May 20, 2019

Nine Ways to Prevent Future Recessions

A Macro Musings Transcript
David Beckworth Senior Research Fellow , Dylan Matthews

David Beckworth: Our guest today is Dylan Matthews. Dylan is a senior correspondent with Vox and is one of its original founders. Previously, Dylan worked for Wonkblog at The Washington Post. Dylan is an eclectic writer, covering everything from immigration policy, universal basic income, education policy, to effective altruism, animal welfare, and global development. Dylan has also recently looked at the business cycle in an article titled, The Government Failed to Stop the Last Recession. It Can Prevent the Next One. 

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

Dylan joins us today to discuss this article as well as some of his other related work on this subject. Dylan, welcome to the show. 

Dylan Matthews: Thanks so much for having me.  

Beckworth: Oh, it's a real treat. You had an interesting article and we've interacted in the past in the blogosphere, Twitter, so forth. In fact, you've been a helpful resource for me. I know I've contacted you before when I wanted to find something because you have this ability to get almost any kind of information out there in quick, accessible format. So, I've appreciated all you've done in the past and I really appreciate you coming on the show.  

I thought I would mention to our listeners that you are probably the only one that has ever bought the nominal GDP targeting T-shirt. 

Matthews: I definitely have one of those socked away in my t-shirt drawer. Yeah, I think I got it back in 2011 after Michael Woodford, or 2011 or 2012. 

Beckworth: Oh, nice. 

Matthews: Whenever Michael Woodford came out for it. 

Beckworth: Yeah. That's impressive because I made that T-shirt on one of those T-shirt websites. It has a target with nominal GDP, kind of like our nominal GDP targeting mugs, which you'll get one later. But that is fascinating, exciting for me to learn. We may have to revisit that and make that part of our Macro Musings swag in the future, but you got the early version. You're an early adopter. Kudos to you. 

Matthews: It's a great shirt. I definitely have had more conversations about NGDP targeting with folks because of it.  

Beckworth: Nice. I'm glad to hear that.  

Well, I want to ask you as I do most my guests, how did you get into this career path? You were at Vox, you were at Wonkblog, and it's true, you cover a wide swath of topics. I mean, it's hard for me to imagine. Most humans, most people like me, are able to focus on a few areas and maybe begin to understand them, but you have this wide net you cast.  

Tell us about that. Tell us about your work and how you're able to cast such a wide net.  

Matthews: Yeah, no. I mean, there's definitely a jack of all trades, hopefully not master of none quality about it. 

Beckworth: Not at all. No, not at all.  

Matthews: Yeah. So, I got into journalism kind of circuitously. I think there are people who are in journalism because they love the active reporting, and the process of doing the news and that's a lot of our newsroom, it was a lot of the newsroom at The Washington Post since there were people there who had to bounce from being local crime reporters to serving in Islamabad covering intelligence of Pakistan, to covering the Department of Justice. There's a kind of career trajectory where that's what you like doing: you like calling people and asking questions and finding out facts that other people don't know.  

I kind of got into it through another avenue, which was I was just very interested in politics, and in particularly, government policy. That was something that we had talked about in my family, but I think a lot of it was that I grew up in New Hampshire, and New Hampshire has this very odd birthright where we and I will get to decide who the president is kind of. So I just grew up like, you could go to a diner and meet Dennis Kucinich, or Wes Clark, or John McCain and hear them give their talk and run through their policies. I got interested because of that. 

I started writing a blog because I started reading blogs by other people that I enjoyed. I was reading Marginal Revolution and my now-colleague, Matt Yglesias's blog, so I started writing one of those in high school, found that I enjoyed it, got an internship at the American Prospect where Ezra Klein was working at that time. We hit it off and I think he and Matt helped convince me that if you're a curious person who's broadly interested in how the government works and in economic policy that journalism is a way that you can learn more about that. I've been lucky to find that to be true over the course of my career. 

I would say the other thing is that I think partly it was due to the oddness of Wonkblog that we had a lot of autonomy and a lot of freedom to stretch into different topics, but I think especially at Vox because it's our website, we were defining what it was from the get go, we had a lot of freedom to be eclectic and to try different things.  

I think the point that I do share with my colleagues who can go from sports coverage to foreign correspondence to crime reporting is that you learn a way of learning stuff, you learn how to ask good questions, and find the right people to ask questions to. That is something that I've enjoyed. My fiancée's an academic and she is very, very narrowly focused on a few topics and that's fantastic and she's brilliant, but I've always been more roaming than that. A thing I appreciate about journalism is that it allows you to roam like that. 

Beckworth: Yeah, no, you roam fairly well. I mean, again, you're not just touching the surface; most of your work, you delve in pretty deep and we're going to talk about that in a minute, particularly as it relates to business cycles and recessions, but I want to give one more example of how you've dabbled in an area and you've really taken it to heart, you've really embraced and gone all in. 

