PSST vs. Monetary Walrasianism
By Arnold Kling
Why wouldn’t a reduction in marginal tax rates on all forms of “nominal interest income” (i.e. all forms of “income” from deferred consumption) have exactly the same effect on Aggregate Demand as an increase in expected inflation?
This is the sort of analysis that follows from what I call monetary Walrasianism (I am not the first to use this term). In ordinary Walrasianism, there are n goods and an auctioneer calling out prices to clear the markets in those goods. In monetary Walrasianism, we add money as good n+1. When there is excess demand for good n+1, there is excess supply elsewhere, and hence unemployment.
Rowe is suggesting that the excess demand for money is the same as an excess supply for bonds. So if you subsidize the demand for bonds, that is equivalent to increasing the supply of money.
This seems to me to run slightly counter to Brad DeLong’s view that our current situation is one in which liquidity preference consists in part of a demand for Treasuries. For DeLong, Treasuries are acting like money, and you need to meet the increased demand for Treasuries with more supply. The Rowe-equivalent policy would be to subsidize the demand for risky assets.
All of this is nonsense according to PSST. The problem in the economy is not one of excess demand for low-risk assets. The challenge is to discover new patterns of sustainable specialization and trade. Noah Smith is right that industrial policy is in principle more appropriate than traditional macroeconomic policy. But if you believe that government is good at industrial policy, then you think that the knowledge problem and public choice problems are less severe than I do.