The End of History: Why the Fed will fail

In 1989 Francis Fukuyama made a bold prediction.  The world would become increasing democratic and market-oriented.  Other political models would gradually wither away.  He called this “The End of History.”  Here are a couple facts about his prediction:

1.  It would be difficult to find any other prediction in the humanities or social sciences that has proved more accurate.  There are many more democratic countries than in 1989, and policy has become much more market-oriented in most countries.

2.  When intellectuals discuss his prediction today, 99% assume it failed to come true.  Indeed most utter the phrase “the end of history” with undisguised contempt.

The juxtaposition of these two realities has made a deep impression on me.  How can we explain why so many brilliant people have failed to acknowledge Fukuyama’s prescience?  In some cases people were too lazy to even inquire as to exactly what the term ‘end of history’ meant.  In other cases they were too mesmerized by what they saw on the evening news. After all, doesn’t it look like “history is being made tonight in Libya”?  In fact, history is probably (knock on wood) ending in Libya.  For the rest of my life it is unlikely that I’ll ever know the name of another Libyan leader.  At least I hope not.

My theory is that it looks very much like history is not ending, if you rely on impressions, not facts.  After all, the cable networks are increasing able to bring political strife into our living rooms, which would have been invisible in past years.  I’m old enough to remember major strife in various parts of the world receiving zero coverage on TV.  Massacres in Africa.  The Cultural Revolution in China.  Pol Pot.  The 1982 massacres in Hama.  The list could go on and on.  The world seems increasing violent, even as it becomes increasing peaceful and democratic and market-oriented.   

How does this relate to the Fed?  Here are two facts about monetary policy.

1.  Economic theory strongly suggests that NGDP falling 11% below trend in the last three years has severely depressed real output (regardless of what other factors might have also depressed output.)

2.  Economic theory strongly suggests that the Fed could have prevented this sharp slowdown in NGDP growth.  Interestingly, the Fed agrees.

The implication is that Fed errors of omission caused much of the Great Recession.  Yet very few economists believe that.  No matter how powerfully theory and empirical evidence point in one direction (the end of history, the Fed’s at fault) if it doesn’t SEEM THAT WAY, even very bright intellectuals will go with the gut, and then invent whatever theoretical rationales they need to make their prejudices plausible.  Policy impotence.  A Fed capable of unlimited money creation is somehow incapable of debasing the dollar.  Structural problems.  Even though unemployment didn’t rise significantly during the big housing crash of January 2006 to April 2008, gosh darn it that housing crash must be to blame for 9% unemployment, because it seems like it’s to blame. 

Imagine the FOMC were composed of 12 Spock-like characters, brutal logicians devoid of any biases.  Ruthless in their reasoning.  Then they might have been able to devise an effective response.  But FOMC members are not Vulcans; they are flesh and blood humans, subject to all the usual biases.

I’m not asking the Fed to do any more than it’s technically capable of doing.  But alas, I am asking it to do more than it’s humanly capable of doing. 

That’s why the Fed will fail.  Oh, they might do something useful, make things somewhat better.  But there is no chance that they will do what Spock would do. 

Part 2.  What is the minimum acceptable action?

I don’t want to end this post on such a downbeat note.  Here’s Jim Hamilton:

I would suggest that the more important and achievable goal for the Fed should be to keep the long-run inflation rate from falling below 2%. The reason I say this is an important goal is that I believe the lesson from the U.S. in the 1930s and Japan in the 1990s is that exceptionally low or negative inflation rates can make economic problems like the ones we’re currently experiencing significantly worse. By announcing QE3, the Fed would be sending a clear signal that it’s not going to tolerate deflation, and I expect that would be the primary mechanism by which it could have an effect. Perhaps we’d see the effort framed as part of a broader strategy of price level targeting.  .  .  .

And while I’m offering predictions, I might as well make it a triple. If events do take this turn and Bernanke does act again, he’ll be the subject of personal political attacks even more vicious than we’ve seen so far. But I expect the Fed chair to go ahead with the policy in those circumstances anyway, because he knows it’s the right thing to do. I could even imagine the Texas Governor delivering a rousing speech, praising in his appealing drawl those who have the courage to make a personal sacrifice for the larger good.

But I don’t expect the Governor to include in such a speech recognition of one person who deserves such praise.

So both Hamilton and Greg Mankiw have suggested a price level target with a 2% trend growth rate.  These are both highly respected moderates who don’t shoot from the hip like I do.  They both praise Bernanke.  I see this as a real test for Bernanke and the FOMC.  If the Fed won’t even do this little amount . . .   Something that would not require tearing up the (implicit) 2% inflation target and replacing with another number.  Something that would anchor the price level and remove any lingering fears of high inflation.  A policy that could be defended even if the Fed didn’t give a damn about unemployment at all, if the Fed lacked a dual mandate.  If they won’t even do that much, then the Fed will have abdicated all responsibility.  

Even the Hamilton/Mankiw proposal would represent failure, relative to what the Fed would be expected to do if rates weren’t stuck at zero.  But at least it would be something (unlike Operation Twist, which seems like nothing to me.) 

PS.  I think Hamilton got a little ahead of himself in the final sentence.  I’d replace “deserves” with “would deserve.”

Update 8/23/11:  I just saw that Matt Yglesias has a similar observation.  Maybe my 99% comment was hyperbole.


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65 Responses to “The End of History: Why the Fed will fail”

  1. Gravatar of adam adam
    21. August 2011 at 16:16

    On The End of History (1) and (2):

    I think (1) is a bit wrong because the whole thrust of his argument was that the argument that liberal democracy was the best form of government was over, and it had won. I believe China’s model is now seen as a challenger to that, so I’m not quite sure how much (1) is true.

    On (2), I think that’s more the lazy pseudo-intellectuals and news writers than actual intellectuals ;)

  2. Gravatar of marcus nunes marcus nunes
    21. August 2011 at 16:25

    Scott
    I put the odds of the Fed doing something “meaningful” at 40-1 (just off the cuff):
    http://thefaintofheart.wordpress.com/2011/08/21/%E2%80%9Cuncertainty%E2%80%9D/

  3. Gravatar of George Selgin George Selgin
    21. August 2011 at 16:46

    I know that Fukuyama’s thesis isn’t the main point here, but it seems to me that whatever merit his predictions may have had, his equating the struggle between capitalism and socialism (or whatever names you like) with “history,” as if “history” coincided with the Cold War (the rest presumably being pre- and post-history), is bizarre–and reason enough for “intellectuals,” including genuine historians, to roll their eyes when they hear his title earnestly referred to.

    What’s more I have always had the sneaking suspicion that books like his (and other “histories of everything” like Jared Diamond’s) owe their appeal in large part to large numbers of people who are happy to read them and then think, “Phew, thank got now I never have to read any more of that stuff!”

