Monetary policy is a panacea for demand shortfalls, for low NGDP

That’s my view and that’s Mr. Bernanke’s view.  At least I think it’s Mr. Bernanke’s view.  See what you think:

WASHINGTON, Oct. 4 (Xinhua) — U.S. Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that monetary policy is not “panacea” for curing the U.S. economic problems, while calling for the Congress and all economic policymakers to act together to boost the recovery.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Bernanke said in his testimony before the Joint Economic Committee of U.S. Congress. “Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”

The central banker said that “fiscal policy is of critical importance,” adding that a wide range of other policies– pertaining to labor markets, housing, trade, taxation, and regulation, for example– also have important roles to play.

If I knew nothing about Bernanke, I’d almost think he’s saying monetary stimulus won’t necessarily boost demand.  But we know he thinks it will, that the Fed’s never out of ammo.  So he must mean that more demand won’t necessarily boost RGDP. 

But every time I read that quotation I start to wonder.  And that makes me really angry.  I presume Bernanke is doing this unintentionally, but he’s leaving the message very unclear, and I find that intolerable.  We need to know exactly where the Fed stands.  If there are any reporters reading this blog, I beg you to pin him down at the next press conference.  Does he believe monetary policy has unlimited ability to boost nominal spending, or not?  What does he mean by no panacea?  More money doesn’t boost AD, or more AD doesn’t boost RGDP?  Is he trying to disavow earlier comments that the Fed is not out of ammo, and never will be? 

I have this dream where I’m at a fancy Washington DC cocktail party.  I grab Bernanke by the arm and drag him over to President Obama.  I say; “Ben, tell the President what you just told me, that the Fed can easily boost nominal spending in the US economy, but doesn’t think we need any more demand.”  Then I wake up, and realize that the world isn’t like that.  There is no imaginary cocktail party where views can be reconciled.  People will keep talking right past each other, not understanding each others views on the most important issue facing the world today.  What a shame.


Tags:

 
 
 

46 Responses to “Monetary policy is a panacea for demand shortfalls, for low NGDP”

  1. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 17:47

    Yeah, Scott you just keep talking past me.

    I give you a perfect explanation of Ben’s RATIONAL thinking, and you refuse to come to terms with what it means:

    Bankers > GOP > Democrats

    When he gets this explicit, it means he’s reaching past protecting bankers and actually trying to push Democrats away from their goals.

    I read this today and it sure sound far more bossy over Fiscal than Ben usually sounds. it sounded like his private sector bias was showing.

    “Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”

    Means BEND OVER and do what the private sector wants.

    Any attempt by those here (or you) to say that can be read two ways forgets:

    1. Who he was admonishing. He wasn’t talking to the private sector.
    2. That he is a Republican.

    When he says don’t make short term cuts too drastic, but fix the long term situation, that means:

    1. End public employee unions.
    2. Cut entitlements.

    This is a FACT. It is a FACT because that is what is required to tackle long term spending. You have to do BOTH to do what he says must be done.

    It cannot happen without those two things occurring, so when Ben says we have to have it – STOP standing there and acting like you don’t understand.

    Which BTW Scott you support.

  2. Gravatar of JPIrving JPIrving
    4. October 2011 at 17:47

    The 5 year TIPS spread is about 1.5, the Euro is 1.33somthing, oil is 77, copper….things are clearly worse than before QEII, yet still no action. I think Bernanke is pretty clearly aiming to sabotage Obama and lower the long run inflation rate to <1%. Even if he is just trying to avoid a public battle on the FOMC, he is acting on behalf of those who are seeking these ends. For my own part I can't give him the benefit of the doubt anymore.

  3. Gravatar of Scott Sumner Scott Sumner
    4. October 2011 at 17:55

    Morgan, Fine, then he should say so.

    JPIrving. The comments on China were the worst thing I’ve ever heard him say.

    The Wall Street protesters should be outside the Fed.

