Larry Summers and Barack Obama

In early 2009 I wondered why Obama didn’t push more aggressively on the monetary policy front.  In one postI suggested he talk to Christina Romer, who knew how effective it was in the Great Depression.  Later I speculated that Larry Summers may have blocked access to the President, or perhaps was dismissive of her arguments.  Summers has made it very clear that he doesn’t think monetary policy has a role to play in this recovery. 

Now we don’t have to speculate any longer.  From the WaPo:

A new book claims that the Obama White House is a boys’ club marred by rampant infighting that has hindered the administration’s economic policy and left top female advisers feeling excluded from key conversations.

“Confidence Men: Wall Street, Washington, and the Education of a President,” by journalist Ron Suskind due out next Tuesday, details the rivalries among Obama’s top economic advisers, Larry Summers, former chairman of the National Economic Council, and Treasury Secretary Timothy F. Geithner. It describes constant second-guessing by Summers, now at Harvard, who was seen by others as “imperious and heavy-handed” in his decision-making.

In an excerpt obtained by The Post, a female senior aide to President Obama called the White House a hostile environment for women.

“This place would be in court for a hostile workplace,” former White House communications director Anita Dunn is quoted as saying. “Because it actually fit all of the classic legal requirements for a genuinely hostile workplace to women.”

Dunn declined to discuss the specifics of the book. But in an interview Friday she said she told Suskind “point blank” that the White House “was not a hostile environment.”

“The president is someone who when he goes home at night he goes home to house full of very strong women,” Dunn added. “He values having strong women around him.”

The book, due out next week, reveals a White House that at times was divided and dysfunctional.

It says that women occupied many of the West Wing’s senior positions, but felt outgunned and outmaneuvered by male colleagues such as former Chief of Staff Rahm Emanuel and Summers.

“I felt like a piece of meat,” Christina Romer, former head of the Council of Economic Advisers, said of one meeting in which Suskind writes she was “boxed out” by Summers.

Larry Summers?  Disrespectful to women?  I thought he was supposed to be disrespectful to everyone.

But seriously, this did surprise me a bit:

“The president has a real woman problem,” an unnamed high-ranking female official told Suskind. “ The idea of the boys’ club being just Larry and Rahm isn’t really fair. He [Obama] was just as responsible himself.”

Based on interviews with more than 200 people inside and outside the White House, Suskind’s book comes as Obama faces the lowest poll numbers of his tenure, and deep discontent over his economic policies.

According to the book, female staffers, like Dunn and Romer, felt sidelined. In November 2009, female aides complained to the president about being left out of meetings, or ignored.

Dunn said in the interview that her husband, now-White House lawyer Bob Bauer, was “surprised to see me as someone who could be talked over in meetings.”

“It’s a place where there is vigorous discussion back and forth. At various times people have issues with their colleagues, but we were united,” Dunn said.  “I’ve been very clear that this is a president who values a diverse set of voices on every issue.”

Dunn refused to discuss the details of “private conversations with the president,” dinners with the economic team or conversations with book authors.

But she added: “I take issue with the idea that [the White House] was a place where senior women weren’t involved in every aspect of every major decision and their voices weren’t heard.”

Obama, according to the book published by Harper Collins, failed to call on Romer after asking her male colleagues for their opinions. The snub prompted Romer to pass a note to Summers where she threatened to walk out of the dinner, according to the book.

It seems increasingly clear that Obama doesn’t have a good understanding of economics.  He approaches issues like a very bright non-economist using his common sense.  Since common sense suggests that supply-side factors aren’t very important, and monetary policy only works through interest rates, he can’t envision any economic solutions beyond demand-side fiscal stimulus.  It’s up to his economic advisers to set him straight, and it seems he listened to the wrong adviser.  Romer would have told him to pay attention to monetary policy and cut employer-side payroll taxes.

If Obama had moved earlier and more aggressively his appointees would by now completely dominate the Board of Governors.  His failure to do so might well cost him a second term.

PS.  I’m in no position to judge the accuracy of this book.  Obama has appointed several women to the Supreme Court and Hillary Clinton seems to have an important role.


