There are two questions here: (1) can monetary policy be effective now at reducing unemployment? and (2) even if it would be effective, is it preferable to fiscal policy?

On (1), while it’s true that the conventional Fed policy of buying and selling short-term government bonds is likely to be ineffective, it’s not necessarily true for the unconventional “quantitative easing” policies that people are proposing. According to Henwood, “Corps have lots of cash – they’re just not investing or hiring.” But the whole point of a QE policy is to get firms to transfer their cash piles into productive investment:

Private investors can choose to hold their wealth in the form of safe assets or risky assets. At the safe end of the spectrum there is cash. At the risky end there is equity and low grade bonds. Unemployment remains at 7.8 per cent in the UK and 9.5 per cent in the US because investors are scared to put their money into activities that create jobs. The appetite for risk has vanished.

Quantitative easing encourages the private sector to create more jobs. As yields on long term assets fall, some of that money moves into equity and newly capitalised firms expand and begin to hire workers.

There’s some evidence that what little of this has been actually tried has worked to increase consumption and exports by raising stock prices and lower the value of the dollar:

For what it’s worth, casual observation suggests that a lot of the growth in consumer spending has been at the high end, which suggests in turn that a higher stock market might be driving it. And the lower dollar has clearly helped US exporters and import-competing firms.

Also,

Nonresidential investment has been rising rapidly, but it was doing that even before QE2 was announced.

So QE2 has been effective, it’s just not been all that large relative to the size of the output gap we face.

1. If you haven’t read it before, this Chris Hayes ’09 New America policy piece on The Case for Inflation is fantastic, and put down all the right markers early. Highly recommended. It made me want to get “Inflation Now” pins made up.

2. The #1 Thing pitch is always lame, but I don’t think Yglesias was wrong on it. I buy Andy Rich’s argument that think tankers should be ideological ideas factories and set what areas need work, and acknowledge how ineffectual they are at the actual process. Their strength is the beginning, not the end, of the work. Yglesias or me aren’t going to get a jobs bills through the Senate, but we can flag what needs attention for recovery – inflation for Yglesias, the mortgage market and foreclosures for me, which we each think is under-appreciated among general liberal thinkers.

There’s a lot of work done from ’08-10 about infrastructure banks, jobs programs, infrastructure, direct hires, etc. I talk about those things but any of those projects have the white papers, have the editorials, even have the interest groups lined up – the arguments are ready, the political actors, notably Obama et al, aren’t.

3. I think the neoliberal straightjacket shows up with the complete lack of push for anything larger than a jobs program. There’s little-to-no push for a right-to-work, for a basic guaranteed income, expanding the safety net or the role of income maintenance etc. Galbraith and others have mentioned now is the perfect time to lower Social Security retirement, as 59 year-olds who are unemployed for over a year aren’t having trouble getting another decent job (and SS was created in part to deal with this) – an argument that hasn’t really caught on sadly.