Good thing I didn’t say Vote for Blue
Could you share what you consider to be the most convincing book/article on monetary policy.
I get the basics, but I’ve never been convinced that it’s a legit science. Always feels somewhere between folk medicine and tarot.
I believe modern monetary policy is the correct way to think about it. My main criticism of many of the books on the subject are that they use it as a platform to suggest spending lots of fiat currency to pursue a very liberal agenda. The mechanics though are sound and represent a much better model of how (in the US) Congress controls the money supply and the money supply directly impacts pricing.
The Deficit Myth by Stephanie Kelton is a good primer. She faces the same criticism from me as listed above. She thinks we should spend a fortune pursuing mostly liberal agenda items but she explains the theory well. Modern Monetary Theory exactly explained what happened with the several trillion of pandemic giveaways. We had inflation and lot’s of it. Want to get rid of inflation? MMT should say to reduce the deficit either by cutting government outflows or increasing government inflows either of which would have the effect of reducing the size of the debt. The debt not held by the Federal Reserve should be thought of as the money surplus in the economy.
I freaking hate this. I’ve read MMT stuff since 1998 or so, I abandoned it a few times for other theories but keep coming back to it. Current supporters seem to latch on to the bit about ‘deficits doesn’t matter’ but skip right over the context around that.
Agree with the rest of your post, we should have cut spending over the past however many years. The economy was hot and we should have reduced the deficit significantly. But we didn’t, so now the Fed is left to fight this alone.
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First, you need to understand why a Government-driven Monetary Policy exists in the first place.
I get the vague idea that monetary policy, like fiscal policy, is theoretically aimed at maintaining a healthy economy. Where things like bubbles, inflation, recessions are considered unhealthy.
In theory, economists are pulling levers, and the lever has some combination of effects, which depend on the current state of the economy. In theory, if they can read the current (and near-future) then they pull the right levers to avoid unnecessary harm.
What I’d like is some really clear evidence that the levers work exactly as they are supposed to.
Nope, not yet.
I’ll spill: it’s so the people in charge can keep their heads off of pikes.
Nothing more, nothing less.
Bubbles, inflation, and recessions are usually caused by shitty federal economic policies in the first place.
Sure, that’s not too far from my above definition of ‘folk medicine’.
I agree with your criticism. I found an old quote somewhere in which Kelton said that MMT proponents are harder on inflation than most other economists. Definitely adjust fiscal policy quickly to control inflation.
But, she says this round of inflation isn’t caused by deficit spending, so no point to use fiscal policy. To me, that’s like saying your fatigue is caused by a virus, not by lack of sleep, therefore rest won’t do you any good.
IMO her proposals aren’t going to do a thing. They are the typical liberal litany. Catch Me on The Mehdi Hasan Show Later Today
We could obviously stop inflation with a temporary hike in FIT rates, but that’s politically unpopular so she won’t touch it.
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And that’s impossible to implement quickly (without a significant change in the authority to do so by The Fed or by some other agency). It’s been that way since I studied Economics in college, and that was A LONG TIME AGO.
I would say “it’s hard to pass a law quickly”. The implementation after the law is passed would be pretty direct – new tables of withholding rates, new numbers in the FIT tables. We implemented the cash payments to individuals pretty quickly. We also passed that law pretty quickly. When there is the political will, things can get done.
The political will is the problem. Voters may list inflation as their number one issue. But they don’t like the most direct fix.
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Which is where leadership is supposed to come into it.
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I think there is a basket of both. We have covid related supply disruptions that are increasing prices of some things… China keeps shutting down really big cities that produce things we buy, and that won’t stop as long as they have a 0 covid policy.
How much of an 8% inflation is supply related to mmt? No one really knows, but i think anyone who says it’s all one side or the other is missing a big part of the story.
I agree that this round of inflation isn’t entirely caused by fiscal policy (e.g. covid cash to almost everyone).
But, they could stop it entirely with fiscal policy – specifically higher FIT rates,
Sure, but that’s political suicide since it would come from congress.
They don’t have to increase the FIT rates. But the they could stop increasing demand by giving away money. That just makes the supply crunch worse.
Do you have any short term way to stop “giving away money” that is more politically feasible than raising taxes?
We could cut Social Security benefits, for example, but I see less chance of that passing the an FIT increase. Or, cut SNAP benefits? Cancel Medicare for people under 70? Or break contracts with private companies for road construction?
Exactly. This is the fundamental problem with the MMT prescription for controlling inflation with fiscal policy. In theory it’s exactly the right thing to do. It’s just political suicide.
They would have to set up some non-elected committee with the power to adjust tax rates monthly (or more frequently). Then congress could complain and hold hearings and not actually stop increases.
Stop the “pause” on student debt repayment. Don’t even discuss new forgiveness programs. Admittedly fast isn’t something the Federal Government is set up to do well in economic terms.
I believe there were a number of work requirement waivers for various welfare programs during COVID which have been renewed. Stop renewing them.
You could also help on the supply side by reducing/rationalizing regulations. Manchin’s proposal isn’t bad. Doesn’t go far enough, but at least its a start.
Also get the NLRB out of the way on some issues. There is no reason for the US ports to be as manual labor centric as they are, for example. The union just won’t allow automation.
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That would have an immediate impact. Do you have any idea regarding the number of dollars in payments per month?
Edit: I did an estimate. 45 million borrowers, 75% repaying pre-covid, $400 average monthly payment = $13.5 billion/mo.
FIT revenue is $2.6 trillion for the year or $217 billion/mo. Loan payments are about 6% of FIT revenue. So restarting loans has the same macro impact as increasing FIT rates by 6%. i.e. the 24% bracket goes to 25.4%. (Note that I sometimes lose decimals on these BOTE estimates.)
I’ll bet this rounds to zero in the US economy.
Maybe some impact (very small) two years from now. I want to stop inflation long before then. And, there are offsetting negatives.
Which issues, What’s the timeframe, and How big is the impact? I’m thinking “long” and “trivial”, you may have better information.