Just as in 2008 and again in 2009, the call has gone out to drop money into the consumer's pocket, this time from Eric Lonergan and mark Blythe writing in Foreign Affairs, the journal of the Council on Foreign Relations. Some have said if it appears in CFR, it is a done deal. We say if it is a done deal, how little we have learned.
We like supporting demand, but this is not effective (aside from the sometimes gross inconsistencies within the Lonergan-Blythe piece). This is a repeat of "Timely, Targeted and Temporary," the Larry Summers program of 2008, instituted by George W. Bush, and has echoes of the badly designed Obama stimulus program that gave government action an undeserved brand of failure.
Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People, Foreign Affairs, September/October, 2014, Eric Lonergan and Mark Blythe
If we want true recovery, we need to invest. Investment creates jobs. Helicopter drops put a temporary worker behind a counter for a few months. It certainly doesn't get to the root of the stagnation -- massive private debt. Nor does it effectivelyi stimulate the domestic economy.
What would real recovery spending look like?
How about cash for energy conservation?
If instead of $3,000 in cash to spend on whatever, how about $10,000 to spend on energy saving appliances, retrofit insulation or heating and cooling systems, or solar panels? Investment! Those of lower incomes who could not take advantage could be given the cash with the stipulation to pay down debt. Cheating would be no worse than the CFR proposal.
Energy-saving investment would pay for itself in energy savings. Productive investment. Of course, energy not bought and generating plants not built won't show up in GDP, so critics have a ready-made shibboleth.
In the CFR piece, Lonergan and Blythe incorrectly claim that the cash they plan to deliver -- though it comes from the central bank, not the elected government -- is somehow different than the tax rebates of the Bush and Obama plans. In an interview with Irish radio, Lonergan made the claim that those rebates were effective. Not so fast. Most observers saw very little effect. Far greater in keeping the recession contained were measures passed 75 years earlier -- Social Security and Unemployment Insurance -- which kept a floor under demand.
The CFR article is interspersed with accuracy and some insight. But we pick out some of the rest:
- Suggesting Japan is a basket case for its investment in spite of its infrastructure investment after 1990 is not quite right. Adjusting for population and relaying GDP per capita shows Japan and the US are on par since 1990, in spite of the "lost decade."
- Citing Ben Bernanke as an expert on Depressions when he did not see the Great Financial Crisis coming and then instituted a massively expensive, ineffective and distortion-ridden strategy to fix the problem, is not the best cite.
- Even agreeing that economies are suffering from insufficient spending does not suggest the best way is to give people money. Cash drops are not as effective as increasing spending by investment. People are employed up front with investment, and these people have a spectrum of purchases which extends beyond consumer discretionaries to homes, education, child care and so on. With subsidies to consumer durables, retrofitting services and solar panels, real jobs are created. The multiplier is half again as much, if not more. Too much of the Bush and Obama stimulus went out the door to China.
Here is something we agree with:
Unlike fiscal policy, which directly affects spending, monetary policy operates in an indirect fashion. Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles -- in real estate, for example -- and encourage companies and households to take on dangerous levels of debt.
Going on to say that not being successful with monetary policy, and in fact screwing things up, gives the Central Bank license to engage in fiscal policy seems somewhat of a stretch. To say that the Fed hasn't doe fiscal policy because of "an accident of history" is not quite right. Representative democracy was an intentional institution. The Fed's independence is an accident of history.
If they are allowed to do such a thing, let them buy bonds from an agency with the mandate to distribute vouchers to enforce the terms of real recovery -- paying down debt, increasing energy efficiency, and producing real employment.
Then we get into the bowels of the article and some of the more difficult parts:
- Inflation: Inflation is not a problem with such a program, we agree, but not for the reasons the authors cite. Inflation is not a problem because the policy would be ineffective
- Cash to households for no purpose, even if it were modestly effective, might generate dependency when the stimulus runs out. Investment does not create dependency, but growth in actual well-being -- if not in GDP figures. The authors make amends for this point very far down in the article.
- Oh, and by the way, the plan is to finance the program with 15 years of investment gains by central banks borrowing to invest in equity indexes. Huh? Maybe it is too late at night, but I don't get that. Could be that Richard Haas rewrote the first part and didn't get to the second. But the plan is to get in on the stock bubble? And start 15 years later? It must be too late. How does that square with the criticism of infrastructure spending, which they say takes too long. (Portrayed by citing the UK's delayed high speed rail and Germany's airport to nowhere.) The U.S. has a grade of D on most categories of infrastructure -- bridges, dams, roads, rail, etc.. There is plenty to do and maintenance to begin with
But if we cannot let government invest, and least when we stimulate spending, let's do it on investment, paying down debt and assisting the most desperate.