The best and worst economic ideas of 2012

The votes have been counted. The supercomputers have run their calculations. Experts from around the world have been consulted.

And I have chosen. So here you go, the best economic idea of 2012 … and the worst economic idea of 2012.

The Best Economic Idea of 2012: Market Monetarism

The idea that central banks should target nominal GDP as a way of conducting monetary policy isn’t a new one — F.A. Hayek, for one, recommended it — but it was in hibernation. Then came the Great Recession and the Financial Crisis — and the slow-growth, New Normal aftermath. Once interest rates fell to low, low levels, monetary policy seemed powerless to help more.

But a group of economists in the blogosphere disagreed. Thus was born Market Monetarism, inspired by Milton Friedman and his view that major downturns are caused by monetary mistakes rather than market malfunctions. Market monetarists blame tight monetary policy for exploding the housing bust into a near-depression. And they think more aggressive easing — through predictable bond buying — to return NGDP to its pre-recession trend level (or at least the expectation that the Fed will do so) would create a more robust recovery. Their case was advanced considerably when economist and monetary policy expert Michael Woodford of Columbia University jumped on board with a landmark paper in September at the annual Jackson Hole economic conference.

Then came a four-day stretch earlier this month when three critical events happened. First, the Bernanke Fed moved significantly toward an NGDP level targeting rule by adopting an unemployment target and promising to continue regular bond buying until it was hit, as long as inflation remained quiescent. Second, incoming Bank of England boss Mark Carney endorsed the idea. Third, the newly-elected Japanese government made it clear it would push the Bank of Japan into a more aggressive stance as part of a clear policy goal of achieving higher NGDP growth.

No silver bullets or magic wands here. Central banks can’t raise the growth potential of an economy. Those are issues of taxation, regulation, education, immigration, and innovation. Those are  supply-side issues. But monetary policy may have a greater role to play in ending the Great Slump. And thanks to the spread of market monetarism, it just might.

The Worst Economic Idea of 2012: Debt Denialism

Federal debt held by the public, as a share of GDP, has doubled since 2006 and now stands at 73%. President Obama’s most recent budget would merely stabilize the debt at around 76%. Beyond that, the president has no plan as Treasury Secretary Timothy Geithner has admitted and this White House chart shows:

And during the fiscal cliff negotiations, Obama has been pushing for a tax hike-heavy solution even though spending, particularly, entitlements, are the big problem. The Obama plan seems more like an ideological indulgence than a real fix.

But why should Team Obama be concerned when liberal economists are now arguing that Medicare, the big long-term debt driver, is just fine? They argue that the Congressional Budget Office is wildly overestimating future health care cost inflation. And their response to Republicans who say that Democrats have abandoned Bill Clinton’s hawkish budgetary legacy?  Clintonomics was nothing but a fairly tale:

The truth is often painful but nonetheless it is important that we live in the real world. Just as little kids have to come to grips with the fact that there is no Santa Claus, it is necessary for millions of liberals, including many who think of themselves as highly knowledgeable about economic matters, to realize that President Clinton’s policies sent the economy seriously off course.

Even the liberal media is jumping on board, such as this hit piece by The New Republic on Maya MacGuineas of the Campaign to Fix the Debt. Or this Bloomberg column, “The Deficit problem: Not at bad as they want you think.”

Every year we don’t act, the debt problem and the cost of fixing the debt problem increases. And heaven forbid another Great Recession which doubles the debt again.  Strolling hand in hand — and a strong runner-up — is the idea that tax rates can double with no harm to the economy. Not true. Hopefully both ideas will stay suck in 2012.

6 thoughts on “The best and worst economic ideas of 2012

  1. So the Fed changes its signals from timeframes, such as low rates through 2015, and adopts specific targets instead, like unemployment at 6.5 percent instead. The result? Recovery in …… 2015! And those will be three long years for folks who have nothing to show for their new college degree except for $60,000 in debt. The fact is that printing money has little effect if no one is willing to spend it. In such times, Keynes was right.
    So the notion that debt is the problem remains the worst idea of 2012, as it was in 2011 and 2010. And 2013 and 2014….

  2. Years ago I got some valuable insight into consumer credit behavior while doing marketing programs in the credit card industry. What I learned was that when consumers are faced with a decision as to whether to buy something on credit, they don’t look at their level of indebtedness. They usually ask only one question: Can I afford the payments? This is why you see so many offers for no interest or deferred payment financing. If your monthly payment doesn’t increase, OF COURSE you can afford to buy it!

    Now consider the US government’s behavior. In 1995 the national debt was about $5 trillion and annual interest payments were about $230 billion. In 2011 the national debt had risen to $15 trillion and interest payments were about … $230 billion. Because the Federal Reserve was creating astronomical sums of money to keep Treasury interest rates down, we tripled the national debt without paying a penny more in annual interest. OF COURSE we can afford to increase Federal spending! We can afford the payments.

    Besides, Obama HAS a plan: Blame everything on George Bush.

    • Median credit card debt in households that carry a balance dropped from ~$19000 in 2009 to $15500 in 2011 and has stayed flat since. Guess they haven’t gotten the word that the Fed is printing money.

  3. Hmm, it seems an odd argument that monetary policy has been too tight in the last couple of years, after all the money supply has nearly tripled. Further inflation only reduces the ability of firms to engage in long term, sustainable projects because of the flattening of the yield curve.

    Further distortions of the price signals in our economy seems to be an odd call for a free market institution.

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