Research

Populist politicians, among others, have claimed in recent years that monetary policy is too easy and that it is hurting ordinary workers.   But raising interest rates is not the way to address income inequality.It is a strange claim for anyone to make, but especially for populists.  Low interest rates are good for debtors, of course, and bad for creditors. Throughout most of US history, populists have supported easy monetary policy and low interest rates, to help the little guy, against bankers, who had hard hearts and believed in hard money.

As the G-7 Leaders gather in Ise-Shima, Japan, on May 26-27, the still fragile global economy is on their minds.  They would like a road map to address stagnant growth. Their approach should be to talk less about currency wars and more about fiscal policy.Fiscal policy vs. monetary policyUnder the conditions that have prevailed in most major countries over the last ten years, we have reason to think that fiscal policy is a more powerful tool for affecting the level of economic activity, as compared to monetary policy.

Markets can fail.  But market mechanisms are often the best way for governments to address such failures.  This has been demonstrated in areas from air pollution to traffic congestion to spectrum allocation to cigarette consumption.    Markets for emission allowances - in which those firms that can cheaply cut pollution trade with those that cannot - achieve desired environmental goals at relatively low economic costs.   As of a decade ago, that long-standing economic proposition had become widely recognized and put into action.

On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the European Union.   China agreed to constrain its exports to a minimum price and a maximum quantity.   The solution is restrictive relative to the six-year trend of rapidly Chinese market share (which had reached 80% in Europe), and plummeting prices.  But it is less severe than what had been the imminent alternative:  EU tariffs on Chinese solar panels had been set to rise sharply on August 6, to 47.