Posted by: Doug Henwood | July 16, 2011

The limits of easy money

[I delivered a condensed version of this as my July 16 radio commentary. It’s a rewrite, with some additional material, of the easy money vs. jobs program debate presented in fragments below.]

I’ve been involved in some internet polemics—remember internet polemics, back before the Facebook “like” button made everyone sweet and nice?—that I thought might be worth recounting here. It all started when my friend (and occasional Behind the News guest) Corey Robin, a professor of political science at Brooklyn College, asked for comments on a piece by the liberal blogger Matthew Yglesias, a contribution to a debate hosted by The Atlantic magazine’s website on the single-best thing we can do to spark job creation. (For Corey’s own thoughts on the issue, along with links to other disputants, see here.) The “debate” itself was a remarkable collection of tiny little “ideas”—expand the R&D tax credit, offer entrepreneurs the welcome mat (I’m surprised they were treated any other way in this very capital-friendly country), increase the amount of money in circulation, fire the bad teachers (that from former DC schools chief Michelle Rhee, who didn’t put it exactly that way, but that’s what she meant), offer a tax credit to employers for hiring the long-term unemployed), and so on. Yglesias’ contribution was suggesting that the Federal Reserve should adopt a higher inflation target, which although not explicitly stated, is now probably 2%. This suggestion is all wet.

Raising the inflation target implies that the Fed has been too tight, when in fact it’s been anything but. It’s been pumping like crazy since the financial crisis broke out. We’ve gone through two rounds of quantitative easing (which basically means the Fed bought gobs of long-term Treasury bonds, which it usually doesn’t do). This extended program of indulgence has set the loons of the right aflame, leading them to fulminate about currency debasement and hyperinflation, when in fact it’s done little but encourage commodity speculation.

In fact, the BLS released the June inflation numbers on Friday morning, and they provide an interesting perspective on all this. The headline CPI number was down for the month, because energy prices have been falling. The year-to-year rate was 3.4%, the highest it’s been in three years, just before the Great Recession and the collapse in oil prices took it down below 0. Leaving out food and energy, core inflation is running just under 2%, also the highest it’s been in three years. Despite this modest rise in inflation, which is what you’d expect from a commodity price spike and something of a recovery from utter collapse, the economy is losing steam, not strengthening.

hating jobs programs

Back to the more theoretical level. Orthodox types—and I’m including Yglesias, who describes his political leanings as “neoliberal” on his Facebook profile page—usually prefer monetary to fiscal remedies. Why? Because they operate through the financial markets and don’t mess with labor or product markets or the class structure. A jobs program and other New Deal-ish stuff would mess with labor and product markets and the class structure, and so it’s mostly verboten to talk that way. From an elite point of view, the primary problem with a jobs program—and with employment-boosting infrastructure projects—is that they would put a floor under employment, making workers more confident and less likely to do what the boss says, and less dependent on private employers for a paycheck. It would increase the power of labor relative to capital. I’m not sure that Yglesias understands that explicitly, but it’s undoubtedly part of his unexamined “common sense” as a semi-mainstream pundit.

Jobs programs and infrastructure investment can be very potent economic tools. Economists use the concept of a multiplier to estimate the effects of fiscal policy on the economy. For example, a multiplier of 1.5 means that for every dollar the government spends, GDP would increase by $1.50. The multipliers on jobs programs and infrastructure are quite high. According to Economy.com, such spending has a mulitplier of about 1.6 to 1.7—meaning that for every $1.00 spent on such programs, GDP increases about about $1.60-1.70. (Economy.com is run by Mark Zandi of Economy.com, who advised John McCain during the 2008 campaign, so these multipliers are not from some pinko source.) The multipliers on tax cuts are much much lower – under $0.40 for extending the Bush tax cuts or giving corporations tax breaks (meaning that they increase GDP by less than half what they cost). The multiplier on the payroll tax holiday is higher—around $1.20 – because the working class spends all it gets, but the upper brackets don’t. Infrastructure spending has a big kick not just because workers spend so much of what they get, it also involves buying lots of raw materials and equipment, meaning large spillover effects beyond the site of the initial spending.

So aside from putting the unemployed to work, a compellingly humane goal in itself, and spiffing up our rotting environment, jobs programs and infrastructure investment would boost broad economic growth dramatically. But we can’t do that, because the yahoos don’t like it (high-speed rail = Europe = fags) and because jobs programs might lead the working class to develop an attitude, and we can’t have that. Therefore, respectable people don’t suggest such things.

populism

There’s also a strain of populist thought, prominent in U.S. political history, that embraces inflation and easy money as some sort of curative strategy. I don’t agree. Easy money is really a cowardly substitute for redistribution—over the long term, Milton Friedman was more or less right that loose money can’t change the economic fundamentals. It can’t spark much growth, it can’t raise real wages—it’s mostly just froth. To spark growth and raise wages you need serious spending, better labor laws, and stronger and more pervasive unions. Or, to put it another way, the best that loose money can give us is more of the same; jobs programs and infrastructure spending can give us child care and high-speed rail, and not just more consumer goods and carbon dioxide emissions.

