Where the buck stops
One of my first posts was entitled President Obama: You need to talk to Christy. Little did I know that they had already had a rather spicy conversation. Here is Ann Althouse:
It was Romer’s first meeting with the President-elect in November 2008. According to Ron Suskind’s book “Confidence Men: Wall Street, Washington, and the Education of a President,”Obama had “a woman problem: too few of them in key jobs” and he was trying to bring in Christina Romer. And “It’s clear monetary policy has shot its wad” is what Obama said to her before even “hello.” Is that how you talk to a woman?
She then quotes the following passage from Suskind:
It was a strange break from decorum for a man who had done so outstandingly well with women voters. The two had never met before, and this made the salty, sexual language hard to read. Later it would seem a foreshadowing of something that came to irk many of the West Wing’s women: the president didn’t have particularly strong “women skills.” The guy’s-guy persona, which the message team would use to show Obama’s down-to-earth side, failed to account for at least one thing: What if you didn’t play basketball or golf? Still, for the moment, the comment didn’t faze Romer. She was curious to hear what he thought.
“What do you mean?” she asked.
Obama extended his hand, now ready to greet her. “I guess we need to focus on fiscal policy,” he said.
“No, you’re wrong,” Romer corrected him. “There’s quite a bit we can still do monetarily, even with the historically low interest rates.”
I have to say, in the past 24 hours my opinion of the President has been completely transformed. I may even owe Larry Summers an apology. And here’s what’s most amazing of all. Even Ben Bernanke keeps insisting the Fed can do much more on the AD front. Just try to imagine those meetings between Obama and Bernanke. We were all envisioning Obama pressing Bernanke to do more. Now it looks like Bernanke was telling Obama that the Fed could provide much more monetary stimulus if it wanted to, Obama was insisting it couldn’t, and that in any case the real problem with the economy was rapid productivity growth. I’m speechless.
PS. My first link to Ann Althouse, a blogger from my hometown. She handles the sexual innuendo angle far better than I can—so please take a look at her amusing post.
HT: MikeDC
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20. September 2011 at 12:19
Odd to think now that my respect for Obama had actually increased with his handling of the debt debacle. Early on, he struck me as one who might not take the opinion of others seriously. Plus the dynamic with his wife at times seemed a bit odd…but in recent months I had really given him the benefit of the doubt.
20. September 2011 at 12:29
I don’t care much about the salty language-women angle etc. These are anecdotes, and may or may not reflect the whole of Obama (or anybody else).
I care that we have a US President who incorrectly rejects monetary policy as a tool. Then, of course, so do all the GOP candidates.
Oh, it just looks worse and worse….
20. September 2011 at 12:55
Obama extended his hand, now ready to greet her. “I guess we need to focus on fiscal policy,” he said.
“No, you’re wrong,” Romer corrected him. “There’s quite a bit we can still do monetarily, even with the historically low interest rates.”
Funny that Obama has better intuition than a trained economist. Talk about why people don’t trust economists.
Compared to monetary “oh-let’s-pray-expectations-go-the-right-way” type of thing, fiscal policy has direct impacts that always go they way we want. So if we want AD stimulus, why not a simple fiscal one? SS has no arguments other than he cannot stupify the readers with his wizardry based on misunderstanding how banks work.
20. September 2011 at 12:56
Benjamin Cole,
Give an argument why monetary policy is preferable to fiscal. You can’t. And neither can SS.
20. September 2011 at 13:03
Althouse!
Now start pointing towards Instapundit and Big Government, people will begin to understand.
Dog whistle.
20. September 2011 at 13:06
Becky, Same here.
Ben Agreed.
OhMy, In new Keynesian models the fiscal multiplier is zero. If you think those models are wrong, I’d be interested in hearing why.
And fiscal stimulus also works through expectations, just like monetary policy. A temporary tax cut and a temporary monetary injection are equally ineffective.
20. September 2011 at 13:06
OhMy,
Here’s one reason: monetary policy is handled (in almost all countries now) by unelected officials using bludgeoning instruments. Their incentives and capacity for controlling the economy for political means are smaller than that of the wielders of fiscal policy.
20. September 2011 at 13:07
Morgan, How do you have time to keep up with all these blogs–are you independently wealthy?
