Putting Warren Mosler’s Debate Club idea into effect.

Warren Mosler recently argued for a permanent near zero interest rate in a recent Debate Club article. That isn’t the first time he argued for that policy. In a Huffington article in 2010 he argued for a system under which the only liability issued by the government / central bank machine would be monetary base. As he put it, “I would cease all issuance of Treasury securities. Instead any deficit spending would accumulate as excess reserve balances at the Fed.” And since monetary base normally pays a zero or near zero rate of interest, Warren’s Huffington suggestion comes to the same as his Debate Club suggestion.

And Warren is not the first to argue for that sort of arrangement: in 1948, Milton Friedman argued for much the same in this American Economic Review paper. As Friedman put it, “Under the proposal, government expenditures would be financed entirely by either tax revenues or the creation of money, that is, the issue of non-interest-bearing securities. Government would not issue interest-bearing securities to the public..”.

However there’s an obvious objection to the above policy which adherents to the conventional wisdom will raise, namely that interest rate adjustments are ruled out. And that in turn implies that aggregate demand is adjusted purely by fiscal policy or by the sort of combination of fiscal and monetary policy favoured by Warren: i.e. having the government / central bank machine create new money and spend it (and/or cut taxes) in a recession.

The objection will be that fiscal adjustments are currently determined politicians. Thus if the sort of stimulus envisaged by Warren were to be implemented quickly, there’d be no time for politicians to argue about where the extra money was allocated to. I.e. the allocation would be done by bureaucrats and that might seem to remove powers from politicians. And politicians would probably object.

However, the loss of power by politicians wouldn’t be all that much and for two basic reasons. First, there is no need for purely POLITICAL decisions to be taken away from the electorate or politicians: that’s decisions like what proportion of GDP is allocated to public spending, and how that is split between education, roads, the military, etc. It’s purely determining the size of the DEFICIT that needs to taken away from politicians and put into the hands of some sort of committee of independent economists.

In other words given a decision by the latter committee to increase aggregate demand by say 1%, the extra money could be split between public and private sectors in the same proportion as the proportion of GDP already taken by those sectors. Plus the various types of public spending (education, law enforcement, etc) could be increased by the same 1%.

But the latter changes would not prevent politicians changing the proportion of GDP taken by public spending, nor would it prevent them deciding at any time to spend more on law enforcement and less on the military, for example.

And a second reason why Warren’s system would not remove all that much power from politicians is that the size of stimulus is ALREADY out of the hands of politicians since any central bank that thinks the amount of stimulus coming from fiscal measures is wrong, can counter that by adjusting interest rates.

However, the above points will be a bit complicated for those simpletons we call “politicians”. So implementing Warren’s ideas will not be plain sailing.

In fact a fair amount of thought has already gone into exactly how a Warren type system would be implemented. See pp. 10-11 here.

Also, Simon Wren-Lewis (economics prof. at Oxford in the UK) dealt with this topic in a recent blog post.

And finally, there’s a neat little argument against interest rate adjustments as follows. Those adjustments effect just borrowing and investment, and there’s no logic in channelling stimulus into an economy JUST VIA extra borrowing and investment. That is, there is no reason on the face of it to think that the average recession is caused by deficient investment spending rather than a decline in consumer spending or exports. Ergo, come a recession, it’s ALL FORMS OF SPENDING that should be expanded (public and private) not just investment spending.


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