  4. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2011 at 18:12

    Take down the Stars and Stripes
    While it lasted, it was fun
    Run up some new cloth over the Fed
    The flag of the Rising Sun

  5. Gravatar of Bonnie Bonnie
    4. October 2011 at 18:27

    “The Wall Street protesters should be outside the Fed.”

    This would make a great title for another post like this one!

    What Bernanke said means something different to all listeners and he meant it that way. There was something there for Republicans, something for Democrats, and everyone else in between. It could very likely be a way to deflect criticism from both sides without telling them why they are wrong, or bothering to smooth the feathers, hoping he can obfuscate the issues in a mass of double-speak and sneak out the backdoor. To the rest of us it means “Let them eat cake!”

  6. Gravatar of MikeDC MikeDC
    4. October 2011 at 18:29

    I thought Bernanke goes to the White House and meets the President every month or so. I’d love to know what those conversations are like.

  7. Gravatar of Matthew Yglesias Matthew Yglesias
    4. October 2011 at 19:12

    The state of the art thinking in DC, as I understand it, is that with interest rates and capacity utilization low monetary policy may not be able to boost NGDP by arbitrary amounts. Under the circumstances, to push it up non-trivially might require “crazy” steps that cause inflation expectations to become dangerously unanchored. So you need fiscal policy + monetary accommodation (i.e., bigger short-term deficit + Fed holds interest rates low) to produce the kind of moderate AD stimulus that’s wanted.

    Unclear to me where this model comes from, or what evidence people think they have for it. But it’s a popular view among professional staff at Treasury & Fed and is bouncing around in the heads of some important principals and “name” economists. See Peter Diamond’s remarks to Ryan Avent and what Donald Kohn and Joel Prakken told Dylan Matthews.

    To me this seems like what happens when a bunch of really bright people fuck up. Rather than admit that they fucked up, they’re devising clever theories to explain why they haven’t fucked up.

  8. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 19:13

    Scott, that violates:

    Bankers > GOP > Democrats

    If he says it word-for-word like I do, then the Dems gain power, which violates the above MO.

    This is why you have to learn to listen to Greenspan.

    Greenspan is as close to Ben unleashed as you are going to get, because Greenspan gains from clarity after the bashing his rep has taken.

  9. Gravatar of dtoh dtoh
    4. October 2011 at 19:48

    Scott,
    It seems likely that the end game is to a) get rid of Obama and as many Democrats as possible at the next election and/or b) to roll back some liberal policies even if it requires short term economic pain. What is unclear is whether Bernanke is supportive of this or whether he is doesn’t have enough votes and is being outflanked by the conservative (i.e. pro-Republican) members of the FOMC.

  10. Gravatar of Philip Crawford Philip Crawford
    4. October 2011 at 19:49

    I was thinking the key word of the quote is “healthy”. What does he mean by that? Why use that word? Possibly due to the reasons Mathew states above?

  11. Gravatar of Louis R. Woodhill Louis R. Woodhill
    4. October 2011 at 20:17

    I don’t think that there is anything that the Fed can do to boost NGDP as long as the IOR interest rate is above the 90-day T-bill interest rate. Any new “money” they create (and it’s hard for me to think of interest-paying reserves as “money”), it will just go into the “roach motel” that they’ve created.

    When IOR was introduced on 10/6/08, both the real economy and the equity markets went off a cliff. In 2Q2010, the IOR rate was about 10 bp above the 90-day T-bill rate. Now it’s 25 bp higher. And, the economy is tanking again. I say that this is not a coincidence.

    No matter what else is done or not done, the economy will not recover until the 90-day T-bill rate is above the IOR rate. As a practical matter, this means that the economy will not recover until and unless IOR is ended.

  12. Gravatar of Dan Kervick Dan Kervick
    4. October 2011 at 20:19

    Well, I’m encouraged by Bernanke’s statement, because it indicates that the Fed and the punditry and politicos are finally developing a more proper and realistic understanding of the limits of the CB’s role in our economy. Here are some things I believe personally; and I think Bernanke’s statements are broadly consistent with them:

    - The Fed’s capacity to boost demand and spending is not unlimited.