The embrace of inflation and easy money as good things has a long tradition in American populism—which makes sense, given its roots in a petty bourgeois love of small business, which wants easy money without higher wages, tighter regulation, and unions that might come with a more class-conscious agenda. Or, as I said earlier, it leaves the structure of class relations largely untouched.

Sure, we need a central bank that doesn’t tighten to make sure that unemployment doesn’t get too low, as the Fed has done in the past. But that’s about it. I don’t want a monetary policy that encourages inflation. It doesn’t work as a stimulus, and it can have bad results. Over time, people find inflation very destabilizing, and can lead to a taste for an authoritarian solution, to counter the sense that things are out of control. That was an important part of the rightward turn during the 1970s—and not just in elite opinion, but popular opinion as well. It contributed mightily to the election of Reagan and Thatcher.

redistribution?

Some partisans of the loose money/higher inflation view (e.g. Josh Mason) argue that such policies could be redistributionist—shifting wealth from richer creditors to poorer debtors by eroding the real value of the debt over time. But that position assumes that high personal debt levels are desirable and/or eternal. Debt has been used to offset stagnant wages and, up until a few years ago, inflated housing prices. Permanent inflation can’t increase real incomes and it can’t improve the quality of life.

Josh also argues that high real interest rates—market interest rates less the inflation rate—are hallmarks of neoliberalism, so presumably low real rates would be anti-neoliberal. Yes, high real interest rates were part of the early days of neoliberalism, but they haven’t been so much since. Real rates on 10-year U.S. Treasury bonds averaged 4.9% from 1983-95—but from 1996-2006, they averaged 2.6%, not much higher than they were in the 1960s, 2.3%. Since 2006, real long rates have averaged 1.6%.

Things were surprisingly not so different in a real social democracy, Sweden. Real long rates averaged 4.8% from 1983-95, just 0.1 point lower than the U.S., and they were 4.1% from 1996-2006, 1.6 points *higher* than the U.S. Real long rates in Sweden during the 1960s were 2.0%, just 0.3 point lower than the U.S. Yet for just about every period in modern history, Sweden’s real hourly earnings have grown faster than the U.S.: 1.3 points faster in the 1960s, 1.2 points faster during the early neoliberal era (1983-95, when Swedish real interest rates were almost identical to the U.S.’s), and 1.6 points faster during the later neoliberal era (1996-2006, a period during which Swedish real rates *exceeded* U.S. rates).

The Swedish central bank, the oldest in the world, is a pretty tough customer. But what made the difference in Sweden—why their wages increased while ours stagnated—were all the other, real sector institutions, like redistributive fiscal policies (tax-funded welfare state benefits), active labor market policies (which promote employment aggressively), and union-friendly labor law.

Finally, the politics of loose money are intriguing. Proponents act as if the bourgeoisie won’t notice if the value of their bonds is being eaten away by rising inflation. Or if they notice, they won’t care. So it’d take considerable political strength to push a central bank into actively inflationary policies. But if you have that sort of strength, why not go for the stuff that can really make a difference—the social democratic package I mentioned for Sweden? Or, in the context of this original debate, a jobs program and serious infrastructure investment rather than loose money?

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Responses

  1. Hey Doug,

    Good to see you still around and blogging. I and some other Paper Tigers interviewed a long, long, long time ago about corporate crime for a documentary called America’s Least Wanted. It’s still a classic in the genre of two hundred dollar budget documentaries…

  2. Wasn’t arguing, just asking some questions. I’m not a partisan on either side.

    Mainly I want to clarify where the line of disagreement is. The claim that monetary policy cannot raise inflation in current conditions is different from the claim that higher inflation would not effectively redistribute income from creditors to debtors, which is different from the claim that loose money might be effective but it would be more politically difficult than other stuff that would be both more effective, or would better pave the way for a more transformational program.

    I do reject the third argument. It’s not like we’ve got some scarce political resource that we have to use to support either the welfare state or loose money. Talk, as they say, is cheap. And at the moment we’re not getting either. Some of us can push one, and some can push the other. We don’t know what will be politically possible in the future, so there’s no cost to exploring different strategies.

