Why did the US government develop all sorts of policies, regulations, tax breaks, etc, which tended to subsidize the real estate industry? Most smart people respond “special interest politics.” OK, so why does Washington keep pressing China to raise its exchange rate, and why did they press Japan in earlier decades? After all, even Paul Krugman admits that a weak yuan doesn’t hurt the US unless we are at the zero bound. And yet this sort of mercantilism has been official US policy for decades. Smart people will tell you that it’s special interest politics—the political influence of the US manufacturing lobby.
But there’s a conflict here. The same US policies that boosted the housing industry, also tended to enlarge our current account deficit—hurting manufacturers. So which is it? Does the US government want a big CA deficit, or not? My theory is that this question doesn’t have an answer, because governments don’t have brains. They don’t have preferences or opinions. They are stupid. Yes, there is someone nominally in charge, but does anyone think Bush or Obama keeps track of all these indirect effects? Just thinking about it makes one realize the preposterous nature of many “special interest” explanations for policy failure.
Some commenters tell me that it’s obvious why the BOJ has a tight money policy. It pushes nominal interest rates to zero, which keeps borrowers like the Japanese government afloat. Others tell me that it’s obvious that the Japanese policy of deflation favors the lenders, the old people who have saved a lot. So which is it? And why aren’t we talking about real interest rates?
Some people tell me that the Fed policy of 2009-10 had the effect of steepening the yield curve, allowing the banks to make money by borrowing short and lending long. Others tell me that Operation Twist, which flattened the yield curve, tends to boost the value of T-securities held by banks. Some people tell me that the Fed’s tight money policy is all a plot to help the “rentiers” who live by clipping coupons. But when the government does QE I’m told that it’s a right-wing plot to help fat cats by boosting the price of securities.
All this seems silly to me. It’s not a zero-sum game, as rich people hold both stocks and bonds. I’m almost certain that the Fed’s (post-2008) tight money policy has hurt low income people, middle income people, and rich people. It’s hurt wealthy people who hold of stocks, and it’s reduced the real interest rate on T-securities. It’s forcing states to reduce benefits to public employees, and it’s depressing the value of 401k retirement accounts for people like me. It’s hurt the job prospects of many low-skilled workers. It’s depressed the value of people’s homes, and their businesses. It’s depressed the stock prices of the big banks.
Given that academic economists clearly don’t have a clue as to what went wrong, why is it such a stretch that government policymakers might be similarly confused. Are they really that much smarter than academic economists?
Also note that these nefarious special interest groups only seem to come out of the woodwork when rates hit the zero bound. Thus they didn’t take control of Australian monetary policy in 2008. And I’d add that monetary policy didn’t seem to change when Obama took office, so these mysterious special interest groups presumably control both our political parties.
Or maybe it’s all just a terrible mistake.
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