    - To the extent the Fed does possess the capacity to boost demand and spending, that capacity can sometimes not be exercised without producing other unwholesome and unwelcome economic effects, such as excessively high rates of inflation.

    - Higher inflation most harms the worst-off in our economy: those whose incomes are fixed or who have so little bargaining power that their nominal wages are unlikely to be driven upward in response to higher prices, and who will therefore experience a real decrease in their standards of living as a result of those higher prices.

    - In a buyers’ market for labor with double-digit unemployment, wage bargaining power is extremely limited, so nominal wages are likely to lag increases in the price level. The result is anti-stimulatory, not stimulatory.

    - For those whose nominal wages are stuck in this way, inflation does not assist with delevergaing from debt. The real value of the debt declines, but so does the real value of the wages; the nominal value of the debt stays where it is and so does the nominal value of the wages. So the worker has to work the same number of hours to pay of debt at the same pace. Meanwhile, other costs have gone up.

    - To the extent that the Fed does possess the power to boost demand and spending, the tools at its disposal are exceedingly blunt, crude and inefficient. That is because the Fed does not have the power to inject purchasing power directly into those sectors of the economy where increased purchasing power is likely to have the most significant and dynamic effects. Fiscal authorities, on the other hand, have both the power to spend themselves on specific goods and services, and the power to inject income into specific sectors of the economy where the added income is most likely to be spent or invested immediately. The Fed can only swap assets with financial sector bank accounts, or further adjust already extremely low interest rates.

    - Part of the Fed’s power to increase demand and spending is grounded in its power to raise inflationary expectations, which lead some people to spend now rather than later. But Fed influence over expectations – even among the limited class of people who allow their expectations to be influenced by Fed statements – has been diminished by the Fed’s recent ineffectiveness, which has dissipated some of the superstitious mystique that once attended Fed pronouncements, and disconfirmed false and outdated theories about the causal channels through which the Fed influences economic activity. Many people, of course, are not moved one way or another by Fed pronouncements, or the analyses of Fed-watchers, and so the Fed has never had much influence over their expectations anyway.

    - Over-reliance by the political class on the crude and blunt tools of monetary stimulus to squeeze more spending out of the economy is serving as an enabler of fiscal inaction and neglect of official duties. Incumbents in both parties need to be put on notice that the Fed will no longer ameliorate the effects of fiscal neglect, and that if the political branches do not begin to discharge their fiscal duties competently, they are all likely to face electoral defeat next year.

  13. Gravatar of Dan Kervick Dan Kervick
    4. October 2011 at 20:23

    I was thinking the key word of the quote is “healthy”. What does he mean by that?

    Maybe he means that blowing up another asset bubble – which appears to be one of the effects of QE and QE2 – is not a healthy way to advance a recovery, especially when we might be on the verge of another financial asset collapse – this time in Europe?

  14. Gravatar of John John
    4. October 2011 at 20:31

    Dan,

    Great posts.

    Scott,

    I can’t wait to hear what you have to say about Bernanke’s China comments. It amazes me that guys like Krugman and Bernanke will fight against peaceful exchanges. Even if the Chinese are pegging their currency low, that is essentially a gift to the American consumer at the expense of the Chinese. You’d think with all the logic and experience behind the benefits of free trade policy, the top economists in the world would get that right under pressure.

  15. Gravatar of Mike Sandifer Mike Sandifer
    4. October 2011 at 20:31

    Scott,

    Here is a blog post bashing the Fed, which concerns me, because of the way it’s done:

    http://www.washingtonsblog.com/2011/10/protesters-target-federal-reserve.html

    You can notice the anti-Fed chanting in the protest video link.

    Sometimes I wonder if the Fed understands how dangerous its timidity is to itself as an institution. A good central bank is one that average people don’t talk about.

