What Is Pushing On A String?
Pushing on a string was a phrase coined as a metaphor for the limits of monetary policy and the impotence of central banks in regards to stimulating an economy.
- Pushing on a string refers to exerting effort where it will not be useful in that particular context.
- In economics, pushing on a string was first used to describe central banks trying to enact loose monetary policy when there was already slack in the economy, resulting in little to no results.
- Pushing on a string has come to be used as an argument for expansionary fiscal policy to take over as the main tool to raise an economy out of recession
- The term has been attributed to economist John Maynard Keynes, although the phrase was apparently first used in congressional testimony in 1935.
Understanding Pushing On A String
Pushing on a string is a figure of speech for influence that is more effective in moving things in one direction rather than another—you can pull, but not push. Monetary policy sometimes only works in one direction because businesses and households cannot be forced to spend if they do not want to. Increasing the monetary base and bank reserves will not stimulate an economy if banks think it is too risky to lend and the private sector wants to save more because of economic uncertainty.
In economics, pushing on a string specifically refers to a situation where expansionary monetary policy is ineffective at raising an economy out of a recession. Since the demand to hold cash is effectively unlimited so that additions to the supply of money and credit are simply added to the cash balances of financial institutions, businesses, or consumers (or used to pay down debt), and do not result in any increase in aggregate demand or multiplier effect. This situation is known as a liquidity trap, where the market can absorb unlimited amounts of new liquidity into the precautionary cash holdings of market participants regardless of how low interest rates are pushed.
Because these circumstances render expansionary monetary policy powerless to stimulate an economic recovery, the analogy of pushing on a string is used as an argument for expansionary fiscal policy to take over as the main tool to raise an economy out of recession. To extend the analogy, if the money supply is the string that the central bank is (unsuccessfully) pushing on, then it is up to the fiscal policy makers to "pull" on the other end of the string by directly boosting aggregate demand with new government spending in order to restore confidence and boost private spending of cash balances through the multiplier effect.
While the phrase "pushing on a string" is often attributed to British economist John Maynard Keynes, there is no evidence he used it. However, this exact metaphor was used in U.S. Congressional testimony in 1935, when Federal Reserve Governor Marriner Eccles, echoing the phrase uttered by Congressman T. Alan Goldsborough, said there was little the Fed could do to stimulate the economy and end the Great Depression:
Governor Eccles: Under present circumstances there is very little, if anything, that can be done.
Congressman T. Alan Goldsborough: You mean you cannot push a string.
Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and...beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery.
Pushing On a String Example
The pushing on a string metaphor was relevant during the 2007-2008 Financial Crisis, when early efforts to stimulate the economy appeared to produce little results. The Fed had allocated trillions of dollars toward quantitative easing (QE) and also lowered the federal funds rate to near zero percent.
At first the Fed appeared unable to produce demand out of thin air because households—burdened with debt—increased their savings rate. Monetary policy appeared desperate and futile, with the increase in money supply in the U.S. offset by declining money velocity. Hence, the Fed was pushing on a string.
Household debt fell until 2013, but rebounded to a record level of $14.15 trillion at the end of 2019. Some believe that quantitative easing and low rates managed to stave off disaster—though we will never know how much better or worse the crisis would have been without these efforts.