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28 Responses to “Larry Summers and Barack Obama”

  1. Gravatar of Bonnie Bonnie
    18. September 2011 at 06:25

    Interesting Press Release from Barney Frank, Ranking Member of the House Financial Services Committee (the entire release can be found here: http://democrats.financialservices.house.gov/FinancialSvcsDemMedia/file/press/112/09-12-11%20FOMC%20position%20paper_Barney%20Frank.pdf )

    Frank Calls for Increased Democratization of the Federal Open Market Committee

    September 12, 2011

    WASHINGTON – Congressman Barney Frank today released a detailed statement calling for increased democratization of the Federal Open Market Committee (FOMC), the body within the Federal Reserve that oversees monetary policy by setting targets for interest rates. This issue is particularly important because of the powerful role being played by the FOMC during the current period of considerable economic distress.

    Currently, the 12 voting members of the committee are made up of the 7 members of the Federal Reserve Board of Governors, who are nominated by the President and subject to Senate confirmation, and 5 of the 12 presidents of the regional Federal Reserve Banks. The 5 members are not subject to a confirmation process by elected officials, and instead are chosen by regional Federal Reserve Bank directors who effectively are appointed by large commercial banks in each region.

    In his statement Frank says that this creates “a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials nominated by the President and confirmed by the Senate.” Frank argues that this results in the Federal Reserve Chairman presiding “over a structure where he confronts people appointed by business interests who do not share the commitment to equal consideration of the full employment section of the Federal Reserve’s dual mandate” to combat inflation and promote employment.

    Last spring, Congressman Frank introduced a bill which would remove the 5 members of the FOMC not subject to Senate confirmation. Some have argued that those 5 members are needed to provide regional diversity to the FOMC. In upcoming weeks, Frank plans to introduce new legislation which would address that concern by still eliminating those 5 current positions but requiring the President to nominate 4 new members to represent the Federal Reserve Bank regions. Those 4 members would be “subject to Senate confirmation, but not otherwise employed by the Federal Reserve system.”

  2. Gravatar of dwb dwb
    18. September 2011 at 07:14

    Update Sept 22, 2013, 11:45 am.

    This just in from the former head of the Obama re-election campaign, reflection on the 2012 Presidential campaign: “Well, looking back, the quest for the second four years is umm, different from the first. Hope and change is good for the first four years, but turns out, there is this record thing and voters want to know am I better off now than I was four years ago. Sure, knowing what i know now, would we have allowed the political wing to dominate? No. Would we have fought harder for more stimulus? Yes. But who really thought the American people would elect a Mormon. A Mormon! No one saw that coming.”

  3. Gravatar of Scott Sumner Scott Sumner
    18. September 2011 at 07:40

    Bonnie, Good idea.

    dwb, If we are lucky. It may be “who would have thought Americans would elect another cocky Texan.”

  4. Gravatar of John John
    18. September 2011 at 07:59

    It’s a good thing Obama didn’t push harder for more monetary stimulus

    August 2010- August 2011

    Consumer Goods +3.8%
    Finished Goods +6.5%
    Intermediate Goods +10.3%
    Crude Goods +18.4%

    I’m gonna keep bringing these numbers up because I think they are so damning to all the AD theorists out there (and yes that includes both Scott and Krugman). If, as the New Keynesians say, inflation has to bid up prices through a higher demand for goods and services, then these numbers should correspond to an improving employment picture.

    It also makes the Friedman theory that depressions come from Fed inaction look stupid as the Fed refused to any of the monetary aggregates money supply fall despite massive deflationary pressures from late 2008 to the present. The massive increase in the monetary base, soaring precious metal prices, a lack of deflation, and now accelerating inflation with more on the way make the hypothesis of Fed timidity look like a silly joke.

  5. Gravatar of John John
    18. September 2011 at 08:12

    I also think it’s funny how Scott talks about how effective monetary policy was during the Great Depression. What a horrible example to have to point to in order to back up your case. Why not point to a healthy economy for examples of a good economic policy rather than the worst economy in US history. The Keynesians like Krugman do the same thing; they point out how great their policy recommendations are by referencing the most unsuccessful period of economic policy ever. It’s very ironic that we got the same economic policies that modern academics think worked during the Great Depression and we’re getting the 2nd Great Depresssion.

  6. Gravatar of Mike Sandifer Mike Sandifer
    18. September 2011 at 08:24

    I will never understand why Obama wanted Summers, Rubin, or Geithner to have anything to do with his administration. For one thing, they were all politically toxic, left, right, and center.

