Tyler Cowen writes:
“Neoclassical macroeconomics” is not totally out to lunch, and it is ignored at our peril.
He is quoting Stephen Williamson:
Williamson: The scarcity we are observing is not a traditional currency scarcity. As such, we can’t correct the scarcity by using conventional central banking tools – open market operations in short-term government debt…. [T]he inability of monetary policy to correct the liquidity scarcity problem has nothing to do with the zero lower bound on short-term nominal interest rates, as the key problem is a contemporary liquidity trap, not Grandma’s liquidity trap…. If monetary policy cannot do it, that leaves fiscal policy…. But the problem here is financial, and it’s not a Keynesian inefficiency associated with real rates of return being too high; in fact real rates of return are too low given the scarcity of liquid assets, which produces large liquidity premia. One way to solve the problem would be to have the Treasury conduct a Ricardian intervention, i.e. issue more debt with the explicit promise to retire it at some date in the future. If the future arrives, and we still have a scarcity, then do it again. This requires a transfer, or a tax cut in the present, and leaves the present value of taxes unchanged, but the result is not Ricardian because of the exchange value of the government debt issued.
Alas for Tyler! From my perspective this "neoclassical macroeconomics" is merely Hicks (1937) (or perhaps Wicksell (1898)) "plus", as Rüdi Dornbusch liked to say, "original errors".
One thing that I think is wrong is in the passage Tyler quotes. It is the claim that what we have now "is not a Keynesian inefficiency associated with real rates of return [on savings vehicles] being too high; in fact real rates of return are too low". In the Keynesian-or perhaps it would be better to say Wicksellian--framework, when you say that real rates of return are "too high" you are saying that the market rate of interest is above the interest rate consistent with full employment, and with savings equal to investment at full employment. Wicksell called that interest rate the "natural rate of interest" and it is relative to that natural rate of interest that Wicksellian (and Keynesians) speak of interest rates being "too high" and "too low". Thus Williamson is wrong when he say that what we have now--when the natural rate of interest on relatively safe securities is negative and the market rate of interest is not--is "not a Keynesian [or Wicksellian] inefficiency". It is precisely such an inefficiency. To claim that it is not misinterprets Keynes (and Hicks, and Wicksell), and misleads readers trying to understand what they did and did not say.
This has consequences. A second thing I think is wrong is Williamson's claim that while things could be (or perhaps should be) improved by shifting the IS curve out and to the right by (or, if you prefer to speak Wicksellian language, raising the natural rate of interest by) cutting taxes now and committing to raise them in the future after the economy has recovered, things could not (or perhaps should not) be improved by pulling government spending forward from the future into the present. Why does pulling spending forward into the present fail while pushing taxes back into the future works? They both, after all, involve the issue right now of the additional safe and liquid financial assets that private savers are desperate for, and the absence of which is leading them to cut back on their spending. As far as the troubling shortage of safe, liquid, savings vehicles is concerned the two different policies are almost symmetrical, aren't they?
I do not find the explanation illuminating:
there is a tendency, particularly in the blogosphere, to frame the problem in Old Keynesian terms… so it might seem natural to have the government employ people directly by spending more. But the problem here is financial, and it's not a Keynesian inefficiency associated with real rates of return being too high; in fact real rates of return are too low given the scarcity of liquid assets, which produces large liquidity premia…
And yet a third thing I think is wrong is Williamson's claim that "the Fed is powerless" because "swap[s of] reserves for T-bills or reserves for long-maturity Treasuries… essentially amounts to intermediation activities the private sector can accomplish as well, this will have no effect". But such swaps take various forms of duration and default risk onto (or off of) the Fed's and thus taxpayers' balance sheets and off of the private market and thus investors' balance sheets. These are different (but overlapping) groups who perceive risks differently, have different resources, and react to risks differently. The fact that the private market could undo any particular Federal Reserve policy intervention does not mean that it will.
I would say go back to Hicks, Keynes, Fisher, and Wicksell, and think about them carefully: they were smart. A "neoclassical macro" that does not start from them has little chance of getting much of anywhere.
Comments