Monetary Reflections… more to come in 2015
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…
I agree. Europe can not seem to get away from its austerity kick, Russia is collapsing, China is slowing and Abenomics has hit the wall. the U.S. political system will be even more dysfunctional (if that is possible) with Obama being the lamest of lame ducks and the GOP having control of both the Senate and House but not over its own caucus. On the other hand unemployment is down, there has been a bit of wage growth, energy prices have felt like a tax break to the average consumer and at least for the time being we are doing a better job of providing health care to our citizens. I think we can muddle along domestically if external events do not tip us into serious deflation and erode the painfully slow improvements that have been made since the bottom of the Great Recession. How long that can be sustained is another question entirely, but I simply do not see any improvement in fiscal policy until after the 2016 elections unless it is part of a “grand bargain” which guts social security and medicare.
Edward,
“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.”
That is the nub of our situation. Anything else is a bandaid, and is doomed to fail after forcing government debt to unsustainable levels. Iceland’s population is looking smarter by the year, there is no free lunch.
Monetary policy can not bring an economy out of debt driven depressions and we are in one.
The richest among us wanted more and more of a large US domestic economic pie. But they spend very little, instead they accumulate. They say they invest but invest in what? As more and more production was moved overseas, exactly what did they invest more and more in domestically? Profitless dot coms, the residential housing market, banks, or pay day lenders? (The dot com bubble, the residential housing bubble, and the massive debt bubble leading up to the Great Recession.)
Those earning less than the median wage spend their income for necessities and a few discretionary purchases. They drive velocity. But there was less for them to spend as their wages stagnated.
Effectively the US domestic economic pie was made smaller.
So how do we increase the size of the US domestic economic pie? Asking corporations to raise wages is a futile gesture, just ask the Japanese. It will be up to federal government to place its foot on the scales. And the Republicans will fight that to the bitter end. Global Free Trade will continue and taxes will be increased little or not at all. The Democrats also want more trade treaties.
In my opinion the US domestic economic pie is about as large as it is going to get, any time in the next decade or two. (Excluding some small GDP growth related to population growth or some miracle.) That implies that the exporting world also has a problem, since we ARE the net importer.
But we could always make our situation worse, we already have the formula. Let’s approve more trade treaties which advantage our trade partners at our expense. Or we could allow 12 million more illegal immigrants into the country so that we can increase unemployment and underemployment rates or better yet, suppress working class incomes.
There are a lot of things we could do–we won’t because both major political parties are owned by the capitalists. the feds and states could use a progressive income tax to fund the repair of the nations infrastructure which would us American labor and American resources and would make us more competitive with the rest of the world as well as make everyone’s life here better. We could raise the minimum wage to $15 per hour. we could rewrite the mandatory overtime rules from around $20,000 per year to $70,000 per year so that people who work 60 hours a week and are not members of a union get paid for 60 hours of work a week not 40. We could fund free or almost free tuition at public institutions through progressive income taxes, we could sharply reduce corporate tax rates and put capital gains and dividend income on a par with ordinary income–we could even make them subject to social security and medicare taxes if received by persons under 65 or 67, we could break up the banks and reinstate Glass Steagall, the list is endless of steps that could be taken to make life better and more prosperous for the 99% and make it a little tougher for the 1% to get all of the pie. the income inequality and falling labor share is not an accident, nor do I believe that it is inevitable–it is the direct result of government policy to aid business at the expense of everyone else.