Friday, 3 October 2014
Vox article backs the “create base money and spend it” idea.
An article has just appeared on the Vox site entitled “Thinking the unthinkable: The effects of a money-financed fiscal stimulus.” That idea is in line with the “combine monetary and fiscal policy” idea pushed by Positive Money, Richard Werner and Milton Friedman in the latter’s 1948 paper “A Monetary and Fiscal Framework….”. (See his paragraph starting “Under the proposal…”).
Of course, the idea is more sophisticated than simply creating new base money and spending it when stimulus is needed: that is, a right wing government, rather than go for the above “create and spend” idea would want to keep public spending relative to GDP constant, or even reduce it. But that is easily done under the above “PM / Werner / Friedman” regime by cutting taxes rather than raising public spending.
The above Vox article cites near zero interest rates as one reason for the “create and spend” policy. And that is certainly a point: that is if interest rates are zero, it’s difficult to reduce them any further when stimulus is needed.
However, there is a more fundamental reason for the create and spend idea, namely that we shouldn’t deliberately adjust interest rates at all. The latter “non-interference” with interest rates seems to be implicit in Friedman’s above paper, and certainly I criticise interest rate adjustments in section 1.6 of the book featured at the top of the left hand column.