  4. Gravatar of George Selgin George Selgin
    21. August 2011 at 16:46

    I know that Fukuyama’s thesis isn’t the main point here, but it seems to me that whatever merit his predictions may have had, his equating the struggle between capitalism and socialism (or whatever names you like) with “history,” as if “history” coincided with the Cold War (the rest presumably being pre- and post-history), is bizarre–and reason enough for “intellectuals,” including genuine historians, to roll their eyes when they hear his title earnestly referred to.

    What’s more I have always had the sneaking suspicion that books like his (and other “histories of everything” like Jared Diamond’s) owe their appeal in large part to large numbers of people who are happy to read them and then think, “Phew, thank god now I never have to read any more of that stuff!”

  5. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    21. August 2011 at 16:53

    You are deluding yourself about Fukuyama. He was totally wrong. When 99% of smart people disagree with you, it’s a good idea to spend some time thinking why is that.

    What was the last important change that happened in the world as a result of democratic voting? I seriously cannot name any. How is the world becoming “democratic” exactly?

    And world economy is closer to a mix of state controlled hybrid capitalism of China and other Asian countries on one side; and bankers and assortment of oligopolies dominating state on the other side.

    History keeps going on.

  6. Gravatar of JTapp JTapp
    21. August 2011 at 16:56

    Reading Murray Rothbard’s The Mystery of Banking, I have found that Austrian models acknowledge aggregate demand, sticky prices/wages, and the ability of the central bank to boost AD by increasing the money supply. If you ignore all the “rises in price are evil” stuff, the book reads like a Sumner book would– there is plenty of monetary policy discussed without the lens of interest rates. It appears to me that the Austrians also would have to accept a price level target as having the ability to stimulate aggregate demand (and an increase in quantity supplied). Any Austrian-leaning folks out there willing to point out any errors in this post I wrote exploring it? (Thanks!)

  7. Gravatar of W. Peden W. Peden
    21. August 2011 at 17:00

    The main thing I have learnt from history is that, contra Marxists and contra Hegelians like Fukuyama, history does not give us a true story about the future.

    In 1975, as Britain suffered from weak governance, 25% inflation, galloping socialism, a loss of credibility in democratic institutions and had growth that could not support the standard of state welfare to which the populace had become accumstomed, a flaky commentator called Samuel Brittan wrote an article on how democracy had reached an impasse. His reasoning, which is doubtless familiar, was that electorates would never willingly suffer the costs of bringing inflation under control and would eventually willingly give up their freedom in the pursuit of painless “solutions”. Hayek had similar, though less certain, opinions during this time.

    Four years later, Margaret Thatcher would be elected. For the next 18 years, control of inflation became the main official goal of British economic policy and very high unemployment rates didn’t stop the electorate returning the Conservatives time after time. Electorates were clearly more disciplined than Brittan had anticipated.

    I am very suspicious of grand narratives, because they tend to be supported more by selection rather than rigorous testing. There are people who will claim that the last 22 years have shown that Marx was right all along. We can say that democracy has proven to be surprisingly resilient FOR NOW, but we shouldn’t forget that there is nothing natural or commonplace about democracy.

    Equally, did anyone have predict the Great Moderation in 1979? The consensus among those who knew their stuff was that some sort of semi-arbitrary rule (a k%-rule, a Gold Standard, an exchange rate mechanism etc.) was necessary to constrain policymakers. I’m still not entirely convinced they were wrong.

  8. Gravatar of Policy Wank Policy Wank
    21. August 2011 at 17:23

    You haven’t yet commented on the two people that Obama has nominated to the Fed. If he can somehow get them confirmed through the Senate then maybe the stance of Fed’s policy could loosen.

  9. Gravatar of Gene Callahan Gene Callahan
    21. August 2011 at 18:33

    I’m with George. Fukuyama was doing silly, pseudo-history.

  10. Gravatar of cassander cassander
    21. August 2011 at 18:52

    Even if Fukayama is right about market democracy, all societies age, and as they age they get more brittle, less adaptable, and acquire more cruft. Nothing lasts forever. Eventually it will all fall apart, and history will resume.

  11. Gravatar of Bob Murphy Bob Murphy
    21. August 2011 at 18:57

    Scott Sumner wrote:

    …and policy has become much more market-oriented in most countries.

    Scott, do you agree is has become much *less* market-oriented in the United States? I mean, a few years ago, the idea that the federal government would nationalize banks and car companies, and own a huge fraction of all mortgages would have seemed impossible.

  12. Gravatar of cassander cassander
    21. August 2011 at 19:13

    Bob> I’d say our deregulatory wave ran out in the late 90s, since then it’s been downhill.

  13. Gravatar of MTD MTD
    21. August 2011 at 19:56

    Scott – I think the largest impediment to the Fed acting more forcefully is due to the perception – false in my view, but firmly entrenched nonetheless – that QE1 and QE2 precipitated a surge in oil prices or “bad” inflation. With RGDP stalling in 1H11, that perception is even firmer. The association between the QEs and surging crude and commodity prices is of course the source of the venomous attacks on Bernanke from the extreme right as well. It’s a shame because NGDP or level targeting would be strongly resisted on similar grounds. Perhaps China will falter enough, soon enough, to give Bernanke a bit more flexibility. It shouldn’t be this way, since commodities of all stripes we’re rising rapidly from 2002-2008 before any QE from the Fed, but I’m afraid it is. And that’s a problem.

  14. Gravatar of dirk dirk
    21. August 2011 at 20:11

    Dude, best theory on the FOMC yet.

  15. Gravatar of marcus nunes marcus nunes
    21. August 2011 at 20:16

    MTD
    You´re right. “False perceptions” are a bummer. I argued some months ago that the surge in commodity prices was a “chinese affair”:
    http://thefaintofheart.wordpress.com/2011/02/06/bernanke-and-higher-food-commodity-prices/

  16. Gravatar of MTD MTD
    21. August 2011 at 20:37

    Thanks, Marcus, your China charts are very compelling!

  17. Gravatar of Morgan Warstler Morgan Warstler
    21. August 2011 at 20:50

    1. End of History: once again we agree.

    2. 2% and Rick Perry making hay are perfectly consistent with AN12.

    CLEARLY, the point of “treason” is to make sure the Fed DOES NO MORE THAN 2%.

    Look, in politics you only need to win 51%; we don’t need unemployment at 12% to beat Obama, we just need to make sure he’s not running around taking credit.

    Matty’s crowd thought they were catching Perry admitting something by saying “playing politics” – see! Perry knows it would help!

    Let me show you the response, “yes, and….”

    Perry was setting up that ANY fed activity is both SMALL and GETS THE CREDIT, so Obama doesn’t.

    Perry isn’t dumb, he knows the stock market will go up when the Fed prints money. He got in front of it, and DISCREDITED that growth before it even happens.

    NOW AGAIN, we see what I have been saying is true: If you people want aggressive Fed action, you HAVE to make sure Obamaa’s policies get NO CREDIT.

