Two dubious ideas
By Scott Sumner
Here’s The Economist:
In places stuck in deflationary quicksand it may be necessary to be more radical still. Olivier Blanchard and Adam Posen of the Peterson Institute for International Economics have argued that Japan would benefit from an incomes policy. Under their proposal the state would mandate an across-the-board 5-10% increase in salaries in order to jump-start a spiral in which high wages drive up prices that drive up wages, thus soon leaving deflation behind.
. . .
Those with memories of the dismal failure of incomes policies in the 1970s (aimed then at capping, rather than spurring, inflation) will be aghast that the idea might be considered at all. For one thing, employers back then often found ways to escape the mandate. Advocates argue that companies would be encouraged to meet the costs of the pay rises through higher prices–indeed that is the whole point. In the 1970s low real interest rates undermined the income policies’ wage caps; today monetary policy and incomes policy would be pushing in the same direction.
The incomes policies of the 1970s were enacted to prevent tight monetary policies from increasing unemployment. In contrast, a policy trying to force nominal wages higher would have the effect of making unemployment higher during a period of reflation. Maybe the BOJ wants to do that, but it’s not obvious to me why that would be the case.
Policies aimed at artificially boosting wages were tried by FDR during the 1930s, and failed.
Here’s another head scratcher:
The academics suggest central banks are following a rough rule of thumb. They postpone rate increases when volatility is high, for fear of causing further upset, but respond to high volatility with rate reductions.
Investors may thus have learned that if they throw the equivalent of a toddler’s tantrum, central banks will eventually come to their rescue. Over the long run this might have encouraged risky behaviour of the kind that was common in the run-up to the crisis of 2007-08.
The power of tantrums may still apply. In September the Fed postponed a rate increase in part because markets seemed to point to a slowdown in the global economy.
That’s a very odd metaphor, which seems to get things exactly backwards. Markets have buyers and sellers. If a stock prices plunge, the people who would be “rescued” by monetary stimulus are those with a long position. But the “tantrum” would be thrown by sellers. If the Fed switched to easier money, it would be punishing the people who threw the tantrum, not rescuing them.
Nonetheless, I suspect this sort of muddled thinking is quite common. And it might even help to explain why people get upset when Fed policy seems to help the stock market, even though this is exactly what you’d expect when the Fed adopts a policy that is in the best interest of the America people. Is what’s good for the market also good for America? Not always, but when we are talking about monetary policy the correct answer is “usually”.
PS. In response to my previous post, some commenters pointed to certain aspects of the real economy that might make it more stable than 100 years ago. However I was talking about the nominal economy, which is a totally different concept from the real economy. This earlier Econlog post explains why. In order to make the nominal economy more stable, an allegedly stabilizing property must either stabilize the monetary base, or else stabilize the share of income that people and banks prefer to hold as base money. (aka the “Cambridge k”.)