Federal Deficit
Hello Dr. Kelton.
I heard you on an interview with Matt Klein on Alpha
Chat and read the article you wrote with Scott Fullwiler. You had some very thought provoking things to
say in particular regarding the forgiving student loan debt and Federal
deficits. I have a questions / thoughts
to which I hope you would be willing to respond.
First, if you take the overdraft approach rather than T-Bill
approach to funding deficits you remove from the Fed the discretion of
exercising monetary policy. That is, you
take away from them the option of doing QE and putting money in the economy and
later perhaps reversing QE, selling the T-Bills and taking money back out of
the economy to potentially slow it back down if needed. You move monetary policy to the
treasury. You’re just changing who
controls at least some aspects of monetary policy. Do you think the treasury / executive branch
is in a better position to do that? I
believe many would argue that keeping monetary policy in the hands of a
quasi-independent Fed is a good check on politicians who may use the ability to
push money into the economy eventually bringing about high and detrimental
inflation. How would respond to that
concern?
Second, during the podcast you said, “If you run budget
deficits that exceed the capacity of the economy to keep up with any demand
that’s being created by stimulus from the deficits the results are inflation.” Are you recommending that the federal
government run deficits funded by over drafts / “new money” until the U. S.
economy hits a certain inflation target?
Say, 2% or 3%. What target would
you pick? Also, once you hit that target
would you advocate that the government begin to issue debt again until the
inflation rate drops below the target?
In this regiment who decides when to fund deficits with “new money” and
when to fund deficits with debt?
Or alternatively, are you suggesting that the Federal
government never issue debt in the future but always fund deficits with new
money. In this case, it seems like you
would fully couple fiscal policy with monetary policy and when you see
inflation arise in order to address it the federal government would have to run
a surplus until inflation is back under control. Based on past experience it seems unlikely
that congress, which is largely responsible for whether we run deficits or
surpluses, has or ever will have the economic savvy or discipline to manage
federal spending in this way. Are you
advocating this approach? And if so, how
do you address the concern of the Congress lacking the ability to manage fiscal
/ monetary policy in this manner effectively?
Finally, I got hung up on your discussion in the Alpha Ville
article from 2013 on interest on reserves verse interest on Treasury
bills. I was having a hard time
following your argument. I finally
reached the conclusion that your point with all that was there is very little
point in preferring one form of interest payment over another, lending support
to our suggestion that spending be supported by overdrafts. Please correct me if I got that wrong.
If you have gotten this far, thanks for taking time to
consider my note. I really appreciate it
as I know that you must be quite busy.
Thanks,
John Christopher