  18. Gravatar of woupiestek woupiestek
    22. August 2011 at 00:03

    I don’t think it is just a question of impression versus fact. Political models are religions and faith is more important than reason or facts. Of course believes shape impressions, but that is just a transition mechanism. People express their opinions to earn the respect of fellow believers with frightfully little interest in being correct.

  19. Gravatar of Martin Martin
    22. August 2011 at 01:41

    @Bob, I think you have to understand this thesis as the EMH, you’re using the strong form, that is that all countries will become right of center neo-liberal democracies. Scott is using the weak form of this thesis, that is that (parliamentary) democracy will triumph.

    Given recent events in North Africa and the Middle East and the events of the last two decades I can’t deny that Fukuyama has been right so far.

    - The trend for democracy as a form of government has been positive.

    More countries have become democracies than countries that have reverted to something else. I believe even that more people now live under a democractic regime than before.

    - Rhetorically even dictators or mild authoritarians now pretend that they’re close to democratic.

    did so many Arab leaders bother with faking elections? Why does Chavez pretend he’s a democratically elected leader? Why does Khadaffi still pretend that the people love him?

    The thesis cannot be rejected based on the past two decades.

  20. Gravatar of Martin Martin
    22. August 2011 at 01:44

    @Bob, before I forget, didn’t Mises argue something similar? That all forms of government, totalitarian or not are based on the consent of those governed?

  21. Gravatar of Rien Huizer Rien Huizer
    22. August 2011 at 02:29

    Peden,

    Grand narratives sell because (1) they are fiction with a reality element and (2) they simplify complex and sometimes threatening reality and as such may be inspirational or therapeutic. And some disciplines are more likely to tend towards this type of work product than others. Traditional historians have a choice between unreadable monographies or entertaining rides like Ferguson or Schama. Obscurity or fame. Politics scholars too: look at the commercial success of Huntington once he started to talk about clashing civilizations.

    TV has something similar to grand narratives: reality shows: not pure fiction/acting, not something that requires excellence. Not cops and robbers with actors and not sport with elite athletes. My own grand narrative could be that politicians tailor their performances and themes in a different way since the arrival of reality shows and their socializing effects. And a handful of unintended consequences that will change our lives. Only, it will not sell. It would be fiction with a grain of truth.

    But I bought Fukuyama’s book a long time ago and only remember that I did not like it at all. Maybe now is the time to enjoy it and maybe not in the way meant by the author.

    So, Scott, write a book about how NDGP targeting using NDGP futures will make us richer than the Arabs and more numerous than the Chinese, rather than a making a list of relevant posts for the convenience of bloggers. It could change the world and make you rich..Just make sure you hire a fiction writer to make it interesting.

  22. Gravatar of James in London James in London
    22. August 2011 at 02:43

    For three years you have been (mostly) complaining that the Fed has not done enough to boost NGDP. Surely the Governors’ fear, my fear, many people’s fear, is that they might go too far and overshoot on NGDP and have high inflation.

    Of course this couldn’t happen if the Spocks were in charge, but could easily happen in the real world, given how “incompetent” you think they currently are, or possibly how pressurised currently you think they are by other misguided stakeholders.

    What would the world be like if they had overshot due to “incompetence” or possibly stakeholder pressure, and instead you had spent three years saying that the Fed could easily reduce NGDP growth, it has the tools, it’s just not using them, etc, etc.

    This counterfactual needs to be considered as a risk, and helps explain why they seem reluctant to act today. You constantly ask what relevance the lack of fiscal prudence has for monetary policy, well it is a good signal for the pressure that might come from those same stakeholders not to reduce the growth in NGDP if it had indeed overshot on the upside.

  23. Gravatar of Claudia Sahm Claudia Sahm
    22. August 2011 at 03:12

    In David Wessel’s book in Fed We Trust, he discussed ‘blue sky’ email exchanges at the Fed during the financial crisis in 2008…no reason to give up yet on American institutions and their ability to be creative when they need to be.

  24. Gravatar of John Thacker John Thacker
    22. August 2011 at 03:36

    When 99% of smart people disagree with you, it’s a good idea to spend some time thinking why is that.

    Tomasz Wegrzanowski, you’re making the same argument that people who attack NGDP arguing make. It’s a good thing that Scott is stubborn.

    Scott has spent time thinking about why people disagree with Fukuyama. By any objective measure of the facts, war and deaths from war have decreased, economies have liberalized, and democracy is spreading. There is a firm trend line over many years, and it has not reversed in the last twenty but rather continued.

    Hegelian Historical inevitability has some things wrong with it as an outlook, but at least the facts match what Fukuyama said. I would have no problem with people complaining about Fukuyama’s explanations of the reasons, but “experts” are as bad as laypeople when it comes to actually knowing the facts about the spread of democracy, decrease in war, etc. (And about the facts about improving environmental indicators in the US and elsewhere, for that matter.)

    Regarding Rick Perry, while he’s wrong, at least he was debating a real and important issue (perhaps the issue), instead of the sort of nonsense people like their politics to be about. In my optimistic dreams, Perry’s comments cause intellectuals to become more in favor of monetary stimulus, simply to dissociate themselves from him.

  25. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2011 at 03:50

    The end of history is capitalism, and Democracy exists as long as it support it.

  26. Gravatar of Mike Sandifer Mike Sandifer
    22. August 2011 at 04:22

    Bob Murphy,

    You write as if this is an old style nationalization, when it seems little could be further from the truth. This was an economic emergency, and whether you agree with this specific action, it seems amazingly blind to paint it as some kind of ideologically socialist policy. Have you extremist libertarians no nuance?

    By the way, I would have preferred outright government seizure of the relevant financial institutions with all stakeholders being wiped out and then privatization that perhaps could have even proved profitable in terms of government revenue.

  27. Gravatar of Mike Sandifer Mike Sandifer
    22. August 2011 at 04:27

    I don’t think that capitalism in the future will necessarily be recognizable as such. We are just entering an age of the automation of thought and intellectual creativity that could mean the marginal productivity of most labor increasingly approaches 0.

    No, marginal productivity = 0 is not on the visible horizon yet, but it’s on the map. As a result, the world will appear very socialistic in the future, if it displays much humanity at all.

  28. Gravatar of Doc Merlin Doc Merlin
    22. August 2011 at 04:47

    @JTapp

    As most economists agree:
    1) you can’t affect long term AD via monetary policy, but
    2) you can affect short term AD via monetary policy

    The Austrians would agree, yes, you can boost short term AD by goosing money, however the Austrians would say that this is a terribly bad idea. Because in order for both to be true, it means the transition between the short term and long term becomes much, much more painful when you boost the short term. The Austrians would say that if you goose short term AD you prevent necessary reallocations from happening which will cause intensified difficulties later on.

    So they agree that in the short term monetary stimulus “works” they just think it makes things way worse later on.

