’t working we should make it better, not get rid of it. Unfortunately, a majority of those people that will tell you that government stinks will keep voting the stinkers into office. Don’t want to get some lefty, socialist, abortion-loving librul in there now do we? The religious right knows exactly what they are doing marrying religious issues to their stances. They know that whatever anti-populist financial positions they have will get ignored and the voters will just vote for who loves Jesus more.
I think the weakness in your argument is being alluded to by the commenters complaining about the corruption of our current government.
The problem is that there is a system in operation that is causing the results we want to change (most people on this thread anyway). It’s not a designed system, it is an emergent system, with many loosely coupled parts.
Your suggestion to move towards ideals and practices of representative democracy to increase fiscal policy nearly begs the question. How do we do that? It seems obvious to some that the US govt can spend as much currency into existence as it needs.
But currently it is not able to do so (politically, maybe legally?).
Whether this is just a simple misunderstanding amongst the powers that be or it is actually a situation with a bunch of vested interests opposed to changing the fiscal policy of the US is a significant question.
I think MMT should revert back to the name of Chartilism. T in MMT shouldn’t be there, who’s idea was that?
Dan I appreciate this piece cause it’s long over due-that some one question Sumner. I have many times on my blog but I haven’t seen it much elsewhere.
Having said that I have some reservations about some of your arguments here. I think it’s important to understand the historical causality that got us here. Many of us wanted to see fiscal stimulus and felt we didnt’ get nearly enough. In a vacuum some people started looking to Sumner. It was the failure of fiscal policy that made monetary policy seem paltable for many.
Honestly if the Fed can do the job and tomorrow did the job I’m not so interested in the idea that it offends some nicety about democratic government. Our democratic government has failed to do it’s job. Monetary policy has failed too though-Sumner himself thinks that it has been too tight during this crisis. So where not getting enough in either place.
All I know is that we need stimulus. I’m not partial to where it comes from. My qualm with Sumner is he tries to claim that fiscal policy is somehow always inferior to monetary policy. But don’t get me wrong if tomorrow Bernanke would get aggressive I’d take it.
When you say, “sure, if we allow the central bank to become a second, unelected Congress that can conduct a second channel of fiscal policy by crediting bank accounts and buying things, without any direct democratic accountability or debate over its spending decisions, then it can no doubt have the same kind of macroeconomic impact that an unleashed Congress and Treasury could have. But if we do cross that Rubicon and go down that authoritarian road, turning the Fed into some kind of neo-Soviet Stroibank empowered to spend and command real national resources outside the normal democratic process at the behest of a technocratic elite, we will probably never get our democracy back”
all I can say is it’s already gone. I mean this is the most incompetent Congress we’ve ever seen. And don’t absolve the people, they voted for these (tea party) clowns.
“People frequently rail against the pork barrel spending and earmarks that result from the legislative process. But the pork barrels don’t worry me nearly as much as handing our economy over to another generation of theory-addled elitists like Alan Greenspan. As part of the democratic process, representatives come from all over the country to look for the resources to deliver the things their constituents want and need. They wrangle and haggle. And yes, in the process they land a few “bridges to nowhere.” But most of what they get are bridges to somewhere. The people in New Hampshire might not like the way the people in Georgia use their share of our national resources, and the people in Georgia might feel the same way about the people in Oregon. But the end result is that things get built; people are hired; public goods are created; national and local needs are met; things get done.”
Pork barrell spending? Not in this Congress which as a first act actually passed legislation eliminating it. The people in Georgia, New Hampshire and Oregon all are getting nothing. There have been no bridges to somewhere or nowhere.
What I mean is that I’m a pragmatist. I’m not partial to which way we do it, let’s just do it.
I do appreciate you starting a conversation on this though and will have more to say about it at Diary of a Republican Hater as well.
Many of us wanted to see fiscal stimulus and felt we didnt’ get nearly enough. In a vacuum some people started looking to Sumner. It was the failure of fiscal policy that made monetary policy seem paltable for many.
