2013-02-10

Targeted Monetary Policy

An Idea I had while commenting on Reddit:

I think one lesson learned from this experience is that monetary policy needs to be directed towards particular sectors of the economy rather than being a broad action.

This would mean that the agency involved in setting monetary policy (a country's central bank) would actively and directly engage in important internal markets. And by engage I'm talking about buying and selling.

Of course the guiding principle should be price stability rather than making profits. A central bank can make huge profits or losses - but since it has the power of seigniorage, neither should affect it in any way (it can't go bankrupt).

It would work like this:

Let's say that an asset-price bubble appears in the share market. P/E ratios are going through the roof and people are making money simply by buying in the morning and selling in the afternoon.

The Central Bank would then directly enter the market by selling shares - shorting. This process would continue until P/E ratios begin to drop to realistic levels.

**Of course one important factor is that the share market would know and expect a direct entry into the market by the central bank once p/e ratios began getting too high. Knowing that the central bank would respond would affect their own behaviour and thus the market would end up being self-correcting**

Apply this same principle to asset price bubbles in other areas of the economy, such as property, resources, etc. ie any sector which is undergoing substantial growth and which constitutes a significant portion of the economy. The Central Bank would not act if the sector of the economy is very small, for example.

Also apply this same policy tool to achieve a reverse effect when prices are low and getting lower.

2013-02-03

The US Gun debate - a problem in terminology

The image to the left is very clear. It says "No Guns". It is a symbol used by those on the Anti-Gun side of the current firearms debate in the US.

And it appears that the Anti-Gun lobby has some populist weight behind it. Poll after poll of Americans show clearly that they disagree with the arguments and logic of the Pro-Gun people, and want stricter laws, stricter background checks and bans on certain types of weapons.

But there's a problem here with terminology. The "Pro-Gun" people are called "Pro-Gun" because they support the 2nd Amendment, they support the right of people to buy and use firearms. What the phrase "Pro-Gun" does not support is the idea that people can buy their own personal tanks, surface to air missiles or nuclear weapons. Yet the phrase "Anti-Gun" is problematic, because it does not adequately reflect the ideas of those who wish for stricter laws. You see, for someone to be "Anti-Gun" means that they are against guns. Get rid of all guns, remove them from people's homes, etc etc etc. This is not the point of view of the (majority of) opponents of the "Pro-Gun" side.

Here in Australia we have laws against civilians owning assault rifles (automatic and semi-automatic) and other weapons that are the domain of the military. We allow people to buy and use handguns, though with a restriction on the amount of bullets they can carry. We also allow people to buy and use hunting rifles. Although our per capita gun ownership is a couple of magnitudes lower than the US, we still have people owning guns and, while we do have some level of firearm violence and misuse, the per capita numbers are very low.

And you know what? I think Australia's gun laws are pretty good. I don't think there's a need to tighten them. I'm happy that people can't purchase AR-15s but I would be unhappy if people were unable to purchase handguns. You see I have no problem with the idea of people owning a handgun or shotgun for home defence - some parts of Australia are quite remote and police response time would be measured in hours, not minutes. These people need guns. Farmers need rifles to shoot pests and put down sick animals. A metally fit and law-abiding citizen may choose to own a handgun. I'm happy for these people to have access to these firearms. But to have less restrictive firearms laws here would be a mistake. I'm happy where things are - they should not move either one way or the other.

So as you can see, while I support all reasonable means to reduce gun violence in the US - and this includes tightening access to certain firearms and banning others outright - I'm not "Anti-Gun". I don't wish to disarm the community completely, and I do not wish that Americans would universally disarm either. Yet the debate seems to be between those who are "Pro-Gun" and those who are "Anti-Gun". As a result, one of the arguments that the Pro-Gun side has used is the spectre of disarming a country and turning into tyrrany and to Nazism - which fits in very well with all the right wing garbage about Obama being the Muslim Kenyan Socialist Communist Nazi Black Panther that the completely ignorant and arrogant and easily confused eat up every day.

In essence, it's a straw man. The more radical and unhinged Pro-Gun side scream that the commies are gunna take their gunz, disarm America and give it over to the godless United Nations (probably headed by the Antichrist), with Jews, Blacks and Gays taking turns to rape and slaughter good Americans. But that's not what Obama is trying to achieve; it's not what I'm trying to argue, and it's not what the majority of Americans would want either. Having stricter gun laws does not mean universal disarmament and an eventual Communist takeover.

