Raising the Bar

Max Sawicky sawicky at epinet.org
Thu Sep 3 13:09:54 PDT 1998

>Why are you getting on the Bandwagon calling for the Fed to ease?

I owned the bandwagon. I was driving it first. Now it's being hijacked.

>I get this feeling that we are all monetarists now, in thrall of the Fed's
purported ability to prevent depressions. Even an old-fashioned Keynesian would be a voice of reason right now, pointing out that you can't push on a string. Remember the flat LM curve, liquidity traps and all that gibberish? It seems more appropriate to argue that the Fed should accommodate public spending, but only the latter can counteract a general glut of commodities (trying to think like an inside the beltway type of guy).>>

Don't forget the point of my question was to ask what else could be done, including my own mantra of spend the budget surplus.

I don't read the keynesian/monetarist divide as a binary choice of run deficits versus expand the money supply faster. This may have been true in the 1970's when Friedman's work came into its own, but since then both 'sides' acknowledge the effects of both policies. If anything, however, the keynesians seem to have come around to using money because they think it works much faster (e.g., Krugman, Galbraith). They don't think there's a liquidity trap, nor that the LM curve is flat. With the benefit of my bar-room macroeconomics, I would say a Fed move on rates would boost the market, raise consumer confidence and spending, stimulate some interest-sensitive sectors, and help people refinance debt (and spend even more, yum yum).

As noted above, I was saying spend the surplus in January, so I'm way ahead of the curve from the old-fashioned Keynesian standpoint (or "primitive Keynes", in Herbert Stein's phrase). I've noticed that when unemployment gets high and consumer spending low, business goes native too.

A political circumstance I've noted here recently which bothers me no end is that the Dems think they can use the budget surplus to beat up the Repubs by claiming that "saving" the surplus from tax cuts will "save Social Security." This blows away any thought of using the projected surpluses for spending for another ten years. Nor does it save Social Security. God knows what they'll say if we ever start running 'on-budget' surpluses (e.g., even not counting the Social Security trust fund surpluses). I suppose we'll be told to save the children by paying off the national debt.



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