This was work you did on kidney donation. You took it so seriously, you talked the talk, you walked the walk, you went as far as to actually donate a kidney. I want to read the first few paragraphs from the write-up you had on this experience. Just a fascinating story and this is from an article back in 2017. 

You write, "On Monday, August 22, 2016, a surgical team at Johns Hopkins Hospital in Baltimore removed my left kidney. It was then drained of blood, flushed with a preservative solution, placed on ice, and flown to Cincinnati. 

"Surgeons in Cincinnati then transplanted the kidney into a recipient I'd never met and whose name I didn't know; we didn't correspond until this past month. The only thing I knew about him at the time was that he needed my kidney more than I did. It would let him avoid the physically draining experience of dialysis and possibly live an extra nine to 10 years." 

You go on to talk about it's one of these big trades where multiple people traded. He had a relative who was willing to give a kidney but couldn't give it to him so he promised to give it to somebody if someone gave it to him. So it's a real complex operation but you were a part of that and I'm guessing you just felt convicted after doing your research and writing on this. Is that right? 

Matthews: Yeah. I didn't have kidneys as a beat beforehand and it was less of a professional interest but it was something that a lot of folks that I met professionally who worked in healthcare or especially worked in philanthropy had been thinking about.  

I think one of my big influences is a guy, Alexander Berger, who is also very interested in monetary policy but who's a program officer at The Open Philanthropy Project Foundation out in San Francisco. He's someone who spends his day job trying to figure out how to use this pot of resources he has and how to make grants that ... Their mission is very explicitly about trying to save lives or improve the most lives in a very cost-effective way. He's someone who tried to apply that reasoning to his own life and found that kidney donation, it's a serious surgery and I don't think anyone should take it lightly, but the risks to the donor are significantly lower than the benefits to the recipient. He was someone who was able to go through that process and reach that conclusion. 

I'm not a robot; it took me awhile from hearing that to actually do the same thing and to come to terms with everything that entailed, but I think it was ... One of the joys of journalism is that you get to meet smart people in a bunch of different walks of life and hear interesting arguments from them. That was one that I just found very persuasive. 

Beckworth: Yeah, no, great story. And again, just a glimpse of how all in you go when you get into a topic. Fascinating story and I encourage our listeners to take a look at that. We'll put a link to that article as well as the one we're about to talk about. That one is titled, The Government Failed to Stop the Last Recession. It Can Prevent the Next One. That's where we're going to spend most of our time today. 

I want to read a quote from this article that's a few paragraphs in and you say, "There are plenty of policies that the Fed and Congress could adopt right now that will make a future recession less devastating, or even prevent one entirely. Economists and policy analysts have been proposing a bunch ever since the crash hit. 

"The basic shared premise behind the ideas is that the system failed last time. There's no reason unemployment in the US should ever get near 10 percent, and there's no reason for a recession and recovery to take so long as it did beforeBetter fiscal, monetary, and legal policy would have pumped more stimulus into the economy and gotten us back to low unemployment and steady growth earlier." 

All right, you come up with a list of nine items and we're going to work our way through them. They're in your article. Again, we'll have this article linked to on the podcast webpage. We'll work through them, but I want to ask just a basic question that may seem obvious but it's worth thinking about before we race into these nine suggestions. Why worry about recessions? What do we know about them? Why should we worry? 

It may be the case now that there's maybe some young listeners out there who maybe did not directly experience the brunt of the great recession. It was real severe, but as I get older, I find many historical experiences often are forgotten or maybe weren't fully experienced. Remind us why we should care about recessions. 

Matthews: I think the most basic reason to care is that they're events in which hundreds of billions or trillions of dollars in wealth and income go up in smoke, that if you're having a recession, it means that the output of your economy is going down and things that you could have produced, things that benefit peoples' lives, homes, services, everything, don't exist when they would have existed otherwise. That's a very obvious, sort of almost definitional thing. 

But one thing that was particularly concerning about the last recession, especially compared to recessions before, is that the recovery in terms of unemployment was longer than, in say, the early 1980's recession. That was a very severe shock that spiked unemployment to higher than it got during the great recession, but resolved relatively quickly in the course of a year or two. 

I don't have the numbers in front of me, but we didn't get down to sub-six percent employment for at least seven or eight years after the recession hit, if not longer. It was a decade-long process to return to the 2005-2006 level of unemployment. We know both intuitively, but also through a lot of research from economists and public health researchers, that unemployment's very costly. It's costly in that you have talented people who could be contributing to society who are not given that opportunity, but it's costly in that rates of suicide increase, rates of domestic violence increase, there are serious long-term health effects, and there are serious effects over the life cycle that people who graduate college or high school into a recession have lower remains over the course of their life than people who graduate during a boom time.  

