And what is UE you might ask? Unemployment easing! As the major economies start to slow again (as fiscal stimulus is withdrawn prematurely), the calls are coming thick and fast for more quantitative easing. The Bloomberg editorial (June 8, 2012) – The Key to a Stronger Recovery: A Bolder Fed – was representative of this renewed call for the central banks to somehow stimulate aggregate demand to the tune of several percent of GDP in many nations. Like the latest bailout in Europe, the call for more QE is predictable. Neither initiative addresses the real problem with the relevant policy tool or change. What is needed is something much more direct. Why don’t we have a policy of unemployment easing (UE) where the treasury departments, supported by their respective central banks, immediately set about directly creating jobs and reducing the unemployment rates around the world. Putting cash (wages) into the hands of those that are most constrained (the unemployed) will do much more good for the economy than doing portfolio swaps with banks who will not lend to thin air! So we need UE not QE....
The emphasis on monetary policy as being the vehicle to provide the primary stimulus to ailing economies instead of fiscal policy is contrary to the evidence and reflects the ideological shift that occurred under Monetarism and was refined over the, more recent, inflation targetting era.
Early in the crisis, the reliance on monetary policy to arrest the collapse in aggregate demand around the world only made the real crisis worse although it did stabilise the financial sector, for a time.
Until policy makers realise that fiscal policy is a much more effective way to stimulate aggregate demand this crisis will continue to grind on. I think we need a period of unemployment easing not quantitative easing.
Read it at Bill Mitchell — billy blog
by Bill Mitchell