It is Wednesday and so a less intensive blog post. Note how I no longer claim it will be shorter. The less intensive claim refers to how much research I have to put in to write the post. Apart from some beautiful music, the topic for today is yesterday’s RBA decision to cut interest rates to record low levels. The decision won’t save the economy from recession and highlights the sort of desperation that central bankers now face as governments shunt the responsibility of counterstabilisation onto them while claiming that achieving fiscal surpluses is the brief of the treasuries. This self-defeating strategy – failing to use the most effective policy tool in favour of an ineffective tool is the neoliberal way. It is the recipe that New Keynesian macroeconomics offers. It is mindless, ideological nonsense and the problem is that it is not the top-end-of-town that suffers from the negative outcomes that follow. Quite the opposite in fact....One would be tempted to think that the policy is designed for a purpose rather than in ignorance. But the policy designers probably aren't that smart.
Bill Mitchell – billy blog
Reliance on monetary policy is mindless, ideological nonsense
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
A weakness in interest rate adjustments not mentioned by Bill is that such adjustments are ENTIRELY ARTIFICIAL, and it’s a widely accepted principle in economics that the optimum or GDP maximising price for anything, including the price of borrowed money, is the free market price, not any sort of “artificially interfered with” price.
ReplyDeleteIn contrast, fiscal stimulus is based on the free market, at least in the following sense.
Given a recession in a totally free market, prices would fall, which in turn (by definition) raises the real value of the stock of money (e.g. where gold is the basic form of money, then the price of gold rises relative to the price of other goods). Of course in the real world, prices and wages do not fall all that much in recessions because “wages are sticky downwards” as Keynes put it. However, government (and central bank) can easily engineer a rise in the real value of the stock of money: they can just create the stuff and spend it into the economy (and/or cut taxes).