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Economic Growth

Workers

Quick Thoughts on Modern Monetary Theory

Since there were many thoughtful comments on my earlier post, it seemed worth saying a bit more by way of response. As I noted at the onset, I did not see a difference between MMT and the Keynes that I first studied more than 30 years ago. I guess I still don’t see the difference.

In my prior post I noted that there were three channels to raise the economy back towards its potential:

  1. Government spending and tax cuts;
  2. Expansionary monetary policy; and
  3. Devaluing the dollar to increase net exports.

I should also add a fourth channel that can move the economy to full employment by reducing the average workweek or work year: work sharing.

As best I can tell, the MMT folks would have us only use the first channel and seem to disparage the other three routes to raising employment levels. I will briefly argue the merits of the other three channels and explain why I do not think reliance exclusively on the first channel is the best policy.

The Monetary Policy Channel

Several comments on my earlier post argued that monetary policy alone could not be counted on to get the economy back to full employment. This is true, but of course not what I was arguing.

I was making the case that the Fed can do more to boost the economy, even with short-term rates near zero. It could target a longer term rate, for example committing itself to push the 5-year Treasury rate to 1.0 percent or the 10-year Treasury rate to 1.5 percent.

This would boost the economy in several ways. First, investment is relatively unresponsive to interest rates, but it is not altogether unresponsive. In other words, with sharply lower interest rates, we should expect to see some additional private sector investment.

We should also see money freed up from mortgage refinancing. This amounts to a shift of income flows from creditors to debtors. That should lead to some additional consumption under the assumption that the propensity to consume for people with mortgages is somewhat greater than the propensity to consume among people who own mortgages or mortgage backed securities.  (Many people have over-estimated this effect, but it certainly is not zero. If we can get $4 trillion in mortgages refinanced at interest rates that average 1.5 percentage points less than their prior mortgage, it would reduce annual payments by $60 billion. If we assume that one third of this translates into additional consumption, it amounts to $20 billion a year in added demand. )

CEPR / February 25, 2012

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As Relocation of Champ de Mars Begins, Criticism Over Lack of Adequate Housing Plan Mounts

An important article this week from William Booth of the Washington Post took an in-depth look at the government and international community’s efforts to clear some of most high profile of the remaining 707 IDP camps in and around Port-au-Prince. The article focused on the Champ de Mars, home to some 17,000 people, one of the largest remaining IDP camps, and also the most visible – situated just a block from the presidential palace downtown. In a program coordinated by the International Organization for Migration (IOM), families in the camp will be given $500 rental subsidies for one year. Booth continues:

“We’re not talking about a house. We’re talking about renting a room, space on the floor, with a roof, access to water, a communal kitchen, maybe a toilet,” Fitzgerald said. As program coordinator for the International Organization for Migration, he is working alongside the Haitian government to clear the Champ de Mars camp, with a $20 million grant from the Canadian government.

Booth also notes that the program, even if successful, will only address a small part of the problem:

But the darker reality is this: The Haitian government is spending $30 million to empty six camps. There are 701 more. The Champ de Mars project will cost $20 million for 20,000 people. There would still be close to half a million displaced persons in camps. No country, no group of donor nations, no NGO is considering donating $500 million to Haiti to empty the camps.

The math does not work.

Anastasia Maloney, reporting for AlertNet, explains the details of how the beneficiaries are chosen, noting that each day long lines form to get on buses provided by the IOM to take camp residents into neighborhoods looking for accommodations:

The office can only handle around 50 cases a day, and tensions are simmering. Several people vent their frustrations at IOM officials.

“I’ve been coming here every day, every day, for weeks and I haven’t got anywhere,” said one man, clutching his paperwork.

Missed appointments with landlords can mean more weeks of waiting. Often camp residents find accommodation but it turns out to be unsafe, for example, houses built in areas at risk from flooding and landslides.

Jake Johnston / February 24, 2012