Could Alan Reynolds Have Been More Right?


Brad DeLong recently debated Alan Reynolds at Kansas State, which I’m not too interested in.

However, I was interested in this (h/t Brad DeLong):

In any bank crises, the public wants to hold more currency rather than bank deposits, and banks also want excess reserves as insurance against bank runs. Japan’s central never adequately accommodated that demand for bank reserves and currency before 2001 (if then) nor did the Fed in 1929-33. But that does not mean (as the liquidity trap implies) that monetary policy was impotent and merely “pushing on a string.”…

Reynolds was certainly wrong about Ireland, and is definitely wrong in his belief that cutting spending for its own sake is the correct policy response to a recession…but at least in his analysis of two supposed “liquidity trap” episodes, he is spectacularly right.

P.S. On Twitter, I resolved to refer to the “liquidity trap” as the “lolquidity trap”.

Advertisements

2 thoughts on “Could Alan Reynolds Have Been More Right?

  1. You are spectacularly right on the first point (liquidity trap) but misunderstand what I’m saying about spending. How the government taxes and spends can be as important as how much it expects to spend (often wrong) or how much it expects to collect in tax revenue (very often wrong). It is the microeconomics of public finance that I am concerned with, and if you get that right the improved economy will spin off enough revenue over time to finance enough more than enough government.

    Since federal revenues in the U.S. are usually about 18% if GDP, then government spending can grow by 4% a year in real terms if the economy grows by 4% and spending is about 19% of GDP. But if spending is 23% of GDP and the economy (fearing the taxes that implies) grows by only 2% a year, then real federal spending can’t grow faster than 2% either. Economists who fret too much about the ups and down tend to neglect the ups — economic growth.

    Alan

  2. One may not want to call it ‘liquidity trap’, but something unusual things happen when the central bank attempts to enlarge the money supply beyond the amount needed to finance investment or consumption. Right now, we still have the enormous buildup of “excess reserves” on the Fed’s balance sheet and the unusual circumstance of the Fed paying interest to banks on those excess reserves, and noisily contemplating increasing that rate of payment as part of its monetary policy “toolkit.”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s