Saturday, 10 December 2016
More from Scott Sumner.
A propos the last post on this blog, Sumner has a new article published by the Mercatus Centre entitled “The Four Ways of Increasing Interest Rates”.
He starts by making the popular assumption that because interest rates are currently low by historical standards, there must be something wrong with that: i.e. rates must be raised. But what if the fall in rates is entirely natural, that is, down to market forces?
After all, it is widely accepted in economics that the GDP maximising price for anything is the free market price (absent market failure). But Sumner does not consider the possibility that the fall in interest rates is entirely natural.
Moreover, he doesn’t tell us EXACTLY WHY he wants to see interest rates raised, but presumably it’s so that come another recession, central banks can cut them again. This whole attempt to artificially raise rates so that they can then be cut again smacks of desperation.
Anyway, the first of Sumner’s four ways of raising rates is to have the central bank – er – raise interest rates. That’s under the heading “Contractionary Monetary Policy”. Well given that we aren’t faced with excess inflation, that is somewhat pointless. Plus Sumner claims that raising rates is deflationary, which in turn tends to REDUCE rates. Well that’s certainly possible.
Then a bit later under the heading “Expansionary Fiscal Policy”, Sumner argues that expansionary fiscal policy is no use among other things because Japan has raised it’s debt to 250% of GDP and still hasn’t been able to raise interest rates.
Well that’s like arguing that because ten buckets of water don’t put out a house fire that therefor water is no use for extinguishing house fires. First, had the ten buckets not been thrown on the fire, the fire would probably have been worse. And second, if ten buckets don’t quench a fire by as much as is desired, then fifty or a hundred probably will.
Similarly in the case of fiscal stimulus, the latter involves expanding state liabilities in the hands of the private sector (those liabilities being base money or government debt). And as Martin Wolf pointed out, money and government debt are almost the same thing, particularly in the case of Japan.
Now as MMTers keep pointing out, when the stock of state liabilities in private sector hands rises (and those liabilities are ASSETS from the private sector’s point of view) there must come a point at which households are induced to spend at a rate that brings full employment – even bringing excess inflation and the necessary rise in interest rates which Sumner wants.
When people come by a windfall, like a lottery win, their weekly spending rises. The average taxi driver has worked that out. Whether the average economist has worked it out is more doubtful.
And as for the idea that a debt: GDP ratio of 250% or above represents some sort of disaster, the UK’s debt:GDP ratio was at the level just after WWII. The sky didn’t fall in.
And as for the idea that that we can’t have a ratio of MORE THAN 250% because that’s never been tried before, well that’s like arguing that sending men to Mars should not be attempted because it’s never been done before.