By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil
“Oh no! This is going to get silly!” That’s what I thought when I read the first few lines of Matthew Yglesias’ post on how, in a cashless economy central banks would be able to ‘cure’ recessions. Actually, Yglesias first published this epiphany back in December of last year.
Yglesias claims that in a cashless economy central banks could easily cure recessions. How? Well, they’d simply threaten to debit bank accounts if the Great Unwashed refused to spend or invest their savings. And because people couldn’t take out cash and stash it under the mattress they’d have no choice but to go out and do something with their money before disappears.
This all comes back to the idea of a negative rate of interest that Paul Krugman and other ISLM adherents have been pushing as a way for Ben Bernanke to get his central bank mojo back. If interest rates fall to zero and the economy still doesn’t recover, these people claim, the central bank should try to stoke inflation so that, with their bank balances threatened with erosion, people would spend and invest.
Basically, this is a way for ISLM adherents to save face after saying for years that interest rate policies actually work in a really effective way. For example, in his original article Yglesias wrote the following:
Starting about 40 years ago, it became clear that central banks had the power to end most recessions pretty easily, independent of fiscal stimulus. If your economy is saddled with idle resources—unemployed workers, vacant office spaces, factories that aren’t running all their shifts, trucks cruising down highways half-empty—what you need to do is increase the flow of spending through the economy. You do that by cutting interest rates.
Yeah, that’s a bit of a howler. When recessions occur in a modern economy fiscal stimulus opens up automatically because as unemployment rises and production falls transfer payments increase and tax revenues fall. So, there’s no real evidence that Yglesias’ assertion is in any way true.
Indeed, some argue that monetary policy is not nearly as effective as neoclassical economists think it is. Some argue that it is akin to a shaman’s wand waved in the hope to revive ‘animal spirits’ which, if fiscal stimulus were not forthcoming, would wither and die regardless. This, for example, was clearly Hyman Minsky’s view of the 1974-75 recession; and, if you read his careful study of the government and central bank response (in ‘Stabilizing and Unstable Economy’) you’ll see that he’s probably right.
In addition to this not all recessions are caused by simple hoarding. Keynes was probably wrong when he focused purely on ‘liquidity preference’ as the cause of recessions/depressions. There are also debt deflation dynamics which take hold to ensure that certain segments of society remain underwater and in debt. This is what Richard Koo calls a ‘balance sheet’ recession. Eroding people’s bank accounts won’t do much if some people remain heavily underwater. He argues that in a balance sheet recession, private parties are preoccupied with paying down debt rather than seeking to increase profits (admittedly, we could try to inflate the debt away, but really, how much inflation are we talking about here?).
But let’s not even argue economics here. Yglesias’ plan is so outlandish that I think that we can debunk it with a simple thought experiment. You see, we could actually initiate the plan in a paper currency system. I’ve come up with two ways of doing this – note that there are probably more.
One way to do this would be for the central bank to announce that it was going to start eating into bank accounts, as per Yglesias’ plan. But they could supplement this by saying that all paper currency hereafter returned to the Treasury or central bank, in the form of reserve holdings or tax payments, would be debased by the same amount. Ta-da! Instant inflation. Banks and taxpayers, threatened with a debased currency, would rush to spend and invest.
Or the central bank could announce tomorrow that they were debiting bank accounts a la Yglesias and that there was no point in hoarding paper currency at all because they would shortly be printing new currency that would be debased by the same amount as bank accounts – once this new currency was issued the old currency would be worthless as the Treasury and central bank would not accept it in tax payments or for reserve holdings. So, you’d better return all your notes to your local bank and hold your balances in electronic form ready for debasing, scum!
So, why doesn’t Bernanke do this? Eh… because it’s stupid. First of all, we live in a democracy (shock!) and people, who already generally distrust the central bank, would not like a system that functioned like this. It’s weirdly dystopian and would make people feel completely impotent. And it would call all property rights into question. If your savings aren’t safe from government seizure, what is?
A politician would not have a hard time getting elected on a mandate of ensuring that the central bank doesn’t nakedly expropriate funds that are not working in the public purpose.
Terrifying people into thinking that their savings were going to be seized by the Matrix may do extreme economic damage too. Such actions might scare people in spending to the point of hyperinflation. This is not as remote a possibility as some might think. There is a psychological component to the value of a currency. If a central banker said that he or she is going to start literally stealing your money, people may become distrustful of the currency itself and try to offload their whole bank accounts in order to obtain real goods and assets. Or they might extract their funds for conversion into a new currency and stash it in a foreign bank account that was not threatened with expropriation. The Austrians would no longer look so dumb when they invoked hyperinflation as a real possibility of Big Government intervention.
It’s columns like this that demonstrate how technocratic (and anti-democratic) neoclassical economists actually are. They say they like freedom and all that – but they don’t really. They have a very scientistic view of how economies – which are ultimately just aggregates of real people (not utility-functions, guys!) – actually function. And they, like all technocrats, have an unflinching desire to control people no matter what the cost. But, as we learned in the monetarist experiment under Thatcher, should any foolish politician allow them access to the levers of power, their little fantasy constructions of how Everything works will come crashing down around them as quickly as… well… as quickly as Ben Bernanke could technically expropriate your earnings, peasant!