Other People’s Money

Matt YglesiasIn response to the question “What is the single best thing Washington can do to jumpstart job creation?” Matt Yglesias writes, “The best step to create jobs and boost the economy would be for the Federal Reserve’s Open Market Committee to announce a plan to target inflation at 3 or 4 percent.” In a follow-up post, he’s even more emphatic: “The actual single best thing Washington can do to jumpstart job creation” is “adopt a higher inflation target.”

I’m no economist—the worst grade I got in college was in Econ 101; the professor was a newly hired economist by the name of Ben Bernanke—but I would have thought the single best thing the government could do to create jobs (and boost the economy) is, well, create jobs.  You know, hire people, pay them, that sort of thing.

As my friend Doug Henwood, the economics whiz kid journalist of the left, pointed out to me in a Facebook exchange (reproduced here and here), the multiplier effects of a jobs program are far higher than, say, tax cuts (not something, it should be said, that Yglesias advocates):  1.60 to 1.70 in GDP growth for every dollar spent on a jobs program versus under .40 in GDP growth for every dollar lost in extending the Bush tax cuts. That’s because poor and middle-income people spend the money they have (not a lot of room for savings when your wages are so low to begin with), as opposed to the corporations and wealthy who’ve been squirreling it away of late.

And as my friend Gordon Lafer, one of the leading experts on labor politics in the country, pointed out to me in that same exchange, the House Labor Committee estimated it would cost the government less than $150 billion to create 1 million jobs for 2 years. “By comparison,” he adds, “last December’s extension of the Bush tax cuts just for those making over $250,000 is projected to cost $700 billion over 10 years.”

The government hiring people, in other words, is a lot cheaper—and more economically beneficial—than tax cuts or employer tax credits or the stimulus bill.

But if the idea of the government creating jobs seems too retro or radical, how about if the government just stopped firing people? Based on his work with the Labor Committee, Gordon estimates that the government—federal, state, and local—has shed anywhere from 1.5 million to 2 million employees in the last five years (that includes government-funded non-profits doing vital service-sector work like drug rehabilitation, soup kitchens, and so on).  And as the recent jobs report demonstrates, letting government workers go is a major reason for the latest jump in unemployment, a point Yglesias himself has made here and here.

Instead of the government creating or not cutting jobs, Yglesias proposes it increase inflation.  He offers three reasons for his position:

Higher inflation expectations would have a number of benefits. For starters, they would reduce real interest rates, mitigating the problem of the zero lower bound on nominal rates. They would also increase the cost of hoarding cash. This would encourage wealthy individuals and cash-rich firms to purchase real goods and services, or else invest in productive assets. Last, since mortgage debt is denominated in nominal terms, a faster rate of inflation would speed the deleveraging process and let households repair their balance sheet.

The first reason seems to assume the problem is that there is insufficient money out there for employers to hire people or purchase goods and services. Make it cheaper to borrow money, and employers will do so. But isn’t that what the Fed has been doing for a while now? The result, as Doug points out, is corporations (and financial markets) awash in cash, without much movement on employment.

Also, the fact that Yglesias (like so many others) is trying to figure out how to overcome a nominal interest rate that is nearing zero should tell us something about the utility of lowering interest rates in today’s economy.  Seems like a classic, almost literal, case of “keep digging” when you’re in a hole.

As for the second reason, as I asked Doug and he confirmed, if hoarding cash becomes too expensive because of inflation, capital has plenty of other options, including taking its toys elsewhere, to keep its money safe.

What both of these reasons have in common is that instead of putting money into the hands of people who not only need it but would spend it, thereby stimulating demand and more jobs, they keep (or put more) money into the hands of people who already have it and don’t need to spend it in economically beneficial ways. Presumably because they are, in Yglesias’ eyes, the real movers and shakers of the economy, as opposed to the vast majority of middle- and working-class people or the government that represents them.

In a follow-up post, Yglesias says, “America would produce more real goods and services if people were spending more money, and people would spend more money if there was more money around to spend.” To my mind, that sounds like government should hire workers, wages should be increased, etc.  But as Yglesias proceeds to gloss his own comment, it becomes clear that the money being spread around is not going to go into the hands of working people (at least not directly).  Instead, channeling Ryan Avent, Yglesias suggests that the Fed should buy more Treasury bonds—something, Doug points out, the Fed has done twice since in recent years (since 2007, money in circulation has gone up by $1,350 billion), without much effect—and lower interest rates on the cash reserves of banks, thereby prodding them to lend more money.  Share and spread the wealth, in other words, among the wealthy.