20. September 2011 at 13:09
Many folks don’t seem to realize that the phrase “he blew his wad” is not lewd””it means “he spent all his money at once.” To many, the phrase now seems to mean “he ejaculated.” Obama must be in this camp, because he substituted “shot” for “blow,” which doesn’t make sense in the original innocuous phrasing. Had Obama used the phrase correctly, it would’ve made sense and should not be considered crude.
Most people seem to realize that the phrase is old, and they have a hazy idea that it isn’t obscene, but they just don’t understand why it isn’t obscene.
20. September 2011 at 13:10
“The Moody’s model that Christina Romer — here’s what I think happened. It’s her first day on the job and somebody says, you’ve got to come up with a solution to this — in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they’re kind of — I don’t know. So I don’t think anyone really believes. These models have never been discussed or debated in a way that that say — Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that’s not what that paper does. I think it’s a very naked rationalization for policies that were already, you know, decided on for other reasons..”
-Robert Lucas
Yup
20. September 2011 at 13:10
OhMy,
OK, here you go:
We set the level target of NGDP at 3%, maybe 4%.
This gives us:
1. A neutered Fed. They are basically run by a PC / Futures market.
2. A target low enough that routinely forces interest rates higher, stimulating capital formation (savings), and keeps us from having loose money EVER lead to housing booms.
3. NOW we KNOW persistent unemployment is obviously structural – which gives us the ammo to unwind Minimum Wage, Davis-Bacon, the EPA, and a host of other government killing regulations and taxes.
MMT is for idiot hippies. People who have nothing wishing monetary policy was run for them, and that the government worked towards their interests.
20. September 2011 at 13:12
OhMy-
My layman’s answer is that monetary policy does not incur national debts, and stimulates through a general increase in private-sector economic output, as compared to government-directed fiscal spending, which first boosts government outlays and then the general economy.
We don’t need more warplanes, bridges to nowhere or museums at the Smithsonian. More patronage.
We need private-sector growth.
However, I am open to a national lottery (federal program!) that pays out more than it takes in. The biggest ticket is $100, and the largest payout is $1,000, and no more than $100 in tickets can be bought at any location at once.
So you get a lot of lower- and middle-income types buying tickets at 7-11 stores, and generally winning.
Moral hazard is avoided, as capital is risked.
The idea is to put cash in the hands of people who would spend it. If you are buying $50 tickets at a 7-11, you likely will spend your winnings.
This is by far the best idea to spur our economy, and sadly it is likely to happen as my winning a MacArthur Prize, although I deserve that prize for this idea. Or maybe to share it with Scott Sumner.
20. September 2011 at 13:16
Meanwhile, in the UK, a piddling £5 billion stimulus is the object of discussion-
http://www.bbc.co.uk/news/uk-14985709
– whereas, more importantly, we are inching painfully towards our own QE2 (“But wouldn’t that cause inflation? Why can’t we just invest with a VAT cut instead?”)-
http://blogs.telegraph.co.uk/news/jameskirkup/100105677/vince-cable-is-pushing-for-more-quantitative-easing-but-hes-bound-to-meet-tory-opposition/
– though the UK’s very own Tea Party is not pleased-
http://blogs.telegraph.co.uk/news/danielhannan/100102202/more-quantitative-easing-my-masters-are-you-mad/
– and QE1 officially saved the UK economy-
http://www.guardian.co.uk/business/2011/sep/19/quantitative-easing-helped-economic-growth
– quite something for “just” an asset swap!
20. September 2011 at 13:38
W. Peden, and the IMF also upgraded their forecast for the level of UK NGDP in 2011; now 1.2% higher than the level they predicted in April 2010 – expansionary fiscal contraction in action.
With some luck and a bit of QE we might even get to 6% or 7% annual growth… and then we’d only be about 9% below trend.
But the headlines say the GDP deflator is going to be even worse than expected, so The Government Must Spend More.
20. September 2011 at 13:55
Britmouse,
I suppose we’re nearing the point where we can solve most of the problems of economics: if the coalition’s plan works, then everything Larry Summers knows about economics is wrong. All we have to do is work out what he thinks and then affirm the opposite proposition.
I certainly don’t think that many pundits expected the UK economy to be growing and still have a AAA+ credit rating if the world economy hit the skids again in 2011.
One very annoying thing is that we’re hearing about growth downgrades for the UK, but no medium is saying that other countries are having their growth downgraded.
20. September 2011 at 14:30
“Give an argument why monetary policy is preferable to fiscal. You can’t. And neither can SS.”
