Over on Frog Blog Russell Norman says we should have a rational debate about policy – in this instance the idea of having the RBNZ finance government spending by buying government bonds when the government increases spending. Good, this is the right sort of attitude, we should be willing to debate and discuss everything – and to do so in a logical, clear, and transparent manner.
Now, as I’ve discussed that I don’t agree with his policy conclusions. The post I’ve linked too was pretty clear on things – but I’m going to do a shorter post here. Since that QE post I’ve talked with people who are pro this sort of financing, and in this post I am explicitly trying to talk about the trade-offs in a way that is consistent with the way they have 🙂
I would note that, getting the RBNZ to purchase bonds when other monetary policy actions are consistent with their inflation mandate will violate their inflation mandate – it will violate their “non-monetization” commitment in this sense.
This is important, as it implies that in the first instance bond purchase financing is essentially a tax. This is something I will get to in part 5 of the tax series I’m popping up at the moment. I’m only up to part 3 at present (out tomorrow), so the argument will have to wait till then.
Let me give a brief flavour though.
When we have an economy where the RBNZ is meeting its inflation targeting mandate (closing the output gap) we know the following. In the first instance, the cost of spending from bonds purchased by the RBNZ stems from pushing up the relative price of capital and labour the government wants to use, and from “tricking” individuals into working longer hours for less real pay than they think they will get. As we mentioned here the government is looking at ways of financing how it pays its workers in non-government produced goods and services to produce government goods and services. If government employees only produce and consume government goods then indeed this wouldn’t matter – but this is not the case, not at all.
In the longer term, the expectations of households and firms change – and the tax ends up solely falling on those unable to “protect themselves from inflation”. If everyone can protect themselves, we just end up in a situation where bond purchases themselves create inflation.
This is not an argument about the money multiplier, excess reserves, or any of those sorts of things. It is about the credibility of the central bank with regards to expectations, and the fundamental fact that land, capital, and labour are scarce. Yes at the moment unemployment is high (and there is a negative output gap), hence why the RBNZ has pushed the OCR down low levels to “stimulate activity” – and the current path of interest rates the Bank is forecasting out is consistent with unemployment falling and activity returning as quickly their modeling indicates as feasible. If interest rates were at zero, we could indeed introduce QE, in order to do things in the same way.
Monetary policy is already trying to get “underutilised resources into work” in that way – as a result, any additional policies (such as bond purchases) HAVE to be viewed as actions beyond this. And all this jazz about M1, M3 etc etc is not terribly relevant for this specific question. If we were instead worried about borrowing, then that is cool look at monetary aggregates … but let’s try to understand what is going on before setting policy in this entirely different area 😉
Having the central bank buy government bonds GIVEN the rest of its policy are consistent with its inflation target is equivalent to telling the central bank to “tax” parts of society in order to pay for the additional government spending that Russell Norman is advocating. I have zero problem with him advocating spending that he believes is consistent with what society wants from government – I am just concerned that funding it (getting access to scarce labour, capital, and land from the private sector) via inflation is regressive, that relies on “tricking” people into thinking their purchasing power will be higher than it will be, and it hits those who are least able to “dodge the tax”.
I would prefer we looked at ways of transferring resources where the burden of the tax was less regressive.
Furthermore, I would note that once the RBNZ commits to breaking its “non-monetization commitment” the entire monetary policy regime changes. Suddenly people lose certainty about the price level in the future, and expectations of inflation (which are reinforcing) will become more erratic. In a macro-policy sense, this will reduce the ability for the RBNZ to smooth the business cycle in the future – something I believe will be costly.
Remember, printing money doesn’t make the goods and services just appear – we always need to consider these things with regards to how things are produced, and the opportunity cost associated with that action.