    With Summers in particular, while perhaps a brilliant researcher, he hadn’t exactly had a brilliant career as an administrator. His tenure as Harvard’s president was disastrous, for example, as were some of the policies he pushed so hard for in the Clinton administration. One example is helping push Brooksley Born out of Washington.

    Obviously, Obama only has himself to blame and how unfortunate that we had to have our second failed President in a row during times like these.

  7. Gravatar of Scott Sumner Scott Sumner
    18. September 2011 at 09:44

    John, You said;

    “I’m gonna keep bringing these numbers up”

    If so, then you might want to address how I responded to this point when you brought them up earlier.

    You said;

    “It also makes the Friedman theory that depressions come from Fed inaction look stupid as the Fed refused to any of the monetary aggregates money supply fall despite massive deflationary pressures from late 2008 to the present. The massive increase in the monetary base, soaring precious metal prices, a lack of deflation, and now accelerating inflation with more on the way make the hypothesis of Fed timidity look like a silly joke.”

    What is silly is your refusal to acknowledge that inflation has averaged 1% over the past three years. It’s always possible to cherry pick a few months data during rising oil prices to make a theory look bad. But I could do the same with your theories. In 2009 the Austrian right predicted high inflation, some even wanted to bet me that there would be double digit inflation in 2010. Instead, inflation has averaged 1% over three years, and TIPS spreads suggest markets expect sub-normal inflation to continue for another 5 years. So much for the inflation scaremongers.

    As for the Depression, monetary stimulus was highly effective when it was tried in early 1933. The problem was that FDR mostly relied on policies that delayed recovery.

    Mike, Good point. Interesting that Geithner was confirmed as Treasury Secretary despite being a proven tax cheat, whereas two women that Clinton wanted for Attorney General were nixed because of trivial nanny tax issues.

  8. Gravatar of Benjamin Cole Benjamin Cole
    18. September 2011 at 11:29

    Monetary policy can be a puzzle–indeed, as a long-time financial reporter, and long-time economics “buff,” I still had unclear sentiments regarding monetary policy until I started reading Scot Sumner’s excellent blog. (Now I have the zeal of the recently converted!)

    This is why I so often honk at NGDP’ers to seize the public megaphone whenever you can, by op-eds, blogging, sending letters to Fed officials etc.

    I think the NGDP argument has edged onto the public stage. Keep on plugging. There has been progress.

    I recent wrote letters to Charles Evans and James Bullard, and should have an op-ed in tomorrow’s LA Business Journal. Small potatoes, yes, but if all others do the same…..

  9. Gravatar of Carl Lumma Carl Lumma
    18. September 2011 at 12:11

    LOL. Dysfunctional administration? The problem must be misogyny. Yes, that’s the ticket!

  10. Gravatar of Bonnie Bonnie
    18. September 2011 at 12:15

    There’s more in the PDF file of Barney Frank’s statement, and it is well worth reading. Here is what he says about the current situation:

    “For some time this [the 5 regional president FOMC seats] has troubled me from a theoretical democratic standpoint. But several years ago it became clear that their voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve. In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate—specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.

    “…the voting presence of the regional presidents on the FOMC has now become a significant constraint on national economic policy making. The 7-3 vote of the FOMC in August in favor of keeping interest rates low is stark evidence of how much of a constraint this is. Obviously it is not a matter of pulling a switch and achieving a guaranteed physical result. How people in the financial community react to the decisions has a major effect, and a 7-3 decision is clearly less effective in influencing other’s decisions—which is the way in which the decisions are executed—than a 10-0 vote.

    “Those who are critical of the Federal Reserve for not doing more—and I have been one of them—should take this into account and make sure that their criticisms are not of Ben Bernanke, who in my view has been trying hard to deal with the situation responsibly, but rather of a structure over which he presides and where he confronts people appointed by
    business interests who do not share the commitment to equal consideration of the full employment section of the Federal Reserve’s dual mandate.

    “It is not at all surprising that those appointed by Presidents—Republican or Democratic—are more supportive of taking action to focus equally on both mandates, than are those who come from the collection of business interests who appoint the regional presidents. And the proof of that is that the record of greater dissents coming from the regional presidents than from governors is equally the case whether the governors were appointed by Democratic or Republican presidents.”