    Personally, I’d like people on the FOMC to say they can and will stimulate the economy to full employment and back to trend growth, without overshooting much with inflation, but if they do overshoot, they easily can and will correct the problem. Then, they should just get it done.

    There might be hysteria for a little while as the Fed proceeds, but very few people will care if the economy picks up, especially if it’s considered to have fully recovered with inflation where it should be.

  16. Gravatar of K K
    4. October 2011 at 20:34

    “If I knew nothing about Bernanke, I’d almost think he’s saying monetary stimulus won’t necessarily boost demand.  But we know he thinks it will, that the Fed’s never out of ammo.”

    No, he doesn’t think that. If all bonds are at zero yield and the NGDP growth is negative and declining, then you’re dead. The market prices zero probability that rates will ever be above zero, and your promises about future inflation are literally worthless. Helicopter drops still work though. Unfortunately those aren’t available.

  17. Gravatar of Mike Sandifer Mike Sandifer
    4. October 2011 at 21:12

    I just noticed a link to this in the comment section of the post I linked to above:

    http://kucinich.house.gov/news/email/show.aspx?ID=X7EX6WS6JW7AZSDNJHSVS5UZXM

    Representative Dennis Kucinich was introduced a bill that would have the government basically print money to pay for new infrastructure spending, putting 7 million Americans to work.

    http://kucinich.house.gov/news/email/show.aspx?ID=X7EX6WS6JW7AZSDNJHSVS5UZXM

    To quote from the short article:

    ‘“The ability to coin money is an inherent power under Article I, Section 8 of the United States Constitution. The NEED Act would control inflation because it will enable the government to invest in America by creating infrastructure, which is real wealth. Inflation is caused when new money is created without the creation of new wealth,” explained Kucinich.’

  18. Gravatar of Liberal Roman Liberal Roman
    4. October 2011 at 21:17

    Matt Y,

    If you have any pull over there in Washington, tell them to PLEASE READ THIS BLOG!!!

    Please Matt. This is our only hope! And your only hope as a liberal!

    Also, I was not encouraged by Bernanke’s statements. It seemed schizophrenic actually. Or rather it was schizophrenic from a perspective of a reader of this blog. In reality, I think that the has some model in his head that he is not letting on and its something close to what Yglesias described up above.

  19. Gravatar of John John
    4. October 2011 at 23:13

    I really don’t think there is any such thing as a panacea in this case. Without setting the private sector free to produce, which requires regulatory overhaul and prudent use of government spending, monetary efforts to solve the crisis will prove disappointing.

  20. Gravatar of FT Alphaville » Further reading FT Alphaville » Further reading
    4. October 2011 at 23:16

    [...] need to know exactly where the Fed [...]

  21. Gravatar of dwb dwb
    5. October 2011 at 04:05

    Weird, I have this dream I am at the a party too, except your on the FOMC.

  22. Gravatar of brendan brendan
    5. October 2011 at 05:22

    Bruce Bartlett was on CNBC this morning, suggesting the Fed start targeting NGDP…bashing republicans, etc. The folks at CNBC, including Mohamed El-Erian, reacted as if they’d never heard of the idea before.

  23. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2011 at 05:49

    It will be superfunhappydays watching Bartlett trying to buy his way back into the GOP with Scott’s argument.

    Dan,

    You bring all the right weapons to the fight, but you are holding the wrong end of every one of them.

    1. We’ll end Obamacare. Which will do wonders for the confidence fairies, you’ll just have to wait and see. But we WILL see DeKrugman go from laughingly asking where they are, to decrying that OF COURSE evil businessmen will do more business if their costs go down / profits go up.

    2. We’ll use the fear of fixed incomes being inflated away to force the fiscal contraction of govt. This expresses itself EXACTLY like Wisconsin.

    It took less than two months for the schools districts to announce they had had new found budget surplus when they stamped on public employees.

    Dude, they HIRED more teachers. Even retards get it.

    It is an immediate positive feedback loop. When you are doing corporate turnaround, cutting out overpriced lazy workers, is the FIRST THING.