That's concerning both in humanitarian terms but also in terms of equality of opportunity, that it is not due to working less hard that someone who graduated in 2009 is going to be disadvantaged relative to someone who graduated in 2006, but it can affect their life in a serious measurable way. 

You and I, I think, had saw this up close. I entered college in 2008 and by the time I left four years later, things had still not really recovered and I saw a lot of classmates and friends struggling with unemployment for long periods of time, but we're now finally at this very, very tight ... Well, I wouldn't say very tight, but there's still some slack as you and I have both seen. We're now at sub-five percent, sub-four percent, some months, unemployment and it's harder to imagine what it was like when things were as bad as they were, and also easy to move on to other topics.  

Our political system is not good at preventive measures. It's sometimes okay at responding to emergencies. They will pass a bank bailout very quickly if they think that that's needed, but we are less good at saying, "This is something that might happen in the next five or ten years. What could we do to make it less bad or prevent it from happening?" That was the goal of what I was trying to do in that piece. 

Beckworth: Yeah, very interesting piece. Let me just echo and maybe push a little bit more on the importance of the Great Recession. You've highlighted it can have long lasting, career-lasting effects, the scars can persist. Worst case scenarios, there's suicides, there's definitely health effects. I want to push this though a little bit stronger.  

I know there's debate about this and I know some of your colleagues, maybe even you have written about this, but the rise of populism, white nationalism. There's two views. One is there's this economic angst interpretation; the other one is it's just kind of latent racism that's bubbled to the surface at this time.  

I understand it's a complicated world, there's many moving parts, but I look around the world and I see populism rising in many places, not just in the US, and they all seem to arise at the same time. It's easy for me to kind of map it onto the severity of the Great Recession throughout the world. Again, there's more than just the Great Recession; there's many moving parts, but what is your take on that? Is this another reason to worry about recessions because they can give rise to movements like populism, or was it something already baked in because of globalization and other issues? 

Matthews: It's a good question. I would distinguish a bit between left and right forms of populism. 

Beckworth: Okay. 

Matthews: I think I'm persuaded by arguments of people like my colleagues Zach Beachum, also Eric Kaufmann, who's a sociologist, recently came out with a book on this that's broadly sympathetic to some forms of right wing populism but also making the argument that it's primarily about demographic shifts in Europe and in the United States.  

Those obviously aren't disconnected from economic trends. Migration flows are profoundly linked to the overall state of the global economy, but I would say that just going to the obvious 1930's example, and I should say that I do not intend to draw firm comparisons between any people and the Nazi Party. Everything is wildly different in certain important ways.  

But I think the dynamic there that I found interesting was you had this horrible economic downturn followed by a kind of crash austerity program and tight money from the German government and if you looked at who went where after that, the very poorest, the people who got unemployed, went communist and tended to vote for the German Communist Party, which is its own kind of concerning. I don't see anything ... They were not just left-wing but left-wing and aligned with a specific totalitarian state of political ambitions. That was disturbing for that reason. I don't know the firm analogy to that right now. Maybe the Chinese government might have similar proxies in the future. I'm not a specialist in that. 

But small business owners, sort of what Marx would have called the petite bourgeoisie, people who were suffering just in general but in less acute ways from the economic downturn tended to go Nazi. I think that's something I worry about as well but it's not that you suffering in the recession makes you open to brands of right-wing populism necessarily, but that the overall environment of an economic downturn, the overall panic and fear and openness to new extremes allows people who even might not be bearing the brunt of it to become more open to that kind of politics. 

So I think that's closer to what I would describe happening in, say, the Netherlands with Geert Wilders and Italy, which had a very rough recovery. But it all depends.  

I think one of the strangest things to observe is that after Greece, Spain had the worst, in unemployment terms, downturn in Europe and until just this year, they haven't had a real right-wing populist movement. They now have a right-wing populist party that is inconveniently for us called Vox that is on the rise. But I thought it was funny there that you had a left-wing populist movement but not a right-wing populist movement. 

Beckworth: Interesting. 

Matthews: So it's complex and very historic-contingent and country-specific, but I do think there's some kind of complex linkage there. 

Beckworth: Okay. Well, let's move onto your piece then. Again, you outline nine options for preventing or at least making the next recession less severe. Let's work our way through that.  

Let's start with the first one and that one is automatically pay out more food stamps when unemployment is higher. Tell us about that. 

Matthews: Sure. This is a form of fiscal stimulus. The US did an awful lot of this in 2008, 2009, first with the Pelosi-Bush stimulus and then with the famous Obama stimulus. I think there's one school of analysis. I think you hear this from Larry Summers, from Christina Romer, you heard it from Christina Romer at the time, was that there was either a forecasting error or just a failure of political ambition that made the stimulus from us smaller than it should have been. 