There are plenty of arguments. In addition to the ones already given (focusing on, e.g., monetary stimulus is always more efficient because it’s less politically directed), there’s a practical one. The monetary authority both moves more quickly and moves last. In the time it takes to draft, debate, and pass a fiscal stimulus bill, the monetary authority can meet and reverse the entire stimulus by shrinking the money supply and canceling the stimulus.
Many to most fiscal stimulus bills in the US have actually ended up spending their money after the recession technically ended. Of course, you can make that into a case for automatic stabilizers instead, but you still have to make sure that the monetary authority doesn’t cancel out all your hard work.
20. September 2011 at 14:33
Scott,
I’d starting to think about the same conclusion regarding Summers after reading this over the weekend:
http://www.washingtonpost.com/politics/book-portrays-dysfunction-in-obama-white-house/2011/09/16/gIQAdxloYK_story_1.html
I link to page 2 of the article, because that’s where the Summers quotes are.
Maybe it makes sense that Summers was trying to manage Obama, if he was.
20. September 2011 at 14:39
http://blogs.wsj.com/economics/2011/09/20/full-text-republicans-letter-to-bernanke-questioning-more-fed-action/?mod=wsj_share_twitter
The Obama thing, and now this…
“To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.”
Scott, do you think there is a chance, and if so how significant is it, that the Congress/President affect Central Bank Neutrality if they don’t like what comes out of the Fed, if it is in fact helpful stimulative policy?
20. September 2011 at 14:39
Is it possible the Obama has been won over by the Robert Reich/Joseph Stieglitz’s of the world
“Monetary stimulus is not only useless, it can be harmful…Zero bound…Commodity Inflation…We don’t want to blow any more bubbles..etc,etc.”
I also wouldn’t be too hard on him Scott for believing that productivity growth is what’s keeping employment down. Yes, it’s monumentally stupid. But that’s what passes for expert punditry in today’s world on CNBC/Bloomberg.
Look here:
http://blogs.reuters.com/columns/2011/02/04/productivity-growth-keeps-u-s-recovery-jobless/
20. September 2011 at 14:54
@Liberal Roman:
I don’t think Scott is being too hard on the President for making the same mistake as most non-economists (including finance news shills who don’t understand economics or pretend not to). What he’s being hard on is the President’s refusal to listen to his economists on economics.
An executive of moderately high intellect who chooses good people and trusts them in their category of expertise is generally better than a smart executive who thinks he’s smarter than his advisers even in their portfolios.
The problem is not whether President Obama is smart or not; the problem is that he appears to have believed his own press clippings.
20. September 2011 at 15:00
Bizarre to think anyone would see “”It’s clear monetary policy has shot its wad” as having a sexual meaning in that context. A wad is the felt put in a gun to hold powder and shot in place. When you ran out of ammunition, you could only shoot your wad. Obama was using the colloquialism, precisely, in its original meaning: The Fed has run out of ammunition. Maybe people who heard a different meaning have spent too much time on the down-low.
20. September 2011 at 15:03
It’s only sexual innuendo if a Democrat is making that comment. If Republicans are making that comment, they’re talking about 19th century musketry.
20. September 2011 at 15:06
You people have dirty minds! I would never have taken it that way! It is quite an innocent expression. From WikiAnswers:
“In some current American slang it is a reference to male ejaculation; however the phrase has a very long history covering most of the time that muskets have been in use up to the present. The wad is a piece of paper put in the muzzle along with the projectile and gun powder. If the shooter is too hasty — say in a tense battle — they may not include the projectile. The result is a fire without the intended bullet; only the wad will fly out…a wasted shot. Hence, “shooting your wad” can mean expending your energy fruitlessly. The OED also references the wad as in a roll of paper money; in this case “shooting your wad” means blowing all your cash at once.”
20. September 2011 at 15:09
The Republican letter to the FOMC just reinforces my view that the greatest threat to that independence of the Fed is a bad economy. I hope the FOMC thinks about it this way.
If they try everything they can to get the economy moving and it works, almost no one will care about the Fed anymore. They’re better off not being noticed.
20. September 2011 at 15:11
Do you think that Obama came up with the opinion that monetary policy was impotent (yes, another reference) all by himself?
20. September 2011 at 15:11
@Joh Thacker
That’s what really got me. Put aside the potty language and here’s Obama, meeting one of the world’s foremost authorities on a subject, and rejecting the conclusion of her scholarly work before he even greets her.
It’d be like meeting Einstein and telling him you think relativity is bullshit.
