Monday, June 17, 2013

Expecting the Unexpected

. Monday, June 17, 2013

Here's David Beckworth explaining a "foolproof" mix of monetary and fiscal policy (bold added):

In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits. ...

If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed. ...

What is there not to like about it?
I have eliminated most of the substance of his post because those 'ifs' are just too big for it to really matter what comes after. The public does not, cannot, and will not understand why an NGDP target is superior to an inflation target. Hell, most economists don't buy this, a big percentage of financial market actors don't either, and plenty of central bankers are at best skeptical. Meanwhile, 30% of the public doesn't know who the Vice President is. (I couldn't easily find a statistic on the % of Americans who know who Ben Bernanke is, but it's gotta be less than 20%.)

I think academics and maybe some policymakers vastly overstate the value of the expectations channel. People are not so forward-looking as they are in models. Here's what they (sometimes) know: Do I have a job? Does it pay well? Is that job threatened? Do I have a bunch of debt? Can I service that debt? If the answers to any of these questions (and perhaps many others) is "no" then the public will "hoard cash", where "hoard cash" actually probably means using any excess income to pay down debt.

It gets even worse. The Paradox of Thrift is a paradox because what is individually rational is not collectively rational. The expectations channel doesn't make that go away even if there is a functioning expectations channel. Which there isn't, or at least not one that the Fed can so easily manage.

We can't base policies on the presumption that people are 100% informed and intelligent. If we want folks to spend money we have to just find a way to give them a bunch of money. If they have money, they'll spend it. If they don't, they won't. I personally think that monetary mechanisms are generally better for this than fiscal mechanisms, but I also think the jury is still out on that one.

More importantly, monetary policy benefits banks while fiscal policy (in the form of spending) benefits subcontractors, unions, urbanites, and public sector employees. Fiscal policy in the form of tax cuts benefits the top 10%, i.e. the ones who overwhelmingly pay the federal tax burden. So these questions are political.



Expecting the Unexpected




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