    3. With the public employee unions out of the way, and a healthy dollop of NGDP targeting / easier money, we can solidify GOP = Growth.

    And that’s how we get the strength to deal with entitlements.

  24. Gravatar of flow5 flow5
    5. October 2011 at 05:56

    Bernanke is stupid. The number of economic turning points (let alone levels), he’s missed is astonishing (and should be grounds for his immediate dismissal). And real-gDp takes off before inflation, as anyone who has actually traded the markets would be acutely aware of.

  25. Gravatar of Dan Kervick Dan Kervick
    5. October 2011 at 06:03

    Morgan,

    I would be more than happy to see private companies get out of the health insurance purchasing business altogether. Turn the whole thing into a social service with a single monopsony purchaser. That will reduce health care costs and also reduce the cost of hiring for private businesses.

    My view is that we need an expansion of government, funded primarily by taxing surplus savings away from affluent people who don’t spend them on consumption and don’t invest them in anything very productive. Soak the rich, and deliver the funds to all those states who will have no trouble at all hiring people very quickly to fill the decimated state employment ranks. I know you disagree.

    Let the real entrepreneurs keep their money if they are creating jobs with it, but we can’t afford to have a lot of idle, inert capital sitting around doing nothing but fattening the bank accounts of the fat.

  26. Gravatar of K K
    5. October 2011 at 06:09

    John: “Even if the Chinese are pegging their currency low, that is essentially a gift to the American consumer at the expense of the Chinese.”

    Right! So we have to decide how to collect that gift. One way (in theory) is to
    Impose a tariff that brings imports back to equilibrium and pay the proceeds to exporters. That restores equilibrium prices and ends the wealth transfer from importers to exporters.

  27. Gravatar of Kevin Donoghue Kevin Donoghue
    5. October 2011 at 06:46

    Matthew Yglesias: “The state of the art thinking in DC, as I understand it, is that with interest rates and capacity utilization low monetary policy may not be able to boost NGDP by arbitrary amounts. Under the circumstances, to push it up non-trivially might require “crazy” steps that cause inflation expectations to become dangerously unanchored.”

    Matt wonders where this model comes from.

    Well, there was some guy who suggested that “a moderate increase in the quantity of money may exert an inadequate influence over the long-term rate of interest, whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence….” Maybe they read that guy’s book.

    If so, state-of-the-art thinking in DC has reached the level attained at King’s College, Cambridge in 1936.

    I only wish the guys in Frankfurt were as advanced.

  28. Gravatar of Bob Murphy Bob Murphy
    5. October 2011 at 07:19

    Scott wrote:

    Then I wake up, and realize that the world isn’t like that. There is no imaginary cocktail party where views can be reconciled.

    Sure there are gatherings like that, Scott. Bilderberg meetings and CFR meetings, for example. But I agree, the participants don’t sweat bullets wondering, “How can we boost RGDP?!”

  29. Gravatar of Gabe Gabe
    5. October 2011 at 07:24

    You act as if Bernanke and Obama actually make the real policy decisions. These people are teleprompter readers. They issue PR talking points, they don’t get involved in things like logical debate, they don’t solicit opinions from the blogs widely thought of to be the most insightful regarding monetary policy. I hope you keep trying to corner the bastards Scott, your reputation is growing. People under 40 go to these blogs to get monetary policy discussion these days…they don’t go to the NYT and WSJ for that anymore, because we know those are professionally framed talking points intentionally designed to keep people asking the wrong questions and leaving the important topics off the table.

  30. Gravatar of Gabe Gabe
    5. October 2011 at 07:28

    Bilderberg doesn’t exist neither does the CFR or the Club of Rome or the Group of 30 or the Trilateral Commission. Stop spreading conspiracy theories.

    The Democrats and Republicans are trying to represent the masses and debating the important issues every day…just vote more and everything will get better. The Fed is trying to improve our lives Bob with better Partial Differential Equations, how can you be so cycnical as to not get that?

