Monetary Policy isn’t a Radical Left-Wing Idea
Just in case people think quantitative easing is some left-wing wacky idea, here are some conservative economists that favor it.
When I started my blog in early 2009, fiscal stimulus was the hot issue. Many conservatives were opposed to fiscal stimulus, arguing (correctly in my view) that it would fail. And they made it quite clear that “failure” meant deficit spending would fail to boost nominal spending. The implicit assumption was (almost everyone agreed) that more nominal output would be desirable, and the argument was that fiscal stimulus could not deliver it. With monetary stimulus, the right is making exactly the opposite argument—they are opposed to QE because it might succeed in boosting NGDP. Both fiscal and monetary stimulus boost NGDP (if they work at all) by shifting AD to the right. Whether that extra spending shows up as inflation or real growth is of course an important issue. But it makes no sense to argue fiscal stimulus would fail because it would not boost NGDP, and simultaneously argue that monetary stimulus would fail because it would increase NGDP. I’m sure the right doesn’t think of its views in those terms, but that is essentially the message they are sending out, and it is an extremely incoherent message.
My view is that QE2 is a modestly good idea. I say it is a “good idea” because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation. By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand. I include the modifier “modestly” because I don’t expect these actions to have a very large effect.
Well, it is impossible to say whether he’d support QEII specifically because he’s dead, but he certainly didn’t have a problem with using monetary policy as a tool to increase the money supply to remedy the economy.
“The Bank of Japan can buy government bonds on the open market…” he wrote in 1998. “Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”