    This is confirmation, in a very round about way, that Obama allowed the votes on the FOMC to be skewed toward the hawks by leaving those seats that he is responsible for filling empty, leaving Bernanke to fight it out with them, and likely losing most of the time. It only accounts for what has been going on after Obama took office, though, and says nothing for the critical events in the late summer and fall of 2008 when the Fed allowed a free fall of NGDP.

    If I have a problem with the removal of the regional presidents from the FOMC, I don’t know it yet. It would likely solve the immediate problems, but I am not sure if it’s a good idea to have the FOMC composed entirely of political appointees in the long run or if it should be done because there were empty seats as a result of someone being asleep at the wheel. I think I would rather see more defined mandates from Congress which would limit FOMC discretion than rearranging of the deckchairs on what is potentially the Titanic when it autonomously moves too far in one direction or another.

  11. Gravatar of Bonnie Bonnie
    18. September 2011 at 12:18

    There’s more in the PDF file of Barney Frank’s statement, and it is well worth reading. Here is what he says about the current situation:

    “For some time this [the 5 regional president FOMC seats] has troubled me from a theoretical democratic standpoint. But several years ago it became clear that their voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve. In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate—specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.

    “…the voting presence of the regional presidents on the FOMC has now become a significant constraint on national economic policy making. The 7-3 vote of the FOMC in August in favor of keeping interest rates low is stark evidence of how much of a constraint this is. Obviously it is not a matter of pulling a switch and achieving a guaranteed physical result. How people in the financial community react to the decisions has a major effect, and a 7-3 decision is clearly less effective in influencing other’s decisions—which is the way in which the decisions are executed—than a 10-0 vote.

    “Those who are critical of the Federal Reserve for not doing more—and I have been one of them—should take this into account and make sure that their criticisms are not of Ben Bernanke, who in my view has been trying hard to deal with the situation responsibly, but rather of a structure over which he presides and where he confronts people appointed by
    business interests who do not share the commitment to equal consideration of the full employment section of the Federal Reserve’s dual mandate.

    “It is not at all surprising that those appointed by Presidents—Republican or Democratic—are more supportive of taking action to focus equally on both mandates, than are those who come from the collection of business interests who appoint the regional presidents. And the proof of that is that the record of greater dissents coming from the regional presidents than from governors is equally the case whether the governors were appointed by Democratic or Republican presidents.”

    This is confirmation, in a very round about way, that Obama allowed the votes on the FOMC to be skewed toward the hawks by leaving those seats that he is responsible for filling empty, leaving Bernanke to fight it out with them, and likely losing most of the time. It only accounts for what has been going on after Obama took office, though, and says nothing for the critical events in the late summer and fall of 2008 when the Fed allowed a free fall of NGDP.

    Removal of the regional presidents from the FOMC would likely solve the immediate problems, but I am not sure if it’s a good idea to have the FOMC composed entirely of political appointees in the long run or if it should be done because there were empty seats as a result of someone being asleep at the wheel. I think I would rather see more defined mandates from Congress which would limit FOMC discretion than rearranging of the deckchairs on what is potentially the Titanic when it autonomously moves too far in one direction or another.

  12. Gravatar of johnleemk johnleemk
    18. September 2011 at 14:41

    An idea for the 2012 Obama campaign poster: http://i.imgur.com/S5JQb.png

  13. Gravatar of MikeDC MikeDC
    18. September 2011 at 16:30

    Given his track record, I don’t see evidence to suggest Obama would have appointed doves to the Fed, especially early in his administration.

    All of the lamenting his failure to act completely misses the causal link. He failed to act because he and the economists he listened to believed that acting didn’t matter. If they’d acted to appoint people to the Fed, they would have appointed people who similarly believed monetary policy didn’t matter.

    To the extent they seemed to argue anything about monetary policy in the late 2008 and early 2009 timeframe, they were arguing to keep the dollar strong to keep foreigners buying T-Bills to keep fiscal policy cheap. They totally and completely didn’t get it and a good many of them still don’t and still seem to think its only role is to set the stage for fiscal action.

  14. Gravatar of Joe2 Joe2
    18. September 2011 at 16:48

    I’m not buying the line that this Administration was/is hostile to women. This to me sounds a grievance looking for a home.

  15. Gravatar of Jim Glass Jim Glass
    18. September 2011 at 19:02

    While you were on vacation I told everybody “it’s Summers’ fault”.

