Everybody is very excited about Thomas Piketty’s new book Capital in the Twenty-First Century, whose English translation is due out on March 10th from Harvard University Press. The book studies long term trends in the accumulation and concentration of wealth, and in the evolution of inequality. The argument of the book is intensely data-driven, and has been billed as a game changer since it first appeared in French earlier this year.
Matt Yglesias reproduces a chart from the book, and calls it “the chart the debt alarmists don’t want you to see”. However, if I were a debt alarmist, I don’t think I would be very much moved by the chart, and wouldn’t worry so much about others seeing it. Let me explain. Here is Piketty’s original version of the chart, and here is Yglesias’s colorized reproduction :
University of Denver legal scholar Greg Shill has posted an interesting piece at Conglomerate Blog about the relative dearth of legal research on the Fed and monetary policy:
One thinks of monetary policy decisions—whether or not to raise interest rates, purchase billions of dollars of securities on the secondary market (“quantitative easing”), devalue or change a currency—as fundamentally driven by political and economic factors, not law. And of course they are. But the law has a lot to say about them and their consequences, and legal scholarship has been pretty quiet on this.
Some concrete examples of the types of questions I’m talking about would be:
♦ Pursuant to its dual mandate (to maintain price stability and full employment), what kinds of measures can the Federal Reserve legally undertake for the purpose of promoting full employment? More generally, what are the Fed’s legal constraints?
♦ What recognition should American courts extend to an attempt by a departing Eurozone member state to redenominate its sovereign debt into a new currency?
When it comes to issues like these, it is probably even more true than usual that law defines the boundaries of policy. Legal constraints in the context of U.S. monetary policy appear fairly robust even in times of crisis. For example, policymakers themselves often cite law as a major constraint when speaking of the tools available to the Federal Reserve in combating unemployment and deflation post-2008. Leading economics commentators do too. Yet commentary on “Fed law” is grossly underdeveloped. With the exception of a handful of impressive works (e.g., by Colleen Baker and Peter Conti-Brown), legal academics have largely left commentary on the Fed and macroeconomics to the econ crowd.
In my opinion, calls for the type of research Shill is talking about are much overdue, and such research is urgently needed. I am particularly interested in the second part of Shill’s first bullet point: What are the legal constraints on Fed action? Over the past few years I have been involved in many online debates about monetary policy, and questions about the legal bounds on Fed powers have come up frequently. And yet there never seems to be anyone around to speak authoritatively about the answers to these questions. Someone will ask “Can the Fed do that?” and nobody seems to know the answer. Many of us have done what research we can on our own, on an as-needed basis, but it continues to surprise me that there is no clear resource for expert opinion on these questions.
One reason why it is important to understand the Fed’s legal requirements and boundaries is that the public might want to act through their representatives to change the existing legal structure if they discover the Fed has either more or less power than they would like it to have. Some people have over the past several years called for the Fed to undertake “asset” purchases that are so broad and aggressive that they would amount to the Fed conducting something close its own separate fiscal policy. I think many Americans, who understand that the power of the purse is supposed to reside with the elected, political branches of government, would regard such policies as far outside the Fed’s intended purpose, and as a potential threat to our system of government. If loopholes for such action exist, we might want to act to close them.
As for the dual mandate, however, I doubt that legal research will be able to provide very definitive answers. The 1977 amendment to the Federal Reserve Act on which the claim of the dual mandate is based seems extraordinarily vague and open to the Fed’s own discretion. Here is the relevant text:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.
Notice a few things about this paragraph. First, the so-called “dual mandate” is actually a three-part mandate, since there are three articulated goals: (i) maximum employment, (ii) stable prices and (iii) moderate long-term interest rates. Second, there is a certain amount of monetarist economic theory baked into the text of the law that, while very popular in 1977, now appears to be dated. The law seems to presuppose that the way the Fed is to promote the three goals is by managing “monetary and credit aggregates”. But the Fed’s own economists and top policy makers no longer seem to believe that the Fed achieves its policy goals by targeting aggregates. Recent central bank policy tools, both in the US and around the world, are based on the targeting of rates, not aggregates.