    I must be missing something, but I don’t understand how saying that a period of higher inflation would be useful because it would reduce the real indebtedness implies the idea that permanently high levels of debt are a good thing. It seems to imply the opposite? (As it happens I do think there’s a good argument that the US financial system would function more smoothly with a substantially higher ratio of federal debt to GDP. Minsky certainly thought so. But that’s a different argument.) And who said anything about permanent inflation? The argument is that a period of higher inflation would raise nominal incomes relative to financial obligations and reduce the real value of debt. It’s just the flipside of the debt-deflation story. If you think that the Depression would have been less severe if prices had been stable rather than falling, then why wouldn’t it have been less severe still if prices had been rising moderately?

    I suspect that a big part of what’s in back of this is a sociological rather than economic disagreement, on whether owners of financial assets (rentiers) constitute in some sense a class distinct from capitalists in general. I know you don’t think so; Brad DeLong doesn’t either. And in that case it makes sense to say that monetary populism is an attempt to somehow trick or cajole capital into giving up its share of the surplus, rather than challenging directly in the real sites of power, the workplace and the state. In that case you’d be right that the focus on the Fed is just an evasion of politics. But if you think there’s a sense in which the interests of the owners of financial assets have a political form independent of the owners of capital in general, things aren’t so clearcut. In that case a challenge to the claims of rentiers might be necessary alongside — not instead of! — the rest of social-democratic program.

  3. The point about destabilization and a desire for authoritarian solutions is a vital one. I know he’s not popular on the American left (either center- or far-), but John Gray made a valid point:

    “It is no accident that over the past decade Europe has witnessed a resurgence of the far right. As in the interwar period, the radical right understands the fragility of liberal societies better than most of their defenders.”

  4. […] The limits of easy money from LBO News from Doug Henwood by Doug Henwood […]

  5. […] of you following this discussion between me, Matt Yglesias, and Mike Konczal, need to check out this post from Doug Henwood. It not only cuts through a lot of the fat, but it also takes us in a completely different, […]

  6. Sweden has been incredibly aggressive with their monetary policy, moreso than we’ve been in the US (see here, and here). Swedish central bank expanded its balance to sheet to 25% of GDP versus our Fed’s 15%, it set an explicit and clearly communicated inflation target, and charged a negative interest rate on excess reserves.

    The automatic stabilizers that come with a robust safety net, labor law and other parts of redistributive fiscal policy were obviously an essential part of their quick recovery, but they were not the only part.

  7. It’s not either/or. It’s both/and. How are you going to get higher wages if you have a Fed that consistently takes the punch bowl away every time there’s a whiff of a wage increase? If you’re going to avoid that outcome, you need an accommodative monetary policy that supports redistributive fiscal policy and active labor market policy.

  8. The comparison with Sweden is interesting. I wonder how the share of the national income going to interest differed? One of the take-homes for me from Kenneth Boulding’s Structure of a Modern Economy was the correlation between (a) the share going to interest and (b) the economy going all nasty.

  9. “Raising the inflation target implies that the Fed has been too tight, when in fact it’s been anything but. It’s been pumping like crazy since the financial crisis broke out. We’ve gone through two rounds of quantitative easing (which basically means the Fed bought gobs of long-term Treasury bonds, which it usually doesn’t do)”

    Tom is right. There’s a number of misconceptions about monetary policy in this article.

    The most prominent is the idea that the fed has been “loose.” Because the Fed uses interest rates as its target, and interest rates have been zero recently, which means that a very stimulative policy looks the same as a stimulative one in terms of interest rates.

    Most of the bank reserves created by Fed intervention have just been sitting there, rather than leading to more lending. So it’s not that they’ve been loose–they’ve been pretending to do a lot, but actually doing very little. How do we square this circle?

    Well, it all has to do with how the Federal Reserve frames their actions.

    1. The Federal Reserve prefers to talk about “lowering interest rates” instead of “raising inflation” because the former sounds better. But they actually want to raise inflation, no matter what they actually say, when they stimulate. The interest rate they raise or lower is the Federal Funds Rate, the rate banks charge each other to loan money from their accounts at the Federal Reserve. When the Fed buys treasuries, it creates new reserves, increasing the supply and lowering the interest rate charged to lend those reserves. (These reserves, contra the Paulistas, are not actually created out of thin air–the Federal reserve receives financial assets, usually treasury securities, in return for the money it creates). Because the Fed says that it wants to keep rates at a certain level until at least the next meeting of the FOMC, everyone realizes that these reserves will stay in the system for awhile.

    2. As long as the interest rate is not zero, all the Fed has to do to conduct effective monetary policy is create new reserves to keep the interest rate at a certain level until the next meeting of the FOMC.

