Our very own Benjamin Cole (actually he’s not our very own because the peripatetic Mr. Cole shows up all over the blogosphere, but he’s like family) has recently written a guest post for another frequent commentator on this blog Lars Christensen whose blog is a must read. Working in the private sector, Lars has an entrepreneurial eye for what will appeal to the market, and so he is always ready and willing to open up his own blog to guest bloggers with something interesting and worthwhile to say. One more reason to always keep Lars’s blog on your radar screen.
Regular readers of this and other blogs know that Benjamin is a no-nonsense guy who is interested in results not idle chatter. So everyone could expect that when Benjamin got the opportunity to give us all a piece of his mind, he would get right to the point and talk about how to implement Market Monetarism with a sophisticated understanding of the issues and in simple and direct terms that ordinary people can follow. And that’s just what he did.
Benjamin makes a strong case that adopting a simple and transparent policy that the public can understand can monitor. So he recommends that the Fed commit to buy $100 billion of securities a month for up to 5 years in order to achieve a target annual growth rate of NGDP of 7.5% over the next 5 years.
The recommended concrete sum of $100 billion a month in QE is not an amount rendered after consultation with esoteric, complex and often fragile econometric models. Quite the opposite—it is sum admittedly only roughly right, but more importantly a sum that sends a clear signal to the market. It is a sum that can be tracked every month by all market players. It has the supreme attributes of resolve, clarity and conviction. The sum states the Fed will beat the recession, that is the Fed’s goal, and that the Fed is bringing the big guns to bear until it does, no ifs, ands, or buts.
Now every so often I have recommended that the Fed and Treasury announce that they would target the dollar/euro exchange at a level 20% below the current dollar/euro exchange rate (something like $1.50 or $1.60 per euro), through open market operations and unsterilized purchases of euros in foreign-exchange markets and would continue to do so until a suitably defined price level rose by 20 percent. This would mean that the only way for the Europeans to avoid an increase in the euro’s value against the dollar would be for them to inflate at nearly the same rate as the dollar was inflating. But once the new higher price level was achieved, the policy of driving down the dollar’s exchange rate against the euro would be terminated. Benjamin’s proposal is similar in the sense that is easily articulated and easily monitored, and therefore, credible. If the policy is credible, the public will believe in it and adjust their expectations accordingly, thereby ensuring its ultimate success.
Just to show that I am not a complete pushover, let me just mention a couple of points on which I don’t entirely agree with Benjamin. Benjamin opposes further extensions in the duration of unemployment insurance, but I am not so sure. Theoretically, the effects cut in both directions, so it is doubtful whether limiting unemployment insurance would do very much to reduce unemployment. Perhaps a better approach would be to scale back the benefit when extending unemployment insurance rather than terminate it altogether. Nor do I think that reducing federal expenditures to 18% of GDP, as Benjamin proposes, is a realistic goal given the increasing age of the population, meaning that the government will be paying more and more for the medical bills of an aging population. Discretionary non-defense spending has already been reduced as a percentage of GDP to historically low levels. So I think people are kidding themselves if they think that spending can be cut just by picking a number like 18% out of thin air. If you want to cut the budget, Benjamin, tell us what you want to cut.