  31. Gravatar of Oscar Oscar
    5. October 2011 at 07:29

    Or maybe Bernanke is deliberately fooling us all so he can pave the way for QE3.

    http://www.merkfunds.com/merk-perspective/insights/2011-10-04.html

    A quote

    “Whereas his predecessor Paul Volcker took years to convince the markets that the Fed was serious about fighting inflation, Bernanke appears to be relentless in trying to convince the markets that deflation is not going to happen in his back yard. But why not simply print more money as the economy has slowed (engage in “QE3”)?

    It looks like Bernanke at least wants to maintain the appearance of keeping long-term inflation expectations low. Earlier this year, Bernanke complained a few times that the risk-reward ratio of another round of easing is not all that clear. Well, how about making it clearer, by:

    First crushing the short end of the yield curve by committing to keep interest rates low until the middle of 2013.
    Then lower long-term interest rates by initiating “Operation Twist”, the selling of short-term securities by the Fed in the billions, then reinvesting the proceeds in long-term securities.
    Add to that overall gloomy economic data, and conditions may be ripe for inflation expectations, as priced into bond price differential with and without inflation protection, to drop.”

  32. Gravatar of Cthorm Cthorm
    5. October 2011 at 07:31

    “Turn the whole thing into a social service with a single monopsony purchaser. That will reduce health care costs and also reduce the cost of hiring for private businesses.”

    Dan – this is a dangerous idea. You are overestimating the benefits from economies of scale in bargaining and staffing, while vastly underestimating the consequences for healthcare R&D. For all its myriad flaws, the US healthcare system is highly supportive of medical technology and treatment R&D. Monopsony organizations encourage mediocrity in exchange for bargaining power. Look at NASA – manned space flight has been stuck with the Space Shuttle for 30 years. In much less than a decade of development and production, private operators like SpaceX are offering low earth orbit launches for 1/30th the price of a Space Shuttle launch. We would be much better off cleaning up the market distortions and paperwork-intensive red tape to make private healthcare more efficient. If you’re concerned about universal coverage, eliminate the patchwork of medicare and medicaid and just offer universal catastrophic health insurance.

  33. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2011 at 07:50

    Dan,

    I too want to have a universal healthcare system, but I’m REALISTIC.

    I know the haves deserve BETTER CARE, the same way they deserve BETTER CARS, BETTER EDUCATION, BETTER CHEESE, BETTER PHONES than the have-nots.

    If you just accepted this one fact, you’d have been able to score yourselves a low end single payer public option.

    I suggested you call it Soup Kitchen Care. You get $4K per man per year tied to inflation (not health care inflation driven by high tech rich wanting newest stuff before they die).

    But you run it like the VA, gvt. hired doctors, gvt. owned hospitals everybody is a number, everybody queues, no one picks their doctor or their treatment, you means test, so that free riders have to go to Soup Kitchen Care, and they still pay after the fact. (no illegal mandate).

    All that technocratic crowdsourced death panel stuff – you can do ALL OF IT – to the have-nots.

    And IF you do a great job, people will choose to buy you low end car, your low end cheese, your low end phone.

    This would SELL. Because this gets to the underlying issue that the 85% of the haves with insurance have with Obamacare.

    It ensures that the have-nots get less than the haves.

    You can sell it by putting it down, “ANYONE who can afford their own insurance SHOULD BUY it, because this is just for those who can’t cover themselves, and it isn’t as good!”

    Anyhoo, that’s how you win the silent majority to your side, you make sure your policy accepts that “beggars can’t be choosers.”

    Guarantee them that, and they’ll be as Christian as they are advertised to be.

  34. Gravatar of Richard A. Richard A.
    5. October 2011 at 07:56

    It looks like Bernanke is trying to scapegoat the Chinese.