    3. Once the interest rate hits zero, the Fed has a choice: do things the easy way, or do things the hard way.

    4. The hard way is to try to keep up the charade about interest rates. The Federal Reserve has to create a lot of bank reserves to achieve minuscule reductions in interest rates on longer term securities. After all, they control the supply of bank reserves directly, and thus the interest rate on lending those out, directly; they control the long-term bond market only in the most indirect way, and hence control interest rates in that market in only the most indirect way.

    5. The easy way is to drop the interest rate charade. Instead, they could simply follow the advice of FDR and William Jennings Bryan and come right out and state that they want higher inflation. Once the interest rate for bank reserves at the Fed drops to zero, simply creating more money will have little effect on much of anything. This is because, at this point, the key question is whether the Fed wants the reserves it creates to stay out there for a little or a long time. When the Fed says it wants a certain interest rates on bank reserves, the market basically knows that they will have to keep new reserves out there until they say otherwise. But at zero, this could mean that the fed wants inflation of 100 percent or 2 percent. With interest rates at zero, unless the Fed explicitly says that it will not remove that new money until inflation hits a certain level, there is deep uncertainty about the level of reserves the Fed is comfortable with. Rates were already zero before the Fed created another 1200 Billion with QE1 and QE2. If the Fed said they would keep those reserves in circulation until inflation hit a certain level, then it would be clear that they actually want to stimulate. But right now, they are basically refusing to signal this one way or the other.

    6. Before, setting interest rates meant allowing a certain rate of inflation for a certain period of time. Now, zero interest rates could mean any number of different levels of inflation in the near future. Setting an inflation target is desirable because in a situation of high unemployment and excess capacity, to get even moderate inflation you have to have very high job growth. Without job growth, it is simply too easy for employers to refuse wage increases, because there are so many unemployed workers that it is hard for them to demand higher wages. This is a perfect example of Marx’s “industrial reserve army.” Announcing an inflation target was highly effective when FDR did it and it greatly reduced unemployment. Monetary policy helped and worked with Fiscal policy. (http://rortybomb.wordpress.com/2011/06/21/president-sets-a-price-level-target-in-a-depression-fdr-1932-edition/)

    7. The problem is that the Fed refuses to countenance higher inflation, even for a temporary period, to restore full employment. So they stick with the interest rate charade, which basically ties their hands in advance. It’s as if the adults who invented the story about the stork decided that they would have no more children because storks went extinct.

    8. Millions of workers remain unemployed. We have a modern version of Marx’s industrial reserve army. Corporate profits soar as wages fall because workers are so desperate to keep their jobs that they will allow their employers to extract more surplus value by increasing work load and keeping pay stagnant.

    9. We find that Marx is surprisingly accurate in predicting the three disasters that currently plague us: mass unemployment, extraction of surplus value, and increased alienation as millions fail to recognize that the perceived scarcity of money is actually a real scarcity of mutually beneficial economic relationships.

    10. The Fed becomes more reactionary despite this manifest problem in part because the left is attracted to the pleasing anti-authority dogmas of the Ron Paul crowd. As the Fed receives anti-stimulus pressure from both the left and the right, they decide that there is very little political rationale for more stimulus. The right once again convinces the left that if they are honest about their ethical stances, they have to act against their own interests first and foremost. But the right is not so principled. They will capture the political gains that proper monetary management bring, and direct it toward reactionary policies.

    Marxists should recognize that just because we have to play by capitalist rules does not mean that we can’t use those rules against the system. Monetary policy was historically one of the sites for doing this. Right wingers oppose both monetary stimulus and fiscal stimulus. Fiscal stimulus leads to more government spending. Monetary stimulus leads to more tax revenue by increasing the total level of national spending.

    The real goal should be to put pressure on the Federal Reserve to adopt an explicit inflation target. By increasing tax revenue, that would also make it easier to increase Fiscal stimulus.

  10. On the Sweden example, it’s worth noting that from 1996-2006, when real Swedish long rates were substantially higher than US real long rates, Swedish unemployment averaged about 6 percent per year compared to 5 percent in the US. From ’83 to ’95 unemployment in Sweden averaged about 4 percent compared to 6 percent in the US. It sure looks like tighter money in Sweden since the early 90s may have resulted in more unemployment.

  11. Just a few more questions:

    1. Why is Yglesias part of the “elite” whereas you are not? You, after all, are wearing a tie in your head-shot, just like Yglesias in his Facebook picture. Is it because he also has the sweater vest?