But it's easier to be labelled as "Anti-Gun" rather than "Stricter and more sensible gun laws".

2013-02-02

Government Contracts and Money Velocity - an adjunct to fiscal policy

Fiscal Policy is used by governments as a way of expanding or contracting an economy. Such a policy occurs during the business cycle, whereby a fiscal expansion is enacted when the economy is slowing, and a fiscal contraction is enacted when the economy is in danger of overheating. Traditionally, Fiscal Policy requires legislation to be passed to increase or decrease spending, or to increase or decrease tax rates. Fiscal Policy is problematic in that it becomes a political issue, rather than an economic one. In order for fiscal policy to enacted quickly and properly, political influence must be somehow reduced, and the effects of the policy need to be broadened rather than aimed at a narrow area of the economy.

One solution to this is to ensure that government contracts - the money that governments pay the private sector for providing various goods and services - are given variable payment dates. Usually, when one business purchases goods and/or services from another business, payment for these goods and services is often delayed for a time. One example of this delay would be an invoice that is payable 30 days from the end of the month of the invoice. In this case, an invoice dated 15th May would be due on 30th June. Such invoicing arrangements are common in the private sector. One advantage that this system brings the buyer is the chance to build up liquidity - by delaying payment for a time, the company has an increased cash flow. This invoicing system, therefore, affects Money Velocity - the speed at which money travels through an economy. Increased money velocity is linked with economic expansion and inflation, while reduced money velocity is linked with economic contraction and deflation.

Since governments in Western countries are the largest economic and business entities in their respective economies, the way in which a government pays its bills to the private sector can have a huge impact upon an economy's money velocity.

The process of paying back money owed to the private sector can thus be used as a form of Fiscal Policy - with money being paid back to private suppliers sooner or later depending upon the state of the economy. Once legislation approving this policy is passed, all government contracts from then on would be subject to variable payment dates depending upon macroeconomic need. Payment dates for invoices would be moved from the original date - paid sooner for expansionary policy; paid later for contractionary policy.

As an example, let us assume that a government department agrees on a contract with a private business for the supply of stationary. As this government department buys from this business, the standard invoice (as an example) is 30 days from the end of month of the invoice.  Now let us assume that the economy needs expansionary policy. As a result of this, the invoice due date changes to 15 days from the end of month of the invoice. Thus the stationary company ends up with its money sooner, thus increasing the velocity of money. Now let us assume that, instead, the economy needs contractionary policy. As a result of this the invoice due date changes to 45 days from the end of month of the invoice.

There are a number of advantages to this model:

  1. This policy would fall under the scope of "automatic stabilisers" in the sense that any changes needed to the economy can be enacted straight away.
  2. There would be less need for legislative debate amongst politicians about if and how changes to government spending should be made (in the case of debating Keynesian stimuli)
  3. The effects of the policy will be broad - affecting the areas of the economy which deal directly with government contracts.
  4. The policy will be budget neutral - it would neither increase or decrease a budget deficit in real terms over the course of the business cycle.
  5. It does not replace current Fiscal Policy, but rather adds to it and may even reduce the need for such policy over the longer term.
  6. The government department responsible for enacting this policy need not be secretive but can operate faithfully in full view of the public. There is no reason for hiding information for the sake of national security - this needs to be the case given the chance that those who benefit from government contracts could attempt to corrupt the decision making process.
Important points to consider:
  1. Size of government: will the effect on the economy be bigger if governments are bigger (as a proportion of GDP)? Will the effect be smaller if the government is smaller?
  2. Should this system include welfare payments and payments to government employees? (I think not, but it is a point to discuss)
  3. How much should the government department reponsible for this policy be allowed to be influenced by central bank information? Should the Central Bank be responsible for this policy, and enact it along with Monetary Policy?
  4. Would such a policy function well in a single-currency area like the Eurozone?
  5. Would such a policy function well for non-national governments, such as state governments and municipalities?
  6. What should be the natural limits of this policy? Could super-expansionary policy involve paying for goods and services before they are supplied or even ordered? Could super-contractionary policies involve debt default?
  7. How would such a policy affect governments who purchase goods and services from foreign suppliers?
  8. Should some private sector suppliers be exempt from this policy? (I think not, but it is debatable)