    Bernanke blasts China for currency manipulation
    http://www.csmonitor.com/Commentary/Editorial-Board-Blog/2010/1119/Bernanke-blasts-China-for-currency-manipulation

  35. Gravatar of Gabe Gabe
    5. October 2011 at 08:00

    The views being reconciled are more like…”what is the better way to implement a global taxing mechanism on the herd?…are we having better luck using the green scam or do we need to get more of the republicans on board by having Greenspan, Murdoch’s boys and Rush Limbaugh emphasisze the need for a VAT? Perhaps we just need to create some scarier Emanual Goldstein’s?”

  36. Gravatar of Gabe Gabe
    5. October 2011 at 08:08

    “perhaps escalating the tensions with china will allow us to scare the herd into allowing us to ramp up the taxes, good job Bernanke!…now get on the horn with Mao junior(kissinger’s buddy)…tell him to shoot a couple missiles at Korea…then we can surely get the serfs to quit bitching”

  37. Gravatar of TheMoneyIllusion » Words of wisdom from Matt Yglesias TheMoneyIllusion » Words of wisdom from Matt Yglesias
    5. October 2011 at 08:33

    [...] following comment left by Matt Yglesias is a gold mine, which will generate a number of posts: The state of the art thinking in DC, as I [...]

  38. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. October 2011 at 09:46

    ‘Incumbents in both parties need to be put on notice that the Fed will no longer ameliorate the effects of fiscal neglect, and that if the political branches do not begin to discharge their fiscal duties competently, they are all likely to face electoral defeat next year.’

    Be careful what you wish for, Dan.

  39. Gravatar of Morgan Warstler Morgan Warstler
    5. October 2011 at 11:17

    This is why we have to have “Fiscal First”:

    http://www.nytimes.com/2011/10/05/us/farmers-strain-to-hire-american-workers-in-place-of-migrant-labor.html?src=tp&smid=fb-share

    ““They wanted that $10.50 an hour without doing very much,” he said. “I know people with college degrees, working for the school system and only making 11 bucks.”

    A mismatch between employers’ requirements and the skills and needs of the jobless — repeated across industries — has been a constant theme of this recessionary era. But here on the farm, mismatch can mean high anxiety.”

    ALL of the 99% sitting on their asses on Wall Street ought to picking this guys corn.

  40. Gravatar of BullseyeMicrocaps.com » Words Of wisdom From Matt Yglesias BullseyeMicrocaps.com » Words Of wisdom From Matt Yglesias
    5. October 2011 at 11:26

    [...] following comment left by Matt Yglesias is a gold mine, which will generate a number of posts: The state of the art thinking in DC, as I [...]

  41. Gravatar of Scott Sumner Scott Sumner
    5. October 2011 at 16:36

    Ben, I’,m afraid so.

    Bonnie, Yes, I’ve thought of doing a post.

    MikeDC, The conversations are Obama telling Bernanke that he’s “shot his wad.”

    Thanks Matt, I did a post on that.

    Morgan, Greenspan?

    dtoh, That’s certainly the endgame of some in the GOP, but probably not Bernanke.

    Philip, Because it suits his purpose to be vague?

    Louis, Yes IOR is a huge problem, we both agree on that.

    Dan, You said;

    “The Fed’s capacity to boost demand and spending is not unlimited.”

    No, Bernanke thinks it’s unlimited.

    You said;

    “To the extent the Fed does possess the capacity to boost demand and spending, that capacity can sometimes not be exercised without producing other unwholesome and unwelcome economic effects, such as excessively high rates of inflation.”

    Then it makes no sense that he’d call for fiscal stimulus, which is more inflationary than monetary stimulus.

    You said;

    “In a buyers’ market for labor with double-digit unemployment, wage bargaining power is extremely limited, so nominal wages are likely to lag increases in the price level. The result is anti-stimulatory, not stimulatory.”

    No, it’s stimulatory precisely because wages lag prices.

    You said;

    “Part of the Fed’s power to increase demand and spending is grounded in its power to raise inflationary expectations, which lead some people to spend now rather than later. But Fed influence over expectations – even among the limited class of people who allow their expectations to be influenced by Fed statements – has been diminished by the Fed’s recent ineffectiveness,”

    When has the Fed ever tried to raise inflation, and failed? I don’t recall a single time, at least since the 1930s.

