"Easing Without Twists Or Quantities"
Given that yesterday’s “Operation Twist” announcement is going to be both treating as a big deal by the press and also won’t work, the upshot is simply going to be to increase the quantity of people who think that monetary policy can’t boost employment under these conditions. Under the circumstances, it’s perhaps worth sketching out what I would do if I were running the zoo.
The key step is that you need to drop the “quantitative” part of quantitative easing. Chairman Yglesias says:
[M]y view is that due to hysteresis and structural problems, the full employment rate of the United States is probably now closer to 6.5 percent than to 4.5 percent. My view is also that for a variety of reasons, an inflation rate of around four percent would be better than a rate of around two percent. But of course my view of the natural rate of unemployment is just a guesstimate. What I’m going to do is that I’m going to have the Federal Reserve purchase lots of stuff, with the quantities of the stuff, the nature of the stuff purchased, and the timing of the purchases done at my discretion. And I’m going to keep doing it until unemployment is down to 6.5 percent or so unless core inflation gets over 5 percent. If core inflation goes over five percent, then I’ll conclude that my estimate was off and we need to reconsider. But as long as inflation is below 5 percent and unemployment is above 6.5 percent, my conclusion will be that the Fed needs to buy more stuff and buying more stuff is exactly what we’ll be doing.
Then what happens? It’s like FDR and the gold standard redux. A minority of rich businessmen will think to themselves that this is a great idea, and revise upwards the quantity of potential customers for their products or services in the medium term and start investing to hire workers and equipment while idle resources are still cheap and plentiful. The majority of rich businessmen will think to themselves that this guy is an insane socialist who’s going to produce runaway inflation, and will start ditching cash and low-yield dollar-denominated financial instruments in favor of some mix of foreign currencies, commodities, and concrete assets like bigger houses and fancier yachts. Both the majority who think I’m an idiot and the minority who think I’m a genius will be taking steps that boost real output. This will increase nominal wages for many middle class Americans and increase nominal land prices for a partially overlapping set of middle class Americans, both of which will speed the debt-deleveraging process. As the weaker dollar and rising rents begin to push the inflation rate up above three percent, all the whores and politicians will look up and shout “Save us!” And I’ll look down, and whisper “I told you, inflation of up to five percent is acceptable until we return to full employment.”
This will hardly solve all of America’s problems. If you asked me in March 2007 to describe my feelings about the American economy I’d say we had too much inequality, too little investment in physical and educational infrastructure, a dysfunctional health care system, way too much investment in “defense,” and an overly financialized economy. Monetary policy isn’t going to solve any of those problems. But what we didn’t have in March 2007 was millions of people depressed, demoralized, and idle.
PS: What assets do I actually purchase during this time? It doesn’t really matter! I’d probably have my staff pick by throwing darts at copies of the Wall Street Journal, or ask local bartenders what they want us to buy.