I think Romer, at the time, argued that it should have been about $1.5 trillion instead of $900 billion. I think the approach of automatically tying food stamps, and I think there's a similar option, tying payroll tax rates, the logic there is instead of forcing policymakers to make these forecasting decisions since we know they're very imperfect economic forecasters and it's hard, in 2009, to see where things will be in 2013, that you tie it to some objective metric of how the economy's doing. You automatically pump in more food stamp money that can boost consumption if the economy's going more slowly than you would have thought. 

Hopefully, that can also change expectations, that Walmart is deciding whether to build another store and employ a bunch more people if it knows that even if the economy's not doing great, the government will be pumping in money for people to have food stamps to spend at its stores, that might affect some of its business investment decisions, might encourage expansion. 

That's the basic reasoning there. Obviously, there are a lot of arguments against fiscal stimulus. Your colleague, Scott Sumner, is very vocal and fairly persuasive on this, but if you're of the view that it can be necessary in downturns, this is one way to make it less arbitrary. 

Beckworth: Yeah. Just to reiterate what you've said, this would be an automatic program. It would kick in whenever the unemployment crossed some threshold, right? 

Matthews: Right, right. Yeah, so maybe if unemployment is under six percent, proceed as normal, but have a five percent boost to benefits for every point above that. I don't know the optimal structure, but it would be something like that where there's automaticity. You're getting monthly data from the Bureau of Labor Statistics that can modulate how the program's operating. 

Beckworth: Yeah and you also bring up something in your piece that I wasn't aware of, that in terms of bang for the buck, funding SNAP or the food stamp program is better than some of the other forms of fiscal stimulus. Is that right? 

Matthews: Yeah, that's per analysis by Mark Zandi at Moody's who does a lot of attempts at estimating the fiscal multiplier. There's big empirical literature there and a lot of different estimates. I once heard Jason Furman, who was one of Obama's top economists, joke that they always cited Mark Zandi because he had two decimal places in his multiplier estimates. 

Beckworth: Nice. 

Matthews: I take those seriously but also not as gospel truth. That being said, I always found it notable and theoretically plausible, more importantly, that food stamps would be on top of there, that we know that the marginal propensity to consume for low income people tends to be higher. If you're living paycheck to paycheck, you're going to be saving less and spending more of each dollar you get. If the goal is to juice consumption, it would stand to reason that a program that's very targeted at low income people like food stamps might be a good way to do that. 

Beckworth: Okay. Alright, let's go onto your next suggestion and that is to automatically cut payroll taxes when unemployment rises. 

Matthews: Right. This is a very similar idea to expanding food stamps, but doing it with a tax cut rather than a cash or cash-like subsidy. 

Beckworth: Okay. 

Matthews: In the United States, there's a significant part of the population, I believe it's about 40 percent now, that does not pay federal income tax or doesn't have a positive federal income tax burden. Cutting income taxes can be stimulative, but it does exclude this portion of the population at the low end. Payroll taxes, especially for people at the bottom, tend to be a bigger share of their tax burden. 

The idea was similar to targeting for food stamps; you'd put money in the hands of people who are more likely to spend it, but also because the payroll tax is a cost of hiring someone, it might change the decision making of employers, that the after-tax compensation for their employees rises, that might make it easier or more affordable for them to find workers. 

Zandi also found this as pretty high impact. There's some empirical literature, I'm sure, around the payroll tax holiday that happened in 2011 and 2012, which was a compromise between Barack Obama and Republicans in Congress. I think one reason I included it is because they did arrive on that as a compromise, that it's stimulus, it's fiscal stimulus, which Republican administrations are often less sympathetic toward, but it's also a tax cut. There's some bipartisan appeal and it might be more politically viable than something like automatic food stamps, given that food stamps have become a very polarizing program. 

Beckworth: Yeah, that's what struck me about this propose was that it would have support probably from both sides of the aisle. Again, it's automatic, so it's not like you have to wait for Congress to tinker around and come to a decision, so it would kick in automatically. So, another interesting idea. 

Alright. Next proposal is to create government jobs. I think this is also automatic. Am I right on that? 

Matthews: Right. 

Beckworth: Okay. 

Matthews: This is another automatic fiscal stabilizer. This is an idea that's been popularized a lot by the modern monetary theory movement, which we'll be talking about in a minute. 

Beckworth: Yep. 

Matthews: But it's also one with more mainstream support. There was a small bit of the stimulus package in 2009 called the TANF Emergency Grant that gave money to state and local governments to try and do direct job creation, directly subsidizing job either at private employers or in government agencies. There's not super rigorous evidence on this, but if you do before/after studies, it appears to have created a significant number of jobs at pretty low cost and might have been one of the more efficient parts of the stimulus. 

