The Economist came out recently with a keynesian-sounding article about old and new wounds affecting economies worldwide, the limited and dubious effects of unconventional monetary policies such as ZIRP, NIRP and QE, but fortunately carrying the good gospel that a “plenty of policies are left” to bring economies out of the marsh.The Economist complains that fiscal policies didn’t want to share their part of the burden (on contrary, embraced austerity) and left monetary authorities alone in the battlefield.
Four are the suggested interventions, and the storytelling looks like much of the things we could read by Krugman. Anyway I think some observations and clarifications are needed.
The first suggested policy consists in bypassing banks and financial markets and putting money in consumers’ pockets directly by so called “helicopter money”, as the increased real money stock available will rise consumption, aggregate demand, GDP and by the way inflation.
Some objections come to my mind, and the prohibition in European Treaties is just the least of the list:
1. Uneven wealth distribution among consumers will frustrate this kind of Real Balance Effect (RBE), as increasing real money stocks are much more probable among the richiest who have a lower propensity to consume.
2. RBE to work, as we already know, relies on the ipothesys of unitarian elasticity of future prices versus actual, otherwise incresing wealth would be saved instead of spent.
3. Anyway, which kind of financial instruments will be purchased by Central Banks? During past years, the households, whose allocation of savings has been falsified by ZIRP and QE, have been steered to high yield EMEs’ bonds, stock markets and insurance financial instruments, in a crazy and blind race for yield as term and risk premia were forced down by excess of liquidity and short-term govies turned to negative territory, where only the braves are willing to invest.
Will Central Banks purchase such a list of securities? To tell the truth some people put money under the bed, and deflation doesn’t make them look silly, ex post. But that decision pull them off the perimeter of CB’s intervention.
The second suggested policy considers labour markets and legislation, in particular incomes policy (subsidies to rise wages or cut tax wedge) and unions bargaining norms that favour inflation indexing, a policy followed in the 70’s by some countries which, as a result, faced high inflation periods.
I always wonder why “keynesians” think subsidies should be “new public expenditures” in the sense Keynes meant it, as it’s clear they support consumption but not investment at all, so I doubt they are effective to let fiscal multiplier work and rise income.
To cut tax wedge is theoretically the best choice but similar policies have been attempted in Italy, without success. The reason why is that its success relies on hypotesis firms are sufficiently large to have adequate benefits, enough to stimulate investment, but a great sproportion in the economy between large and small/micro businesses and the adoption of labor norms favouring part-time or flexible contracts, frustrate this policy reducing the benefits each single small firm could earn.
On the other hand, inflation indexed wages could be effective, but we still ignore the mechanisms which rule inflation : if forecasts vary sistematically, how many times will nominal wages be bargained? Frequent variations could disorientate consumers’ choices and (unawarely) rise propensity to save.
Another objection concerns how will the indexation work with persistent inflation or, worst, deflation.
Anyway, when economy and inflation would turn to work, it’ll be very very difficult, politically, to come back and the danger of a reproposition of the 70s high inflation could bring worse damages.
Finally, the architecture of EU and expecially European Monetary Unione (EMU) is founded on the results of economic literatur about Optimal Currencies Areas, and is based upon free mobility of factor inputs (labor and capital) and price flexibility. If Germany (“Europe’s engine”) reduces wages, to inflate other Member Countries’ salaries, that doesn’t look to be the best choice, and I think an inteuropean agreement is nowadays unbelievable and dreamlike.
Third, fiscal policies which turn on public investment in infrastructure are shown, and that sounds keynesian, at last.
Unfortunately, TheEconomist seems to misunderstand why the great economist from Cambridge leant on public investment to rise income via fiscal multiplier.
TheEconomist suggests to take advantage of the negative rates on govies and rise public expenditures via deficit spending and debt. Unfortunately, only, or prevailingly “virtuous” countries have negative rates and they don’t seem to need an extra of public investment to boost their incomes, though moderate as crisis has been lowering global aggregate demand and by the way their exports and GDPs.
I know I’ll grow older and older and people are still going on talking of the interest rate…The part of yield curve below zero is the short-term, less useful to finance longer term infrastructure investments…
Anyway someone could object that QE and ZIRP have lowered all the yields along term curve, but I beg and urge to consider that economics is a social and a behavioural science: the most among investors and analists are used to think in “neoclassical” terms, and further public debt of countries already “under the lens” is considered to be ineffective and put questions on debt sustainability and growth, which frustrate keynesian multipliers.
Moreover, in my opinion, nowadays there is a further reason for the multiplier to be weaker: Keynes said public expenditures had to power up an already existent but underused productive capacity; but today’s developed countries problem is to shift from a manifacture-oriented economy to much more a services one, so the most useful and needed investments are those in R&D, education and training on job.
Such investments are, on the other hand, riskier: they involve longer views and returns postponed in future, are difficult to quantify in balance sheets reports because they are intangibles, and imply a greater financial effort which could reveal to be a “blind alley”.
I’m glad to recognize that R&D investments across Europe (not so much for Italy…) have been rising in recent years, with growth rates higher than fixed investments. But anyway I still am doubtful that the public hand could be effective as private in favouring these investments in innovations in particular.
Fourth and finally TheEconomist comes to the long waited “structural reforms”, revealing an unexpected interest for “supply side” management!
Oh, how much ink has been shed on the argument, but nothing seems to have found a way into his heart and ears…. TheEconomist seems to believe structural reforms are only something concerning bad banks and NPLs’ (public?) managment.
I think it’s bore to start another time to talk and quarrel about what reforms could be, and how much effective they are or wish to be, and how much time it will take to reforms to be.
EU and EMU architecture is fragile and the most urgent reform to realize are those regarding European Institutions and Treaties. And nothing more be spent on the argument longer.
We italians are aware that GACS and the bad bank to be realized won’t be effective to clean banks’ balance sheet and to restore their capitalization or redditivity. Neither to boost credit (other european countries bad banks weren’t in my opinion effective to rise bank credit again, too).
In conclusion, what is going to be left of TheEconomist’s suggestions? Aggregate demand policies are needed and that’s undoubtful, but I think we need more than further money dropped from aviation (and possibly less bombs worldwide, even if it spreads aggregate demand, someone said…) or keynesian public expenditure in the way it has been done in the past 60 years.
The question is hard to solve and harder to put in simple ways to reach common people’s interest and aknowledgment. But we are forced to be engaged to.