I have a post on the futility of fiscal policy coming, but the hubbub over Jackson Hole has made me alter my publishing schedule. I want to give one more shot on the idea that the Fed is out of ammunition, and that unorthodox moves are more likely to scare the public than result in increased real GDP.
I am better off than all of my friends, I think. A common occurrence for me is a friend coming to me and saying, “How can the government borrow so much? It doesn’t make sense. Why do they spend money on this and not on me?” I understand the paradox of thrift, but I don’t agree with it. One reason is that because it is a paradox, ordinary people will react badly to actions of the government that they can’t do themselves. Second, when the government or central bank does it, it seems like a form of theft, because no one should get something for nothing, and it degrades the ordinary person’s view of the honesty of the Government or Central Bank. Third, what the money gets used for is viewed as a waste by some.
This consideration of the basic sense of fairness among average people should not be discounted by policymakers, nor the fear engendered when policymakers take such actions. It is how average people think. If you remember my review of the book Priceless, you might realize that people often act out of a sense of fairness, not out of economic interest. When you think about the Paradox of Thrift through that prism, it is plain why government action doesn’t work — many people do nothing different when the government/central bank is making bold moves, because they are less certain about the future because the powers that be are dishonest in their view.
That said, the main reason I don’t agree with the solution to the paradox of thrift is that the government generally misspends money on cronies or projects of cronies. It does not build the productive capacity of the economy, but only current consumption. It does not aid growth.
Monetary Policy Now
Looking over a variety of articles on the options the Federal Reserve has, I would say that they are out of ammo that can do good. They have plenty of ammo to destroy the economy, but little to build it. What options does the Fed have left?
- Lower the Fed funds rate into lower positive territory.
- Offer language that says that the Fed Funds rate will be low for a long time.
- Buy more long-dated Treasury bonds.
And the unorthodox options:
- Lend directly to classes of private borrowers.
- Create negative interest rates for Fed funds.
- Debase the currency by expiration dates, lotteries, etc.
I will pick up on this tomorrow, and explain why the options that the Fed has are limited.