The "whatever it takes" methodology

Not so very long ago I mumbled on about Stephanie Kelton's "whatever". Twice.

I quoted Kelton:

"Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy. He argued that the government should be prepared to spend whatever is necessary to sustain full employment without raising taxes or borrowing …"

I quoted Kelton again:

"MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result."

And I said:

Kelton's plan is to "accept" the deficits, the growing deficits, "whatever" they are. However much they turn out to be.

Please don't go there. I know you want to fix the economy but that's not the way.

As an aside, painfully off topic, two sentences on Lerner again:

"Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy."

Maybe you noticed this before. Took me till now to figure it out. I'm always saying we should fight inflation less by changing interest rates, and more by encouraging the repayment of debt. Specifically, by putting tax policy in place to encourage the repayment of debt.

Tax policy is fiscal policy. My idea is a damn good match to Lerner's.


Back to "whatever". We have Robert Barro reminiscing:

In the early- and mid-1970s, Presidents Richard Nixon and Gerald Ford tried to curb inflation with a misguided combination of price controls and exhortation, along with moderate monetary restraint. But then came President Jimmy Carter, who, after initially maintaining this approach, appointed Paul Volcker to chair the US Federal Reserve in August 1979. Under Volcker, the Fed soon began to raise short-term nominal interest rates to whatever level it would take to bring down inflation.

Raising interest rates to whatever level it would take to bring down inflation.

Yeah, and that's what Volcker did, too. He raised interest rates until they took the life right out of our economy. Then rates started coming down. Death throes, it was: Rates came down for 30 years before hitting bottom. And now, for 10 years, the Fed has been trying to bring inflation up, of all things. Trying to bring our economy back from the dead.


I pointed this out before:

In an old post (but one that fascinates me more than ever) Marcus Nunes writes

On becoming chairman of the Fed, Volker challenged the Keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970´s demonstrated that inflation arose from cost-push and supply shocks – a situation dubbed “stagflation”.

... To Volker, the policy adopted by the FOMC “rests on a simple premise, documented by centuries of experience, that the inflation process is ultimately related to excessive growth in money and credit”.

This view, an overhaul of Fed doctrine, implicitly accepts that rising inflation is caused by “demand-pull” or excess aggregate demand or nominal spending.

Essentially, Paul Volcker said there's no such thing as cost-push inflation. And that was all there was to that.

Volcker assumed there's no such thing as cost push inflation, and he proceeded to raise interest rates until he brought down inflation -- whatever level of interest rates it took.

Gone was any thought of looking into the problem to consider what might be wrong.


Back in 1977 I wrote:

If we have "more" money to spend, we'll probably spend it; if we have "less" money, we must spend less.

Two years later (a coincidence, certainly) Paul Volcker started making sure we'd spend less by pushing interest rates up to record levels. Oh, and it worked, because if we have less money, we must spend less. But that doesn't mean Volcker solved the problem. He didn't. He just started us on the trend of spending less. The death throes.

Volcker didn't even correctly define the problem. In 1977 I wrote:

The solution to inflation is "less money". The solution to unemployment is "more money". This is a magnificent answer for an either/or problem. But when the problem is "both", the logical solution is to increase and decrease, at the same time, the country's money supply.

And again:

Our economy is facing a both problem. The solution to that problem is to do two contradicting things to the money supply.

Volcker thought the problem was inflation. It wasn't. The problem was that we had high inflation and high unemployment at the same time.

The problem has since taken a different form, but remains unresolved to this day.


On my old econ blog I wrote this:

The problem in those years was not that we couldn't get good growth. And the problem was not that we couldn't keep inflation at bay. The problem was that we could not do both at the same time.

And this:

Like Solomon, then, policymakers split the stagflation problem in two. They took a "both" problem and dealt with it as two separate problems. They would fight inflation with monetary policy; and they would invent new tales of government and regulation to deal with unemployment and growth.

As with Solomon, splitting this baby was not the answer.

The right answer is not to use extreme measures and do "whatever it takes". The right answer is to figure out what the problem really is, and the source of that problem.