November 20, 2013
Elizabeth Warren (Alex Wong/Getty Images)
Elizabeth Warren (Alex Wong/Getty Images)

For weeks now, a debate has unfolded among Democrats over just how economically populist a posture the party should strike going forward. The unofficial spokesperson for what you might call the “economic justice” wing of the Democratic Party has been Elizabeth Warren, whose signature issues are at the center of this debate: Wall Street accountability, financial reform, stagnating middle class wages, the need for an end to austerity, and now, the push to increase Social Security benefits.

But this debate has been mostly silent on another key area that should be central to any serious new economically progressive agenda: Monetary policy.

This is important, because as Ben Bernanke explained in an important new speech, there is nothing that has more influence over the state of the labor market than monetary policy, and current policy has proven sadly inadequate to our ongoing unemployment crisis. During normal times, the Federal Reserve uses the control of interest rates to adjust the economy. If unemployment is too high, then it lowers rates to spark additional loans and spending. If inflation is too high, it raises rates to slow loaning and spending. But in 2008, the Fed lowered rates all the way to zero — the dread “zero lower bound” — and has been stuck there for five years. Their replacement unconventional policies, while preventing outright depression, haven’t sparked a return to full employment.

The problem, stated in its simplest form, is not enough spending in the economy. Here’s a brief menu of policies that might be considered for Democrats from the “economic justice” wing:

* At the left-most end of the spectrum: We could enable the Federal Reserve to send new money to every American citizen until full employment is restored. If people have more money they will spend more. Simple as that. This policy is somewhat reminiscent of the platinum coin in that its biggest problem is it sounds silly.

* We could abolish paper money and thus allow negative interest rates (because if the Fed tried to reduce rates below zero now, people would just hold cash). That would force people to spend money, as any nominal savings would be slowly evaporating. This combines the political implausibility of the free money solution with serious substantive objections.

* We could adopt a higher inflation target. If inflation is higher, then interest rates are higher (by definition), and the liquidity trap is harder to hit. This isn’t quite as powerful a solution, and nominal creditors (i.e., rich people) will hate it. However, the Fed could simply decide to do it, without requiring any changes in the law.

* We could adopt a nominal gross domestic product target. This is all about working the expectations channel, the idea being that if the Fed is sufficiently committed to stabilizing NGDP then demand shocks (like a burst housing bubble) show up as a short bout of inflation rather than mass unemployment. (Israel seems to have this down.) The Fed could simply decide to do this one as well.

* We could abolish central bank “independence.” This isn’t a policy change per se, but note that the previous two options are just decisions from the Fed, not changes in law. The Fed is very hard to hold democratically accountable under its current form; if it were a simple cabinet department like the Treasury then it would be much easier to get at, so to speak.

Pretty much all of these things would be heavy lifts, politically. But this is the most important economic policy issue of our time. The zero lower bound is highly likely to plague us for an untold period of time if nothing changes, but there is no consensus about what to do to fix it. Democrats who want to see a new economic populism take hold within the party should coalesce around one or more of these solutions, and start pressing for change.