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.
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.
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?