I reflected in a post last week that we should have had less accommodative monetary policy and more fiscal policy since the crisis… Thoughts on Investment, IS-LM & Effective Demand.
Today Paul Krugman also had what appears to be a moment of reflection upon monetary perspectives… The Limits of Purely Monetary Policies. He recognizes the limitations of monetary policy after the crisis in that they cannot just produce inflation when they want to.
He recognizes the need for more fiscal policy… He mentions the idea of just giving money to households, but that is really fiscal policy.
“But, asks Evans-Pritchard, what if the central bank simply gives households money? Well, that is, as he notes, really fiscal policy — it’s a massive transfer program rather than a conventional monetary operation.”
Putting money into the hands or people is a good fiscal idea that would have moved the IS curve to the right, which would have given the Fed rate a better chance to lift-off earlier, and thus normalize better. We could have generated more “grassroots” inflation pressures. My view is that the best way to put money in the hands of people is to raise labor share of income, but firms do not have an incentive to do that. Nor does labor have the power to negotiate that.
I foresee that 2015 will be the year for massive reflections and soul-searching about monetary policies. The Fed says that it is planning to lift-off the Fed rate, but others do not think that can happen (I am one) because they are behind the curve and there is too much global weakness.
2015 will surely be an interesting year…