20. September 2011 at 16:04
Obama is much easier to understand as in incompetent.
I personally can’t believe we let anyone who hasn’t run a business become President.
The business of America is business.
If it was my choice, I’d never let a lawyer or an economist anywhere near a seat of power, in fact I think the real reason I despise strong central power is it sin’t being run by full blooded entrepreneurs.
The best people have something better to do with their lives.
Which is a common thing about Republican politicians, they tend (not always) to enter politics to protect what they know is right – through their own biz experience.
Meanwhile, for Democrats, politician is generally the best job they will ever have.
20. September 2011 at 16:33
But isn’t this the point of an independent Fed?
I guess this is idealistic, but if Bernanke feels like it’s an AD problem why does it matter what Obama thinks?
Not being snarky, I don’t understand how the executive branch would prevent him from acting. I understand he could have given Ben more support in the FOMC, but now how he can pressure the Fed to do or not do anything.
Am I being naive? Dumb?
20. September 2011 at 17:12
GU, Good point. My reaction was that it’s one of those terms like “sucks”, which used to be lewd but are now used so often they’ve lost the original meaning.
Pragmaticon. So many blog posts that write themselves. Lucas was severely criticized for that, but it sure looks like he was right (at least about the politics–the policy is of course debatable.)
W. Peden They do realize that 5 billion won’t do anything, don’t they? Why don’t they just stick to their guns, or do supply-side policies?
Britmouse. Yes, funny how that works. Money affects prices and fiscal policy affects growth.
Mike, Very interesting quotations.
Marcelo, Yes I saw that, and did a new post.
Liberal Roman, Yes, but if he was going to follow a outspoken (often rude) left wing Nobel Prize winning economist, why couldn’t it have been Krugman?
John, That’s right. I normally don’t put too much blame on the President because he must rely on advisers. But if he screws up by ignoring his expert advice, then he must accept the criticism. That’s how it works.
Mark Paul, Maybe Romer and Althouse don’t know much about guns.
Bart, I agree.
Mike Sandifer, Very perceptive comment. The Fed’s controversial when the economy’s bad (1890s, 1933, 1980.)
Statsguy, Yes, I often talk to non-economists and the vast majority feel the same way. They notice that interest rates are near zero, assume that monetary stimulus is cutting rates, and then reach that conclusion. What surprises me is that he didn’t listen to Romer when she tried to tell him he was wrong.
MikeMcK, You said;
“I guess this is idealistic, but if Bernanke feels like it’s an AD problem why does it matter what Obama thinks?”
Because most of the Board is Obama appointees, and he should have two more on there by now. Bernanke needs supporters because a number of people at the Fed oppose him. So it’s not just what Bernanke thinks. Obama didn’t understand the importance of getting his views represented at the Fed.
20. September 2011 at 18:54
W PEden,
Here’s one reason: monetary policy is handled (in almost all countries now) by unelected officials using bludgeoning instruments. Their incentives and capacity for controlling the economy for political means are smaller than that of the wielders of fiscal policy.
Huh? Unelected guys with roots in Wall St have less incentive to control than people who are accountable? Think again. The Fed represents the interest of the rentier class/Wall St. What else can you expect?
20. September 2011 at 18:59
OhMy-
Benjamin Cole,
My layman’s answer is that monetary policy does not incur national debts, and stimulates through a general increase in private-sector economic output, as compared to government-directed fiscal spending, which first boosts government outlays and then the general economy.
You sound like you think govt “debt” is bad. Unlike the private debt, it is sustainable (if you have your own currency).
If the govt has more debt, the private sector has more assets, to the dollar. By accounting. This is always expansionary. Otherwise, the monetary policy works thru inducing the private sector to take on more debt. Each transaction within the private sector creates as many assets as liabilities, by accounting again. So yes, we all can borrow 1M dollars and spend it, but then we are on the hook for 1M dollars. Which brings me to your other point: the lottery which is a fiscal stimulus.
You see, govt spending doesn’t have to be about big govt or influence at all: it can be simply giving people money or tax breaks. VEry simple, very effective. Unlike monetary policy.
20. September 2011 at 19:03
SS,
OhMy, In new Keynesian models the fiscal multiplier is zero. If you think those models are wrong, I’d be interested in hearing why.
Because they get stock-flow consistency wrong. You cannot have more spending being not expansionary unless you assume that people react to govt deficits by miraculously restricting spending by exactly the same amount. Nonsense.
