Monday, June 12, 2017

Edward Harrison — Secular stagnation is a policy choice

My conclusion on the US is that the bond markets have got this mostly right. They are betting that secular stagnation is going to continue in the US. And that’s because we’ve made policy choices that limit wage growth and increase inequality. And judging from the policy priorities in the Trump Administration and in Congress we will continue to do so.
Credit Writedowns 
Edward Harrison


Ralph Musgrave said...

Edward Harrison says (rightly) “The orthodoxy today says that monetary policy is the right way to go to ‘steer’ the economy. This thinking says fiscal policy is to be used as a cyclical boost only in extremis, as it was in 2009…”. The logic behind this “orthodoxy” is flawed for the following reasons.

First, given low interest rates, there is no “steerage” left (unless you want to try negative interest rates), so the orthodoxy advocates an entirely artificial boost to interest rates by having government borrow and spend. As Milton Friedman and Warren Mosler said, there is no good reason for government borrowing. So the net effect of the latter interest rate rise is that mortgagors pay more interest on their mortgages just satisfy economists strange ideas on how the economy should be steered.

Second, interest rate adjustments might make sense if they worked much faster than fiscal adjustments. But they don’t: at least there’s a Bank of England article which claims interest rates take a full year to work.

Third, the purpose of the economy is to produce what people want (both in terms of what they normally purchase out of disposable income and the stuff normally supplied to them by government). Thus if there is scope for supplying “more of what people want” (i.e. if the economy is not at capacity), the logical solution is to give Main Street more after tax income and boost public spending. In contrast, there is no obvious reason why a recession is necessarily caused by inadequate lending and investment rather than an inadequacy in one of the other elements in aggregate demand, like consumer spending or exports.

Tom Hickey said...

Good points, Ralph.

at least there’s a Bank of England article which claims interest rates take a full year to work

I recall Mike Sankowski saying that it takes interest rates about two years to work through the RE channel, which is where their strongest effect occurs.

Monetary policy based on interest rate adjustment is a blunt instrument — a hammer that sees all problems as nails.