Re: C-span hearings

["LYNN TURGEON, PROFESSOR EMERITUS OF ECONOMICS, HOFSTRA UNIVERSITY, ECOELT@xxxxxxxxxxxxxxxx" <ECOELT@xxxxxxxxxxxxxxxx>]

Per, Wouldn't the goal of zero real interest represent the euthanasia of the
rentier? What about less developed countries? Wouldn't they be expected to
require higher real interest rates? I seem to recall that Keynes thought that
capital markets should be national rather than international. Lynn

From:	IN%"pkt@xxxxxxxxxxxxxxxx" 28-JUL-1997 11:41:54.88
To:	IN%"pkt@xxxxxxxxxxxxxxxx"  "POST-KEYNESIAN THOUGHT"
CC:	
Subj:	RE: C-span hearings

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 28 Jul 1997 11:41:48 -0400 (EDT)
 28 Jul 1997 09:37:17 -0600 (MDT)
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Date: Mon, 28 Jul 1997 17:37:39 +0200
From: Per Gunnar Berglund <pgb@xxxxxxxxxxxxxxxxxx>
Subject: Re: C-span hearings
Sender: owner-pkt@xxxxxxxxxxxxxxxx
To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
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Lynn:
	The prevailing monetarist orthodoxy in matters of interest policy seems to
completely overlook the supply-side aspect of interest policy. They keep
stressing that tight money can be used to hold back aggregate demand, and
thus to curb inflation.
	Post Keynesians, on the other hand, keep stressing the demand side aspects
of the economy, but paradoxically, when it comes to monetary policy, PK
economists seem to be more aware about the cost-push impact of interest
rate hikes than the monetarists.
	When considering the short-term impact of interest rate hikes, I tend to
hold the PK view. Clearly the first effect will be increased interest
costs, for business in general and for housing in particular (the latter
goes directly into the CPI by owner-occupied housing imputations).
	In the longer perspective, however, there seems to be a great deal of
truth in the monetarist point of slower aggregate demand growth causing
general economic slack and pressing down prices and wages. Of course it is
unacceptable "curing" inflation by badly hurting the real economy.
	Still, I think that the purely microeconomic, allocative aspect of
interest rates has been overlooked, not only by monetarists but also but PK
economists. One of the most important functions of credit is to bring human
(H) and real capital (K) together. The unequal distribution of real capital
ownership creates the economic potential, in the form of productivity
gains, by "levelling out" the individual K/H ratio.
	The productivity gain must exceed the capital cost for this kind of
agreements to be erected. Obviously, the lower the (real) capital cost, the
larger the amount of K/H-levelling contracting. At zero real interest
rates, the amount of contracting will reach its maximum, thus maximising
the productivity gains to be made from this kind of transactions.
	The mere capital cost effect on aggregate supply is far too small, I
think, to motivate the great importance generally (and rightly) attached to
real interest rates. When this allocative effect is understood and added,
we have a far more weighty argument for the importance of keeping real
rates low. Indeed, we could argue that real interest rates, from the
allocative point of view, ought always to be zero.

Best,
Per


Per Gunnar Berglund
Lilla Sallskapets vag 60
127 61  SKARHOLMEN
SWEDEN

Voice/fax +46-(0)8-883065




----------
Lynn Turgeon wrote:
> On Saturday, July 26, C-span ran hearings on monetary policy that were
very
> interesting. Our Jamie Galbraith was very effective, along with Robert
Eisner,
> in presenting a Post Keynesian view. Perhaps Jamie could post his paper.
The
> main point is to look at real interest rates and realize that they are
still
> very high (even indexed bonds at 3 percent real interest are three times
higher
> than the average before 1980 and Reagan-Volcker boost in real interest
rates.)
> Instead of arguing when nominal federal funds rate should go up, we
should be
> pushing for decrease in ffr. The problem is that it isn't difficult to
imagine
> the reaction of Wall Street to this change in policy. Why not raise
margin
> requirements to prevent runaway animal spirits?
> 	Note July 4th issue of London Economist, p. 29, for article on
> spreading of local money (LETS) to Montpelier, Vermont. This movement
tends to
> thrive in areas of high unemployment (Ithaca, Great Britain, Canada,
Australia)
> and puts local resources back to work. Lynn
>
>