There's always a concern with government-created jobs that they're going to allocate them inefficiently or ineffectively, but I think the depths of the Great Recession led a lot of people to look at direct job creation as maybe the most straightforward way to get where they wanted to go.  

I thought it was interesting that Kevin Hassett, who's now Trump's chief economist, teamed up with Dean Baker, who's a very vocal left of center economist, to call for more direct job creation in the midst of the great recession. I think their preferred versions of that program would be very different, but I think it was a similar part of what we're trying to avoid here is the damage that happens to people when they're out of the workforce and we have all these ways to try to change other parts of the economy to get firms to employ people, but maybe the simplest option is just to employ them directly. 

Beckworth: Okay. Just to be very clear, this program would kick in during a severe recession when unemployment goes up, and then when unemployment falls down, you would unwind the program. 

Matthews: Right, it would not be permanent feature of American government. There's a bill called the Elevate Act that the Niskanen Center helped put together that has that kind of automatic tie-in and not use funding for this during a recession. 

Beckworth: All right, your next proposal is one that comes from a guest we've had on the show recently, and that is to lower utility prices, regulatory relief. Tell us about that. 

Matthews: Yeah. This is an idea that I got from Yair Listokin, who's an economist at Yale Law School. He has a very interesting new book, you might have talked about it, in Europe. 

Beckworth: Yep. 

Matthews: Yeah, called Law and Macroeconomics. The basic idea was there are a lot of what we think of as regulatory rules and laws that affect how much money people have to spend that currently exist outside of what we think of as macroeconomic stabilization policy. How much I pay for my electric utility is not something that the Fed directly intervenes on, it's not something that Congress is worried about in recessions. 

I think the insight from Listokin is that it can affect your income, just like tax cuts, just like spending on things like food stamps. So one of his ideas is while currently utility prices appear to be pro-cyclical so that you might spend more money on utilities during economic downturns in part because there's less investment in new power plants and various other factors, to try to change regulation such that utilities are pressured to lower prices during downturns, that utilities are quasi-public entities, they're heavily regulated as it is. This is a way to introduce a quasi-tax cut without calling it a tax cut. 

Beckworth: Right. Yeah, very interesting. One of his ways to get to this point so that regulators would know to do this or judges or anybody who's in that decision making process is to have law schools start teaching macroeconomics, which I thought was fascinating. But he said, "Look, most of the politicians, many of the regulators are going to be lawyers, so they need to have some understanding of this." So it was a fascinating discussion. 

Well, let's move to your next proposal and this one may be familiar to some of our listeners, but just more debt forgiveness in the depths of a recession. 

Matthews: Right. This is an idea that was popularized a lot by Amir Sufi and Atif Mian. I apologize if I butchered the pronunciation. But two economists who were very interested in the role of deleveraging during the economic recovery, that famously, the recession came about in part because of a financial crash in trading around mortgage derivatives. You had all this mortgage debt left over from that crash. A lot of it needed to be paid off by individual homeowners, many of whom were underwater who owed more than their homes are now worth. 

Their argument is that having to pay that back and having to deleverage slowed the recovery and left them with fewer resources to spend on other things. 

This is an argument I heard a bunch during the recovery and I think I've gotten more sympathetic to as time has gone on, that I think they were identifying a trend in how people were spending their money. I think Listokin added to that that observation that the mortgage process and the bankruptcy process and the processes for deciding how much of that debt is repaid aren't just economic processes; they're legal processes and there are things that could be done to change the way that we respond to those debts in recessions so as to allow more debt forgiveness, to allow quicker deleveraging, to prioritize borrowers over lenders for that period. That might be stimulative. 

Beckworth: Okay. Well, let's move to the next one, which is going to really resonate with me, and that is change what the Fed is targeting. I think you're talking about nominal GDP targeting here. 

Matthews: Yes. Talking about nominal GDP targeting, but I would also include things like Lawrence Ball's idea to increase the inflation target from two percent to four percent. 

Beckworth: Yep. 

Matthews: His idea is very simple. The rate that the Fed is targeting really needs to be adjusted for inflation. If the rate goes to zero and they have a two percent inflation target, it's effectively a negative two percent rate. That gets you part of the way around the zero lower bound and allows for mildly negative rates that can encourage spending. But Ball's idea is if you increase the target to four percent that gives you another two percent at the bottom to get to negative rates. 

I think it's an interesting idea, but I think nominal GDP targeting is a much more ambitious plan and has a built-in mechanism to tell the Fed when it should be prioritizing price stability and when it should be prioritizing job creation and economic stimulus. We've given the Fed a dual mandate in the United States of both full-employment and price stability and there's not always a trade-off between the two, but sometimes, you need inflation to prompt stimulus. Sometimes, you might need to cool the heat around the economy to achieve price stability. Congress hasn't given the Fed a very clear explanation of when to prioritize which. 

