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By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives
Evan Soltas is hoping that President Obama’s appointment of Janet Yellen signifies a new administration commitment to jobs and economic growth.
Unfortunately, Soltas seems to be one of those folks who is convinced that our failures over the past five years have much to do with a monetary policy that has been insufficiently “accommodative”, and he strongly suggests that the national plague of mass joblessness and stagnation could be alleviated if the Fed would only do more aggressive quantitative easing without political pressure to taper prematurely.
It’s a sad fact that, five years into his presidency, Obama has shown little interest in nudging monetary policy toward growth — or even just appointing growth-minded policy makers. Yellen changes that. She has been outspoken about the need for the central bank to support a U.S. economic recovery with accommodative monetary policy — and, in particular, to reduce unemployment. Meanwhile, Obama has been an outspoken, if not well-argued, advocate for the hawkish view that continued easing creates risks of financial bubbles and instability.
Those comments aren’t at all out of place in the Obama administration’s view of monetary policy. You can hear his emphasis on risks that would cause the Fed to tighten. It’s strange to see the president, who you would think wants the economy to grow, so ready to throw away his best option to realize that outcome. And it is a particularly egregious error when, as Obama knows, Republican opposition means fiscal policy cannot ride to the rescue. With Yellen, though, Obama has been forced by members of his own party to hand over the top job in monetary policy to someone decidedly not of his persuasion.”What I’m looking for” in a Fed chief, he told the New York Times back in July, is somebody “to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets.” Amid high unemployment, Obama wanted someone who’d still “keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”
Notice the pooh-poohing of concerns about bubbles and froth, as though somehow a strong preference for financial stability and sustainable patterns of investment and growth goes hand-in-hand with a stodgy taste for stick-in-the-mud stagnation and “tight money”. It’s dispiriting that so many of the young, center-left thinkers seem unable to escape from the dominant neoliberal frameworks of mainstream neo-monetarist economics. In the mental model these writers constantly bring to bear there seem to be just two basic camps: On the one side you have “easy money”, higher inflation, bubbles, instability, growth and high employment. On the other side you have “tight money”, lower inflation, sound finance, lower growth and higher unemployment. The suggestion seems to be that bubbles, instability and inflation are just the price we have to pay for a dynamic and growing economy, and so fighting bubbles means suppressing growth. And the story goes that the difference between tight and easy money is supposed to have something to do with direct Fed control of the money flow.
But there is no reason that aggressively pro-growth, demand-side policies need promote bubbles and financial instability. Targeted, committed and sustained federal spending could drive powerful, innovative growth and job creation without promoting bubbles. The United States could launch a new program of mission-oriented public investment in which the government bears much more of the economic risk as the financier of last resort, while the risks to the private sector are greatly lessened as private firms are able to get their own investments in line with a clear and predictable national strategy. And given the government’s nearly infinite capacity to absorb financial burdens, the risks that the public sector bears on this approach are just the risks of inadequate investment outcomes, not the risks of financial fragility, collapse and debt deflation. The downside can be covered with stabilization programs if the public consumption and investment programs don’t succeed as well as hoped. But such programs have succeeded in the past, and continue to succeed in hungry countries with a “developing country” mentality. The US could use a lot more of this attitude.
It is a trait of neoliberal thinking to believe that the US economy is all about shot-in-the-dark risk-taking, as bold entrepreneurial heroes sally forth on a wing and a prayer to develop new kinds of pet rocks, video games, online retail sites and tastier taco fillings, and that frequent bubbles and failures are the inevitable cost of ready financing and “accommodative” monetary policy. This is the kind of giddy and historically uninformed free-market fundamentalist thinking that has gripped the US during our recent and highly regrettable neoliberal era, and it is depressing that many of our younger thinkers have swallowed so much of this story. It is responsible for a period of national devolution and failure bordering on an embrace of barbarism.
But returning now to Janet Yellen, Soltas is made hopeful by some of her statements:
Compare that to Yellen: “My colleagues and I are acutely aware of how much workers have lost in the past five years,” she told the AFL-CIO in February. “These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families.”
It’s never been clear why Obama has talked like a hawk — or why, as Matthew Yglesias pointed out in a 2011 piece in the journal Democracy, why the left hasn’t fought more aggressively for more growth-oriented monetary policy. But maybe Yellen will help him change his tune.
Soltas isn’t specific about what, exactly, he is hoping Yellen will do, but he seems to be angling for little more than the same kinds of string-pushing and asset swapping that the Bernanke Fed has tried, but with a stronger commitment to doing them harder and longer. But more monetarist re-hashing won’t cut it. The most important thing Janet Yellen could do upon assuming her new position at the Board of Governors, if she really cares about growing the economy and creating jobs, is to march right over to some live Congressional hearing and publicly lambaste both Congress and the White House, in the most strident terms becoming her position, for spending five years doing a criminally crappy job on our economy, and for smothering US growth, well-being and national development under the wet blanket of debt hysteria. Really, Congressional Republicans, Congressional Democrats, Obama … for shame!!!! What in the world have they been doing? They have responded to a crisis calling for bold government action and epochal transformational initiatives with a ridiculous campaign of white-knuckled bipartisan bean-counting, debt hysteria and obsequious servitude to the crony stake-holders in the same rotten economic order that generated the crisis. It’s been a two-party No-We-Can’t agenda that would make even Herbert Hoover blush with embarrassment.
And if Yellen wants to be really bold, she could offer the Fed’s assistance in launching a special program of mission-oriented public investment, with creative forms of public financing directly organized through the central bank. She could break with the current global wave of financial sector hand-wringing over the lost “independence” of central banks and remind Congress that the Fed is a creature of Congress; that it exercises every power it has by virtue of the legislated delegation of Congress’s constitutionally granted monetary authority; and that Congress can and should re-structure monetary policy and public financing institutions when the national interest calls for such a step. It’s calling now.
Yellen might also mention that continued Fed asset purchases, while they might be marginally helpful in holding down long-term interest rates – for what that is worth – also drain financial assets from the economy as the other side of the same swaps that add them, and that these asset purchasing programs are a rather weak, trickle-down economic tea whose effects are primarily limited to the financial markets and wealth extraction rackets. Trading dollars for very liquid bonds in an overly-financialized system that is primarily devoted not to jobs and growth, but to extracting every free cent that flows onto corporate balance sheets for the benefit of shareholders and executives, and that is already sitting on mountains of liquid assets, is no substitute for a jobs program and no substitute for a growth program.
The best thing Janet Yellen can do at the Fed? Tell the political branches to stop punting their responsibilities over to the Fed! The Fed simply can’t do what an energized and progressive national government can do. The center-left strategy of pretending that it can empowers reactionary politics, buttresses the reign of corruption and privilege, validates inequality and exploitation, and points toward generational failure.