Oct 11, 2019

Mainstream economists are getting radical

Dion Rabouin, author of Markets

Illustration: Aïda Amer/Axios

As global growth continues to fall, the world’s top economists and financial authorities are signaling an openness to experimenting with previously fringe economic ideas that just a few years ago would have been considered extreme or even laughable.

What’s happening: Central bank policies, which now include negative interest rates in Japan and the eurozone, have yielded negligible improvement.

  • Even monetary policies previously considered extreme have failed to offset the persistent drag from the world’s worsening demographic trends (too many old people, not enough young ones) and a lack of demand, so policymakers are getting more extreme.

What they're saying:

  • ECB president Mario Draghi recently suggested the eurozone consider modern monetary theory, or MMT — which argues that governments with their own currency should ignore deficits and keep spending until inflation becomes a problem, with federal legislators in control of setting interest rates.
  • A collection of former central bank presidents are calling for "helicopter money" — a program in which central banks would deposit money directly into every citizen's checking account.
  • Top strategists at BlackRock, the world's largest asset manager, are urging more central banks to start buying stocks.

Reality check: The unorthodox policies are being encouraged by either former central bankers or those like Draghi who are on their way out of office. Current central bank leaders largely continue to reject such ideas, even in the face of growing evidence their policies aren't working.

  • Fed Chair Jerome Powell declared that the U.S. central bank is undergoing a wide-ranging examination of its policy toolkit, but also said this week that the only unorthodox plan the Fed is really considering is yield curve control. This was implemented in Japan in 2016 and has yet to deliver meaningful growth or inflation for the country.

The big picture: "The Fed needs new ideas," Christina Romer, a former chair of the Council of Economic Advisers, told Axios at this week's National Association of Business Economists conference in Denver.

  • For Romer, now an economics professor at UC Berkeley, the rethink is required because the previous rules governing how central banks operate have been upended by rock bottom inflation and interest rates. That will make traditional monetary policy less effective.
  • "To their credit, [the Fed] did a rethinking of their framework, but didn’t really conclude that they needed to rethink all that much. I think they need to rethink a little more radically," she added.
A deeper look at some radical ideas from the mainstream
Expand chart
Data: FRED; Chart: Axios Visuals

Federal Reserve economist Claudia Sahm has proposed automatic government payments directly to individuals when the 3-month average unemployment rate rises 0.50 percentage points above the low from the previous year.

  • She picked that metric because every time it has happened since the 1970s the economy has gone into contraction. The indicator currently shows a reading of 0%, suggesting the economy looks stable.

Romer told Axios she supports similar plans that include so-called automatic stabilizers, or government spending, that activates based on data rather than legislators needing to authorize new spending.

  • "Building more of that into the system would be healthy," she said.

Catherine Mann, a former chief economist at the OECD and current global chief economist at Citi Research, has proposed a program that would use central bank funds to deposit shopping vouchers directly into consumers' accounts.

  • She says many new proposals ignore the realities of declining aggregate demand, income distribution and lower productivity.
  • "I think we’re having the wrong discussion," she told Axios at the NABE conference.

Julia Coronado, a former Federal Reserve economist and current president of MacroPolicy Perspectives, said she's working on a paper that will advocate combining helicopter money with a central bank digital currency.

  • "We’re not on the edge," she said during an interview at NABE. "We’re chief economists at major global banks, for God’s sake. We’re hardly fringe players."

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