So one of the things I like about NGDP targeting is that it is clear about how that trade-off can happen. 

Beckworth: Yep. And it's received a lot of attention. I know there's a lot of people who are enthusiastic about it. You mentioned Michael Woodford. You also mention in your piece Christina Romer. Larry Summers has come out in favor for it. There's a number of Fed officials: James Bullard, Robert Kaplan, Charles Evans. 

But one question I have and I'm going to go back to what we talked about earlier, you have that shirt and you said, "It's started some conversations with people maybe who had never heard of it before." What is your sense in terms of how it's publicly received? Do people scratch their heads? Do they get it? Is it a tough sell to make? 

Matthews: It's an easier sell than I had expected. 

Beckworth: Okay. 

Matthews: NGDP is obviously a jargony term that I think even people who know what GDP is don't encounter a lot, but if you just say, "We're trying to keep the amount of dollars being spent every year growing at a steady rate," that's a pretty straightforward idea. In some ways, nominal GDP is more intuitive than real GDP because you're really just adding all of the dollars of income or consumption or any number of any other identities. 

I found people get that but I also think, in many ways, the more important question is who in the markets gets it and who in the business community gets it since I often have conversations with very smart people who, nonetheless, aren't super familiar with how the Fed works who didn't know that there was a two percent inflation target, didn't know- 

Beckworth: Really? Wow. 

Matthews: Is responsible for targeting a specific amount of inflation. Yeah, and these are non-economists like lawyers, accountants, people outside the profession. 

The Fed's not reaching them right now, but the Fed isn't really trying to. They're trying to affect expectations and affect business borrowing and hiring and those decisions. I know there's a lot of important theoretical work around this, but I think the big question is can the Fed, by setting this target, change expectations so that the target's enough? This is something that I know you've written about a lot. I know Scott Sumner's written about it a lot. But the really promising idea is you wouldn't even need to do stuff like quantitative easing because the mere commitment would tell the markets what they need to know and induce a lot of stimulus. 

Beckworth: Yep, that is definitely the hope. And in fact, let's use that to transition to another proposal you have created because I know I have put these together, not everyone does. But you have proposed that the Fed distribute cash directly to people or helicopter drops. Tell us about that. 

Matthews: Right. I should be clear that this is a menu of policy options. I'm sympathetic to each of them but part of why I'm laying them all out there is that I don't know what the best one or best set of ones are. 

Beckworth: Yeah. 

Matthews: But I think helicopter drops have combined attractive features of monetary easing and fiscal stimulus. It's like fiscal stimulus in that you're putting money directly in peoples' pockets, but it's financed by printing money, you're not financing it by taking on direct debt or increasing taxes or cutting spending elsewhere. I think it's politically a potent idea.  

The way that they've proposed to do this is slightly bizarre, but Jeremy Corbyn in the UK, their very left Labour Party leader, has this idea called QE for the People. The basic rhetorical move that he makes is quantitative easing involves the Fed buying up all these bonds from banks so they're effectively pouring money into financial institutions. What if that money went to you instead? 

His version doesn't actually do that, confusingly. He would set up this bank to pay for other government programs using printed money. But I think it has a political appeal as a direct cash stipend as well, that the Fed is intervening and it's intervening by giving you, the voter, money. That's, of course, something some people don't like about it is that it is a kind of political maneuver and it is the Fed engaging in something that's traditionally the province of Congress. 

But I think also, part of why I'm sympathetic to it is that it's another tool in the Fed's toolkit that can make its commitments credible. If the Fed said this is something they're prepared to do, one thing that markets would get from that is they're not messing around. Even if we don't think quantitative easing is enough, even if we don't think that normally they can keep their targets, they have committed to doing something really dramatic if all else fails. 

So that's mostly why I find it interesting. I also write a lot about cash transfers as a matter of fiscal policy outside the business cycle and I think there are a lot of attractive features of them relative to more paternalistic ways of directing government spending. I find that aspect of it appealing, but I would encourage anyone listening to this to go see an old blog post that Scott Sumner wrote about helicopter drops. He is very much not a fan and I think had some of the more cogent criticisms I've read of the idea. 

Beckworth: Yes, he's my colleague and I take the other view. 

Matthews: Yes. 

Beckworth: The way I would set it up, if I were God and I could design this from scratch, I want the Fed to target nominal GDP, level target, and I would use this helicopter drop more as a backup, like as a threat like you said, to make the commitment stronger, to make the market do the heavy lifting if you knew with certainty. 

Now, maybe it might take a few tries. Maybe the Fed initially would have to send a few cash payments to people in the middle of a recession, but I think over time, there would be this learning that would go on that hey, we know the Fed's not going to ever allow deep spending collapses to occur and thus, people don't panic, they don't cut back on spending, and hoard money in the first place. That, to me, it's a question of credibility. It would come to the point where you would never really need it. It just would be there as a credible commitment device in the background. 