Yes, that’s how it appeared to me too Mike. People turned to monetary policy when the politics went against fiscal policy. However, I think the cause of fiscal policy is damaged a bit by constantly referring to it in connection with “stimulus”. Notice that Sumner doesn’t focus on arguing for monetary policy stimulus. He argues for a specific, permanent monetary policy stance which he also believes will produce the desired countercyclical effects. We need to take a similar approach to fiscal policy.
I don’t think the concern about democratic government is just a nicety. The more political power we lose, then the more of everything we lose over time. A powerless people reduced to begging the big banker to do something nice for them in a crisis to slightly offset years of instability and lost economic ground is no way to sustain a prosperous society. Take look at Sumner’s site over the past few days and you will see that he still regards it as a problem for fiscal policy that it doesn’t allow real wages to fall enough in a recession. CEO to worker wage ratios in the US are in the hundreds, and yet Sumner thinks the problem is that America’s workers are overpaid. That’s one reason he wants the Fed to engineer more inflation … er, an increase in “nominal spending”. Inflation will drive real wages down even further.
Congress is not already gone. This country has lived through incompetent Congresses before, but then elected other Congresses filled with a high enough proportion of dedicated public servants to accomplish major progressive goals. I don’t even want to live in a country that is some kind of central bank economic dictatorship that occasionally does the right thing when the right technocrats happen to be in charge, but where most of us have been reduced from citizens to subjects.
I don’t believe in rule by philosopher-kings, economist-kings or banker-kings. Ordinary people can never preserve their share in a nation’s prosperity by trusting to some gang of managers to do the right thing. The only way people can hang on to what they have over time is to retain a political share in the nation’s decision-making, and then press their claim through the political process.
There is more going on here than short-term battles about the right way to stimulate things. In Europe and the United States, plutocrats and a managerial elite who predominantly serve them are trying to use the crisis to erode democratic government even further and transfer it to a smaller group of people.
Ultimately what I mean is that by all means bring back fiscal policy but understand what took it away was not because people were reading Sumner’s Money Illusion but because of the obstructionist Congress that the American people elected. People started reading Money Illusion as fiscal policy wasn’t doing the job.
One reason people started reading the Money Illusion, in my view, is that they have a strong need to believe in he existence of omnipotent and nearly omnipotent forces in the world who can solve their problems if only people put their faith in them. I see one of the key contributions of people like Scott Fullwiler, Warren Mosler and others as dispelling the myths of the Money Multiplier, a myth which leads people to believe that there is an Olympian banker in Fed heaven with the ability to throw down monetary thunderbolts to fix our world down here below. If instead the role of the central bank consists mainly is the passive accommodation of economic activity that is driven from the ground up, then
Also. when they see their democratic institutions failing, they are more vulnerable than ever to authoritarian solutions. And the top-down approach to macroeconomic policy also appeals to the nation’s young elite, who have been trained by their privileged schooling to believe that they have a right to rule, and that real decisions shouldn’t be in the hands of the vulgar and stupid.
Another reason is that Barack Obama sent out the message in early 2009, right after passing the stimulus bill, that he was going to turn his attention to deficit reduction. He appointed the egregious Simpson-Bowles commission, threw the unemployed under a bus, and told progressives they would have to look elsewhere for assistance. Politically connected and obedient pundits whose attitudes are based on short-term political expediency and partisan loyalty took the marching orders and ran with them. They have also tried to set up the Fed as the scapegoat for economic stagnation and macroeconomic failure, to take the onus off the administration’s lack of sense, leadership and political courage. If they had to adopt crazy Chicago-school doctrines in order to make this implausible case, and get in bed with right-wingers like Sumner, so be it.
I think the fact that Sumner the other day admitted he has no transmission mechanism the other day is interesting. He said finding one is too difficult and not worth bothering about.
Indeed. His lack of interest in how things actually work and are put together is stunning. He’s the worst kind of pure theorist.
Dan thanks for the feedback. I’ve written a post about this post, Sumner and other matters.
http://diaryofarepublicanhater.blogspot.com/2012/04/dan-kervick-on-scott-sumner.html
I disagree with you a bit on the idea that the Fed is in istelf a bad institution-if you look at how our economy has performed since and prior to teh Federal Reserve Act of 1913, it has improved a lot since. Before there were frequent recessions-in the 40 years prior to 1913 the age of the gold standard we saw recession 20 out of 40 years with frequeent bank pancis every few years.