  29. Gravatar of Scott Sumner Scott Sumner
    22. August 2011 at 05:04

    Adam, No China’s model is not seen as a serious challenger to liberal democracy. It’s only a matter of time before China becomes democratic. I remember when people said exactly the same thing about Taiwan and South Korea. When China becomes rich it will become democratic.

    Remember that China is a dictatorship lacking human rights, with mass poverty and a per capita GDP similar to El Salvador. It has horrible environmental problems. It’s not a attractive model at all.

    In any case, none of this has any bearing on whether Fukuyama’s prediction was correct. It was–and people should give him credit.

    Marcus, Those are the odds of it doing the right thing. But in my view there are somewhat higher odds that it will do something meaningful, albeit not enough.

    George, I don’t follow your argument. I don’t think Fukuyama argued history began with the Cold War, although it’s been a while since I read his book. His book is full of older history.

    In my view he should never have used the phrase “the end of history” although I don’t place any importance on that decision. It’s his analysis that matters.

    Tomasz, You said;

    “What was the last important change that happened in the world as a result of democratic voting? I seriously cannot name any. How is the world becoming “democratic” exactly?”

    It is not the purpose of democracy to produce important changes. Important changes tend to occur in non-democratic countries, like China under Mao. I don’t know if you realize this, but the number of democratic countries (by any definition you care to choose) has increased dramatically since 1989. That’s even true if you throw out every single borderline case. That’s “exactly” how the world is becoming more democratic.

    You said;

    “And world economy is closer to a mix of state controlled hybrid capitalism of China and other Asian countries on one side; and bankers and assortment of oligopolies dominating state on the other side.”

    I don’t see how this is in conflict with Fukuyama’s hypothesis. He wasn’t predicting that countries would become libertarian, he predicted mixed economies. And China is far more market-oriented than in 1989, so even the one specific example you use to refute Fukuyama, actually strongly supports his point.

    JTapp. Yes, the Austrians definitely believe that monetary policy has real effects. They are sort of anti-Keynesians in how they interpret that fact, however. Keynesians want to end the business cycle by filling in the valleys. Austrians want to lop off the top of the booms. (Of course that’s an oversimplfication–Austrians also want to avoid secondary deflation, but I think it does get at their different mindsets.)

    W. Peden, I think your comment points to the reason why many think Fukuyama was wrong. People don’t like Grand narratives–for good reason. So we tend to assume his predictions must not have come true–as they were based on a grand narrative. But they did come true, probably much more quickly than Fukuyama himself envisioned. (He saw it as a long term process.)

    Policy Wank, I’ve done many posts criticizing Obama for leaving the seats empty for so long–it was easily his biggest mistake as President. I don’t have strong views on the two individuals–at this point what matters is more people, not their precise views. I assume they’d support Bernanke if he pushed for more stimulus. If he didn’t it won’t happen over his opposition.

    Gene, See my reply to George.

    Cassander. Fukuyama never argued anything lasts for ever. Even the universe may end some day. Any pundit is addressing the “foreseeable future.”

    Bob, I never viewed those things as unthinkable. We basically nationalized the liability side of the banking system in 1934. We nationalized lots of train companies in the 1970s. Banking has never been a free market in the US. I recall when bank interest rates were set by the government.

    I don’t know whether the US is more or less market-oriented overall. I know that the various economic freedom rankings (Heritage, Fraser) show the US getting significantly freer after 1980, and then retreating slightly in recent years. They’ve had time to do a much more complete look than I have, and I have no reason to question their findings.

    MTD, I hope the Fed doesn’t have that view (that more AD is contractionary) or we are doomed. But the public may look at things that way. In fact, higher oil prices are generally correlated with stronger growth, which is why oil prices have recently fallen sharply.

    more to come . . .

  30. Gravatar of Scott Sumner Scott Sumner
    22. August 2011 at 05:26

    Morgan, I mention The End of History and you immediately pivot to Rick Perry. Is there any issue that doesn’t involve Rick Perry?

    woupiestek, Good point–very Hansonian.

    Martin, Good points. And consider that in 100 years the world will have 3 billion more adults (many old), and no more children. Aging societies become dramatically less violent–so the trend will continue.

    Rien, I’m not surprised you didn’t like the book, I am surprised when I meet people who did.

    James, Unemployment is a far more serious problem than mild inflation, so I wouldn’t be horrified if they overshot to 3% or even 4% inflation–although I’d prefer 5% NGDP targeting.
    With TIPS spreads available in real time, there is no risk of high inflation unless the Fed wants it. And I think it would be the understatement of the century to say they don’t want it.

    I’m not saying the Fed is incompetent, I’m saying their target is too conservative.

    Claudia, Were there any interesting monetary stimulus ideas during those blue sky exchanges?

    John Thacker, Yes, I’m not at all discouraged by hearing 99% of people disagree with me, unless they have good reasons.

    For instance, during 2008-09 I often discussed the need for monetary stimulus with other economists. I kept getting questions about whether there was anything the Fed could do. But when I pressed them to explain their belief in monetary impotence, their arguments faded away as rapidly as a snowball on a July afternoon. They didn’t have any good reasons.

    Mike, You said;

    “I don’t think that capitalism in the future will necessarily be recognizable as such.”

    I agree, but nevertheless I expect it still will be capitalism.

    Doc Merlin, So Hayek is not an Austrian? In the 1970s he said the Fed should have provided more monetary stimulus in the 1930s.

  31. Gravatar of David Pearson David Pearson
    22. August 2011 at 05:46

    “In fact, higher oil prices are generally correlated with stronger growth, which is why oil prices have recently fallen sharply.”

    Oil prices have recently fallen with growth expectations, but there is a bigger picture. First, focus on Brent, which is the basis for most crude purchases, including those made by U.S. refiners.

    Brent traded at about $75 pre-Jackson Hole. Today, despite arguably lower global growth expectations, a quiet mid-east, and the overthrow of Qhaddafi, Brent trades at $108. What accounts for the higher price?

    BTW, you can argue that QE successfully raised the price level, or you can argue that QE had little impact on food and energy prices; but can you argue that both are true?

  32. Gravatar of Mike Sandifer Mike Sandifer
    22. August 2011 at 05:51

    Scott,

    Obviously I can’t speak for Tomasz, but there seem to be a lot of people who are very cynical about claims like yours because they don’t think there are many healthy major capitalist democracies left. I often hear comments that even most developed countries have essentially sold out to big business and the wealthy, pointing to polls that are often dead set against economic and social policies being pursued which hurt even the majority of citizens in some cases.

    These views are perhaps overstated, but are not without truth. There really does seem to be a great deal of conflict over much of the world now between average citizens and what are at least seen as crony capitalist governments and their sponsors.

  33. Gravatar of Mike Sandifer Mike Sandifer
    22. August 2011 at 05:52

    Scott,

    Yes, I agree it’s still capitalism.