Well, let's move to your last suggestion and that is essentially negative interest rates. You say abolish cash, but really, it's an argument for a negative interest rate. Tell us briefly about that. 

Matthews: It is. You gotta have the snappy headlines, but it is about negative interest rates. 

Yeah, I imagine people on your show have talked a lot about the zero lower bound, the idea that traditionally, the Fed does not let interest rates fall below zero percent. I think a major reason that it's been reluctant to do that is that you have an exit option then, that the existence of cash money means that if the interest rate was suddenly negative 10 percent, so I'm losing 10 percent of my money in my checking account every year, I would take that money out and I would store it as cash under my mattress. 

One thing that we've already learned without changing anything about the nature of cash is that you can make rates slightly negative without that happening. European Central Bank has had a negative interest rate for a while. I believe Denmark has as well. 

Beckworth: Yep. 

Matthews: I believe I mentioned it in the piece. It's mildly negative and I think the intuition there is if it's negative .5 percent, it's just not worth it for people to pull cash out and try to store it somewhere, that it feels silly, but you need guards and a vault and there are costs associated with doing that. That's, I think, an interesting development that has had some positive effects.  

Miles Kimball at University of Colorado has a more dramatic proposal, which would effectively create an interest rate between paper cash and electric cash. Or not an interest rate, an exchange rate. Right now, the exchange rate between a dollar in my pocket and a dollar in my checking account is one-to-one. Under his plan, the Fed would be authorized to alter that so that it could have negative interest rates in the electric accounts. That would prevent the exit option of just pulling all of your cash. 

I think this is a cool idea with some pretty attractive features, among them that Miles claims that this could enable you to get rid of both inflation and unemployment, which is a very, "Whoa, if true." 

Beckworth: Very ambitious, yes. 

Matthews: I have a hard time understanding how it would be politically viable. I think there would be riots if you suddenly had five or six percent negative interest rates, but it's theoretically very interesting and extends how the Fed works normally to apply to even extreme recessionary cases. 

Beckworth: Yeah, I agree with you. I think the tough part of a negative interest rate tool or the adoption of that tool is political. Just look at Marvin Goodfriend's nomination was partly sunk by his past work on negative interest rates. There's a very kind of visceral, almost like negative interest rates are of the devil type reaction. 

But I would make this case and I'm not someone who's going to push for negative interest rates, but I think theoretically, you could make a compelling argument for them. This is what I tell my friends, my libertarian, right of center, free market-loving friends, and that includes myself, I say, "Look, do you believe in capitalism?" They say, "Yeah!" "Do you believe that markets are a big part of capitalism?" "Yeah!" "Do you believe prices are important to clearing markets and capitalism?" "Oh yeah!" I'm like, "Okay, well let's take that logic and apply it to interest rates."  

Sometimes, there are severe cases where interest rates have to go negative in order for the markets to clear and you want prices to do their work. You don't want wage controls. You don't want minimum wage. You don't want price fixing at the store. Why would you want this type of price fixing, some artificial constraint? 

That's the argument I make. Sometimes it works, sometimes it doesn't. But I think it's such a huge conversation, a lot of minds have to be changed, so I agree with you. It's probably a tall order to think that's going to be a big part of the solution, but I also agree with you that Miles Kimball's solution, I think, is great. 

Now, you mentioned Ken Rogoff in the paper. His solution is just get rid of physical cash altogether, which I'm very much against that. That's something I'd actually take a stand on. That'd be a hill I'd be willing to die on because I think there are certain liberty issues, certain freedom things that you want to have physical cash. I don't want everyone knowing what I'm doing with my transactions all the time. 

Matthews: Right. 

Beckworth: But with Miles's approach, it would only be during recessions so it wouldn't be all the time. As you said, effectively a floating exchange rate between cash and the money in the bank account. It's just trying to sell that because you could imagine walking into your grocery store and I'm not sure how they would implement this, but maybe the grocery store would adjust prices or tell you there's some kind of discount if you use physical cash versus digital or your debit card. 

It'd be a mess, I agree, politically, but it is a very fascinating idea. 

Matthews: For sure. I think Rogoff's idea, the main reason I'm skeptical, there are liberty issues, sure, but not least among them that, and this is probably my most libertarianish belief, I'm pretty okay with illegal immigration and think that for the most, the undocumented population is helping make America stronger and moving entirely away from cash would exclude a lot of folks on the margins of society, and in particular, provide a lot more means for border enforcement and make it harder for employers to pay with cash and employ undocumented people. That would be one of my major worries with that idea. 

