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This really shows that not only is their current strategy not being completely effective, but they don't really know what to do to fix it. It seems that they feel they need to do something whether it is tapering or reducing the interest rate paid on excess reserves. If they continue their strategy and nothing happens they would feel vulnerable, but if they do something and it works or doesn't work they can feel comfortable in that they tried to do something and didn't sit around while nothing happened. In these conditions monetary policy isn't very effective and something else needs to be done such as expansionary fiscal policy. The FOMC can only control a portion of a market. Something needs to be done to stimulate the other parts to make their strategy effective.
The theory makes sense. Since, the poor tend to have a higher MPC, giving them more money would have a greater effect on spending due to the multiplier effect. However, it is just a theory. It is based on how much people think they might spend if they were to receive x-amount of money. If we could somehow actually give people money and see how much they spend then that might give a better idea of what would happen. Also, as the author mentioned in the last paragraph they didn't control for the effects of the taxing or borrowing on other variables other than the MPC. The economy is a very complex system, so it would be incredibly difficult to find the exact effect a stimulus would have. But the big idea is that a redistribution of wealth would increase GDP no matter to how much of the poor to whom you give money. Which is a good idea, could it happen? Well the wealthy may use their power to stop that from happening, but who knows?
I would argue that most people do not factor inflation into their consumption. When was the last time you decided to buy something at that moment because inflation would make it "more expensive" in the future? Probably never, I know I haven't. I would go further and argue that a lot of Americans do not really know what inflation is. Since they do not know what it is, how will it effect their spending? It probably won't. Also, if you you look at inflation rates of other countries, most developed countries have inflation below 3 (Germany has 1.2, the Netherlands have 2.45, U.K. has 2.7, Canada has 1.1) and most of the countries with rates between 4-6% are middle eastern, african, and south asian countries. While many of those countries with inflation between 4-6% have unemployment around the natural rate, the growth in their GDPs isn't any better compared to America's growth rate of 2.5% and often lower. ( For years, the Fed has kept interest rates low, and it hasn't done that much. So targeting interest rates in a different way might not be the most efficient strategy. The government or private companies need to do something that encourages borrowing in a completely different way. I'm not sure what that would entail, but taking action in other areas might be effective at poking the economy towards where it was pre-recession.
This goes back to the exogenous vs endogenous variables. While unemployment went down, which is good, the variables behind this change do not seem very positive. The article notes this by saying "the economy had slowed in the third quarter." To harm the outlook of the economy even more they noted that "This is before any negative effects of the shutdown." In addition the positive changes from september's report were simply reversals of this summer's job loss except for a few anomalies (such as government education). They also showed that while job growth is positive it was less than it has been for a year. And much of the decrease in unemployment rate is due to people leaving the job market, which is not really a decrease in the unemployment rate.
Reich argues that the reason the US market is not free is due to people's ability to change and influence the rules placed on the market. Specifically wealthy people's ability to change and influence the law. Is that a wrong thing to do though? Is it amoral? Well, no. One of economics assumptions is that people act on their self interest. So it is completely reasonable to think that is how the wealthy act. If you were able to make yourself better off would you? If you said no you are crazy. The wealthy feel targeted by the government and they are actively trying to take this target off their backs. It just happens that policies that help the wealthy hurt the poor and policies helping the poor harm the wealthy. Changing the rules can be amoral though. If they change the rules in such a way that it harms society or other parts of society, then it is wrong and needs to be changed. Government policy is a tough debate and one that will probably never be settled, but at least we aren't North Korea or Cuba.
Toggle Commented Sep 23, 2013 on Link from Twitter econ 102 at Jolly Green General
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Sep 23, 2013