    I say we should now call it the Summers Stagnation.
    ~~~~

    I’m gonna keep bringing these numbers…

    Don’t forget these:

    The market’s expected level of annual inflation over the next *10 years*: now down to 1.37%.

    This following annual CPI increases over the last three years (8/2008 through 8/2011) averaging 1.13%.

    Anyone worried about inflation today is a crank, disciple of cranks, or an obsessive.

  16. Gravatar of John John
    18. September 2011 at 20:30

    Scott

    When I brought up these numbers in response to a previous post, you said that NGDP has been slowing for some time. The point I’m trying to make is that NGDP isn’t slow because of a lack of inflation; inflation being the Federal Reserves main source of economic influence. There’s a lack of real growth that is killing employment. Targeting NGDP at 5% does nothing to address that as our NDGP is already close to 5%: around 4 % inflation and 1% real growth. My question for you is: What set of circumstances would lead you to say that slow economic growth and high unemployment is not due to “tight” money? Because if there’s ever a time when that’s the case, that time is now.

    The Friedman-Schwartz hypothesis for the Great Depression, and recessions in general involved a fall in the money supply. There was no such fall in the past few years besides a couple months in late 2008 to early 2009. The Fed more than compensated for this drop with massive injections to the monetary base and, despite large scale deleveraging, we only had a few years where (core) inflation was slightly below the historical average. The point I’m trying to make is that if I’m correct that the Friedman-Schwartz hypothesis says that monetary falls explain recession, and are roughly proportional to the severity of the recession, then our current recession appears to contradict that hypothesis.

  17. Gravatar of John John
    18. September 2011 at 20:42

    Jim Glass,

    If you wanna start throwing the word crank around, I think it applies very well to the monetarists (monetary cranks) who believe that you can keep an economy healthy so long as you print up the right amount of money. It is similarly crankish to argue that you can print your way out of a recession.

    If your even interested in listening, the reason for inflation fears is that the Fed has pumped in well over 1 trillion bucks worth of base money. To inject this money, the Fed purchased many assets which it may have to sell at a loss in the future when it tries to shrink the base again. Therefore, the value of the Fed’s assets may not be enough to soak up all the liquidity it provided earlier and prevent a very disruptive rise in prices.

    A second reason to fear inflation is that the dollars position as a reserve currency and safe haven have given it a measure of strength that has prevented American’s from experiencing rising prices. The trouble in the Eurozone adds to this. If people stop viewing the dollar as a reserve and safe haven, there’s a large possibility that the dollar’s value will undergo a rapid fall.

    All that being said, it is possible the US has a Japan like experience of overall low inflation. In which case that would be highly preferable to a situation like the 1970s which is where I believe we are headed. In either situation, the solution is less government spending and regulation and an embrace of freer markets. All the money printing and government spending in the world isn’t going to solve the problem.

  18. Gravatar of Matt Waters Matt Waters
    19. September 2011 at 00:31

    “It is similarly crankish to argue that you can print your way out of a recession.”

    I don’t get this thought when we printed money to get growth after the 1929-32, 1937-38, 1981-82, 1991 and 2000 downturns. There’s a myth out there that we lived fine without monetary policy the last 30 years, but really the Fed still did monetary policy to get around sticky wages even as so many economists argued that sticky wages shouldn’t matter. No, we don’t have to “pay for our sins” as David Brooks recently said. We can really can print money to fix cyclical unemployment. We can’t print money to fix productivity shocks or structural unemployment. But we can and we HAVE printed money to fix cyclical unemployment.

    Re the possibility of the Fed losing money on assets it buys. Yes, the Fed can lose money on long-term Treasuries if interest rates goes up. So? Why should we care if the Fed loses money? The only way Americans suffer from the Fed losing money is that the Fed would stop repatriating profits to the Treasury. And the Fed would have to sell A LOT of Treasuries at a substantial loss to overwhelm the interest income from the rest of its assets. Even if the Fed stops repatriating money to the Treasury, the Fed can’t become insolvent. The Fed’s “liabilities” are all in dollars and just mean you can show up with 10 dollars and the Fed gives you 10 dollars back.