Finally, the goals themselves are specified with extremely vague terms. What interest rate levels qualify as “moderate”? How much price movement is permissible within the bounds of “stable” prices? How is the employment level to be measured and what level of employment is the relevant “maximum”? And if economic theory claims the existence of tradeoffs among the three goals, how are the tradeoffs to be resolved? It is not clear that this part of the Federal Reserve Act provides much substantive policy guidance at all. Instead it has the feel of a statute written by politicians in an effort to produce something that sounds nice, but means little.
Frances Coppola has a very nice piece in Forbes that takes on some of the continuing confusion over commercial bank reserves, central bank payments of interest on reserves and the relationship of both to commercial bank lending. She concludes with a ringing rejection of the frequently voiced claims that the Fed’s policy of paying interest on reserves inhibits bank lending, and that high excess reserve levels are an indicator of sluggish bank lending or bank hoarding:
The volume of excess reserves in the system is what it is, and banks cannot reduce it by lending. They could reduce excess reserves by converting them to physical cash, but that would simply exchange one safe asset (reserves) for another (cash). It would make no difference whatsoever to their ability to lend. Only the Fed can reduce the amount of base money (cash + reserves) in circulation. While it continues to buy assets from private sector investors, excess reserves will continue to increase and the gap between loans and deposits will continue to widen.
Banks cannot and do not “lend out” reserves – or deposits, for that matter. And excess reserves cannot and do not “crowd out” lending. We are not “paying banks not to lend”. Positive interest on excess reserves exists because the banking system is forced to hold those reserves and pay the insurance fee for the associated deposits. It seems only reasonable that it should be paid to do so.
I wholeheartedly agree with the bottom line moral Coppola draws from the operational mechanics of bank lending, but I do think some additional clarity can be had on the question of whether or not commercial banks lend their reserves. And I also have some reservations about the justification Coppola cites for the policy of paying interest on reserves in the first place.
Alan Blinder, writing in the Wall Street Journal on Tuesday, expresses enthusiasm about some recent hints at a possible change in the Fed’s policy on interest paid on excess reserves. The hints were contained in the minutes of the Federal Open Market Committee’s last policy meeting, which included a passage indicating that most participants in the meeting “thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”
Blinder has been a strong proponent of changing the current policy, so he thinks the hinted changes are of the utmost importance. “As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative,” he says, “I can assure you that those buried words were momentous.”
But I have always found Blinder’s arguments about the importance of the rate of interest on excess reserves to be unpersuasive, and I continue to be puzzled by his reasoning. In the recent piece he again moots the possibility of imposing a negative rate of interest on excess reserves, thus charging banks money to hold them. He then says:
At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money.
If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want.
I am unclear as to how changing the rate of interest of excess reserves could succeed in changing the quantity of excess reserves banks are holding.
Paul Krugman has yet another pair of pieces up about real interest rates, inflation rates, monetary policy “tightness” or “looseness”, and the purported theoretical connection between these phenomena and US stagnation: stagnation in US growth, employment and wages. Read them and yawn.
These discussions are a waste of time. The fundamental source of stagnation in the United States is a conservative, corrupt and intellectually deficient US government – infesting both Congress and the White House – that refuses to do its job and is incapable of thinking big. We need an industrial policy, a detailed and aggressive program of mission-driven public investment for the 21st century, a national commitment to full employment and human development, and a very substantial increase in the federal government role in our economy. And we need our democracy and its citizens to get active in charting and implementing an agenda for our future, and to seize control of that agenda from the corporate profit-seekers and the complacent affluent who are stakeholders in the existing stagnation.
I recently joined Tom O’Brien as a guest on his terrific podcast From Alpha to Omega, and the interview is now available online. We discuss many of my favorite topics: the central banking system and the role of reserves, fiscal vs. monetary policy, capital requirements, differences between the US and European systems, and the need for healthy deficits and engaged government action to promote full employment and drive transformative change. Here is the link to the podcast:
When Larry Summers said:
Even a great bubble [first in high-tech and then in housing] wasn’t enough to produce any excess of aggregate demand…. Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess…
He wasn’t calling for more bubbles. He was pointing out that an economy that can only attain anything like full employment with stable inflation in a bubble is an economy with something deeply and structurally wrong with it–something that needs to be fixed.
