Here’s an interesting point from Josh Barro about an underrated source of political resistance to expansionary monetary policy:

But one likely barrier to a higher inflation target is a quirk of tax policy: non-indexation of capital taxation means that higher inflation causes a stealth rise in the real tax rate on capital gains and interest income. Naturally, this makes investors more keen on rock-bottom inflation than they otherwise would be — and the Federal Reserve Board is institutionally likely to focus on the interests of the investor class.

Barro deploys this to try to get people like me to back CPI-indexation of capital gains taxes. Another point to make would simply be that the domination of policymaking by the interests and predilections of rich people is dangerous. At the end of the day, though, if you’re a rich person worried about the capital gains tax implications of the Yglesias Inflation Agenda, consider this: Every time central banks announce big expansionary moves, markets soar. The real gains entailed by more robust growth should easily outweigh tax considerations. That’s not to deny that there’s a case for wide-ranging reform of the US tax code, merely to say that appropriate monetary policy shouldn’t have to wait for it to happen.

As you’ve probably heard politicians of both parties emphasize, ninety million percent of job creation comes from small businesses—who, with the exception of family farms, are by far the most precious of the Lord’s creations. These factoids have always struck me as a bit oddly phrased, since presumably the really big job growth comes not from small businesses but from firms that are rapidly enlarging from a small base.

Allison Schrager brings the relevant data:

A new paper from economists John Haltiwanger, Ron Jarmin, and Javier Miranda looks at which firms typically create new jobs. Earlier work found that small firms are the ones who tend to create more jobs. This new paper finds that when you control for firm age the small firm effect weakens. Newer firms are the ones who create jobs and because most companies start small, small firms are more likely to create jobs.

That’s not to say that factoids you’ve heard about small businesses are wrong, per se, just that the rhetoric is a little misleading. People enjoy sentimentalizing small-scale mom and pop operations and it’s true that in the aggregate a lot of people work for such firms. But economic growth isn’t driven by those kind of companies, instead it’s driven by small firms that find a way to scale-up. People associate “start-ups” with the high tech sector, but these things can happen in many fields of enterprise. Barnes & Noble used to a neighborhood bookstore, my favorite place to grab lunch near the office is a small chain that started in San Francisco and just now expanded to LA and DC, etc.

I think, however, that it’s a bit of a mistake to draw too sharp a line between “demand shortfalls” and the kind of organizational and technical innovations that drive firm growth. Entrepreneurs are much more likely to drive themselves to think of ways to expand their operations if they believe overall demand for goods and services is going to be growing.

This from Ezra Klein touched off a conversation on Twitter that wound up focusing on the general issue of regulatory discretion in the financial regulation bill. One standard criticism of the bill, which I do agree has some force, was that it entailed too much regulatory discretion. Regulators, however, are prone to “capture” or just being appointed by crappy presidents. Better to have hard and fast rules. And, indeed, sometimes it is.

But it’s worth saying that there’s no hard and fast rule in favor of hard and fast rules. After all, the only thing people like less than undue regulatory discretion is too many stifling bureaucratic rules. Specifically, one problem with doing away with regulatory discretion is that regulated firms have a large interest in coming up with ways to comply with the letter of the law while gutting its spirit. Properly motivated regulators faced with firms exploiting loopholes or engaged in regulatory arbitrage can formulate new rules to enforce the principles that congress charged them with upholding. If, that is, congress left them plenty of discretion.

Alternatively, you might just be faced with new problems or new information. Almost every liberal I know who thinks it’s bad that the FinReg bill contains so much discretion is also very happy that the Environmental Protection Agency is going to be regulating greenhouse gas emissions. If the Clean Air Act had been drafted so as to deny EPA bureaucrats discretion and had instead proscribed specific regulations on specific substances, it would’ve have mandated regulation of greenhouse gases. But since Congress wrote a principles-oriented law, a regulatory finding that sources of CO2 emissions generate air pollution that endangers public health or welfare is sufficient to generate action. And it will be much harder for the fossil fuel industry to get the Clean Air Act partially repealed than it’s been for them to block new climate legislation.

All of which is to say that if there’s a flaw in the Obama administration’s approach to this it’s that I’m not certain they’ve paid enough attention to building high-quality regulatory institutions. The basic idea of writing a law that depends on the creation of such institutions is correct, but it’s hard to pull off in practice. That’s one reason I’m more regulation-skeptical than most progressives. But there are key areas where robust regulation is indispensable and in those areas there’s no good alternative to the hard work of institution-building.

Tim Fernholz brought to my attention Robert Reich’s argument that more aggressive monetary expansion won’t boost employment. I have a variety of objections to the details of what he says, which I think misdescribe the mechanisms, but the most important issue is that I think what he has in mind when he describes “easy money” and what proponents of monetary stimulus want to see are actually quite different.

Consider Paul Krugman’s 1998 paper on “Japan’s Trap” in which he constructs a rigorous model of a situation in which “the economy finds itself in a slump against which short-run monetary expansion, no matter how large, is ineffective.” Reich sees the United States as being in such a situation, and views proposals for monetary stimulus in terms of this kind of short-run expansion. But in the same paper, Krugman argued that there was a monetary solution to the problem:

If this stylized analysis bears any resemblance to the real problem facing Japan, the policy implications are radical. Structural reforms that raise the long-run growth rate (or relax non-price credit constraints) might alleviate the problem; so might deficit-financed government spending. But the simplest way out of the slump is to give the economy the inflationary expectations it needs. This means that the central bank must make a credible commitment to engage in what would in other contexts be regarded as irresponsible monetary policy – that is, convince the private sector that it will not reverse its current monetary expansion when prices begin to rise!

To try to rephrase this in a less-provocative (but hopefully more appealing to opinion leaders) way, here’s what needs to happen. Instead of saying “inflation is below two percent, so we need some expansion to bump it back up” we need the FOMC to say “inflation’s been running below two percent for a while now, so we’re going to try to bump it back up to four percent or so until we make up for all that lost ground.” That’s not the same as a one-shot injection of some cheap loans into the economy, it’s an effort to shift expectations about the trajectory of demand and therefore change present-day economic behavior.