Beckworth: Yeah, I think that argument applies not just to illegals, but low income people in general, even Americans, right? 

Matthews: Yep. 

Beckworth: They too operate on the fringes and sometimes they need cash to get around the system. 

What also concerns me about getting rid of dollars, physical dollars, is the role they play in the global economy. There are places that really need physical dollar cash to survive. I'm thinking of Zimbabwe. Zimbabwe had hyperinflation and it was a failed currency there, so people started using the dollar. It was a natural emergent dollar order that came about. The government finally resigned and said you could use the dollars, but the point is, people around the world will turn to the dollars if they can't use their own money system if it's not stable. We provide a public good to the world by providing physical cash and I'd hate to see that go because many places simply don't have the institutional capacity to provide their own medium of exchange. 

Matthews: Yeah. I would add to that, both Venezuela, which has a similar hyper inflationary situation, but also, there are some countries, Ecuador is probably the most prominent, where they just use the US dollar as their currency. I don't think that's a great idea because it denies them the ability to do normal monetary policy, but you should ask Ecuador before getting rid of their currency. 

Beckworth: Right! No, I agree. And I agree it ties one of their hands, but I think maybe not all Ecuadorians would say this, but many of them would say, "Look, we're willing to take effectively monetary policies set by the Fed in exchange for avoiding hyperinflation or very destabilizing regime changes brought about by ..." 

Matthews: Yeah. 

Beckworth: There's a trade-off there. Again, if they don't have the institutional capacity, maybe they're willing to put those handcuffs on. I agree, it makes me nervous, but it's a choice they've made and maybe they can change it as they are able to run their own currency. 

Well, let me ask this. We have nine items on the list. If you had to pick the top three, and you're going to play God now, you're going to pick the top three, implement them to your heart's desire and your content, what would they be and how would you do it? 

Matthews: I think I would do two monetary options. I would do NGDP price level targeting and authorize helicopter drops to give that more oomph. My hope would be that those two things are all you would need to avoid, but I think if I had to do a third one, I would add automaticity to payroll taxes. I think that would be supplementary to what the Federal Reserve is doing, but I think also, humans are in charge of the Fed. They can have a target and they can try to be credible about it, but there might be a regional bank president who is preventing the FOMC from doing what it needs to do.  

I just remember the experience of the Ben Bernanke chairmanship just being him trying to get Jeffrey Lacker and various other regional Fed presidents to accept that they needed looser policy. So I like having a physical option as a backstop in case politically the Fed doesn't rise to the challenge. 

Beckworth: Yeah, I think there's merit in that. I think one, it's literally a backstop and it's automatic so it's kind of rules-based. It kicks in automatically. But two, I think it gives the right incentives to the Fed itself, right? If you're in the FOMC and you know you're not doing your job, you're not hitting your nominal GDP level target, and you know that Treasury or some automatic fiscal stabilizers are going to kick in and effectively take the reins of monetary policy from you, I think that's a huge incentive to get your act together and get it done. 

So I think there's two ways that makes a big difference: it's a credible backstop and it also creates great working incentives for the Fed.  

We're getting short on time here and I want to ask you before our time is up, this year, the Federal Reserve is doing a big review of its policies. It's having a conference in June and in the rest of the year, there's supposed to be more discussions going on. They're looking at this very thing. They're looking at their operating system and considering things like a price level target, maybe an average inflation target, nominal GDP level target. They say everything's on the table. 

What is your sense of how serious they are about this and any sense of what direction they might be going? 

Matthews: Yeah. I'm not a Fed reporter directly so I would not claim to have special insights as to what Jay Powell is doing. I'd be very surprised if they did an NGDP target. I know Bernanke discussed that that was an idea they talked about under his chairmanship and rejected as too drastic of a move. 

I think yeah, price level target would be a very natural partial move for them. I would also put on the table something like the Evans Rule that Charles Evan, former bank president for Chicago, proposed committing to not raise rates unless inflation got over three percent or unemployment got under six percent, I believe were his parameters. The idea was to make quantitative on both aspects of the Fed's mandate.  

I know there's some folks advocating for more pro-employment Fed policy who think something like the Evans Rule is more achievable than an NGDP target and I think it would be a step forward, if a little less elegant, than relying on arbitrary lines since I think we still have some slack in the labor market and unemployment is nowhere near six percent. 

Beckworth: Yeah. Well, my hope is they actually do something and it's a meaningful exercise, not just a PR stunt. That's my concern is that this may not amount to much, but I hope it does, and I'm going to give them the benefit of the doubt. It just has seemed really low energy so far. 

Well, our time is up. Our guest today has been Dylan Matthews. Dylan, thank you so much for coming on the show. 

Matthews: It's a pleasure. 

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. While you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening. 

Photo credit: Carlos Delgado; CC-BY-SA/Wikimedia Commons

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