I do think that the Fed should be divested of more of it’s “independence” which would make it more accountable. Barnek Frank suggested some reforms like that as did Henry Gonzalez Rep-Texas when he was alive.
I do believe that experts have a part in government as well. There’s no way to claim that average people can be an expert on every function of government. We elect teh President for example but he selects his own cabinet and heads of each department. All expertise is not fraud.
In my post, I wrote it before reading your responses.
“Another reason is that Barack Obama sent out the message in early 2009, right after passing the stimulus bill, that he was going to turn his attention to deficit reduction. He appointed the egregious Simpson-Bowles commission, threw the unemployed under a bus, and told progressives they would have to look elsewhere for assistance. Politically connected and obedient pundits whose attitudes are based on short-term political expediency and partisan loyalty took the marching orders and ran with them. They have also tried to set up the Fed as the scapegoat for economic stagnation and macroeconomic failure, to take the onus off the administration’s lack of sense, leadership and political courage. If they had to adopt crazy Chicago-school doctrines in order to make this implausible case, and get in bed with right-wingers like Sumner, so be it.”
On the other hand I don’t agre at all with your view of Obama. He’s the only thing that prevented large scale austerity in this country as there is in Britain-which is most similiar to us monetarily-and Europe. In David Corn’s recent book you sse that Obama did-as all the naysayers mocked-play a good game of three card monte. No one seriosly talks about austerity anymore.
And we are as a country in much better shape than Europe. Part of this is because we aren’t in the badly constructed EU. But Britain isn’t either but has Cameron driven austerity.
The reason I’m bothered by so much anti-Obama talk is that if he loses that will only make our political process worse as if his ACA is defeated as I know some Obama haters hope. They think that defeat ACA and the next day the GOP House will pass single payer.
Nathan that’s an interesting point about the “shape” of aggregated demand. On my last post I joked that mabye a marroeconomist doesn’t see the difference between spending $50,000 today on treasuries or sending the money to me but I sure do.
And maybe that’s the dimension that is lost by simply saying it’s all the same regardless of whether it all goes on treasuries or direct fiscal stimulus that helps people directly.
I do agree Dan about him being a pure theorist. This is why the establsihment macro guys-the whining of people like Stephen Williamson and John Cochrane is surreal-hated Krugman when he came out in 2009 and declared that the profession had failed.
To them it’s impossible to fail as their own models matter more than anything that could happen in the real world
In order to end the complacency and bring fiscal policy back, we can fundamentally redefine the words “recession” and “depression”.
I suggest a recession could be defined as “a period in which the national unemployment rate exceeds three percent”.
A depression could be defined as “a period in which the national unemployment rate exceeds eight percent”.
My sense is that Americans are dead tired of a corrupt and aimless government that can’t or won’t do anything important anymore; ..
I don’t mean to offend the author of this blog post, nor many fine economists out there (OK, there are really only a few decent ones, which is why we continue returning to this site), but all variables should be discussed.
When the safecracker approaches a job, they are familiar with their tools, either RDX or Semtex, etc.
So too, economists and econ profs should have an understanding of how global finance works to some degree, and forever discussing monetary policy without any understanding or fundamental comprehension of the tools of the trade for global speculators today, is really a major shortcoming.
The four major tools possessed by the financiers, banksters, hedge fundsters, private equity types, etc., are: (1) credit derivatives in general, and the naked swaps (uncovered credit default swaps) specifically, of which an unlimited number can be purchased against bonds, sovereign wealth funds/bonds, etc.; (2) unlimited number of commodity futures contracts which can be purchased against specific commodities, etc.; (3) unlimited number of investors permitted per hedge fund; and, (4) the Stock Borrow Program of the DTCC which allows for colossal and massive naked short selling, etc.
The combinations and permutations allowed by combining any or all of the above cedes unlimited power to the worst in our society and throughout the existing Transnational Capitalist Class today.
Anyone read E. Ray Canterbery’s Wall Street Capitalism: the theory of the bond holder class??