    John, Did Bernanke advocate tariffs?

    Mike, What was their complaint against the Fed.

    K, He discussed lots of things the Fed could do just a few months ago. None involve helicopter drops. None have been done. So you are wrong, he doesn’t believe they are out of ammo; the issue isn’t even debatable. He’s on record.

    Mike Sandifer, These sorts of economic situations lead to nutty ideas, just like the 1930s.

    John, No panacea for what? Be specific.

    dwb, That’s a weird dream.

    brendan, Little by little we are winning. But it’s a multi-decade struggle.

    K, You are wrong about China–a tariff makes the welfare cost bigger. If China’s policy was a distorting subsidy, the same would be true of private purchase of bonds by foreign individuals, as Mankiw recently pointed out in a post.

    Kevin, I’ve read that many times, and no matter how many times I read it, it’s still nonsense. It doesn’t say what Keynes thinks would go wrong if there was a loss of confidence. Depression? Hyperinflation? It’s totally unclear. Is he saying there is no liquidity trap? Unclear.

    Bob, How come I’m not invited!

    Gabe, I like your comment about the young reading blogs. It reminds me about the comment about science making progress one funeral at a time.

    Oscar. I have mixed feeling about QE3. Better than nothing, but a missed opportunity.

    Richard A. Very disappointing.

  42. Gravatar of Philo Philo
    5. October 2011 at 19:50

    The Christian Science Monitor article that Richard A. linked to (“Bernanke blasts China for currency manipulation”) is almost eleven months old. Still, I was glad of the link, for I had missed the article. Yes, it is depressing to see Bernanke saying these things, though Washington’s campaign against Chinese monetary policy has turned out to be less aggressive than one might have feared.

    But I must appeal for help in understanding the underlying concept. The dollar and the renminbi, as well as all the other important currencies, are *fiat currencies*. They are constantly “manipulated” by the relevant central banks; that’s part of the function of a central bank. It makes no sense to posit “natural” exchange rates among these currencies, absent “manipulation.” It might make sense to object to Chinese monetary policy, but to object *on the grounds that it constitutes “manipulation”* seems incoherent to me.

  43. Gravatar of Kevin Donoghue Kevin Donoghue
    6. October 2011 at 05:08

    Scott, I agree that’s not one of Keynes’s best. My reading is that he generally opposes any policy which is so radical that there is a serious risk of raising long-term interest rates appreciably. GT Ch 15 section II gives a good idea of how strongly he feels about that. But as you say it’s quite unclear.

  44. Gravatar of Scott Sumner Scott Sumner
    6. October 2011 at 14:57

    Philo, That’s exactly right. You see that, but somehow Krugman can’t. And he has a Nobel prize. I don’t get it.

    What really bugs Krugman is China’s high saving rate. But he doesn’t say that, because the argument doesn’t sound as appealing. “High saving is bad?” would be most people’s reaction.

    Kevin, Maybe. At one time or another Keynes expressed almost every opinion you can imagine. He even once posited a sort of “liquidity trap” for fiscal policy. He said (around 1930 I think) that big budget deficits might be contractionary because they’d lead to such a loss of confidence that people would pull back, perhaps leading to a run on the currency. Interestingly, the one liquidity trap alluded to in the GT (the spring 1932 OMPs in America) failed for exactly that reason. Weird.

  45. Gravatar of Mike Sandifer Mike Sandifer
    9. October 2011 at 19:10

    Scott,

    You asked, “Mike, What was their complaint against the Fed.”

    I don’t know what the complaint of the protests is in the above video. I wouldn’t be surprised if there are many ideas about how the Fed’s to blame for the bad economy.

  46. Gravatar of ssumner ssumner
    10. October 2011 at 09:41

    Matt Yglesias suggest they are criticizing the Fed from both the left and the right.

Leave a Reply