  34. Gravatar of Zamba Zamba
    22. August 2011 at 05:55

    Scott, okay, capitalism won the debate. But which form of capitalism? I mean, the world is becoming more liberal in terms of business environment, acceptance of international flows of capitals, international trade, more flexible labor laws, etc (maybe not US or Europe lately, but probably the rest of the world). But what about government spending? I think we are going to see developing countries ending up more like Denmark, Sweden, etc… not Singapore. Isn’t democracy the natural road to social-democracy? Is it possible for libertarians to implement their policies with people’s support?

  35. Gravatar of David Pearson David Pearson
    22. August 2011 at 05:57

    BTW, the recent drop in China PMI’s points to a potential hard landing there. Markets are concerned that high China inflation might cause the PBOC to withhold stimulus. This confluence of events (accelerating inflation, decelerating growth) was arguably not anticipated by markets pre-Jackson Hole. If China were the major driver of the oil price increase, Brent would be below $75.

  36. Gravatar of Chris Brennan Chris Brennan
    22. August 2011 at 06:12

    Sumner has joined the Colbert Nation when he says, “My theory is that it looks very much like history is not ending, if you rely on impressions, not facts.”

    http://www.colbertnation.com/the-colbert-report-videos/24039/october-17-2005/the-word—truthiness

    “Truthiness is a ‘truth’ that a person claims to know intuitively ‘from the gut’ in that it ‘feels right’ without regard to evidence, logic, intellectual examination, or facts. American television comedian Stephen Colbert coined the word in this meaning as the subject of a segment called ‘The Wørd’ during the pilot episode of his political satire program The Colbert Report on October 17, 2005.” http://en.wikipedia.org/wiki/Truthiness

  37. Gravatar of W. Peden W. Peden
    22. August 2011 at 06:45

    “I think your comment points to the reason why many think Fukuyama was wrong. People don’t like Grand narratives–for good reason. So we tend to assume his predictions must not have come true–as they were based on a grand narrative. But they did come true, probably much more quickly than Fukuyama himself envisioned. (He saw it as a long term process.)”

    Certainly, many of his predictions have come correct. Contrary to some other people’s predictions, communism has never recovered from the collapse of 1989. Traditional fascism is even more moribund. Radical Islam has proven to be incapable of spreading to previously non-Islamic areas and has had all the properties of a reaction rather than a revolution.

    But none of these predictions is going to make me trade my “The Poverty of Historicism” for a copy of Hegel’s “The Philosophy of Right”. It’s no accident that Fukuyama, Marxists and other historicists are at their best when predicting exactly just what happened…

    Zamba,

    In 1945-1980, the idea that the state might manage the economy was taken to be almost axiomatic by most people. These days, the primary function of most states is as pay-as-you-go national pension schemes. This is the part of state intervention about which people have proven to be least amenable to libertarian arguments.

    Fortunately, I don’t see Social Security/National Insurance as roads to serfdom, despite their numerous faults. There is a real and insurmountable tension between a centrally planned economy and liberal democracy. I don’t think that the same tension exists between the pension fund state and liberal democracy.

    As for social democracy, I suspect that democracies will tend to fluctuate between social democracy and market liberalism. Social democracy is a powerful force until the burden on taxpayers becomes too much; market liberalism is a powerful force until affordability doesn’t become a constraint on the expansion of welfare.

    In this sense, the incentives of democracy make both ideologies rather self-limiting: if market liberalism creates a dynamic economy, then there are strong incentives to use it to pay for greater welfare; if social democracy succeeds in expanding the provision of the welfare state, then it eventually creates an intolerable burden on taxpayers. So just as there has been a recent move towards social democracy in the US, there has been definite movements away from social democracy in much of northern Europe.

    I suspect the recent wave of American social democracy will be very short-lived because of America’s debt burden. Every society is eventually forced to choose between guns and butter; in the case of America, they’ve had both guns and butter for too long and for some time they will have less of both.

  38. Gravatar of George Selgin George Selgin
    22. August 2011 at 06:48

    Scott, while it’s true that in his original essay Fukuyama wrote, “What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government,” it’s perfectly clear that he considers all those pre-Cold War “chapters” a mere prelude to the climactic struggle that precedes the “end” of the story. But however much Fukuyama may grudgingly concede that there was in fact some “history” prior to 1947 or so, his insistence that history is coming to an end, and his underlying assumption that the only “story” with which history is concerned is that concerning “mankind’s ideological evolution [sic],” mark him as someone with a very poor grasp of the discipline whose demise he announced so prematurely.

  39. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2011 at 06:53

    More on 1 of the 2 real Fed problems, the housing front / shadow inventory:

    “In other words we have more homes in foreclosure or that are 50 percent underwater than we have of actual previously owned homes (non-distressed) that are looking to be sold. This is the core of the issue and it has been this way since the beginning. If you can pull your memory back to 2007 and 2008 much of the bailout talk revolved around putting mechanisms up for clearing out the shadow inventory. Whatever happened to that? The financial industry used a Trojan horse ploy to funnel money into their system while still keeping these properties on their portfolio. Why? Consider it double dipping.”

    http://doctorhousingbubble.com/never-ending-pipeline-of-shadow-inventory-homes-in-foreclosure-while-another-2000000-are-underwater-by-50-percent/

    http://doctorhousingbubble.com/housing-apocalypse-tomorrow-675000-homes-in-foreclosure-no-payment-in-over-two-years/

    Placed here because someone is needed to see how we get to 12M, and because Scott shows NO signs of blaming the Fed for its greatest travesty – robbing the guys with dry power of their pay day.

    On the 2nd problem that the Fed had better solve the Tea Party’s way (and they know it)…

    Scott, you still have NOT answered my point:

    Since YOU ADMIT Rick Perry becoming President will lead to the greatest possible chance at GIANT Fed support AN12….

    Why are you not actively campaigning for Rick Perry?

    —–

    Here is the logic:

    You advocated for the greatest amount of fiscal structural reforms we can get.

    On Fiscal reform Sumner is a RADICAL.

    Sumner AGREES that the more aggressive the Fiscal Reforms are, the more aggressive Fed policy is likely to be.

    Sumner AGREES that AN12, we are far more likely to get real Fed action.

    Sumner AGREES that the GOP / WSJ will radically advocate Fed easing the moment they have seized the reigns of power and have made hard core cuts to government.

    THEREFORE, Sumner’s logical course of action is to advocate for QE now, SCREAM for giant Fiscal reforms, and hope that the most aggressive Fiscal reformer will take over Nov. 2012.

    It makes no sense for you to support anyone other than Rick Perry…. altho Paul Ryan would be ok too. And Mitt Romney is better than Obama.

  40. Gravatar of StatsGuy StatsGuy
    22. August 2011 at 07:33

    @Morgan

    Perry made a strategic error calling attention to Bernanke so directly. The message was already there, but he made it public, and by doing so called everyone attention to the fact that the Republican strategy is to prevent a recovery.

