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Monetary policy and progressive politics

There’s a kind of mini-spat going on at the moment between Matt Yglesias, a liberal blogger who emphasises the importance of monetary policy from a progressive perspective and Henry Farrell and Doug Henwood at the other end arguing that the correct progressive response to the recession is more government spending and reforms which tilt bargaining power away from capital and back towards labour.

Now, for the record I am 100% in agreement with Yglesias on this point. In particular, I also agree with pretty much everything in this Will Wilkinson post. What I’d like to add to their responses is that it is impossible to have a coherent view of government policy, and in particular the appropriate fiscal response to a recession, without having a view as to what monetary policy ought to be conducted by the central bank. For example, if a central bank is doing inflation targeting properly, then government spending (at least at the margin) is going to have a negligible impact on overall economic activity.  For by hypothesis, if the central bank is aiming for 3% inflation, and has taken steps sufficient to generate 3% expected inflation, any additional fiscal stimulus by the government would just be offset monetarily by the central bank in order to maintain that expectation*.

Farrell objects to this kind of ‘neoliberal’ master-plan on how to combat recessions on a number of unconvincing bases (read Wilkinson in particular), but for me the problem is that there isn’t any account in there of what the central bank should do. As inflation is largely a product of expectations, it is prudent for the central bank to have some kind of official policy – which in the era of mature market economies has usually been either a) maintaining an exchange rate (see China, People’s Bank of) or b) explicit or implicit inflation targeting, with maybe a smattering of c) steady growth of the money supply. All of these policies have implications for the ability of the government to influence the economy through fiscal stimulus. A) usually fails eventually, or the costs of it vastly outweigh the benefits (see Euro, the).  C) has traditionally been the preferred position of the right, and while it would ironically be more accommodating of opportunities for fiscal stimulus there would still be effects through changes to the velocity of circulation. And besides, I just don’t see any liberals coming out for old-school monetarism.

Whether you have a fiat or a commodity based currency, you have to have a view on monetary policy. There is no escaping it, and it matters a lot. If you think we should go back to the gold standard, you therefore think that the government should fix the price of gold (why the right-wing of the Republican party is just so keen for the government to fix the price of a commodity I will never understand). At the moment the central bank effectively fixes the price of a certain type of credit, with the price determined by its conduciveness to fulfilling a policy goal. If you don’t think the central bank should inflation-target, you had better have a better idea of what it should do.

Monetary policy really isn’t a threat to progressive or conservative politics – it says nothing about what the size of the state should be, but simply that in what are probably the optimal monetary policy regimes the government can’t affect GDP through aggregate demand. In fact, given how cheap it is for the US government to borrow right it is almost silly not to invest in all the capital maintenance in infrastructure that needs to take place. Plus it would bring back some construction jobs. Not only is good monetary policy not a threat to progressives, it advances the progressive goal of tipping the balance of power back towards labour by helping achieve full employment.

So come on people way to the left of people like me, there’s plenty of room for people to support sensible monetary policy whilst having diverse ideological commitments in other respects.

So let’s all get together give monetary policy some love. Somehow ‘you shall not crucify mankind on a cross of gold‘ had a better ring to it, but the principle was by and large the same.

*Of course, in the ideal world the central bank wouldjust target 5% NGDP growth. But hey, I’d definitely take 2-3% inflation which the US Fed woefully failed to produce in market expectations

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  1. April 12, 2012 at 10:35 am

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