And fiscal stimulus also works through expectations, just like monetary policy. A temporary tax cut and a temporary monetary injection are equally ineffective.
No, they don’t work thru expectations. Did you ever play Monopoly? Central banker makes a fiscal injection of $1000 to each player. Do you thing spending will not increase? Memo: it will, and not because players “expect” anything. They just have more money.
20. September 2011 at 21:11
Just an aside on the political tea leaves:
If Democratic sources and alumni of the White House (and Democratic leaks) are spreading stories of Obmam having a “respecting and getting along with women” problem — a true hot button issue on the left — then the knives are coming out due to the 40% approval rating, and the rats are looking for another ship.
Last week Carville prescribed what the Democrats should do: “Panic!”
A Hillary challenge this cycle? That would certainly solve the “women” problem, and make Carville, her good and loyal friend, happy. (Not that he’d ever encourage such a thing.) … just speculating here.
BTW, remember way back in 2009 when Carville wrote “40 More Years: How the Democrats Will Rule the Next Generation“? (today “68 new from $0.01” available via Amazon.)
Wow, time sure does fly when you are having fun in politics.
20. September 2011 at 22:39
OhMy,
If the Fed works for Wall Street, it’s either doing a phenomenally lousy job or it really doesn’t have much power. At any rate, apparentely no-one denies that micromanagement by the Fed- on the same scale as occurs with fiscal policy- is not possible. Fiscal stimulus creates huge moral hazard for politicians to exploit a situation for political gain.
Scott Sumner,
£5 billion sounds like a lot of money to most people, including politicians. It is, in some respects. However, it’s just 1/40th of our QE, and our QE could have been twice as large without much trouble politically.
To their credit, the coalition is trying some supply-side reforms; they’ve also got some utterly braindead vote-farming policies, like the bank tax and increasing the pension liabilities of employers.
20. September 2011 at 23:53
Oh My,
MMT isn’t economics. It’s just a series of misused accounting tautologies used to justify unlimited government. Ill point out two quick simple problems with it. When you say “If the government has more debt, the private sector has more assets.” This is true by simple accounting. It would also be true to say that the more debt I personally issue the more assets the private sector has. You could just as easily have the G in your formulas stand for my buddy Gary instead of the government.
Second, government spending, whether financed by taxation, borrowing, or money printing, does not call resources into existence, it merely redirects resources away from market outcomes, i.e. the uses non-politicians actually prefer.
In short, MMT fails to recognize the “economic problem” of limited resources and unlimited potential projects. Because they fail to recognize this problem if their doctrines were put into practice, we would end up with a simple command economy which history has shown time and time again to be despotic and inefficient.
21. September 2011 at 00:05
Ben Cole,
I like your lottery money give away example because it clearly shows the most destructive economic fallacy ever. The fallacy you clearly illustrate is the idea that economies grow by simple spending. If this is the case, all that would be necessary is to hand out lots of bills like you suggest.
In actuality, society becomes better off by becoming more productive on a per person basis. Increased productivity comes from UNDERCONSUMPTION which allows for investment in capital goods. This investment in capital goods allows for longer processes of production which yield a greater per unit output.
For an example of this process, think of agriculture by picking berries off trees compared to modern agriculture which uses chemicals and machinery. Designing useful chemicals and building machinery takes additional time but yields much higher output. Without underconsumption, people wouldn’t be able to embark on processes involving longer periods of production. Productivity and living standards wouldn’t rise.
Without savings there is no economic growth. Printing money and having people spend does not create a single new capital good or consumer good, it merely allows someone to buy something they didn’t earn by producing.
21. September 2011 at 00:23
To make that last post relevant to the question of which is better, monetary or fiscal policy, I’ll add that the best fiscal policy is to spend as little as possible and the best monetary policy is commodity money which governments and banks cannot produce in massive quantities at low cost.
In order to fix a downturn, you have to understand what caused the boom. Booms are products of credit expansion. What makes them unsustainable is the lack of savings available to back up this credit expansion. Society literally lacks the capital goods, which savings creates, to produce and consume at boom levels. As prices of factors of production rise, eventually the errors of entrepreneurs and their cheap credit financed projects become apparent.
In order to solve this misallocation of resources, prices must adjust to reflect the underlying realities. For instance the price of houses or tech companies must fall so that resources are channeled into projects consumers need more urgently.