    And there’s no question about the Fed being able to fight inflation in the future. You really think the Fed, with 2 trillion (roughly) in Treasuries, could not overwhelm other sources of liquidity in trying to raise interest rates? If the Fed announces a short-term rate of, say, 5%, who exactly would buy 2 trillion of Treasuries at 0% and bet against the Fed’s will? Nobody has that sort of liquidity, which is why the Fed never fails to raise interest rates.

    Finally, no, there really isn’t a 1970′s-type inflation around the corner. The 70′s stagflation happened for two reasons:

    1. Much more powerful unions throughout the economy.
    2. A Fed which honestly believed in the Phillips curve to battle unemployment.

    After the 1973 oil embargo, the economy suffered a real productivity shock but unions had wages indexed to prices, not to their actual productive capacity. When wages went above their productivity, that led to higher unemployment despite higher inflation. With wages staying above their market level, unemployment stayed high despite inflation.

    Unions are much less powerful today and that simply will not happen. Even public-sector unions have tremendous pressure as most governments refuse to raise taxes. In the 70′s, by contrast, the Big Three had so much market power that they could pass along any of the UAW’s demands in unison. Today, a truly expansive monetary policy (i.e. with higher NGDP, not higher monetary base necessarily) will lead to higher unemployment very long before it leads to another wage-price spiral, just as the huge monetary expansion from 1933-36 did not lead to much higher inflation but to lower unemployment instead.

  19. Gravatar of johnleemk johnleemk
    19. September 2011 at 04:47

    John,

    You can’t print your way to prosperity but you can easily underprint your way to poverty. Also, I’d like to see you back up your claim that NGDP is growing at 5% per annum, and that 4% of this is inflation. Cherrypicking a basket of goods to make your case doesn’t count.

  20. Gravatar of John John
    19. September 2011 at 08:37

    johnleemk,

    I was using the official CPI number of 3.8% for August 2010- August 2011, not cherry picking a basket of goods. Last I checked, real growth was around 1.25%, but let’s certainly hope that it hasn’t fallen below 1% since then. By all means, check the official numbers; the August CPI numbers I bring up caused a little bit of a scare on Wall Street.

    john and matt,
    You both argue that it’s possible to underprint your way into way into depression. This is just Phillip’s Curve thinking; in the real world, there is no connection between inflation and unemployment. The problem with that argument is that inflation is an artificial demand that misallocates resources. You get a temporary period of prosperity followed by a bust when the inflation stops. I’d refer you to the Austrian thinkers, but Milton Friedman understood this as well: read Chapter 10 of “Free to Choose.” So the bottom line is, and even Uncle Milton is on my side for this one: YOU CAN PRINT YOUR WAY INTO A DEPRESSION THAT YOU CAN”T PRINT YOUR WAY OUT OF.

    Also, Matt, the Fed bought treasury bonds as well as some bad assets like mortgages at peak prices. If the value of treasuries falls for instance, the Fed will make capital losses on those and not be able to sell them back to banks at a similar price as what they paid for them. This is why they might have a problem with soaking up liquidity. In addition, it would be politically unpopular to tighten with high unemployment, and the Fed almost always does what is politically popular.

  21. Gravatar of John John
    19. September 2011 at 08:49

    Matt is right about monetary policy over the past 30 and especially ten years. It’s been there, it’s just that its been extremely loose. Money growth in the late 1990s and early 2000s was roughly equal to money growth in the 1970s. Not coincidentally, in the early 1980s the US found itself in a recession it couldn’t print its way out of just like we face today. The rates of monetary growth also feed into my argument that we are in for 70s style stagflation.

  22. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 09:23

    Benjamin, Thanks for fighting the good fight.

    Carl, It surprised me too. Maybe it’s one of those things that’s in the eye of the beholder.

    Bonnie, Thanks, I agree that a more explicit mandate is the key.

    MikeDC, You said;

    “All of the lamenting his failure to act completely misses the causal link. He failed to act because he and the economists he listened to believed that acting didn’t matter.”

    I’m not sure what I “missed,” as that’s exactly what I said.

    Joe2, You may be right, I don’t have a view on the matter.

    Jim Glass, Yes, inflation isn’t the problem.

    John, You said;

    “Targeting NGDP at 5% does nothing to address that as our NDGP is already close to 5%: around 4 % inflation and 1% real growth.”

    I don’t know where you get these numbers. NGDP growth has average about 1.4% since mid-2008. If you want more recent data it’s averaging 3.4% this year, in a so-called “recovery.”