    2. Why do you imply that Yglesias is not in support of high-speed rail? He is actually a very strong advocate of fiscal stimulus, especially when it comes to mass transit infrastructure (and I suppose by extension, he is a strong advocate of fags). There are only a very few individuals advocating monetary stimulus but not fiscal stimulus, and they all consider him to be a strong advocate of jobs programs, infrastructure programs, and social democracy more generally. Actually, one of the major monetarists, who is not a Fiscal stimulus advocate at all, is a much bigger fan of Sweden than almost any other economist, right or left, that I know of. Including Yglesias (http://www.themoneyillusion.com/?p=9699). He actually believes that Sweden set the model for recovery from the Great Depression internationally by leaving the gold standard and thereby creating inflationary stimulus.

    3. Why do you assume that Yglesias wants monetary policy as a substitute and competitor of Fiscal policy? Do you actually read his blog? The reason Yglesias wants monetary stimulus is because the Fed can destroy any fiscal stimulus. I think we can all agree that we live in a capitalist country and not the communist utopia. In capitalist economies, we use money. The central bank issues that money and can take away as much of it as it wants. When there is too little money, no economic transactions can occur, and this causes economic stagnation. (NB: the communist utopia would putatively not be affected by this problem, as it has eliminated money in favor of barter, and thus the money supply is not a factor in economic growth).

    4. Do you understand that a faster growth rate, whether as a result of fiscal policy or monetary policy, would actually require higher inflation? The relationship between higher prices and higher output (i.e. higher real wages) is defined by the short run aggregate supply curve. It defines the increase of supply relative to any given level of increase in demand. For any given level of inflation at the current moment, we would get a certain level of real gross domestic product growth. So inflation targeting is actually just a way of saying that the Fed will allow a certain level of real economic growth. Without higher inflation, there is no way to return the economy to full employment, because of the simple fact that we experienced a significant deflation during the economic crash. To make up for that growth, we need higher inflation temporarily.

    5. You say that what made the difference in Sweden was fiscal policy, not monetary policy, but do you know that Sweden adopted both aggressive fiscal policy AND an inflation target? See Yglesias’s blog (http://thinkprogress.org/yglesias/2011/06/28/255674/keynesian-lessons-from-sweden/)

    6. Why do you adopt the right-wing argument that a temporary increase in inflation to 3 or 4% would be equivalent to the stagflation of the 70s? The current situation is actually akin to the Great Depression, when there was low inflation (actually deflation mostly) and very low interest rates. When Roosevelt aggressively created inflation, it lowered unemployment from 25% to 9%. It did not create stagflation.

    7. Are you aware that Yglesias actually considers monetary policy an important factor in creating class antagonisms, and has advocated looser policy as a subtle way of shifting more wealth to the working class? (http://thinkprogress.org/yglesias/2010/12/14/199349/monetary-policy-since-the-great-inflation/) He identifies it with a “free market” solution, but the Republicans are so crazily biased against monetary stimulus that this seems like it would constitute a far-left policy in today’s environment.

    8. You realize that it takes congressional approval for fiscal stimulus, but not for monetary stimulus, right? Obama could recess appoint pro-stimulus people to the Fed. There are currently several vacancies, no doubt in part because of the distrust of monetary policy on the center-left and the left.

    9. Why is monetary policy inherently less leftist than fiscal policy? The former, when effective, increases revenues of the government, the latter spending. In each case, we have a stronger position for the public sector. In the current environment, more revenues would be more helpful, it seems, than more spending, in improving the reputation of the public sector.

    10. When you talk about “a petty bourgeois love of small business, which wants easy money without higher wages,” you do realize that when the Fed creates inflation, it does so by increasing all prices equally–it creates monetary reserves, and money is the common factor in the price of everything–including wages?

  12. Sweden may have had lower unemployment, but our poverty rate was far higher and income distribution far more unequal. Back in the 1970s, according to the Luxembourg Income Study, the U.S. poverty rate (based on a 50% of median income line) was 15.8%; in 2004, it was 17.3%. In Sweden, over the same period and by the same defintion, poverty went from 6.4% to 5.6%. The U.S. rate went from 2.4 times Sweden’s to 3.1 times. In the 1970s, their gini ratio was 0.215, vs. our 0.318. In 2004, the numbers were 0.237 for Sweden and 0.372 for the U.S.

    From 1973 to 2011, Sweden’s real hourly wage rose 55% – ours fell by 5%.

    In the U.S., having a job is no guarantee of escaping poverty.

  13. “Most of the bank reserves created by Fed intervention have just been sitting there, rather than leading to more lending.”: yeah, pushing on a string, like I said.