Any attempts to stop these prices adjustments, especially manipulating interest rates and pursuing greater credit expansion (monetary policy) either paralyze the system or exacerbate the problem by creating another unsustainable boom people must pay for later.
Fiscal policy can be damaging as well because government spending isn’t subject to profit or loss and therefore has no feedback mechanism. It is impossible to know whether government spending increased or decreased well-being because it doesn’t rely on voluntary contributions to fund its projects. Unprofitable projects, which include most government projects, waste resources in the eyes of the consumer.
21. September 2011 at 02:39
“If the govt has more debt, the private sector has more assets, to the dollar. By accounting. This is always expansionary”
What does MMT say about the Swiss CHF intervention? If the SNB expands the monetary base to buy bonds denominated in EUR, is it still “just” an asset swap for the private sector?
21. September 2011 at 03:02
Scott, if you’re going to criticise a black man for speaking inappropriately to a white woman, it might be better not to use the word “buck” in the title of your post.
Yes, I know the expression is quite innocuous to those who know their history, but so is “shot his wad”.
Incidentally, it’s surprising how many people think it’s vulgar to say “it’s cold enough to freeze the balls off a brass monkey” but that phrase, too, is quite innocuous.
21. September 2011 at 04:01
[…] Christina Romer wanted more monetary stimulus, but Obama made up his mind on fiscal stimulus before …. […]
21. September 2011 at 05:02
I’m taking grains of salt on this one. For one, I had a difficult boss, once, who was tough to convince to do the right thing. It was my job to keep her out of trouble. But she expected me to be thorough, and I had to work at it.
I look at the situation here, if there is any degree of truth to it, as that was their job – to convince Obama of the right thing to do.
Given the economic calamity that has unfolded over the last few years, it really is no wonder everyone, especially Obama’s former economic advisers are running from him. If they told him fiscal was the only thing to do, they are set to have forks stuck in them – finished.
I blame them all. They were all there, and all responsible for the mess.
21. September 2011 at 06:06
John,
Yes, G could stand for Gary, but Gary doesn’t issue currency that can be used to extinguish tax liability. So that would just reflect the point that the amount of new assets of the private secor is equal to new liablities (Gary’s IOU). Exactly my point.
You are assuming full use of resources. look out of the window. Unemployment is 10%. In this sense we live in a world of unlimited resources: by spending more you can employ more of them. Of course it ceases to work once you reach full capacity utilization. By deficit spending you can reach full capacity, but of course not stimulate technological progress, nobody claims that. So your critique of MMT is simply a critique of your misunderstanding of what MMT is.
21. September 2011 at 06:40
W Peden
If the Fed works for Wall Street, it’s either doing a phenomenally lousy job or it really doesn’t have much power.
It rescued all the US banks with unlimited loans. Now it is rescuing EU banks giving ECB loans with no collateral whatsoever. So you bail out Wall St no questions asked. The Fed gave Wall St credit guarantees to the tune of 20T, did you know that? Yes, it trumps the whole “debt” US raked up in all of its existence.
21. September 2011 at 07:05
Oh my,
I assure you I wasn’t assuming full resource utilization. There are two problems with the general Keynesian argument about idle resources. The first is that they assume that production should continually grow based on levels projected out from the height of a boom. Almost any economist worth their salt knows that a boom like the last one was unsustainable. Consumption and investment increased by through low to negative savings rates and home equity financing. The economy was able to produce and invest at a high level by consuming capital. Insisting that the government print money to keep economic activity at these unsustainable levels is ridiculous.
The second problem with the idle resources argument is that having idle resources doesn’t justify government involvement. Following a boom-bust, price signals need to work to shift resources around into profitable uses. Just because the government prolonged the recession by interfering with price signals doesn’t mean that they can use resources more efficiently than the private sector. The government needs to stay out of the way and let markets clear rather than pour money down the toilet.
MMT has some interesting aspects. I liked the article you linked to about bank reserves not being inflationary, and I’ve read some interesting things they’ve written about international trade. However, from what I can tell, Modern Monetary Theory almost completely ignores the importance of efficiency and the problems of rational resource allocation. For rational resource allocation you need an economy based on profit and loss as well as accurate market prices. The policy recommendations of MMT undermine these two most essential components of economic health by advocating high government spending and rampant use of the printing press.
