Inflation Targeting and Neoliberalism, Part 3

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Yves here. In a bit of synchronicity, this post continues the theme of Dipherio’s podcast over the weekend on NAIRU, describing how other central banks around the world look at the issue of what inflation rate to try to achieve and why. I’m a little surprised that Epstein did not mention how the Fed kept interest rates at 2% during World War II, when the US was running massive fiscal deficits and the economy was running well above its theoretical potential by virtue of employing IIRC 6 million women who left the workforce when the war was over.

Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. This is the concluding part of an interview in which he discusses the rise of “inflation targeting” around the world. The first two parts are available here and here.. Originally published at Triple Crisis

Alejandro Reuss: In your view what would be a preferable approach to central bank policy—what priorities should central banks have and how should they go about achieving these aims?

Gerald Epstein: Central banks should be free and open, in conjunction with their governments, to identify the key problems facing their own countries, the key obstacles to social and economic development, and developing tools and targets that are appropriate to dealing with those problems. And these are going to differ from country to country. So, for example, in South Africa, my colleague Bob Pollin, James Heintz, Leonce Ndikumana, and I did a study a number of years ago: We proposed an employment-targeting regime for the central bank. The Reserve Bank of South Africa, in conjunction with the government of South Africa, would develop a set of policies and tools—such as credit allocation policies, subsidized credit, lower interest rates, capital controls to keep the capital in the country, more expansionary and targeted fiscal policy—so that monetary policy and fiscal policy would work hand-in-hand to lower the massively high unemployment rate in South Africa. That’s an example of an alternative structure for monetary policy and one that has worked for other developing countries. So, for example, in South Korea in the 1950s ,1960s, and 1970s, the central bank supported the government’s industrial policy—by lending to development banks that would lend to export industries, by subsidizing credit for export industries, and they would do this as part of the government plan to develop the economy. I call this developmental central banking, that is, central banking that in combination with the government is oriented to developing the country using a variety of tools—interest rates, credit allocation tools, etc..

Not all countries would do the same thing. It not only depends on the country, but also on the problems of the historical conjuncture. So take the United States for example. Right now we do have for the Federal Reserve a dual mandate, which some Republicans are trying to get rid of, for high employment and stable prices. But the financial intermediation system is broken because of what happened in the crisis. Interest rates are down to zero but banks aren’t lending to the real economy. People aren’t able to borrow from banks for small businesses and so forth. The Federal Reserve, through quantitative easing, bought a lot of financial assets but it’s probably time for the Fed to develop new tools, to give direct credit to small businesses, for infrastructure development, etc.

It is the case now, with the crisis and with negative interest rates, or very low interest rates, central banks are being much more experimental trying to develop new tools, new approaches. But they’re all doing it under the guise of inflation targeting. European central bankers were doing all these wild monetary experiments, but their goal was really just to get inflation up to 2%. In fact, what’s happening is that this inflation targeting is no longer the guiding post for central banks. They have to him have much broader sets of tools and targets to get out of this terrible slump that most of these economies are in.

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  1. animalogic

    “They have to him have much broader sets of tools and targets to get out of this terrible slump that most of these economies are in”
    There it is: the “struggle” to to achieve a 2% inflation rate could be achieved over night with a fiscal policy designed for employment and development…no holding your breath….

    1. Jim Haygood

      To express it in golden era terms: “We’re going to shave and clip the coins until this terrible slump ends.”

      Yeah, it worked for ancient Rome. Let’s roll!

      Unless peeps are suffering from chronic inflation illusion, such measures will have no long-term effect on the economy, other than probably impeding investment owing to inflation’s effect of front-loading borrowing costs.

      Central banksters fantasizing themselves as social healers is a case of people responsible for a plain, simple public utility (a stable currency) succumbing to grandiosity and megalomania.

      Accordingly, when their monumental schemes fail, they will do so on an epic scale.

      1. diptherio


        An economist says that we’d be better served if we used the Central Banks control of the money supply to fund things other than buying financial assets from banks and you start talking about failure “on an epic scale.”

        Goddess forbid we accept the reality that somebody has to create currency units and that that somebody is the US gov’t through it’s Central Bank, the Fed. Once you accept that, the only question is how they should use that power. Right now they mainly seem to use it to prop up banks. Someone suggests they should do otherwise and Jim (who loves to belittle “doomers” in other contexts) screams “Doom! Doom! That way lies the path to perdition!”

        For those of us who have never been served well, in fact have been spit on, repeatedly, by the system as it is, all your hand-wringing over suggestions like this just sound like so much entitled, elitist twaddle (and unhistorical at that — Epstein can point to history for proof, where’s yours?) . Maybe Epstein’s proposal would bring Wall Street crashing to the ground and utterly destroy our financial system. Good. “Nobody cares about your party,” as someone said the other day. Most of us were never invited to begin with.

  2. Sound of the Suburbs

    The great triumph of Neo-Liberal inflation targeting was achieving low inflation figures whilst run-away house price inflation was taking place.

    2008 – How did that happen?

    We are supposed to be making nations more competitive to compete in the global economy, but do the opposite with high house prices, which necessitate high mortgage payments and rent, which in turn require a high basic wage to cover these costs.

    Raising the cost of living, raises the cost of doing business.

    How does China’s cost of living compare to the US’s cost of living?

    This is what sets the minimum wage in both economies, the cost of a bare subsistence existence.

    For good measure add in student loan repayments that also raise the cost of living and the minimum wage required.

    1. Sound of the Suburbs

      Watch Canada and Australia as they experience the next exploding housing bubbles.

      I am sure it will come as a great surprise to them.

      No matter how many times it happens, it is always a surprise.

      For amusement factor alone, pay attention to the excuses offered by the corresponding Central Banks.

    2. RabidGandhi

      Add healthcare to your list of non-inflation inflation.

      Also, competing for the Great Triumph of Neoliberalism is getting unemployment under 6% while the EPOP is under 60%. Millions unemployed and even more disemployed, but we’re at full employment.

      Impossible is nothing!

      1. Sound of the Suburbs

        We still have the NHS in the UK, but if the Neo-Liberals get there way we won’t for much longer.

        I read quite a few US web-sites and get the impression US health care costs are rising rapidly.

  3. steelhead23

    It might be worthwhile to look at U.S. economic policy motivation by looking at the nation’s actions. The U.S. is a huge supporter of free trade, often leading the negotiations and working to empower corporations over governments. Why? Because the U.S. dominates the financial world. That is, if an American shoe company wishes to utilize cheap Malaysian labor, they need to build a factory. While a foreign bank may make the loan, there would still be flows to U.S. finance in one way or another (derivatives, insurance, etc.). Hence, U.S. trade policies may harm American workers by offshoring jobs, but they help Wall Street by increasing capital flows. For some reason, U.S. policy-makers see no harm in exchanging the basis of the economy from one favoring production to one favoring consumption. In fact, they are working to facilitate excessive consumption – to the point that the U.S. population has some 50 trillion in outstanding debt. I am no psychologist – but the broad dissatisfaction with the current situation and the rise of the Trump and Sanders campaigns may in part be due to crushing debt and a sense of impending doom among the wage class. I note that about the only industry that is not enticed to go abroad seeking lower labor costs are defense industries. In fact, just today, Obama was lauding a trade deal with Viet Nam, including 80 Boeing aircraft. I suspect that the U.S. defense industry has about the highest priced labor in the nation.

    1. animalogic

      Given that the US government is the largest purchaser of US defence products, I suspect that defence manufacturing remains largely in the US for for political reasons as much as economic ones.
      Of course that doesn’t stop defence contractors sourcing many of their components from low wage countries.

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