    That doesn’t mean Perry won’t win, but it was dumb. It actually allowed Ron Paul to cast himself as a moderate.

    http://www.politico.com/news/stories/0811/61609.html

    BTW, among the republican field, I like Huntsman. He probably has no chance.

    Scott,

    I have few clues about Jackson Hole. My suspicion is that Bernanke needs evidence of a stronger AD collapse to justify a QE3, and oil (WTI) is still >75, and Brent is still way over 100. Last year, we had some preliminary disinflation, but we haven’t gotten that yet (largely due to expectations of QE3). The market is actually killing itself, or being killed by the Fed, as the Fed takes hints of the market’s expectation of Fed action as evidence to justify Fed inaction – this would be OK if there weren’t 6 weeks in between Fed meetings. It’s broken, my friend.

    I don’t now that I understand operation twist. I suspect that it would be a lot more effective IF the Fed already held a much larger portfolio of govt debt AND IF it drops the IOR. In essence, if the Fed is selling short and buying long (which is what banks do), it’s depressing the return on long bonds (forcing banks to invest elsewhere, or hold on reserve). This could help force banks to lend out (especially if IOR was dropped), AND it were to effect a transfer to the Treasury. In essence, look at the difference in rates on the 30 year and 1 year. If the Fed moves a trillion dollars from 1 year (no return) to 30 year (3.85?? return), then that’s an annual transfer of 35 billion or so – not a pittance, but not huge. If the Fed already owned 5 trillion, and conducted Twist on that scale, it would effect a much larger fiscal transfer (which can essentially be considered monetization, or at least an absorption of future nominal GDP growth risk).

    Anyway, I generally expect to be underwhelmed. This Fed, much like Obama, rarely does anything on a big enough scale to matter. Listening to Obama’s plans for a “major jobs bill” is depressing. Not because I think whatever bill they come up with will be great, but simply because it conveys a lack of appreciation for the magnitude of our situation in general (and I expect that lack of appreciation extends throughout DC).

  41. Gravatar of StatsGuy StatsGuy
    22. August 2011 at 07:39

    Scott, one more subtle point:

    You’ve in the past suggested that world growth (AD) is good for the US. Let me challenge this in one respect – in the same sense that you say the Fed has a response function to fiscal policy.

    If global growth outside the US collapses, and the Fed is a pure inflation targeter, the collapse in raw material prices (like oil, commodities, etc.) and wages would then cause the Fed to compensate. If, however, the global growth is high, then raw input prices will remain high, and the Fed will not compensate because they see the specter of inflation.

    If this were true, then I’d say we still have a couple more years until US wages/consumption are more closely in line with wages elsewhere.

    The reason I would continue to argue this is not a global depression is that we still have > 6% inflation in much of the developing world…

    Anyway, I’m NOT saying that this SHOULD be the Fed’s policy. I’m saying that if you treat the Fed as a pure response function with an inflation target, high global growth is not necesarily good in the short to medium term.

  42. Gravatar of James in London James in London
    22. August 2011 at 08:14

    Scott, you said “Unemployment is a far more serious problem than mild inflation”. That is not particularly interesting, if by unemployment “high unemployment”.

    What about a situation where there is high unemployment and high inflation, what would you choose then? More importanly, what would the Fed choose?

    Why not fear this as a possible future scenario if a future Fed is as “unreasonable” (and hostage to stakeholder pressure) then in not wanting to risk higher unemployment by tackling the inflation, as you see it today being unreasonable (and hostage to stakeholder pressure) in not wanting to tackle (in your view) low inflation?

    Fear of the Fed making a mistake in that environment drives people like me to fear the Fed generally, a fear heightened by you so eloquently pointing out how it is messing up today.

  43. Gravatar of W. Peden W. Peden
    22. August 2011 at 08:31

    James in London,

    “What about a situation where there is high unemployment and high inflation, what would you choose then? More importanly, what would the Fed choose?”

    What do you think that NGDP targeting would imply?

  44. Gravatar of Gregor Bush Gregor Bush
    22. August 2011 at 08:40

    I took this post to mean that, 22 years from now, once we’re in a Sumnerian world of NGDP fututes targeting, we will have reached the macroeconomic equivilent of “the end of history” in which there are no more demand-side recessions. We will still have modest supply-side slowdowns in which unemployment rises an bit and inflation increases, and these episodes will still make headlines, invoke policy debates and feel like a big deal to many younger people. But to those of us old enough to remeber 2008-2012, they will be trivial episodes. The policy options discussed during these slowdowns will have only very minor implications. From our perspective, the great macroeconomic policy debates will be over.

    Scott, is this what you were getting at? If so, I agree.

  45. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2011 at 08:44

    “That doesn’t mean Perry won’t win, but it was dumb.”

    No it wasn’t. I wrote elsewhere here on this. Perry’s goal was to make sure Ben’s actions LOOK political.

    So:

    1. it is smaller rather than bigger.
    2. if there is a pop, Perry can say it was all Ben, not Obama.

    Inflation CANNOT be sold politically. It can only be not be allowed to happen.

    There’s no chance of that happening until the right is in power.

    And the more the right gets to remake fiscal, the more they will let it happen.

  46. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2011 at 08:49

    Gregor, you skip the crucial part.

    It’s the pissing on booms that’s the hard part. We may have to let rates rise even if unemployment is 8%.

    The Fed has to stand its ground, and insist the government must economic policy.

  47. Gravatar of thruth thruth
    22. August 2011 at 08:58

    Statsguy said “This could help force banks to lend out (especially if IOR was dropped)”

    I despair of a monetary policy that relies on a credit mechanism in this environment of overleveraged balance sheets.

    @Scott, would probably be good for your readers if you do a post (if you haven’t already) contrasting level vs growth rate targeting. (Why do we need to catch up with missed targets? Is the core problem that level targeting addresses wage rigidity, rigidity of other nominal contracts or something else?)

  48. Gravatar of StatsGuy StatsGuy
    22. August 2011 at 09:09

    @thruth

    I agree with you. I have stated repeatedly I’d prefer a monetary policy mechanism that does not rely on credit expansion, or expectations thereof. That means controlling the injection of money. It is hard, it turns out, to limit credit since the private sector instantly seeks to arbitrage away any expected future monetary expansion.

  49. Gravatar of david stinson david stinson
    22. August 2011 at 09:12

    ” I’m not asking the Fed to do any more than it’s technically capable of doing. But alas, I am asking it to do more than it’s humanly capable of doing.”

    Sounds like a fantastic argument for free banking.

  50. Gravatar of Bababooey Bababooey
    22. August 2011 at 11:53

    Fukuyama bombs, to me, because nothing explains everything.

    @Chris re: “theory … impressions … facts.”

    Inductive reasoning still lives alongside the fetishists of empiricism; well done speculation can win an open mind better than some mountebank’s stumble into infinite regress (not numerate regress, but eis apeiron ekballonta.