21. September 2011 at 07:20
Scott, you said:
>Because most of the Board is Obama appointees, and he should have two more on there by now. Bernanke needs supporters because a number of people at the Fed oppose him. So it’s not just what Bernanke thinks. Obama didn’t understand the importance of getting his
Gotcha, understood. However, given these recent revelations maybe maybe maybe maybe leaving those seats empty has been _better_ for the nation. He could have appointed people who agree that productivity gains are driving unemployment, right?
21. September 2011 at 08:05
I take this as an opportunity to blame Krugman. Of course, I don’t know whether Krugman had any influence on Obama’s thinking, but given Krugman’s constant droning on about ‘conventional monetary policy is powerless’, it’s very possible. Krugman won the Nobel in October 2008 and the conversation between Romer and Obama was in November 2008.
See this:
http://www.nytimes.com/2008/09/19/opinion/19krugman.html?scp=4&sq=krugman+monetary+policy&st=nyt
And the Federal Reserve, which normally takes the lead in fighting recessions, can’t do much this time because the standard tools of monetary policy have lost their grip. Usually the Fed responds to economic weakness by buying up Treasury bills, in order to drive interest rates down. But the interest rate on Treasuries is already zero, for all practical purposes; what more can the Fed do?
Well, it can lend money to the private sector “” and it’s been doing that on an awesome scale. But this lending hasn’t kept the situation from deteriorating.
http://krugman.blogs.nytimes.com/2008/11/07/gurk-zirp/?scp=11&sq=krugman+monetary+policy&st=nyt
http://krugman.blogs.nytimes.com/2008/10/08/the-trouble-with-rate-cuts/?scp=6&sq=krugman+monetary+policy&st=nyt
21. September 2011 at 09:40
One other thing that MMTers can’t get their minds around is the role that savings and capital accumulation play in improving economic conditions. They have this in common with the Keynesians tho.
21. September 2011 at 11:13
SS- “OhMy, In new Keynesian models the fiscal multiplier is zero.”
This is not always true, see Eggertson’s work on “What Fiscal Policy Is Effective at Zero Interest Rates?”
http://www.newyorkfed.org/research/staff_reports/sr402.pdf
He explicitly argued against (some, supply-side) tax cuts as being contractionary.
*Many* New Keynesian models have a zero multiplier, but not all. Part of this is that there are tons of different New Keynesian models, so I don’t know that any blanket statement about them would be correct, except maybe that they don’t include price and wage flexibility. NK models include productivity shocks, so we should just call the whole literature DSGE.
21. September 2011 at 11:18
“He explicitly argued against (some, supply-side) tax cuts as being contractionary.”
This is unclear- I mean that Eggertson argues that all tax cuts are not equal at the zero lower bound, though some can function as fiscal stimulus.
21. September 2011 at 11:46
“W. Peden, and the IMF also upgraded their forecast for the level of UK NGDP in 2011; now 1.2% higher than the level they predicted in April 2010 – expansionary fiscal contraction in action.”
Britmouse- Everyone is entitled to their opinion, but not their own facts, as the saying goes.
http://www.guardian.co.uk/business/2011/sep/20/imf-uk-growth-forecast-cuts
UK growth just got *downgrade* by the IMF for the umteenth time. Saying upgraded over April 2010 is meaningless, and the IMF came close to arguing for a policy reversal from the failed fiscal contraction:
“The IMF said it was cutting its growth forecast for the UK to 1.1% this year – down from 1.5% in June, 1.7% in April and 2% at the start of the year. It also predicted a more sluggish recovery in 2012, with activity expanding by 1.6% against the 2.3% it was predicting just three months ago. ”
The UK benefits from having a floating exchange rate, that’s why they are marginally better off than the continent. But a Labour administration would have been a better choice for stimulative policy at the zero lower bound. Just look at Japan in the 30s for an example of fiscal and monetary policy working in tandem for rapid economic growth.
http://www.eh.net/eha/system/files/ShibamotoShizume.pdf
21. September 2011 at 11:52
justanothereconomist,
Had Labour won, I think it’s at likely that (at best) the Bank of England would have raised interest rates earlier in this year and at worst we’d have a credit downgrade. The UK’s finances are a joke; the only reason no-one is laughing at us is because we have a more credible deficit reduction strategy than almost anyone else.
