Adam Posen: We Need To Do More

Your recommended reading of the day is Bank of England commission member Adam Posen’s strident call (PDF) for his colleagues at the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve Bank to undertake more monetary stimulus. I’ll quote the conclusion:

[W]hile it is rational for any given individual household or even any one bank to cut back on risk as a result of this legacy of bad debt, that means that a substantial (and sub-optimal) number of worthwhile real investment projects are going unfunded and thus are not undertaken. The cost to this investment shortfall in terms of the immediate growth outlook are substantial, and the longer-term costs are even greater in terms of impeded restructuring, diminished aggregate supply, and foregone innovation and productivity growth. Expansionary monetary policy, both on its own and in concert with constructive investment supporting policies by government, can provide the risk financing and the risk bearing capacity the economy currently lacks. As I quote Samuel Gompers at the start of my text, “we shall never cease to demand more until we have received the results of our labor.” In this economic context, we will know that monetary policy has done enough for long enough when long-term interest rates rise due to demand for capital from our private sector taking on risk and making investments.

At present, when there is too much risk aversion in the private sector, the British public can ill-afford unjustified risk aversion on the part of its monetary policymakers as well. The Bank of England and other central banks can do more for our economic recovery effectively, beneficially, and without political taint. And we can do more without causing high inflation. Therefore, we must do more to fulfil our responsibility to the British people. We are obliged to look past the unfounded fears of others and to get past any unwarranted reluctance on our own part, and do the right thing with the monetary tools at our disposal.

I note that both Posen and the likewise excellent Joe Gagnon are associated with Pete Peterson’s lesser-known project, the Peterson Institute for International Economics. Given Peterson’s considerable success at putting his pet cause of closing the long-run fiscal gap on the Washington policy agenda, I wish he would consider increasing his investment of resources in promoting the ideas of Posen, Gagnon, and like-minded colleagues. This is an issue that suffers much more from low-salience in the DC policy community and the agendas are complementary as prolonged mass unemployment only makes budget challenges harder to deal with.