More Worthwhile Canadian Initiatives
Nick Rowe:
The paradox of thrift vs the paradox of hoarding: There is no paradox of thrift. There is a paradox of hoarding. Hoarding is a subset of thrift. "Thrift" means saving. "Saving", as defined in macroeconomic models, means anything you do with your disposable income other than spend it on newly-produced consumer goods and services. "Hoarding" means saving in the form of money. And "money" means medium of exchange.... Hoarding can lead to a general glut of newly-produced goods and services -- like the current US recession. Thrift, unless it leads to hoarding, cannot cause a recession. A desire to buy antique furniture is a form of saving, because antique furniture is not newly-produced. But a sudden fad for antiques is very unlikely to cause a recession, because it is very unlikely to lead to hoarding (unless I'm wrong in my judgement that hoarding money is a very poor substitute for buying antique furniture). A desire to buy government bonds is also a form of saving. It is more likely to lead to hoarding, because hoarding money is a closer substitute for buying government bonds. And that's what makes a desire to buy government bonds more likely to cause a recession than a desire to buy antique furniture. A desire to buy government bonds is more likely to lead to hoarding, and the hoarding is what causes a recession. Yes, this is very wonkish. It looks like angels dancing on pins. But it also has real policy implications....
Yes, the in the current US recession there is indeed a very high demand for safe nominal assets, like government bonds. That's thrift. And that shortage of safe nominal assets, and the high prices and low yields on safe nominal assets, has spilled over into an increased demand for the medium of exchange, because that too is a safe nominal asset. That's hoarding. And that hoarding has caused the recession.... How to get the US out of the recession?
Brad DeLong suggests fiscal policy. By running large fiscal deficits to increase the supply of government bonds, you can reduce the shortage of safe nominal assets, and reduce the spillover from that shortage into the demand for money. Satisfy the excess desire for thrift, and you eliminate the spillover into hoarding. I'm not sure it would work, though I think it probably would work. But it might come at a very high cost.... The "exit strategy" to a fiscal solution looks very ugly. Brad also suggests increasing the supply of safe assets by government policies that would make risky private assets safer. Again, the logic makes sense, and this sort of policy would probably help, but I worry about the costs. If I thought that those were the only policies that would work, I would probably still argue that the benefits were worth the costs, because a recession is even more costly.
But I think monetary policy could do the job more surely and with much lower costs. Maybe even negative costs. I want a radical solution, and since the root of the problem is hoarding money, the radical solution is monetary policy. To the extent that fiscal policy works to end a recession, it's because fiscal policy is just monetary policy by other means.... [A] permanent increase in the money supply would have an effect, because it increases the expected future price level.... How does the Fed make it permanent, which means perceived as permanent? By announcing a price level path target. A permanent increase in the price level would require a permanent increase in the money supply to support it.... If the Fed had had an explicit inflation target over the last 20 years, and had built up credibility, the announcement of a price level path target might have been enough. But in current circumstances, it might not be credible enough.... If I had my druthers, the Fed would buy stocks. Something like the S&P500 index. The increase in stock prices, and increased money supply would have a direct effect on reducing the incentive to hoard. More importantly, when people see stock prices rising, that shows the Fed's policy is having an effect, and the expectation of recovery causes a further increase in stock prices, in a positive feedback loop....
Coda: Yes, it's fair to call me and David Beckworth "quasi-monetarists". I would accept that tag. But you must also recognise I'm at least quasi-Keynesian too. The funny thing is, the literature that has been most influential on forming my views in this area was all begun by Robert Clower, as an interpretation of Keynesian economics. It was he who insisted that monetary exchange was essential to understanding Keynesian macroeconomics and why Say's Law was wrong, and that money really was special. This isn't just quasi-monetarism. This is real Keynesian macroeconomics, as it should be done.
More from Nick Rowe:
Why we should stop talking about inventories when teaching macro: Nothing earth-shattering here. This post is about teaching macroeconomics better.... Whenever we teach the Keynesian Cross... we always talk about inventory accumulation.... We should stop....
This is what we should do instead.... Think haircuts, not widgets. A haircut is produced... to order.... Quantity supplied is what sellers want to sell; quantity demanded is what buyers want to buy; and these are both conceptually distinct from the actual quantity bought and sold. There's Qs, Qd, and Q. We should make exactly the same distinction in macro, only we are talking about aggregates of goods....
The AE curve in the Keynesian Cross diagram... shows aggregate quantity of goods demanded as a function of aggregate income from the sale of goods.... The 45 degree line is a semi-equilibrium condition... that... Qd=Q.... At the equilibrium point, where the AE curve crosses the 45 degree line, income from the sale of services (and goods) Y* is at exactly the right level for the demand for services (and goods) at that level of income to equal that same level of income. We are at a point "on" the demand curve....
Suppose people expect to be able to sell Y1 services (and goods), and so expect to have income equal to Y1.... They demand AE1=AE(Y1) of services (and goods). And AE1>Y1. Firms (because they want to sell even more) are willing to produce and sell AE1 worth of services (and goods). So actual income exceeds the income people expected to earn. So people increase their demand for services (and goods) based on that higher level of expected income. Etc. Then run the same thing in reverse, if we start out at a level of income above equilibrium.
Don't mention inventories at all...
