Add some chocolate ice cream to a hearty beef stew. How about a slice of Key Lime pie in your lamb stew? Add some fresh watermelon to your spicy chili.
Mix JD with
some Scotch.
Sound
terrible?
Add a soccer
player to your NBA team? A sumo wrestler to your swim team relay?
Enough?
Garlic is
very different from a lamb shank. But grill them together in a pan and you have
made something delicious.
Some things
go together. Some things are best kept separate.
That’s the
way I feel about monetary policy and policies to improve income distribution.
These are both important and delicious in their own rights. But they are not
like ingredients of a stew – you cannot just mix them together and hope for
anything good.
As I hear
some of our politicians today – they don’t want to keep the watermelon separate
from the chili. Monetary policy is held hostage or must support a variety of
issues – poverty, race, education, housing, college education, global warming, etc.
What do I
mean? I have been arguing that the Fed has poured too much money into banks. I
want the Fed to judiciously remove that money. People worry that such a policy
is unfair because it disproportionately hurts the poor and minorities. I don’t
know if that is true, but so long as we think it is true it means that monetary
policy won’t be used for its intended purposes. If we use monetary policy
judiciously, we use it to stabilize the economy. That should be good for the
poor.
Monetary policy
is a simple thing. The Quantity Theory of Money (MV=PT) is the basis for
thinking about money. If monetary velocity (V) is constant, an increase in the
amount of money in circulation (M) will impact either the price level (P) or
the amount of transactions (T) or both. With V unchanged, an increase in M will lead to
an increase in P and or T. Why? What's the thinking behind this simple equation?
It has to do
with the demand for goods and services. An increase in money causes demand for
goods and services to increase. Firms will accommodate that rise in demand with
a rise in output and/or a rise in prices.
That’s it.
That’s the whole story. If you have a shovel, you can move dirt. Your shovel will
not turn on the electricity and it will not pour you an Old Fashioned. If you
increase the money supply, it will affect output and prices. It will not solve international
trade problems and it will not solve poverty. It will not make our incomes more
equal. MV=PT. That’s it.
If we have
unequal incomes in America, don’t fool around with monetary policy. If we have
distribution of income problems, then use policy tools that directly address what
you think causes unequal and unfair incomes. Stay focused. Don’t throw out the
baby with the dirty bath water.
One final
point. Some say that monetary policy has driven up the stock market and that
has benefited mostly rich people. But clearly the same people who say that also
want monetary policy to spur the economy into creating more jobs and incomes. There
is no conflict.
If along with a strong stock market, we find distribution of income issues worsen, how does one rectify
the imbalance in a useful and effective way? I doubt the solution is very
simple, but I’d prefer discussing those approaches rather than folks wanting to
hamstring the Fed by asking it to solve things it has no real influence on.
OK. I am refinancing my house at 2.5% because the banks are begging somebody to borrow/use their money. That gives me an equity loan at a very low rate. Housing market is booming because of early retirement and retired people want to get out of the NE and cities. That creates jobs in prime areas to move. It also created a need for a whole slew of manufactured goods. The cession prematurely created a huge demand fro electronic communication programs, software and technicians...ergo ZOOM. At the same time many under utilized service jobs have disappeared and many will not return but drive in and delivery jobs are thriving. Who knows where all of this will go but low to 0 interest rates are supplying the investment capital.
ReplyDeleteFed policy designed to keep interest rates near zero is a tragic mistake. While housing might be doing fine, the rest of fixed investment is not. And people who conservatively invest their savings in bonds and saving accounts are getting killed. Do not praise low interest rates.
DeleteAgree but good for my mortgage payment and some cash back. The rest is a mistake. Looks good for politics in the short term. Reminds me when Hamilton set up the FED by selling bonds for at that time the first US dollars.
ReplyDeleteThe the FED sold out in 1 hour. What happened next is history.
A few historical notes. The first national bank of the US was a product of the 1790s. And it resembled very little the Fed, which was not created until 1915. It was a complicated institution that was a private bank as well as a structure to facilitate government. One important difference between that bank and the Fed is that its money was largely backed by gold. It did not make up money out of thin air and it did not conduct monetary policy. So no, Hamilton did not even envision something as silly as our Fed that promises to keep interest rates at zero until hell freezes over.
DeleteYou are correct it was the First National bank but government operated. Simply provided the government with operating capital while keeping the various factions of for profit business happy. Otherwise the government could not pay the former soldiers and other war debt. It was compromise to avoid being like the various kings in Europe....I think. The reading is relativley dry.
ReplyDeleteIt is hard to imagine a new country without a government -- and without a currency. A currency overcomes many of the difficulties involved in a barter system or even in a system with commodity money like gold and silver. So long as the government kept the currency credible, they could have benefits of money without crisis. The gold standard helped with that but even that is not foolproof.
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