    Think about Colbert’s show, he argues by impressions and wins more than, say, Piers Morgan’s trade in asserted facts. Keats nails Colbert’s winning ways:

    “…at once it struck me what quality went to form a Man of Achievement, especially in Literature, and which Shakespeare possessed so enormously – I mean Negative Capability, that is, when a man is capable of being in uncertainties, mysteries, doubts, without any irritable reaching after fact and reason-Coleridge, for instance, would let go by a fine isolated verisimilitude caught from the Penetralium of mystery, from being incapable of remaining content with half-knowledge. This pursued through volumes would perhaps take us no further than this, that with a great poet the sense of Beauty overcomes every other consideration, or rather obliterates all consideration.”

  51. Gravatar of MikeDC MikeDC
    22. August 2011 at 11:54

    1. So if the Republican strategy is to prevent a recovery while campaigning from the minority position, why is the Democratic strategy apparently to prevent a recovery while holding the Presidency and the Senate?

    2. Doesn’t an elementary public choice analysis tell us inflation will be *treated* as a more serious problem than unemployment. Inflation affects nearly all voters whereas even high unemployment probably directly affects only a small minority.

  52. Gravatar of Claudia Claudia
    22. August 2011 at 13:36

    Seriously? The Fed did not exactly stop at the zero lower bound. You should read the book…I learned a lot from it.

  53. Gravatar of More Evidence That Scott Sumner Is Insane More Evidence That Scott Sumner Is Insane
    22. August 2011 at 13:37

    [...] here we have Scott giving his general view of world events (and knowledge of predictions in the social [...]

  54. Gravatar of Bob O’Brien Bob O'Brien
    22. August 2011 at 14:32

    My list of actions the government could take to help improve the economy and reduce unemployment would include:

    1) Simplify the tax system.
    2) Go back to something like Glass Steagall and stop bailing out bankers.
    3) Adopt the Ryan Plan for premium support for government funded health care so we are not looking at huge future deficits.
    4) Reduce redundant government programs/agencies
    5) Pass laws to reduce regulations that hinder business and that don’t significantly help the environment.

    I think any of the above would help us more than targeting a 5% NGDP target level.

    If we don’t do some combination of the above, then I am not convinced monetary policy by itself will be of much help any time in the near term. For example, QE2 seemed to drive up asset prices but only temporarily and did not seem to help unemployment. I like to think that this is what Rick Perry was getting at when he spoke ill of Bernanke.

  55. Gravatar of W. Peden W. Peden
    22. August 2011 at 14:48

    Bob O’Brien,

    Economics is about supply & demand, after all. I think that monetary policy would help a lot and it would bring down unemployment if sustained, but obviously that would be a lot easier if the supply-side policy was right.

    Reagan’s great recovery of 1983-1984 was driven by a mixture of regulation, loosening monetary policy and incentivising enterprise. That’s the kind of approach that America needs right now.

    If Rick Perry had focused on positive policies for growth, I would have no problem. But he chose to align himself with the deflationistas and the liquidationists, and that in itself will have made the Fed more timid and weakened America economically, militarily and influentially. He’s not even president yet and he’s already hurting America’s status as a superpower.

  56. Gravatar of Scott Sumner Scott Sumner
    22. August 2011 at 17:05

    David; You asked;

    Brent traded at about $75 pre-Jackson Hole. Today, despite arguably lower global growth expectations, a quiet mid-east, and the overthrow of Qhaddafi, Brent trades at $108. What accounts for the higher price?

    I’ve seen studies suggesting that growth in the developing world is the key factor.

    You asked:

    BTW, you can argue that QE successfully raised the price level, or you can argue that QE had little impact on food and energy prices; but can you argue that both are true?

    Yes, just imagine QE raised all prices by 2%. That would be a huge amount for the CPI, but trivial for food and oil.

    Mike, There has been that cynicism about politics my entire life, it doesn’t seem to be getting worse. I recall when we had riots in the street just like Britain has now. Fukuyama didn’t predict uncorrupt democracy, or trouble free democracy, he just predicted democracy. I don’t see the world dropping democracy and going back to dictatorship, although it can’t be ruled out.

    Zamba, Fukuyama predicted a mixed economy, but there are many forms, so that prediction wasn’t very restrictive.

    You said;

    “I think we are going to see developing countries ending up more like Denmark, Sweden, etc… not Singapore.”

    They’d be extremely lucky to end up like either (which Yglesias recently pointed out are much more similar than they seem.) But they are unlikely to be that lucky–Greece is a more likely model. I see the Singapore model as far easier to implement than the Danish model. The Danish model requires Danish culture, not so for the Singapore model.

    David, I’m not sure where you are going with this. If you rule out supply, and you rule out developed country demand, and you rule out developing country demand, then there is no explanation. Any explanation must work through one of those three factors.

    Chris, Interesting comparison.

    W. Peden, OK, but I’m not so interested in whether the predictions were an easy call or not, but rather why almost everyone thinks he has been shown to have been wrong.

    George, I don’t recall his book well enough to comment on your argument, but let’s say you are right. It still doesn’t affect anything I wrote in this post. It still doesn’t explain why I read over and over again that events have “proven Fukuyama wrong.”

    I am a philosophical pragmatist. The only two things that matter to me about any philosophy is:

    1. Is it entertaining?

    2. Is it useful?

    Not, is it true?

    Some philosophers have such great minds that reading them is entertaining, even if you don’t agree. Fukuyama is obviously not one of those. But I did find his book useful, as it helped clarify some poorly formed thoughts that were already swirling around in my head. Of course I wa smuch younger then. Perhaps today the book would seem amateurish.

    Morgan, I’ll take Ryan or Romney over Obama. But No New Texans!

    Statsguy, You said;

    “The market is actually killing itself, or being killed by the Fed, as the Fed takes hints of the market’s expectation of Fed action as evidence to justify Fed inaction – this would be OK if there weren’t 6 weeks in between Fed meetings. It’s broken, my friend.”

    This is called “the circularity problem.” Both Bernanke and I have published papers on the subject. His paper criticized one of mine, BTW. I think he understands this problem, at least I hope so.

    Regarding the 30 year bond, it’s even worse than you indicated. The expected return on 30 year bonds over the next year is probably less than 1%, due to the upward sloping yield curve.

    You said:

    “If global growth outside the US collapses, and the Fed is a pure inflation targeter, the collapse in raw material prices (like oil, commodities, etc.) and wages would then cause the Fed to compensate. If, however, the global growth is high, then raw input prices will remain high, and the Fed will not compensate because they see the specter of inflation.”

    God I hate it when people use my arguments against me!! Good point.

    James, Suppose I was worried about hyperinflation. (I’m not.) I’d advocate easy money, hoping we’d get a recovery. Hyperinflation would occur, if at all, because tight money makes our fiscal situation so horrible that we have to rely on printing money. But in all seriousness, I don’t see hyperinflation, that would be a much more obvious policy error than what they are doing now. Maybe 5% inflation would be a comparable error on the upside.