  14. “How are you going to get higher wages if you have a Fed that consistently takes the punch bowl away every time there’s a whiff of a wage increase?” It didn’t in the 1990s, but I get your point. Which is why I said:

    Sure, we need a central bank that doesn’t tighten to make sure that unemployment doesn’t get too low, as the Fed has done in the past. But that’s about it. I don’t want a monetary policy that encourages inflation. It doesn’t work as a stimulus, and it can have bad results.

  15. “yeah, pushing on a string, like I said.”

    The problem with this notion is that the Fed doesn’t really lower and raise interest rates directly, so it’s not actually stuck once interest rates hit zero. it uses a special interest rate–the federal funds rate–to measure how much money it is creating. (interest rate targeting is a social construction: http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/interest-rate-targeting-as-a-social-construction.html). But it could easily use another measure.

    When the fed funds rate is non-zero, banks know that they can lend out however much money the fed created to lower that rate by the amount announced. And they do.

    When the rate is zero, the fed can still loosen policy further. They simply need to say directly what they were saying implicitly before: you can lend out X amount of new dollars until the economy recovers.

    However, what the Fed now says instead is “we will lower long term interest rates.” This doesn’t make much sense as a statement of monetary policy because it doesn’t tell banks how much new money they can create. Unlike the Federal Funds Rate, long term rates are only indirectly related to the looseness of monetary policy. For example, long term rates are lower than they were a few years back, even though money is tighter now than it was then (we know it is tight because of the very slow economic growth).

    Monetary policy is more about the overall level of lending, and the Fed Funds Rate is a kind of meta-rate that says much more about the aggregate level of lending than it does about anything else. By focusing on long term rates–which lack this meta status–the Fed is saying essentially that they don’t want to increase overall lending, just slightly change rates without really affecting the current level of lending.

    In order to stimulate, the Fed has to actually indicate that it wants stimulus. If you cut through all the jargon, you see that stimulus is not failing; rather, the Fed is indicating that it actually wants very little stimulus. The Fed does not have to actually say they want inflation, however; in fact, they don’t really want inflation. They want economic growth. To get it, they have to simply indicate that they will tolerate a bit more inflation than average in the service of economic recovery. To do this, they could couple further creation of liquidity with explicit statements that they will not tighten until unemployment starts to come down substantially. That would be real stimulus. When done effectively, this can act much more quickly than fiscal stimulus, which must go through Congress.

    That’s not to say I don’t want to see infrastructure improvements. In fact, I think we need massive infrastructure projects. But because of the nature of the political process that produces such investments, they will not realistically have a chance until the economy recovers and deficits–which are in large part a product of high unemployment–come down. Right now, the public mistakenly blames deficits for unemployment. Once the latter disappears, they will be more likely to want to spend money on such projects.

  16. Re: Mike’s comment about aggressive Swedish monetary policy. As I made clear, it’s right that a central bank should emit money with a firehose in a crisis. Both the Riksbank and Fed provided immense amounts of support, as they should have. But the Riksbank began withdrawing stimulus as early as 2009, because Sweden began recovering rather quickly. It also has a formal inflation target of 2%, which would outrage the inflation-friendly among us.

    Sweden’s budget was also in far better shape than the U.S. going into the crisis, so it was able to do a substantial fiscal stimulus package without freaking out the bond market. Swedish soc dem has never been about large, semi-permanent deficits.

  17. If we measure monetary ease by the level of total dollar spending in the economy (= inflation + real growth [for every level of inflation there is a corresponding level of real growth, so this is essentially just another form of inflation targeting]) we can see that Sweden *did not begin* stimulus in earnest until almost 2010

    http://2.bp.blogspot.com/-zyS0sf6w0A4/TgtNRGovBoI/AAAAAAAACH8/CY9dEMI7FBw/s1600/sweden.bmp

  18. I’m not sure how this statement makes any sense:

    “Sure, we need a central bank that doesn’t tighten to make sure that unemployment doesn’t get too low, as the Fed has done in the past. But . . . I don’t want a monetary policy that encourages inflation.”

    If you want a Fed that doesn’t tighten to make sure unemployment doesn’t get too low, then you by definition want a Fed that tolerates higher inflation. I don’t see how you can have one without the other.

    Also, re: the 1990s. We had a conservative Republican congress and a fairly conservative Democratic president after 1995. Do you really think the Fed, as it’s currently constituted, would have been as accommodative if you’d had a social democratic Democratic legislature and executive implementing a large-scale public investment program, active labor market policies, and an expanded welfare state?

  19. This paper by Lars Svensson, Deputy Governor of the Riksbank, has some useful bits of information for straightening this all out (http://people.su.se/~leosven/papers/110308e.pdf).