    There is overwhelming evidence from 200 years of macro history that NGDP shocks affect RGDP. Read Friedman and Schwartz if you don’t believe me.

    You said;

    “It’s been there, it’s just that its been extremely loose. Money growth in the late 1990s and early 2000s was roughly equal to money growth in the 1970s. Not coincidentally, in the early 1980s the US found itself in a recession it couldn’t print its way out of just like we face today.”

    Just completely wrong–inflation and NGDP growth have been steadily slowing since 1981, just the opposite of the previous 30 years. And we did print our way out of the 1982 recession–check out my new post on John Taylor, where that famous inflation hawk explains just how the Fed printed its way out of the 1982 recession.

  23. Gravatar of John John
    19. September 2011 at 13:44

    Scott,

    Your just plain wrong. The numbers are right here in front of you. If your argument is that I’m fudging numbers then you guys don’t have a leg to stand on. Copy and pasted from the official BLS website:

    http://www.bls.gov/news.release/cpi.nr0.htm

    The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.8 percent before seasonal adjustment.

    In your face Monetary Cranks!!

  24. Gravatar of Matt Waters Matt Waters
    19. September 2011 at 22:25

    Alright, I’m confused. Are there two Johns here?

    Anyway, I posted an explanation for why the Phillips Curve did not apply in the 70′s. Increasing inflation does not do anything to unemployment if unemployment is caused by structural factors, like it was in the 70′s. For strong unions in the 70′s, inflation of 2% translated to wage growth of 2%. If union wages were above market levels, then unemployment stayed high.

    For today, unions are much weaker. In the “real world” though, even non-union workers never have their nominal wages reduced. Both wages and prices stay above market levels and we have a lot of excess capacity instead. In this case, the Phillips curve does hold.

    On the Fed’s assets, the Fed has repatriated a lot more money to the Treasury the last few years. It’s done very well so far on those purchases. My point is that even if it has a very large loss, the worst thing that could happen is the Fed stops the repatriation (around 50 billion) to the Treasury.

    Lost in your arguments comparing this to the 1970′s is the fact that the Fed did not even try to fight inflation before Volker. The quotes you bring up from Friedman were him emphasizing that the inflation was a monetary problem and nothing more. Would the Fed really not have enough tools to fight inflation today, with the Fed Funds rate, higher reserves and higher IOER? I doubt it and it hasn’t since 1982 had trouble fighting inflation. When it has decided to fight inflation, it has been successful.

    Finally, the CPI-U year-over-year growth is misleading. If the CPI goes down 5% one year and goes up 5% the next year, it’s below where it started. The price level, rather than the inflation rate itself, is the main issue and the price level even now is way below a 2%-per-year trend.

  25. Gravatar of MikeDC MikeDC
    20. September 2011 at 09:24

    Apparently, the first words ever spoken by Barack Obama to Christina Romer were, “It’s clear monetary policy has shot its wad”.

    Since this has fallen off the main page, a little salaciousness can’t hurt. Stay classy Barack!

  26. Gravatar of anon anon
    20. September 2011 at 10:12

    MikeDC, right. And then Romer promptly disagreed with him, stating “No, you’re wrong. There’s a lot we can do on the money front.”

    Unfortunately, Obama disregarded her advice; instead, he followed Larry Summers and the supply-factors proponents. (But he would never go as far as to propose a comprehensive supply-side adjustment package.) This arrogance will probably cost him his re-election. If only the leading GOP nominees weren’t so mediocre.

  27. Gravatar of John John
    20. September 2011 at 11:39

    Matt,

    That’s exactly what I’m saying!! Unemployment today is structural just line it was in the 1970s. There are structural problems besides labor unions. For instance, I can’t think of a better way to keep unemployment high than by extendedunemployment insurance practically indefinitely. That’s why we’re headed to good old fashioned stagflation. Possibly more stag than flation for the immediate future.

  28. Gravatar of Scott Sumner Scott Sumner
    20. September 2011 at 12:08

    John, The data you report has no bearing on anything I said. Reread my comment.

    Thanks MikeDC, I have new post.

    anon, I agree.

    John, The 1970s were nothing like today–almost the opposite. We had very high inflation, and unemployment averaged around 6%. Now we have the lowest inflation in 50 years (over the past three years), and unemployment stuck up at 9%. No similarity at all.

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