Topic: Finance, Banking & Monetary Policy

Japan: The Way Out

“Helicopter money” started out as, and long remained, nothing more than a heuristic device — and a brazenly counterfactual one at that — employed by monetary economists as a means for gaining a better theoretical understanding of the consequences of changes in the stock of money.  “Suppose,” the analysis went, that instead of increasing the monetary base by buying bonds in the open market, central banks dropped new supplies of currency from helicopters, thereby instantly increasing everyone’s money balances.  What would that do to spending and, eventually, to prices?

Lately, however, helicopter money has made its way from the inner recesses of economics textbooks to the financial pages of major newspapers and magazines, where a debate has been joined concerning its merits, not as an abstract analytical tool, but as an actual policy tool for relieving Japan, and perhaps some other economies, of their deflationary woes.  Look, for some examples, here, here, and here.  And see as well this recent blog post by our dear friend Jerry Jordan, written for the Atlas Foundation’s Sound Money Project.

Yet for all the controversy surrounding the suggestion that Japan should actually try dropping money from helicopters (or something close to that), my own response to it consisted, not of either surprise or dismay, but of a strong sense of déja vu.  For I myself wrote an op-ed proposing helicopter money for Japan in the spring of 1997, that is, almost exactly 19 years ago.  I never tried to publish it, in part because I myself couldn’t quite decide just how firmly my tongue was poking my cheek as I wrote it, and because I had then as I do still an abiding dislike of  “clevernomics,” which is the sort of stuff economists write to show just how clever they they can be, rather than because they are seriously trying to help the world along.  Worried that I was myself lapsing into that sort of thing, I stuffed the essay into a file cabinet, where it has been buried ever since.

All the recent writing on the subject has, however, emboldened me to resurrect my dusty old essay and to publish it hereunder its original title.  I don’t pretend that it adds anything to what recent commentators have had to say on the topic.  Consider it a bagatelle, if you like: you’ll get no argument from me.

Administrative Law Judges Are Unconstitutional

The administrative state has ballooned in size and power—essentially having become its own branch of government—and Cato has now filed an amicus brief saying enough is enough.

The Securities and Exchange Commission, no longer content with just regulating securities, has accused a company called Timbervest of fraudulently taking undisclosed real-estate commissions. Timbervest was found liable by an SEC administrative law judge (“ALJ”), but even without getting into the merits of the allegations, there are several problems with this prosecution inquisition.

First, ALJs are executive-branch officers who nonetheless are insulated from removal by the president. Yet Article II of the Constitution, to ensure democratic accountability, vests the president with power over the executive branch—including over quasi-judicial officers like territorial judges—and requires that he “take care that the laws be faithfully executed.” The relevant statute here prevents the president from doing just that by having three levels of officials between the president and the SEC’s ALJs, each of whom can only be removed for cause.

Second, the SEC picked the ALJ who heard this case, even though the Supreme Court has held that there is a reasonable fear of bias when “a man chooses the judge in his own cause.” This problem has become so systemic that a former SEC ALJ felt compelled to speak publicly about how ALJs were pressured to rule in the agency’s favor.

Third, there is a real problem with this matter being in an administrative forum at all. After all, this is real-estate fraud case, of a sort that courts—real courts—have heard since the Founding. Congress can assign new statutory rights that didn’t previously exist for adjudication in an administrative forum (for example, Social Security disability claims), but it can’t take away long-held freedoms without the due process that that only the judiciary can provide. Here the SEC permanently banned Timbervest’s owners from associating with any investment advisers. The Supreme Court has recognized the right of association for the advancement of ideas as a protected First Amendment right, which is not something that can be taken away without at least a jury trial. If the SEC wants to try this case, it needs to do it in a proper Article III judicial proceeding.

Accountability, impartiality, and the right to a day in court before constitutional rights are taken away: is that too much to ask? We hope that the U.S. Court of Appeals for the D.C. Circuit, the court charged with reviewing most administrative-agency actions, agrees that it’s not.

Thanks to legal intern Devin Watkins for his help with Cato’s brief, and this blogpost.

A Monetary Policy Primer, Part 2: The Demand for Money

Although there’s no such thing as a straightforward measure of the quantity of money in an economy, monetary policy is nonetheless about managing that quantity.  How ought it to be managed?  The (misleadingly) simple-sounding answer is: so that it neither falls short of nor exceeds the quantity of money demanded by the public.