    1. Sweden did not tighten until Summer 2010. Do you remember the source where you read that they tightened in 2009 Doug?

    2. Sweden uses “flexible inflation targeting” that considers both inflation and unemployment. Translation: they let inflation run above target temporarily when it will help increase employment due to past deflation or disinflation. They target an average of 2% over time, which means that they have to balance out periods of undershooting with periods of overshooting.

    3. The fact that they have a formal inflation target for the long run actually provides credibility that they will tolerate inflation temporarily to allow for catch-up growth. If the U.S. announced a formal 2% inflation target over the long run starting *before* the crisis, unemployment would fall rapidly because this implies higher inflation temporarily to return to full output.

    See the power of this “mere” 2% inflation target? Who you calling J. Carter Stagflation now?

  20. “The embrace of inflation and easy money as good things has a long tradition in American populism—which makes sense, given its roots in a petty bourgeois love of small business, which wants easy money without higher wages, tighter regulation, and unions that might come with a more class-conscious agenda. Or, as I said earlier, it leaves the structure of class relations largely untouched.”

    The 19th century Populists, who were mostly farmers, promoted easy money policies because the gold standard killed them and because the low quantity of money in circulation made them dependent on local monopolies and monopsonies. Individual farmers were forced to buy from a local merchant on credit and sell to a local purchaser who would pay them by retiring their debts and, if the market was ‘kind,’ adding a surplus to their local account. They thus existed in a condition of debt peonage, and were self-exploiting entrepreneurs, if that’s the correct word to use for them. Their social and political efforts were meant to undo this yoke.

  21. Yglesias probably thinks direct government hiring interferes with ‘market equilibrium’ but I don’t know for sure.

    Sweden comparisons aren’t always the greatest, our cultures and economies aren’t remotely similar. France in many ways is a better comparison, in that they are much more culturally diverse (probably as much as the U.S), yet have avoided an increasing income disparity, a behemoth prison population, and have probably the best national health care system. This is of course because they have class resistance.

  22. […] getting picked up, at least thematically, by Paul Krugman and Brad Delong. Henwood’s ‘the limits of easy money‘ is the best (and seemingly final) summary and statement of the stakes of this debate, as is […]

  23. Is the goal social democracy (like Swedent) or socialism ( like the Soviet Union)?

  24. Don’t we want the working class to take state power, and not be in a permanent posture of resistance ?

  25. Do we want an ignorant working-class that hasn’t managed yet to coalesce into a strong proletariat to panic and hand power over to some authoritarian asshole eager to bust some “commie” heads (not to mention working-class gonads), all for the sake of political purity?

    Get your priorities straight, Charles; the revolution isn’t on a fucking time-table (or a score-card).

  26. So, are u saying u are for socialism, but we just can’t talk about it yet , Todd ?

    Do we want an ignorant working-class that…etc. ?

    ^^^^
    No, and what I said doesn’t in anyway imply any of what u say , so why did u ask me that question ?

    My priorities are straight. U seem to be confused.

  27. JW Mason writes:

    “And who said anything about permanent inflation? The argument is that a period of higher inflation would raise nominal incomes relative to financial obligations and reduce the real value of debt.”

    yeah I thought that was a straw argument. Yglesias said nothing about permanent inflation. The Fed’s mandate is price stability and full employment. Bernanke should try to do what he can and if he believes they can’t do anymore he should say so and say why and advise what should be done. (he did recently say they should raise the debt ceiling.)

    As Doug and Mr. Robin should know, inflation in the 70s spiraled partially because unions were strong enough to negotiate pay increase into their contract. Do they believe there could be a wage-price spiral today? I’d guess deflation would be more likely.

    On his blog I believe Yglesias has said that fiscal stimulus was more desirable and that the inflation would just be until the deleveraging is complete and demand picks up and hiring picks up, then the Fed could throttle back.

    As Doug remembers Volcker was able to throttle back, and no doubt Bernanke or his successor would also if necessary.

    Doug:
    “That was an important part of the rightward turn during the 1970s—and not just in elite opinion, but popular opinion as well. It contributed mightily to the election of Reagan and Thatcher.”

    What will an extended period of high unemployment do to the political culture. No doubt there will be more fear and demagoguery. Having said that I’m going to check out Mr. Robin’s book. Looks good.

  28. […] at Crooked Timber, Henry has a really interesting commentary to this Doug Henwood piece attacking the neoliberal left. Henry: Neo-liberals tend to favor a combination of market mechanisms and technocratic solutions […]

  29. Talk is cheap, Charles, but don’t act wounded when dip-shit questions you ought to full-well know the answer to (if you’re the same Charles who posts regularly on LBO-Talk) earn you a smack upside the head.

