Stiglitz vs. the Fed
Nobel Prize-winning economist Joe Stiglitz does not think quantitative easing -- or further monetary policy in general -- is likely to work:
It should be obvious that monetary policy has not worked to get the economy out of its current doldrums. The best that can be said is that it prevented matters from getting worse. So monetary authorities have turned to quantitative easing. Even most advocates of monetary policy agree the impact of this is uncertain. What they seldom note, though, are the potential long-term costs. The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting. But no one should be fooled. ...
A final argument invoked by critics of fiscal policy is that it is unfair to future generations. But monetary policy can have intergenerational effects every bit as bad. There are many countries where loose monetary policy has stimulated the economy through debt-financed consumption. This is, of course, how monetary policy “worked” in the past decade in the US. By contrast, fiscal policy can be targeted on investments in education, technology and infrastructure. Even if government debt is increased, the assets on the other side of the balance sheet are increased commensurately. Indeed, the historical record makes clear that returns on these investments far, far exceed the government’s cost of capital. When, as now, there is excess capacity in the private sector, such public investments increase output and tax revenues in both the short term and the long. If markets were rational, such investments would even lead a country’s cost of borrowing to fall.
The column suffers, however, from a peculiar understanding of the politics of the issue. Stiglitz sets advocates of monetary policy on one side of the divide and advocates of fiscal policy on the other. But that's not the state of play, at least in America. Rather, there are advocates of fiscal and monetary policy on one side, and advocates of the government doing nothing at all on the other. And because the advocates of nothing have marshaled enough votes to stop the Senate from passing further fiscal stimulus, the advocates of doing something have turned in desperation to monetary policies like quantitative easing, as they don't have to overcome a filibuster.
I agree with Stiglitz that further fiscal stimulus would be preferable to quantitative easing (though combining fiscal and monetary policy would be even better), but we should be clear on why we're turning to the Federal Reserve rather than the Congress. This is the consequence of minority-driven congressional gridlock. The result isn't that nothing happens, but that the responsibility for action falls to independent institutions like the Federal Reserve, or executive agencies like the Environmental Protection Agency, and we get policies that are worse than what Congress could pass, but better than what you get if Congress is no longer able to pass anything.
| October 19, 2010; 10:24 AM ET
Categories: Federal Reserve
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