To those who do not understand what labor arbitrage and labor deflations is about, or when several economists on the staff of Goldman Sachs explain that the major share of profits falling to the banks and corporations over the past 5-some years is directly due to their taking the larger share of profits while labor’s declines, truly has no comprehension of what is going on today.
Sounds interesting sgt. Any other books or papers you would recommend?
The little known TNEC study, parts of which are still classified to this very day.
http://en.wikipedia.org/wiki/Temporary_National_Economic_Committee
http://www.archives.gov/research/guide-fed-records/groups/144.html
Ferdinand Lundberg’s excellent book, published back in the 1960s, The Rich and the Super-Rich, makes excellent use of those declassified sections of this study — a study which C. Wright Mills was either ignorant of or completely ignored in all his writings.
Certainly one would have to recommend Elle Schultz’s outstanding Retirement Heist, both for its exhaustively researched corporate scams against everyone, regardless of age, and the look into insurance companies and benefits consultant’s nasty sociopathic activities.
Of course, Nicholas Shaxson’s recently published, Treasure Islands is a must read as well.
And of sociological importance, Jane Jacobs very short, and wonderfully clever little book, Dark Age Ahead, where she gets almost everything right (99% — she violates one of her major dictates by making an incorrect assumption that American foreign aid is nonsensical — truly, foreign aid to build all those foreign factories, production facilities, R&D labs, training centers, etc., for the multinationals to offshore those jobs to, and create new ones at. E.g., when Micron Technology shutds down its factory in Idaho, then begins operations anew at a state-of-the-art chip factory in Indonesia, built with US foreign aid, which can mostly benefit Micron and its investors, is one perfect example; plus some of that foreign aid gets money laundered and makes it back to the USA as campaign contributions, ‘natch….
A reason for greater focus on monetary policy is determined by the criterion utilized to determine GDP. Insofar as value is determined by exchange, the rapidity of financial exchange minimizes economic friction while maximizing exchange. Continually increasing the money supply while minimizing wages constrains inflation, which effectively is measured in terms of consumable goods. This channels money into investment where financial interests can rapidly exchange money in various forms (stocks, bonds, commodities, etc.) among themselves, commensurately increasing GDP, while producing no consumables. Indeed, financial exchanges can reduce consumables by raising prices, as in the case of food speculation. To what this logic leads is the most “efficient” economic system is a financial system. Here the economic criterion of optimality is taken to its limit, revealing its purposelessness. Because the number of “players” in a financial system need not be large, only needing to buy and sell to one another, service to the bulk of humanity constitutes inefficiency. Those servicing the financiers by engaging in production of tangibles, need not be great in quantity because the demand for tangibles by the financiers is small relative to the current quantity of humans. As a result, because of competition, compensation to those producing tangibles can be kept at what is necessary for bare survival, or even lower because of the abundant supply of substitutes. Indicated by this reasoning is the failure at the foundation of economics. What debate among Paul Krugman, Scott Fullwiler, Steve Keen reveals an underlying ethical sensibility, that an economy exists to produce general human well-being, not “efficiency.” Why they disagree is because to what “efficiency” now becomes is unclear. Each implicitly presupposes an initial distributive goal, and then proposes a productive means for achieving this implicit end. As for the ironically named Scott SUMNER, presumed is the infamous comment by William Graham SUMNER, “A drunkard in the gutter is just where he ought to be, according to the fitness and tendency of things. Nature has set upon him the process of decline and dissolution by which she removes things which have survived their usefulness.”
Paul Krugman’s column today is essentially a response to your piece, Dan.
I just saw this comment now Tyler. Coincidentally, I just posted a new piece today which is a response to Krugman’s column.
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Scott Sumner is indeed correct insofar as saying the FED (unnecessarily), forced nominal gDp to completely collapse triggering the Great Recession. In fact the evidence is so persuasive that anyone who actually looked at it would immediately call for Bernanke’s resignation. As soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated a “tight” money policy (ending the housing bubble in Feb 2006), for 29 consecutive months, or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression).
The FOMC continued to drain liquidity despite its 7 reductions in the FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed on July 16, 2007, & immediately thereafter filed for bankruptcy protection on July 31, 2007 — as they had lost nearly all of their value), the FED maintained its “tight” money policy (i.e., credit easing, not quantitative easing).
