The ‘debate’ over monetary policy continues, but somehow with a wonkish blindness to the politics. Recently, Matt Rognlie argued that “The Fed’s failure to use all the tools at its disposal… is by far the most serious failure of economic policy today.” This is a surprising statement, given how much the Fed has already done, or tried to do, and how little effect monetary stimulus is likely to have under current conditions. But there’s more that troubles us here than just the economics.
Not a balance-sheet problem?
The reason we are interested in Rognlie’s argument is that it isn’t the familiar one, in which the main economic problem is taken to be a balance-sheet recession. In a balance-sheet recession, consumers are trying to reduce their debt burden, and thus they save more, or pay-off debts. Demand drops, which suppresses economic activity, and we get the long stagnation as this ‘deleveraging’ process unfolds. The trick, then, is to figure out how to either reduce these debt burdens (say, inflate it away) or find a source of demand somewhere else, like fiscal policy.
Rognlie thinks this has the issue backwards. For one, what matters is the ability of debtors to meet their obligations, not eliminate their debt per se, and it’s not clear that debt burdens are what is holding demand back. Instead of going after housing debt, stimulate growth, which will raise asset prices and income, thus lowering debt burdens. Moreover, the key thought for Rognlie is that, if debtors are paying debt back, that money isn’t disappearing, it’s going to creditors, who want to lend it out. If the money market works right, “consumers’ desire to save will translate into an investment boom, not an economic downturn.” That is to say, the money consumers are using to pay down their debts increases the supply of money available to investors who want to invest in production and make things. The problem, according to Rognlie, has to do with the price of money, or real interest rates – there is a market failure, which is where the Fed and monetary policy come in. Rognlie thinks “real interest rates are too high,” and the Fed needs to pursue an even looser monetary policy.
The facts must be wrong
Mike Konczal at Rortybomb has a superb critique of this argument, and instead of reproducing it here we encourage our readers to check it out. Rognlie himself is willing to admit that when nominal interest rates are already zero, monetary policy can do little in the way of stimulus, and many have made this point before. More to the point, it’s hard to believe that if we just got real interest rates right, then suddenly there would be an investment boom and markets would ‘clear’. Corporations are already have mountains of cash, and the cash is just sitting there. A few great graphs from the Planet Money blog (hat-tip Anush Kapadia) show just how much cash corporations are sitting on:
Instead of investing in new production, we see stock buybacks, dividend payouts, massive bonuses, mergers and acquisitions. The reason is that they don’t think they can sell much more, and the reason they think that is because they don’t see demand for their products.
Moreover, markets ‘clearing’ does not necessarily mean investors, and their demand for money, is the same as demand to use that money to invest in productive activities. At the moment, they have been parking money in T-bills and other safe assets, like gold and even Swiss francs. Oddly, Rognlie seems to take this activity as “prima facie evidence that real interest rates are too high.” And he says this because “that’s what every macro model tells us.” So when the facts don’t fit the theory, it must be something wrong with the facts…Or it could be that the problem in the money market reflects a deeper problem in the political economy, but one that the monetarist refuses to recognize.
The political problem
The fact is, Rognlie isn’t wrong that the Fed could undertake various actions, as could fiscal policy, to address stagnation (though monetary policy is hardly the most important of all instruments). But the problem, at heart, is not a failure of technical expertise in economics, it’s a political problem. During QE1, the Fed was willing to buy up a huge number of mortgage backed securities to try and clean up bank balance sheets. In principle there’s no reason why the Fed could not also buy up commercial paper from other business entities to try and make them more liquid and willing to invest. But of course, that would not be tolerated politically.
More broadly, the emphasis on the Fed is an attempt to get around politics itself. There is more than one way to skin a cat. Different kinds of stimulus and different ways of dealing with debt and suppressed demand have decidedly different effects on class structure and on the distribution of pain. So far, the lion’s share of the – Fed-heavy – stimulus has been a redistribution upwards, a way of making sure the major banks don’t feel much pain at all. Buying up MBS, bailing out AIG to make Goldman whole, and the zero interest rate policy have all been major subsidies to the banks at taxpayer expense. Rognlie’s proposal to try and press real interest rates even lower, increase equity values and improve asset values, would, as he notes, be primarily an improvement in the situation of the 10% who still have significant enough net worth that they are likely to spend, rather than pay off their debts: “But the top 10%’s disproportionate share of assets is matched by its disproportionate share of spending, and therefore disproportionate influence on the macroeconomy.” Therefore, “even if in the short term lower interest rates do nothing more than provoke a spending spree among the top 10%, they’ll be worthwhile from a macroeconomic perspective.” In other words, take the existing distribution of wealth and income as given, and stimulate spending by the top 10%. Nevermind trying to boost the earning capacities of the other 90%.
A spending boom by the top 10% is unlikely to occur, and even less likely to solve the problem. But more to the point, there are so many other ways, far more likely to work, but which would also require challenging the very forces that refuse to be challenged, either in courts or in legislatures. The Obama administration could have, and in principle still could, force a modification or restructuring of mortgages – write down some principal, change terms – as a way of easing the pain on homeowners and freeing up more cash for spending; and one could suspend foreclosures, at least until the legal mess and fraudulent claims are sorted out. (Joseph Stiglitz has proposed something like that.) But all that would require being willing to use the state in the interests of consumer-creditors against the banks. The Democrats could also have resisted austerity packages, and have been/be more willing to spend money on jobs programs. Putting a floor under wages, increase earning amongst those who can’t find jobs, all has not just a stimulative effect, but gives those who are starting to earn a reason to believe they will be able to meet liabilities going forward. Again, this requires challenging political opposition, especially the constellation of interests that a) refuses to be taxed b) prefers fiscal austerity but monetary looseness and c) prefers b) because it is more responsive to their needs than public needs. (Which is, ultimately, the problem with the Fed. Not just that monetary policy is unable to dig us out, but that it is never equally responsive to all needs, but rather mostly to the needs of finance capital.)
Finally, our general point about politics and growth here is that what we’re facing is not a choice about the right technical fix, nor is it even about the most politically desirable choice from the standpoint of some view about justice. Rather, the point is that what has collapsed is not just an asset bubble but a growth model. A model based on stagnant real earnings for median workers, but increasing debt, is not sustainable because at some point nobody will believe that all the claims will ultimately be met. Whether this means ability to pay off credit cards, student loans, or most fundamentally mortgages, at some point, there has to be a relationship between debt and earnings. That requires an ability to maintain earning power – which means not just jobs, but better labor laws, stronger unions, etc… – and a willingness to discipline creditors, not just debtors. But right now, those political forces are weak, and the ones that prefer not to be messed with, by courts, taxes, and regulators, are ascendant. The problem with reorienting the economy is more than a matter of getting the right stimulus, it is of getting the right political conditions for a certain kind of stimulus and economic transformation. Lower real interest rates sure as hell won’t get us that. Occupy Wall Street indeed.