Some people argue that monetary policy is actually fiscal policy, as monetary actions have implications for the federal budget. Printing money creates seignorage, and buying assets (even Treasury bonds) exposes the central bank to the risk of a decline in asset prices.
That reminds me of when people tell me “everything’s political”. Well, thanks for clearing that up; now I know that saying something is political conveys precisely zero information. If monetary policy is actually fiscal policy, then telling me that you favor “fiscal policy” is no different from telling me that you are a Friedmanite monetarist.
I don’t regard monetary stimulus as fiscal policy regardless of whether the Fed is buying Treasury bonds or common stocks. Fiscal policy is expected to lead to higher future tax liabilities; monetary stimulus is not expected to do so. That’s a massive difference.
But I don’t want to argue semantics; let’s argue something consequential. Let’s say we need a lot of “fiscal” stimulus, and we need it quickly. Who’s able to quickly inject another $20 trillion in to the economy tomorrow? And if the Fed asked Congress for permission to buy a wider range of assets in a crisis, does anyone seriously believe that Congress would say no? Heck, Congress gave into the Fed in October 2008 when they asked permission to adopt a highly contractionary monetary policy tool—interest on reserves—in the midst of a horrendous recession.
So if the Fed really wanted to, they could buy $50 trillion in assets tomorrow, or at least the day after Congress gave them permission. How about the other “fiscal policy”? Given gridlock in Congress, do you think the Dems and GOP can agree on whether it should be a tax cut or a spending increase? And how big? Fifty billion? A hundred billion? And how long would that take?
If you favor “fiscal policy”, you should be calling for the Fed to do what I call monetary stimulus and what you call fiscal stimulus. It’s our only realistic hope for stimulus.
PS. I’m not advocating the Fed buy common stock; I don’t think that’s needed. I’m advocating the Fed ask Congress to give it permission to buy a wide range of assets, if there aren’t enough Treasuries and mortgage-backed securities. (There are enough.)
READER COMMENTS
Thaomas
Mar 9 2020 at 6:26pm
But should the Fed be doing “monetary stimulus” or just what it should be doing anyway executing day by day the market transactions that it’s model, continuously updated, shows is necessary to keep the price level rising at 2% per year and employment at a maximum? This may not be easy as changes will reflect to some extent supply shortages and days lost to sickness and quarantine, so an NGDP target of 5% pa is probably better than trying to guess the employment maximum. Of course what the model tells the Fed to buy and sell will be affected by fiscal policy such as a FICA holiday or partial waiver of withholding.
robc
Mar 10 2020 at 8:14am
The more important question is embedded inside yours.
Phil H
Mar 9 2020 at 9:36pm
Not really relevant to the point of your post, but this isn’t quite right:
“now I know that saying something is political conveys precisely zero information”
Here’s an analogy: If I tell you that everything you see is whirling through space at thousands of kilometers per hour then that is (a) true and (b) not helpful when you are trying to establish a classification among the things that you see and (c) nevertheless relevant for when you want to take certain kinds of action.
Saying everything is political is supposed to be a bit like that.
Mark Z
Mar 10 2020 at 4:47am
Not sure I agree. You’re still referring to a hypothetical reference point relative to which the earth is moving. If nothing can possibly be non-political, then there’s no reference point to which to compare something ‘political.’ As a rule, describing every possible thing as having an attribute renders that attribute meaningless. I think what people mean to say is, “lots of things you normally think of as not being political actually are political.” I think they’re still wrong, but it’s a meaningful claim at least.
Matthias Görgens
Mar 10 2020 at 5:01am
To get a even more off-topic: the laws of physics don’t have a preferred inertial frame, but the universe itself has a unique reference speed.
It’s the speed at which the cosmic background radiation looks uniform, and not redshirted nor blueshifted in different directions.
Not sure how you’d translate that observation back into the ‘everything is political’ quip, though?
Thaomas
Mar 9 2020 at 10:24pm
Markets sure don’t seem to believe the NGDP will be kept on even a 4% track. Jerome Powell: call your office.
Matthias Görgens
Mar 10 2020 at 4:56am
Common stock mightactually be much more sensible than mortgage backed securities. The government is already knees deep in messing with the mortgage market.
Though being allowed to lend against almost anything with a big enough haircut might be a better approach?
What would be the repercussions, if the Fed was putting the securities it bought back out for lending? Someone with the right stomach for risk could short sell them, thus increasing effective supply, and keeping their prices from rising as much as unmitigated Fed buying would drive them to?
Especially bonds with negative yield would be interesting to short sell until maturity.
Scott Sumner
Mar 10 2020 at 5:45pm
Having the Fed buy MBSs doesn’t really interfere much with the market, as the Treasury has already guaranteed the bonds, thus effectively turning them into Treasury bonds.
Mark Z
Mar 10 2020 at 5:00am
If there’s not really any limit to what kind of assets would work, couldn’t a central bank carry out an actual traditional fiscal stimulus: it could pay workers to build dams, building, etc. Not sure we want to put the idea into anyone’s head, and I presume all assets aren’t equally useful to purchase for stimulus purposes, but the gist is that, it’s not fundamentally what the money is being spent on, but whether it’s being spent on the budget by a federal government vs. by a central bank capable of expanding the money supply, that matters?
art andreassen
Mar 10 2020 at 3:00pm
Scott: I know that you do not believe there is a consumption multiplier because the you feel the Fed will kill it in its crib. I don’t see why the Fed would interfere if there is no inflation and/or there is less than full employment. The question is which fiscal policy is the best.
It is strange how little discussion there is about the multiplier since it was a Keynesian concept. I have see calculations of it as high as 5. This would make it a frictionless machine and, if true, would eliminate unemployment world wide. This calculation is a result of the mistaken calculation that PCE is 80% of GDP and that consumption buys GDP.
In any case, the most efficient fiscal policy is the one which gets money into the consumers hands the fastest. Money sent directly to the consumer has a 15% leakage to imports and 5% to savings before is spent on output not GDP. Value added is 50% of output and compensation is 70% of value added of which 80% is consumption which gives a second round multiplier of 0.3. So until it runs out the multiplier is really about 1.5. These calculations are from Input/Output analysis.
Money given to the other demand components after buying imports then purchases output and has a smaller multiplier.
Scott Sumner
Mar 10 2020 at 5:47pm
Significant fiscal stimulus is unlikely to even get through Congress. If it did, it would be far too small to have much impact. Our only hope is monetary stimulus.
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