Note: Nominal gDp’s 2 year rate-of-change (which equals what the FED can control — i.e., MVt), peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). It fell to 6% in the 3rd qtr of 2008 (another 25%). It then plummeted to a -2% in the 2nd qtr of 2009 (another [gasp] – 133%).
I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers later filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market), on September 15, 2008. The next day AIG’s stock dropped 60%.
By waiting to inject liquidity, risk aversion was amplified, haircuts were increased, additional and/or a higher quality of collateral was required, liquidity mismatches grew, funding sources dried up, long-term illiquid assets went on fire-sale, a counterparties’ creditworthiness was examined more carefully — all of which lead to runs on financial companies.
POSTED: Dec 13 06:55 PM |
10/1/2007 -0.47 -0.22 * temporary bottom
11/1/2007 0.14 -0.18
12/1/2007 0.44 -0.23
1/1/2008 0.59 0.06
2/1/2008 0.45 0.10
3/1/2008 0.06 0.04
4/1/2008 0.04 0.02
5/1/2008 0.09 0.04
6/1/2008 0.20 0.05
7/1/2008 0.32 0.10
8/1/2008 0.15 0.05
9/1/2008 0.00 0.13
10/1/2008 -0.20 0.10 * possible recession
11/1/2008 -0.10 0.00 * possible recession
12/1/2008 0.10 -0.06 * possible recession
Exactly as predicted:
The Commerce Department said Retail sales increased by 1.2% over October 2006, and up a huge 6.3% from November 2006.
BERNANKE SHOULD HAVE SEEN THIS COMING. IN DEC. 2007 I COULD.
Before the downswing in Aug 2008, the rates on (using rates as of Feb 2012):
3-month bills 1.7%) then (.16%) now [will be 10x old rate],
4-week bills 1.5% then (.15%) now [10x],
6-month 1.9% then,. (.23%) now [8.2x]
So these short-term yields are going to explode, multiplying by perhaps ??x if yields returned to “historical averages”.
1 year constant maturity now (.16%) 2.3% then [14x],
2 year constant maturity now (.28), 2.5% then [9x].
3 year constant maturity now (.38%) 2.9% then [7x],
5 year constant maturity (.83%) now, 3.3% then [4x]
10 year constant maturity (1.97%) now, 4.01% then [2x]
20 year constant maturity (2.75%) now, 4.38% then [1.6x]
30 year constant maturity (3.11%) now, 4.57% then [1.5x]
The interest expense on 2011’s Federal Debt was $454b. In the first 5 months of 2012’s Fiscal Year the interest expense has been $187b. Cummulative fiscal deficit this year is $777b.
MMT is just concealed greenbacking reconstituted. Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.
And if you think Congress overspends now, one can imagine what they would end up spending if they had an unbridled license to do so. Instead of Congress defaulting on the Federal Debt, default would come about through the depreciation of our currency. I.e., because Congress will never learn that if there is an inflation-unemployment trade-off curve, it is shifting to the right, and at an accelerated rate. Regardless, MMT’s economic metrics, & the tools to control them, will still be wanting.
The Fed and the Wall Street gurus all failed to see the largest economic bubble in the history of economic activity! So if they say go north you know the only wise move is to go south, this group has zero real credibility except with the lapdog media epitomized by FOX and the brain dead Limbaugh. The Fed has created and doled out to major financial corporations and their friends at least 29 trillions dollars, after claiming they actually only provided 800 billion or so. I hardly think that the Congress could do any worse, and at least Congress is democratically responsible to all Americans. The Fed is a private for profit corporation owned by a cabal of the largest banks in America which cannot be audited and which has unlimited capacity for creating money and handing it out to their friends with no oversight or responsibility for consequences to American taxpayers – which of course does not include the top 10% and largest their mega corporations .
Inflation can easily and more properly be handled through tax increases to take excessive money out of the economy by the government which then destroys it and actually reduces inflation. Higher interest rates take money out of the ‘economy’ by transferring it from the middle class to wealthy individuals who take it out of the economy by storing it in banks or spending it outside of the country. Higher interest rates only increase the wealth inequality in an economy where the level of inequality is at historic levels ever.
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