    I don’t know if bad inflation or bad deflation is worse. Comparing Germany 1920-23 with Germany 1930-33, I’m tempted to say bad deflation is worse.

    Gregor, Yes, I like grand narratives in macro too, especially if I’m right in the center. :)

    thruth, Level targeting is important because it prevents gross errors of the sort we’ve seen. Let’s say policy misses plus or minus 3% each year. With level targeting you are never more than 3% off course. With growth rate targeting you might end up 9% too low after three years. Level targeting also makes the economy more stable. If NGDP starts to fall, people begin to expect faster future growth, and that raises velocity. It’s similar to a currency peg.

    David, Free banking or NGDP futures targeting.

    bababooey, But Fukuyama’s not trying to explain everything. He has little to say about how to change one’s oil, how to collect stamps, which football team to root for, or even what these democracies will look like.

    I’m as skeptical as the next guy, but that’s no reason to shy away from grand narratives.

    I don’t watch TV, so I probably shouldn’t comment on Colbert.

    MikeDC, you said:

    “2. Doesn’t an elementary public choice analysis tell us inflation will be *treated* as a more serious problem than unemployment.”

    Just the opposite, inflation was higher under Clinton than Obama, and Clinton was more popular.

    Claudia, I don’t follow your answer. The point of this comment section is for you to discuss the ideas, not tell me to read books. I won’t read books unless someone gives me an indication they contain something interesting. What did they say about IOR? I’d be very interested. The Fed’s explanation for IOR was that without it policy would be too expansionary. I’d love to know why they thought that would be a problem.

    Bob, Some of those are good ideas, but we also need more NGDP. Indeed more NGDP will make it easier to do reforms.

  57. Gravatar of James in London James in London
    23. August 2011 at 03:34

    Nice to see you think there may be such a thing as “good deflation” (vs the bad deflation you mention in Germany 1930-33).

    I think you need elaborate on this thesis that bad inflation is better than bad deflation, or at least describe better what bad deflation really is/could be in the modern world.

    Lots of modern bad inflations/hyperinflations around as examples, but Japan doesn’t look that bad if that is a modern case of bad deflation. And has avoided the risk of bad inflation, which they may have got given their debt piles.

  58. Gravatar of W. Peden W. Peden
    23. August 2011 at 04:50

    James in London,

    Anyone who didn’t think that good deflation was possible wouldn’t support the idea of NGDP targeting. Supply-side deflation (when output outstrips the NGDP target) is not only non-destructive, but actually a positive part of the price system and any problems caused by it are self-limiting. Central banks should certainly not try to offset the deflation by inflation, since this runs the risk of turning a productivity spike into a boom & bust cycle.

  59. Gravatar of James in London James in London
    23. August 2011 at 06:34

    Agreed. Even a big’ish deflation doesn’t have to be bad if people are ready for it and understand it would be temporary. The urge for governments to “do something” is often very destructive, see what happened in Iraq.

  60. Gravatar of W. Peden W. Peden
    23. August 2011 at 08:50

    James in London,

    Absolutely. I have the same view on inflation: if it’s caused by a supply-side shock, like an oil crisis, then it’s part of the price system working. If it’s caused by the central bank overstimulating the economy, then it’s a distortion of the price mechanism.

  61. Gravatar of Claudia Claudia
    23. August 2011 at 12:22

    I apologize for annoying you with my last comment. I meant it as a friendly suggestion, not an authoritative assignment. (Guess I hang out too much with grumpy macroeconomists to get that tone right.) Plus I should have figured out your rules before posting a comment. I was wrong to simply assume that free disposal applied.

    By the privilege of my job, my comments in public related to monetary policy are constrained by a staff communication policy: http://federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf

    The point I was trying to make via published scholarship is that the Fed like all other U.S. institutions does constrained optimization. Reading Wessel’s book, I was impressed how creative members of the Fed had been in their face of formidable constraints. It has been a while since I read the End of History for my undergrad econ thesis, but I don’t see why Fukuyama would have chosen a hyper-rational Vulkan FOMC over a constrained one led by Ben Bernanke. Though the alternate would probably freshen up our briefings some…

    But really, you don’t need to respond to me. And I promise not to cause confusion in the comments any more. I think it is best that I go back to reading the many interesting ideas on this blog and save my comments for a more appropriate place. Thanks.

  62. Gravatar of MikeDC MikeDC
    29. August 2011 at 04:49

    Oops, my sarcasm was too well disguised! (Sorry)

    Anyhoo, 22 years seems a very short time to pronounce the success of a theory predicting the “end of history”. I think Fukuyama’s theory is mostly irrefutable because of short timeline and an open-ended definition of liberal democracy. If some people say with a straight face that Venezuela is partially democratic but we all know better, we shouldn’t call evolution toward some sort of minarchist state (we could be so lucky) the same thing as the sort of technocratic representative democracy that Fukuyama envisions.

    That is, I can at least potentially see a possibility for a much less intrusive, much more free form of government than what Fukuyama predicts is the “best” form.

    Like NGDP targeting, I don’t think this is beyond human capability, but it might be beyond human capability right now. Ideas take a long-time to percolate and lots of “events” (in Fukuyama’s terminology) to get a chance.

  63. Gravatar of GlibFighter GlibFighter
    2. September 2011 at 21:25

    Scott:

    Regarding Fukuyama: (1) read S. Huntington; and (2) consider how history has ended with the democratic nature of Putin’s Russia.

  64. Gravatar of Scott Sumner Scott Sumner
    10. September 2011 at 07:26

    James, Bad deflation is when NGDP growth is too low.

    Claudia, No need to apologize. I only have time for maybe a minute per comment. So if someone tells me to read a book–it just won’t happen. Sorry if I snapped at you.

    MikeDC, You said;

    “Anyhoo, 22 years seems a very short time to pronounce the success of a theory predicting the “end of history”. I think Fukuyama’s theory is mostly irrefutable because of short timeline and an open-ended definition of liberal democracy. If some people say with a straight face that Venezuela is partially democratic but we all know better, we shouldn’t call evolution toward some sort of minarchist state (we could be so lucky) the same thing as the sort of technocratic representative democracy that Fukuyama envisions.”

    Both are bad arguments. I said he’s been right so far–that’s all. The question of definition of democracy is interesting, but the world’s becoming more democratic by ANY definition, including the borderline cases like Russia and Venezuela, or excluding them. Would anyone seriously argue that countries like Chile and Poland and South Korea aren’t becoming more democratic?

    Glib fighter, How’s Russia less democratic than in 1980? And read Fukuyama, he said it would take a long time for countries like Russia to become democratic. Was that wrong? Has anyone actually read his book?

  65. Gravatar of TheMoneyIllusion » What I said on August 21st TheMoneyIllusion » What I said on August 21st
    22. September 2011 at 06:26

    [...] how this looks today: So both Hamilton and Greg Mankiwhave suggested a price level target with a 2% trend growth rate.  [...]

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