Star Trek: The Next Generation was never shy about tackling the tough issues, usually in the form of allegory involving alien races. The program has only increased in relevance in the almost two decades since it’s been off the air, spawning an entire generation of psychotic fans, of which I am one. Today I’m going to speak to its relevance in regard to macroeconomic policy. Just bear with me.
A liquidity trap is a special sort of economic quagmire that a country can get itself into. Economist Paul Krugman has been vocal in his claims that the US is sinking/has sunk into the same liquidity trap that Japan has been in for over a decade. A liquidity trap is when low interest rates/influxes of cash, one of the classic Keynesian solutions to a recession, are rendered ineffective due to a belief held by businesses, consumers, and investors that the new money will be taken out of circulation once the recession subsides. This leads firms and individuals to hoard the money that has been put into circulation, instead of investing it and thereby increasing economic activity, which is the central aim of loose monetary policy.
As Krugman has noted in the past, countries that get caught in liquidity traps do so primarily because of their reputation for monetary responsibility. In Zimbabwe, he says, people expect the government to print money to pay its bills. As a result, the currency that it prints circulates with abandon. In contrast, Japan, the United States, and Europe will keep the money they print to stimulate the economy in circulation only as long as needed. When they finally tighten monetary policy, the purchasing power of the currency will increase, as will long term bond yields; looking ahead to this situation, many thus opt to hold onto their cash. This explains why the Fed was able to triple the monetary base and have a negligible effect on inflation and, ultimately, growth.
The USS Enterprise happened to find itself in a similar situation a few years back (a few centuries forward in Trekkie time). In the episode “Booby Trap,” Picard et. al. encounter a Promellian cruiser that had been lost centuries ago in battle against a sneaky species called the Menthars. At first the crew is overjoyed to have found such a relic, but it soon becomes apparent that they have become ensnared in the same ingenious trap that vanquished the Promellians. The trap was designed by the Menthars to redirect ships’ energy emissions back to them in the form of harmful radiation–thus, the harder the Enterprise fights to escape the trap, the graver the danger.
The Enterprise’s conundrum can be seen as analogous to a liquidity trap. In both cases, the more power (money) expended in attempts to escape the trap, the more entangled we become. Now, perhaps it is a stretch to claim that cash-hoarding is the same as lethal radiation, but it actually has similarly pernicious social effects in the long run. Cash-hoarding prevents the economy from running at its full capacity, which hurts people that need companies to hire them–sarcastic young women with Spanish degrees, to take a completely random example. The economy’s potential capacity is shrinking every day that machinery and wo/manpower sit unutilised. It’s as if our society were being bombarded with lethal radiation!! And the longer a loose monetary policy is followed, the stronger the belief of investors that a tightening is just around the corner, thus making them even keener to hold onto their cash. Mark Carney seems to have a great understanding of this mentality, and rightly advocates the practice of promising to keep rates low for a specific time period. He’s also a fan of chastising firms for sitting on cash. I am a fan of him. This seems to be getting off topic.
Of course, loosening monetary policy is essential in times of recession, and is certainly not the cause of the trap. (Though some economists wrongheadedly argue that monetary policy of any kind is detrimental.) It is also debatable whether increasing the monetary base is further miring us in the trap, though many see catastrophic inflationary consequences in the future. The truth is that economic policy looks a lot like trial and error to me: shockingly little can be predicted of the effects of policies until they are tested in the real world. But this is beside the point; mostly because nothing can stop me from making this about Star Trek, but also because what happens next is very interesting.
Once Chief Engineer LaForge realises that the expenditure of power is only feeding the Menthar trap, he devises a way to shut off almost all power. Picard then manages to maneuver out of the trap using just one thruster (don’t ask me what that means–the point is that they use hardly any power) and Picard’s exemplary navigational skills.
I am not suggesting we cut the power, as that goes against my not yet fully formed but strong economic belief system. This solution was right to end the stagflation of the late 1970s, but this is a completely different picture. Obviously, new solutions must be tried. Perhaps one of the macro-prudential tools everyone has been so intent on lately will provide the answer. Either way, central banks/governments must find their “single thruster”; that is, the low-energy unit of propulsion that will allow us to manoeuvre out of the trap and to a place where monetary policy will again be effective. Policy-makers will throw their hands up at the crazy Star Trek lady, saying I’m asking them to find the equivalent of the proverbial purple unicorn (I just made that up). But the growing popularity of Bitcoin shows that people are losing faith in their governments’ and central banks’ ability to manage currency effectively, and this should be addressed. Paul Krugman has been adamant about the need for more fiscal stimulus–it is, in fact, highly likely that fiscal stimulus is the purple unicorn! It’s so simple that no one dares to believe it will work. Instead of putting cash into circulation and trusting investors and firms to use it productively, the government should perform this function until faith is restored. Governments held hostage by their own erroneous perceptions of how bond markets will react to the increased debt load that fiscal stimulus would necessitate need to cool it. The moment a nation’s policy is dictated by investors, it ceases to be sovereign–if the situation is as the excuse-makers claim, then perhaps they need to stop and really think about the implications of what is happening here.
There are two more lessons from this Star Trek episode that policymakers would do well to keep in mind. The first has to do with Picard’s taking the helm. The Enterprise’s escape from the trap required the firm and decisive, not to mention skilful, manoeuvring of which only Picard was capable. When this approach is contrasted with the bumbling and ineffectual efforts of US Congress and the European Commission, one can begin to see why it is so difficult to get anything done around here! I am not suggesting we get ourselves a dictator (and in fact it is very important in this climate to be especially vigilant of potential despots, as this is the situation in which they thrive), but governments in the US and overseas are engaging in internecine bickering that only exacerbates their economic woes. We must call on Picard to lead us. Just kidding…kind of.
The second lesson is that the first thing Geordi did when disaster struck was to reconfigure the warp engine. The parallel to this in our current predicament is REFORM REFORM REFORM. Pumping money into an inefficient system will result in the money being ineffectually allocated, or possibly transmitted back to us in the form of lethal radiation. The US has to get serious about regulating its financial system, and the EU needs to divest itself of about 10,000 pounds of red tape, in addition to resolving all the other various political and banking issues that I won’t get into here.
The overarching lesson from Star Trek episode 6 of season 3 is that radiation will reach lethal levels if we don’t change the way we’re handling this recession. In the show new solutions were reached and it was possible to manoeuvre out of the trap using a combination of ingenuity and unconventionality, not to mention Lieutenant Commander LaForge’s special bond with that lady engineer. If we were to take these lessons and apply them to our liquidity trap, I predict that we would deftly coast from sub-optimal to optimum economic performance in no time at all.