Build some infrastructure with these taxes. In this case, also massive investments towards improving productivity. That’ll put the money to good use and at least prime the pump for recovery, and private businesses do not seem willing or capable of doing that.
But you also have the problem of those dollars then going towards labor and materials, which will keep demand there high, continuing inflationary pressure in those areas.
Unfortunately it seems to be a pipe dream in most countries I know.
> But you also have the problem of those dollars then going towards labor and materials, which will keep demand there high, continuing inflationary pressure in those areas.
Yes, and I am not sure there really is a solution to that. I guess hiking interest rates would cause a shift from debt to the new income stream, but it would be complex as ideally you’d still want lower rates to stimulate investment. Probably an increase in corporation and capital taxes as well, but then I might as well wish for a unicorn.
I'm usually a Keynesian, but in this case, i think we should jack up interest rates and deliberately tank housing and asset prices, then use large scale infra investments to stop the unemployment rate rising too high.
Easier said than done, i suppose.
I am mostly with you, but “deliberately crashing housing and asset prices” is political suicide and I don’t see it happening. Interest rates are a good start, though.
Also, I think that considering the current labour shortages the risk of unemployment getting out of control is limited.
I do fear the fed isn’t doing what it needs to because they’re afraid of being seen as political, one way or the other. I hope we don’t have to wait until after the midterms for them to grow a pair.
I agree and I wish this mindset would disappear. Of course a central bank is political. It’s job is to keep a working economy. There are few other institutions that affect directly so many people every day, it’s the definition of politics. They might not like the optics, but each of their decision is just as political as one from any government agency.
There is some sense in insulating them to some degree from short-termist elected politicians looking for a windfall, but their smug “I know better” attitude (and the lack of accountability) is deplorable.
Sorry, that was a bit of a rant, but we should remember that a central bank is there to serve a country, not the opposite.
The Fed tends to be restrained because the monetary policy levers they have been given are deliberately a blunt instrument with extreme overshoot dangers, especially when all the indicators aren't pointing the same way, and managing the economy requires the much more targetable tool of fiscal policy controlled by Congress as well as monetary policy.
(That said, the Fed is pushing, by historical standards, really hard on its levers, raising rates at a pace not seen since 1980.)
If they raise the interest rates anywhere close to the rate of inflation a lot of the 3rd world will have a Sri Lanka style crisis.
This is also a failure of the Fed to raise interest rates when times weren't bad. Interest rates should have been at 2% before inflation started taking off, but people were addicted the cheap, almost free money but they didn't want to give it up.
This works because having interest rates at the rate of inflation will cause more people and businesses to slow down their spending as they feel like they aren't losing money by not spending it.
I believe the Keynesian approach to fix high inflation is to just raise tax rates to get money out of the economy.
I believe this doesn't work as well because the extra tax dollars are then spent by the government, which are them competing for goods and services, though probably in different areas, but it's still keeping that money in the economy which will keep prices high. The only way I could see this working is if the extra tax money was used to pay down debt, which I doubt anyone in the US government would do.