Yesterday, @jasonfurman tweeted out my NYT piece on the Biden infrastructure proposal. He claimed I had ignored the most obvious way to deal with any inflationary pressures that might arise—i.e. Fed rate hikes. 1/ nytimes.com/2021/04/07/opi…
I don’t share Jason’s view that fiscal policy can safely ignore inflation risk since the Fed can always handle any resulting inflation. Congress should not ignore inflation risk when contemplating a multi trillion-dollar spending package. That’s just irresponsible. 2/
I also don’t share the the view that the Fed can easily keep inflation in check via rate hates. I think it’s complicated and not settled science that rate hikes will temper inflationary pressures by dampening aggregate expenditures. 3/
There are other channels through which interest rates matter. And to the extent rate hikes can, in the extreme, cause deflation by engineering a domestic and/or international recession, we should be at least be weary of turning to them as a primary stabilizing tool. 4/
To be provocative, I asked Jason whether he had considered the possibility that Fed tightening might have perverse effects, raising rather than dampening inflationary pressures. It’s something I wrote about back in 2005, and I was curious to hear how he’d respond. 5/
He said, “No.” I suggested that it was worth considering and supplied a link. Unfortunately, the article I linked to didn’t include some of the relevant passages from an earlier version of the paper. 6/ levyinstitute.org/pubs/wp384.pdf
What I wanted to share was my own (co-authored) work, but I couldn’t find a link to the book chapter. I have it now. 7/ books.google.com/books?hl=en&lr…
I did not argue in that chapter (nor do I now) that rate hikes *will* lead to higher inflation. It’s an empirical question. We uncovered some interesting correlations, but that’s it. It deserves more rigorous study. 8/
Others have thought about this too. Tillmann, P. (2007) “Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission,” Journal of Economic Dynamics and Control. 9/ researchgate.net/publication/22…
And here’s a series where Fullwiler (@stf18) draws on my 2005 paper to lay out the conditions under which monetary tightening *can* have perverse macro effects (i.e. stimulus vs cooling). 10/ neweconomicperspectives.org/2013/01/functi…
So here are my views…I consider interest-inflation dynamics an open and interesting question rather than settled (always negative sign) science. 11/
I think it's irresponsible to imply that Congress can safely ignore inflation risk when drafting a multi trillion-dollar spending package. 12/
I think it's naive to assume that the Fed can readily temper any inflation that might be fueled by substantial infrastructure spending. 13/
I think it makes sense to think hard about the offsets we are choosing, rather than grabbing any old “pay for” off the shelf for the purpose of satisfying the gatekeepers at the CBO. 14/
I think Congress should do its level best to mitigate inflation risk *preemptively* when drafting legislation, rather than ignoring inflation altogether and leaving it to the Fed to clean up any potential mess. 15/
Finally, saying that we should take inflation into account (ex ante) when *drafting* legislation (as MMT recommends) is not tantamount to saying that we have to use fiscal policy to fight (ex post) inflation. This is vital.
16/
MMT does not tell us that we must use tax increases or spending cuts to fight inflation. We keep explaining this. neweconomicperspectives.org/2018/01/answer… and here ft.com/content/539618… . And the NYT column was all about using non-fiscal offsets to mange bottlenecks, etc. 17/
Although Jason and I appear to disagree about the purpose of a spending offset, as well as the best way to fight ex post inflation, we are having a more useful debate. 18/
I can remember when Jason was pushing $4T in deficit reduction when there was no inflation to speak of. I'm glad we're beyond that now. /end
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20 yrs ago, Scott Fullwiler wrote this paper, comparing the (then extant) practice of hitting interest rate targets via day-to-day open-market operations and managing TT&L accounts with the yet-to-be-adopted practice of paying interest on reserves. 1/ papers.ssrn.com/sol3/papers.cf…
Scott concluded that instead of replacing non-interest bearing reserves with interest-bearing Treasuries, it would be far "more direct and more efficient" to turn the non-interest bearing reserves into interest-bearing reserve balances (IBRBs). Treasury could then stop issuing securities altogether. 2/
But don't financial markets need Treasuries for a whole variety of reasons? Could we really just stop issuing them? Scott explains why the answer is yes. 3/
"If we could wave a magic wand and wipe out Treasury interest payments, we would have a lot of desperate people who had lost the income from savings bonds, Treasury bills, notes, and bonds and the pension funds that were holding them... 1/2
This in turn would mean less spending on goods and services, less production, and less employment for a lot of other people." 2/2
~Robert Eisner (1994)
"It is sometimes argued that this involves a regressive redistribution of income, on the assumption that the rich receive interest income...
If you see the MMT documentary, Finding the Money, you’ll hear about my struggle to make sense of @wbmosler’s ideas, including his argument that the three-sources view of public spending was wrong. 1/
Like any Econ student, I had been taught that government must choose how to pay its bills: Tax, borrow, or print.
@wbmosler argued that there was only one option. 2/
It didn’t seem right, but I worked through the mechanics of government finance (for the US) and eventually convinced myself that @wbmosler was correct. There is only one way to pay. 3/
Sorting through materials for my next book and stumbled on this piece outlining the influence of MMT in Chinese policymaking circles. 1/ bloomberg.com/news/articles/…
"Modern Monetary Theory can inspire China to make sure central bank easing supports government spending, several prominent economists said, as Beijing turns to fiscal policy to boost economic growth." 2/
"China urgently needs to 'liberate' itself from traditional ideas that fiscal and monetary policy must be kept separate and that government deficits are bad, according to Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, a think tank under the Ministry of Finance." 3/
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Gov spends $100 (G)
Non-gov sector now has $100
Gov taxes $90 (T)
(G-T) = gov deficit = $10
Deficit has added $10 to non-gov
Treasury sells $10 gov bonds
Non-gov swaps $10 for $10 bonds
NET RESULT: $10 increase in net financial assets to the non-gov sector (w/ or w/o bonds) 1/
Without the bond sale, the $10 would stay in bank reserve accounts at the Fed, where it would earn whatever the Fed chooses to pay on overnight reserve balances (IOR). 2/
No one would refer to the interest payments the Federal Reserve is making as the “interest burden,” and no one would refer to the funds in reserve accounts as “government debt,” even though they are liabilities (debt) of the Federal Reserve. 3/