  30. #1 A higher inflation target is separate from a more aggressive monetary policy. The idea is that a public target can change expectations.

    #2 A negative rate on reserves might be another way to strengthen monetary policy. It would force the money that banks are piling up out into the market.

  31. #3 Also monetary policy is not necessarily ideal, but the advantage is that it could be implemented unilaterally by Obama. All he has to do is wait for a congressional recess and fill the empty Federal Reserve Board seats with people who are favorable to a more inflationary policy. Maybe those appointments don’t last, but until then we get policy that is good for the unemployed.

  32. […] &#1072t th&#1077 B&#1077nt Timber blog, Henry Farrell comments &#959n Doug Henwood’s response t&#959 Matthew Yglesias’ argument f&#959r a higher, employment-boosting inflation target, […]

  33. […] Doug Henwood and Corey Robin were confronted by similar appeals to competence for competence’s sake. The […]

  34. […] are discussing the lack of a political agenda in neoliberalism’s policies based on this post by Doug Henwood: Crooked Timber (I, II), Will Wilkinson, Kevin Drum, Matt Yglesias, The American Scene, […]

  35. […] raised the hackles of Doug Henwood, who accused Yglesias and his fellow “left neo-liberals” of preferring monetary to […]

  36. […] term itself was invented in a debate on policy and politics that began with an exchange between Doug Henwood and Matthew Yglesias and that has been raging (if it’s possible for a debate to rage in a […]

  37. […] left-writ-large, ranging from Will Wilkinson and Brad Delong on the neoclassical liberal end, to Doug Henwood and Henry Farrell on the social left […]

  38. From an elite point of view, the primary problem with a jobs program—and with employment-boosting infrastructure projects—is that they would put a floor under employment,[…]

    Most of the public is opposed to government spending to create jobs, not just the “elite”.
    http://www.nytimes.com/interactive/2011/06/30/business/20110630poll-full-results.html (q18)

    http://www.cbsnews.com/8301-503544_162-20080492-503544.html

    http://news.yahoo.com/blogs/lookout/debt-ceiling-deal-impact-economy-ordinary-americans-163456632.html (comments)

    The multipliers on jobs programs and infrastructure are quite high. According to Economy.com, such spending has a mulitplier of about 1.6 to 1.7—meaning that for every $1.00 spent on such programs, GDP increases about about $1.60-1.70.

    And similarly, when government spending on jobs programs stops, GDP drops by a similar amount.

    Surely you would not suggest that the temporary increase in GDP from spending on jobs programs causes an increase in tax revenues equal to the amount spent.

    So aside from putting the unemployed to work, a compellingly humane goal in itself, and spiffing up our rotting environment, jobs programs and infrastructure investment would boost broad economic growth dramatically. But we can’t do that, because the yahoos don’t like it (high-speed rail = Europe = fags) and because jobs programs might lead the working class to develop an attitude, and we can’t have that. Therefore, respectable people don’t suggest such things.

    So the majority of the public are yahoos, eh. Since most people don’t want a jobs program, or an attitude.

    Or, in the context of this original debate, a jobs program and serious infrastructure investment rather than loose money?

    Or the way to reduce unemployment without government spending, by convincing people to work less.

  39. […] ‘left neoliberalism’. What began as a dispute over monetary policy between Yglesias and Doug Henwood quickly widened into a debate over political philosophy and strategies to rebuild the American […]

  40. […] period of time, winning acceptance well beyond those whose interests it has served (remember this recent debate in which Yglesias argued for easier money against the now prescient objections of, among others, […]

  41. […] period of time, winning acceptance well beyond those whose interests it has served (remember this recent debate in which Yglesias argued for easier money against the now prescient objections of, among […]

  42. […] supply, though strong doubts persist as to any further marginal improvements the Fed can make (e.g. Here and here). Meanwhile, while the Fed has pumped like crazy, state spending has come under serious […]

  43. […] the Democratic Party” for decades was once the commitment to full employment. The purpose behind guaranteeing everyone a job was not simply to provide Americans economic security; it was to elevate the overall bargaining […]

  44. […] the Democratic Party” for decades was once the commitment to full employment. The purpose behind guaranteeing everyone a job was not simply to provide Americans economic security; it was to elevate the overall bargaining […]

  45. […] a public jobs program designed to address other social needs is thus superior. Doug Henwood raises the same concerns: “[T]he best that loose money can give us is more of the same; jobs […]

  46. […] a open jobs module designed to residence other amicable needs is so superior. Doug Henwood raises a same concerns: “[T]he best that lax income can give us is some-more of a same; jobs programs […]


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