Robert Samuelson is skeptical

Economists seem split into two camps. Some, such as Paul Krugman, the New York Times columnist, believe the economy is so weak that the government should do almost anything (bigger deficits, more cheap credit) that might help slightly; and others, such as Meltzer, fear that expedient measures now will lead to bigger problems later. Between them, there’s an unstated common presumption that there are no instant cures for the economy’s lethargy. The real Fed, it turns out, is much less powerful than the mythologized Fed.

There may be limits to what the Fed is willing to do. It sometimes hard to workout the arcane language of the Federal Reserve Act, but there are definitely limits on what the Fed is legally allowed to do. However – for our purposes – there is no limit to what a Central Bank has the power to do.

Right now we are talking about the Fed purchasing government bonds in an effort to drive down yields. The limit to this is obviously when the Fed has purchased all the available government securities. However, in theory the Central Bank does not have to stop there. It can begin to buy private bonds. Indeed, it need not stop there, it can buy stocks. Indeed, it need not stop there, it can buy output directly. That is, the Fed could simply go to Wal-Mart and say – I’ll take half your inventory.

Now, I am sure that much of this is beyond the power of the Federal Reserve Act. And of course, I don’t endorse these measures.

I believe the Fed has enough credibility that when it promises to meet the long-run price path that this alone will get corporations and banks off of their cash. However, lets suppose that Bankers and CFOs have been reading too much Robert Samuelson and doubt the Fed’s power.

There is still a trump card. The Federal government can suspend the payroll tax, can raise the standard deduction to 100K, can double the earned income tax credit, can triple food stamp provision, can federalize Medicaid and raise eligibility 800% of the poverty line. It can run deficits out the wahzoo and the Federal Reserve could buy all the debt.

Is there anyone who believes that this wouldn’t induce inflation? Is there anyone who believes that inflation won’t induce banks and businesses to get off of their cash?

Regardless of whether Federal Reserve and the Federal Government should take these measures, can we at least agree that it has the power to induce spending?

If we can at least concede that then we can go back to talking about careful and measured steps to raise inflation expectations.

We don’t have to waste time in the giant game of chicken where the Samuelsons of the world refuse to move out of their nearly zero-yield CDs because they think the government is somehow powerless to create inflation.