DeLong then proceeds to lambaste Crook for his intellectual dishonesty. But Crook does not actually say Summers advocates bubbles. This is the relevant passage from Crook’s piece.
I recently tried to summarize the main themes of the vision of social and economic transformation I have called “rugged egalitarianism.” But that summary was buried at the bottom of a long post covering several recent topics. So I thought it would be useful to present the key ideas of rugged egalitarianism once again for easy reference, minus the extraneous discussion.
I see rugged egalitarianism as just one part of an emerging global effort to rekindle the dream of human social and economic equality. A ruggedly egalitarian society strives to share the burdens of the work people must do to preserve and extend their prosperity, to make moral and material progress, and to govern their common lives together. And a ruggedly egalitarian society strives to share the fruits of that work as well.
I have also explained what is “rugged” about rugged egalitarianism:
The egalitarianism I will promote is rugged, because it will be difficult to achieve, difficult to keep and unavoidably imperfect in its realization. It will require challenging feats of public enterprise, a mature acceptance of the need for governance and social organization, and the willingness to confront decrepit status quo institutions and power structures.
Rugged egalitarianism is a work in progress. But these are some of its central aims:
There is a new Washington think tank on the scene. Well, actually it is just a spinoff and re-branding of an older Washington think tank: the Center for American Progress. The new think tank is called the Washington Center for Equitable Growth. Here is the organization’s self-description:
The Washington Center for Equitable Growth is a new research and grantmaking organization founded to accelerate cutting-edge analysis into whether and how structural changes in the U.S. economy, particularly related to economic inequality, affect growth. Core to our mission is helping to build a stronger bridge between academics and policymakers so that new research is relevant, accessible, and informative to the policymaking process.
And here are the people involved with the project on its steering committee, advisory board and staff. There are a handful of interesting folks in the lineup, including Heather Boushey, Nancy Folbre and Emmanuel Saez, economists who have an authentic, well-established research interest in issues of economic inequality. But the crew also contains a lot of Clinton and Obama administration veterans who, quite frankly, have been a giant part of the problem, and helped lay the foundations for the repulsive and dehumanizing economic order under which we currently live. And the organization is headed by John Podesta, the ultimate beltway insider.
The Financial Times called attention this weekend to one of my favorite themes: the precipitous collapse of US public investment.
Public investment in the US has hit its lowest level since demobilisation after the second world war because of Republican success in stymieing President Barack Obama’s push for more spending on infrastructure, science and education.
Gross capital investment by the public sector has dropped to just 3.6 per cent of US output compared with a postwar average of 5 per cent, according to figures compiled by the Financial Times, as austerity bites in the world’s largest economy.
The Times story dovetails with my recent piece on the postwar history of US consumption and gross investment. I argued in that piece that
The planned economy of WWII was the economic rocket that finally launched the United States out of the depression era and into the prosperous future decades that followed. That period, you might say, was America’s “great leap forward.” Americans in the postwar period, justifiably impressed with the power and success of activist government, kept up very strong levels of government economic participation and agenda-setting. We know the litany: highway programs, educational investment, a space program, and all of the many components of military-industrial complex.
I also argued that the long-term secular decline in US government economic activism and mission-driven public investment, a decline characterizing the neoliberal period, has been responsible for falling rates of US economic growth. Along these lines, I have urged people to listen to the words of Sussex University economist Mariana Mazzucato:
Mazzucato’s central message is that standard accounts of the economic role of the state are incomplete. These accounts focus on the provision of public goods and the state’s role in compensating for negative externalities and other market failures. But Mazzucato believes economists and the public need a better understanding of the role of states in driving economic innovation. She argues that government spending has been most effective when that spending is directed towards large missions, and that missions such as putting a man on the moon or tackling climate change require strong government intervention. Mazzucato builds on her account of mission-oriented investment to explain how to develop public-private partnerships that are symbiotic rather than parasitic.
So it is good to read warnings about this dangerous decline in a prestigious, opinion-leading publication like the Financial Times. Unfortunately, the Times hints at a simplistic partisan analysis of the politics of the public investment failure in America, an analysis which might mislead its readers about what will be required to turn those politics around: