{"id":7507,"date":"2020-02-19T11:11:32","date_gmt":"2020-02-19T11:11:32","guid":{"rendered":"https:\/\/progressiveeconomyforum.com\/development\/?p=7507"},"modified":"2020-02-19T11:14:03","modified_gmt":"2020-02-19T11:14:03","slug":"the-monetarist-fantasy-is-over","status":"publish","type":"post","link":"https:\/\/progressiveeconomyforum.com\/development\/blog\/the-monetarist-fantasy-is-over\/","title":{"rendered":"The Monetarist fantasy is over"},"content":{"rendered":"\n

The forced resignation<\/a> of the United Kingdom\u2019s Chancellor of the Exchequer, Sajid Javid, is the latest sign that macroeconomic policy is being upended, and not only in the UK. In addition to completing the ritual burial of the austerity policies pursued by UK governments since 2010, Javid\u2019s departure on February 13 has broader significance.<\/p>\n\n\n\n

Prime Minister Boris Johnson is determined to overcome Treasury resistance to his vast spending ambitions. The last time a UK prime minister tried to open the government spending taps to such an extent was in 1964, when Labour\u2019s Harold Wilson established the Department of Economic Affairs to counter Treasury hostility to public investment. Following the 1966 sterling crisis, however, the hawk-eyed Treasury re-established control, and the DEA was soon abolished. The Treasury, the oldest and most cynical department of government, knows how to bide its time.<\/p>\n\n\n\n

But Johnson\u2019s latest coup also is indicative of a global\nshift from monetary to fiscal policy. After World War II, stabilization policy,\nthe brainchild of John Maynard Keynes, started off as strongly fiscal. The\ngovernment\u2019s budget, the argument went, should be used to balance an unstable economy\nat full employment.<\/p>\n\n\n\n

In the 1970s, however, came the monetarist\ncounter-revolution, led by Milton\nFriedman<\/a>. The only stabilizing that a capitalist market economy needed,\nFriedman said, was of the price level. Provided that inflation was\ncontrolled by independent central banks and government budgets were kept \u201cbalanced,\u201d\neconomies would normally be stable at their \u201cnatural rate of unemployment.\u201d From the 1980s until the 2008 global financial\ncrisis, macroeconomic policy was conducted in Friedman\u2019s shadow.<\/p>\n\n\n\n

But now the pendulum has swung back. The reason is\nclear enough: monetary\npolicy failed to anticipate, and therefore prevent, the Great Recession of\n2008-09, and failed to bring about a full recovery from it. In many countries,\nincluding the UK, average real incomes are still lower than they were 12 years\nago.<\/p>\n\n\n\n

Disenchantment\nwith monetary policy is running in parallel with a much more positive reading of\nUS President Barack Obama\u2019s 2008-09 fiscal boost, and a much more negative view\nof Europe\u2019s post-slump fiscal austerity programs. A notable turning point was\nthe 2013 rehabilitation<\/a>\nof fiscal multipliers by the International Monetary Fund\u2019s then-chief economist\nOlivier\nBlanchard<\/a> and his colleague Daniel Leigh. As Blanchard recently put\nit<\/a>, fiscal policy \u201chas been underused as a cyclical tool.\u201d Now, even\nprominent central bankers are\ncalling<\/a> for help from fiscal policy.<\/p>\n\n\n\n

The theoretical\ncase against relying on monetary policy for stabilization goes back to Keynes. \u201cIf,\nhowever, we are tempted to assert that money is the drink which stimulates the\nsystem to activity,\u201d he wrote<\/a>,\n\u201cwe must remind ourselves that there may be several slips between the cup and\nthe lip.\u201d More prosaically, the monetary pump is too leaky. Too much money ends\nup in the financial system, and not enough in the real economy.<\/p>\n\n\n\n

Mark Carney, the\noutgoing governor of the Bank of England, recently admitted<\/a>\nas much, saying that commercial banks had been \u201cuseless\u201d for the real economy\nafter the slump started, despite having had huge amounts of money thrown at them\nby central banks. In fact, orthodox theory still struggles to explain why\ntrillions of dollars\u2019 worth of quantitative easing, or QE, remains stuck in\nassets offering a negative real rate of interest.<\/p>\n\n\n\n

Kenneth Rogoff of Harvard recently argued<\/a>\nthat fiscal stabilization policy \u201cis far too politicized to\nsubstitute consistently for modern independent technocratic central banks.\u201d But\ninstead of considering how this defect might be overcome, Rogoff sees no alternative\nto continuing with the prevailing monetary-policy regime \u2013 despite the overwhelming\nevidence that central banks are unable to play their assigned role. At least\nfiscal policy might in principle be up to the task of economic stabilization; there\nis no chance that central banks will be.<\/p>\n\n\n\n

This is due to a technical reason, the validity of\nwhich was established both before and after the collapse of 2008. Simply put,\ncentral banks cannot control the aggregate level of spending in the economy, which\nmeans that they cannot control the price level and the aggregate level of\noutput and employment.<\/p>\n\n\n\n

A less skeptical observer than Rogoff would have looked more closely at\nproposals to strengthen automatic fiscal stabilizers, rather than dismissing\nthem on the grounds that they will have (bad) \u201cincentive effects\u201d and that\npolicymakers will override them on occasion. For example, a fair observer would\nat least be open to the idea of a public-sector\njob guarantee<\/a> of the sort envisaged by the 1978 Humphrey-Hawkins Act<\/a>\nin the US, which authorized the federal government to create \u201creservoirs of\npublic employment\u201d to balance fluctuations in private spending. <\/p>\n\n\n\n

Those reservoirs would automatically be depleted and refilled\nas the economy waned and waxed, thus creating an automatic stabilizer. The\nHumphrey-Hawkins Act, had it been implemented, would have greatly reduced\npoliticians\u2019 discretion over counter-cyclical policy, while creating a much\nmore powerful stabilizer than the social-security systems on which governments\nnow rely.<\/p>\n\n\n\n

To be sure, both the design and implementation of such\na job guarantee would give rise to problems. But for both political and\neconomic reasons, one should try to tackle them rather than concluding, as\nRogoff does, that, \u201cwith monetary policy hampered and fiscal policy the main\ngame in town, we should expect more volatile business cycles.\u201d We have the intelligence\nto do better than that.<\/p>\n\n\n\n

Copyright: Project Syndicate, 2020.
www.project-syndicate.org<\/a><\/strong><\/p>\n\n\n\n

Photo credit: Flickr\/sr hostil<\/a>. <\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Robert Skidelsky argues the ousting of Chancellor of the Exchequer Sajid Javid points toward a broader global shift in economic policy.<\/p>\n","protected":false},"author":11,"featured_media":7510,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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