The sad truth is that the UK’s problems are primarily supply-side, not demand-side. In fact, it’s arguably that our supply-side problems are so severe that a debt crisis is inevitable at some point-
http://www.tullettprebon.com/Documents/strategyinsights/Tim_Morgan_Report_007.pdf
21. September 2011 at 12:13
You really go astray with this post, Mr. Sumner. On the basis of what Suskind says Obama told Romer in two short sentences (!) two months before his inauguration (!), you say:
“Just try to imagine those meetings between Obama and (Ben) Bernanke. We were all envisioning Obama pressing Bernanke to do more. Now it looks like Bernanke was telling Obama that the Fed could provide much more monetary stimulus if it wanted to, Obama was insisting it couldn’t . . . ”
Now that’s one giant leap of imagination, even for a blogger.
It also is contrary to the implications of Obama’s re-appointment of Bernanke as Fed chair more than a year later.
Finally, if Bernanke wants the Fed to “provide much more monetary stimulus” there’s zero evidence that Obama is stopping him or that, as a matter of law, he could.
In fact, since that initial meeting between Obama and Romer nearly three years ago, the Fed has done plenty in the way of monetary stimulus.
Now it might be argued that the Fed hasn’t done enough and/or that it’s done the wrong things. But to imply, as you do that Obama has prevented the Fed from using monetary policy to combat the economic crisis is demonstrably wrong.
Bloggers’ principal occupational hazard is that they have no editors to “spike” a proposed blog post before it’s published on the grounds it’s BS.
21. September 2011 at 12:38
justanothereconomist. You are confusing nominal with real, levels with growth rates, and the Labour administrator with competent government, amongst other things.
Check the forecasts for UK GDP at current prices in 2011 in the IMF WEO database; it has gone up from £1513bn (Apr 2010) to £1532bn (Sep 2011). Fiscal contraction has not reduced the level of nominal spending in the economy (or indeed the growth rate thereof).
21. September 2011 at 13:28
Maybe Obama got the idea that fiscal stimulus was the only option from reading or talking to no other than Paul Krugman.
That sounds like a column waiting to be written by Scott Sumner…
21. September 2011 at 15:10
“Had Labour won, I think it’s at likely that (at best) the Bank of England would have raised interest rates earlier in this year and at worst we’d have a credit downgrade. The UK’s finances are a joke; the only reason no-one is laughing at us is because we have a more credible deficit reduction strategy than almost anyone else.”
Nope, central bank policy would have been the same and fiscal stimulus would have provided a boost to growth.
“The sad truth is that the UK’s problems are primarily supply-side, not demand-side. In fact, it’s arguably that our supply-side problems are so severe that a debt crisis is inevitable at some point-”
We’ve seen what the kind of rhetoric has gotten us in the US- nowhere good. With enough demand, the UK in 2020 can be just like the UK in 2005- a prosperous, high growth, low inflation country.
“You are confusing nominal with real, levels with growth rates, and the Labour administrator with competent government, amongst other things.”
For nominal GDP growth, you missed the Zimbabwean miracle- it was a sight to behold.
I’m not necessarily opposed to nominal GDP targeting, but ultimately what matters is real GDP. If you want to take credit for import cost shocks to the UK as higher nominal GDP growth, that’s strictly correct but pretty much totally uninformative.
Good luck in the next elections though, and dodging the next round of riots. The voters and hoodlums will show you what they think about austerity….
24. September 2011 at 13:45
OhMy, You said;
“Because they get stock-flow consistency wrong. You cannot have more spending being not expansionary unless you assume that people react to govt deficits by miraculously restricting spending by exactly the same amount. Nonsense.”
It’s clear you aren’t familiar with those models. They assume a monetary policy offset (inflation targeting.)
W. Peden, Good point about the difference between fiscal and monetary policy.
Kevin, You said;
“Scott, if you’re going to criticise a black man for speaking inappropriately to a white woman, it might be better not to use the word “buck” in the title of your post.”
Thanks, I’ll keep that in mind if I ever criticize a black man for speaking inappropriately to a white woman. But I don’t expect I ever will.
Mike Russell, Good point!
TravisA and Meegs, Yes, he might have been reading Krugman.
Justanothereconomist, I agree, but the standard model implies zero.
Fred, I didn’t say Obama has stopped the Fed, I said he hasn’t provided enough dovish voices on the Fed. The fact that he reappointed Bernanke has no bearing on my argument, because we don’t know whether that helped or hurt.
2. October 2011 at 05:43
[…] explanation. And I suppose the explanation here is obvious. As Christy Romer discovered, most average people think it obvious that the Fed was out of ammo. So if the Fed loudly said lots of things that […]