If you wanted a purer distillation of the Reaganite temper of our times, you’d be hard pressed to find it in any other notion than this: get more money into the hands of people with money, for they are the truly productive agents in our society, rather than into the hands of the people who might actually spend more money if they had more money to spend.

Again, I’m no economist, so I don’t want to claim a knowledge or expertise I don’t have. I come to this discussion as a political theorist and historian of political ideas.  And what strikes me, in that capacity, is less the wrongness of these arguments than the historically bounded assumptions they reveal.

Yglesias might think, shrewd and sharp man of policy that he is (and, believe me, he’s sharp; one thing Matt Yglesias does not lack is intelligence), that he’s just following the facts.  But the overwhelming fact I see in his  argument is a refusal to consider or inability to imagine any policy lying beyond the perimeters of contemporary opinion.

It’s not our wages that are sticky; it’s our ideas.


  1. Shane Taylor July 14, 2011 at 8:15 am | #

    Richard Koo wrote the book on balance sheet recessions. In his testimony before Congress, Koo said:

    “The key difference between an ordinary recession and those that can lead to a depression is that in the latter, a large portion of the private sector is actually _minimizing debt_ instead of maximizing profits following the bursting of a nation-wide asset price bubble. When a debt-financed bubble bursts, asset prices collapse while liabilities remain, leaving millions of private sector balance sheets underwater. In order to regain their financial health and credit ratings, households and businesses in the private sector are forced to repair their balance sheets by increasing savings or paying down debt, thus reducing aggregate demand.”

    From what I’ve read elsewhere, Koo agrees with Henwood: monetary policy is more or less done. One option is growth, with aggregate demand lifted by either government deficits or a surge in net exports (not happening).

    The other option is private debt restructuring (“cramdowns,” etc.). But one person’s liability is another person’s asset. And that is why there is powerful opposition to restructuring, as Adam Levitin could explain.

  2. halfkidding July 16, 2011 at 2:11 pm | #

    Matt has a fetish for what he calls ‘monetary policy’. He doesn’t know it but this is a political idea with a built in defense mechanism because no matter how loose ‘monetary policy is’, and the expansion of the Feds balance sheet has been massive the last 27 months, he can always claim it wasn’t enough.

    There is no inter mediation between the Feds ‘printing money’ through open market operations with it’s Primary Dealers, and the jobs/people economy. Well no is too strong a word. Let’s just say the flow of money mostly stays within the financial economy. Bank loans and leases continue to decline after all.

    Inflation was at least at 4% the first 6 month of the year for households as commodities rose. Rose on the liquidty provided to the financial players via QEII”s open market operations. This inflation was of course destructive.

    As an old time Liberal it took following MY for 2 years to finally come to strongly dislike for Liberals of a certain type.

  3. J.V. Dubois July 18, 2011 at 5:17 am | #

    Actually even if you are not an economist you hit the nail by this one. That monetary policy is innefective for increase of inflation is one of the key arguments of Modern Monetary Policy (see this blog of Bill Mitchel for instance).

    To put MMT argument in short, the problem with monetary policy now is that it describes the relationship between bank reserves and loans in exactly the opposite way. Modern economists think, that once banks have enough money in their reserves they will immediatelly start lending it. But they ignore the real problem – that there is simply not enough creditworthy people around. Banks will not lend to unemployed people even if they are charged negative interest rates.

    And purchasing other assets by Central Bank, such as long term bonds, or hell, even stocks is not going to change this situation. The only effect this will have on economy is that people with wealth who hold these assets will change them on-for-one for cash. And they will put that cash into bank or hell, even in jars in the kitchen (or into gold or something). No sensible enterpreneur is going to plan a new investment when his factory already run at 50% and just increase their inventories.

    So in short – higher inflation would be a good thing indeed, but it can only come if people will actually start spending their money. And the best way to ensure that people have money to spend is to give it to them (ideally in exchange of something, such as new infrastrucure and such). Central bankers can of course claim that they will put a blind eye and allow moderately high inflation for prolongled time (3-4% for 5 years or so), that is true. But the key problem is that they are basically powerless in creating such inflation by themselves. They are just pushing the string, CB cannot force people (and banks) to actually spend them (or lend them).

    The government has a huge advantage here. Let’s say that somebody says – “If we increase spending by exactly $ 1.873 trillion we will create 4% inflation and we will be out of this mess”. Now government can exactly do this. They may just start projects such as new highways, or Mars expedition or whatever which will create that spending. Central bank is in no such position. They simply do not know what portion of cash they pour into economy in the next round of QE will actually translate to the spending.

Leave a Reply