So much for a summary of Part 1.  Now for the hard part: dealing with the many questions this summary raises.  How can a central bank manage a quantity without being certain just how to define, let alone measure, that quantity?  How is it possible for the quantity of money supplied to differ from the quantity demanded?  When those things do differ, how can one tell?  Finally, just what does “the demand for money” mean?

A Monetary Policy Primer, Part 1: Money

It occurs to me that, despite the unprecedented flood of writings of all sorts — books, blog-posts, newspaper op-eds, and academic journal articles —  addressing just about every monetary policy development during and since the 2008 financial crisis, relatively few attempts have been made to step back from the jumble of details for the sake of getting a better sense of the big picture.

What, exactly, is “monetary policy” about?  Why is there such a thing at all?  What should we want to accomplish by it — and what should we not try to accomplish?  By what means, exactly, are monetary authorities able to perform their duties, and to what extent must they exercise discretion in order to perform them?  Finally, what part might private-market institutions play in promoting monetary stability, and how might they be made to play it most effectively?

Although one might write a treatise on any one of these questions, I haven’t time to write a thesis, let alone a bunch of them; and if I did write one, I doubt that policymakers (or anyone else) would read it.  No sir: a bare-bones primer is what’s needed, and that’s what I hope to provide.

Do Market Failures Justify Bank Capital Adequacy Regulation?

One of the most important elements of contemporary financial regulation is bank capital adequacy regulation — the regulation of banks’ minimum capital requirements.  Capital adequacy regulation has been around since at the least the 19th century, but whereas its previous incarnations were relatively simple, and usually not very burdensome, modern capital adequacy regulation is vastly both more complicated and more heavy-handed.

After I first began research on this subject years ago, I watched the Basel Committee take part in a remarkable instance of mission creep: starting from its original remit to coordinate national banking policies, it expanded into an enormous and still growing international regulatory empire.  Yet I also noticed that no-one in the field seemed to ask why we needed any of this Basel regulation in the first place.  What, exactly, were the market failure arguments justifying Basel’s interventions generally, and it’s capital adequacy regulation in particular?

We’ll Never Improve the Tax System by Clinging to Partisan Folklore

top marginal tax rates over time

A stubborn myth of the pro-tax left (exemplified by Bernie Sanders) is that the Reagan tax cuts merely benefitted the rich (aka Top 1%), so it would be both harmless and fair to roll back the top tax rates to 70% or 91%.

Nothing could be further from the truth. Between the cyclical peaks of 1979 and 2007, average individual income tax rates fell most dramatically for the bottom 80%  of taxpayers, with the bottom 40 percent receiving more in refundable tax credits than paid in taxes.  By 2008 (with the 2003 tax cuts in place), the OECD found the U.S. had the most progressive tax system among OECD countries while taxes in Sweden and France were among the least progressive.

What is commonly forgotten is that before two across-the-board tax rate reductions of 30% in 1964 and 23% in 1983, families with very modest incomes faced astonishingly high marginal tax rates on every increase in income from extra work or saving (there were no tax-favored saving plans for retirement or college).

From 1954 to 1963 there were 24 tax brackets and 19 of those brackets were higher than 35%.  The lowest rate was 20% -double what it is now.  The highest was 91%.

High and steeply progressive marginal tax rates were terrible for the economy but terrific for tax avoidance. Revenues from the individual income tax were only 7.5% from 1954 to 1963 when the highest tax rate was 91%, which compares poorly with revenues of 7.9% of GDP from 1988 to 1990 when the highest tax rate was 28%. 

Wonkblog’s Debt Denial

A Time article by James Grant warning about rising federal debt has prompted pushback by columnists questioning whether debt is really so bad. At the Washington Post, Wonkblog columnist Matt O’Brien says “there’s no reason to cut the debt today.” Fellow Wonkblog columnist Max Ehrenfreund suggests that Grant’s figure of $42,998 government debt per person overstates the problem.

O’Brien suggests that the only reason to fear debt would be if it was leading to a financial crisis, but it isn’t because interest rates are low. But O’Brien neglects to mention that interest rates may rise substantially in coming years. CBO projects that as rates rise, federal interest costs will triple from $253 billion this year to $839 billion by 2026.

As for Ehrenfreund, he is right that $42,998 overstates the debt problem because it does not take into account our future rising population. At the same, however, $42,998 understates the problem because each year the government adds more debt. Over the next 10 years, the U.S. population will grow 8 percent, but the CBO says federal debt will rise 69 percent. So Grant’s simple debt metric will increase over time.

Other than possibly causing a financial crisis, rising federal debt creates other harms: