An odd question

I’m about to ask an odd question.  Before doing so let me indicate that what’s really odd isn’t the question itself, it’s that the question is considered odd.  Here goes:

Suppose Bernanke’s right on the edge of as far as recommending a major QE3 program.  He sees good arguments either way.  He’s decided that if Congress extends the payroll tax then he won’t recommend QE3; the January employment report suggests it’s not needed.  But if Congress doesn’t renew the payroll tax cut he’ll go ahead, as he’s still worried about another growth lull like we saw during parts of 2010 and 2011.  My question is this:

In that case should Bernanke tell Congress about his thought process?

If you don’t like the implicit assumption that Bernanke’s a monetary dictator, re-frame the question with the FOMC being undecided about QE3.  It seems to me this question raises some uncomfortable issues:

1.  Some might view Bernanke’s statement as interference with the legislative process, even though from a purely logical point of view it would make the legislative deliberations much more rational.  Congress could act with better estimates of the likely multiplier effect.

2.  Some might argue that he should focus on fulfilling his dual mandate.  But Bernanke believes fiscal stimulus is effective, so arguably he would best fulfill his dual mandate by making QE3 conditional on the level of fiscal stimulus.

It seems obvious to me that Bernanke would not make that sort of statement.  It also seems obvious that the Fed should occasionally make that sort of statement, if we had a policy regime run by grown-ups that took seriously the notion that fiscal and monetary policy impact aggregate demand.  I happen to think Bernanke is a “grown-up.”  So what’s the problem?  The problem is that the other half of our policy regime is not run by grown-ups.  So Bernanke is forced to talk to Congress in much the same way I used to talk to my daughter about the tooth fairy.  He can’t simply go to Congress and lay “the facts of life” out on the table, because they can’t handle the truth.  They aren’t mentally equipped to deal with the reality that fiscal and monetary stimulus are two ways to boost AD, and if they do more the Fed will probably do less.  They live in a happy dream world where either the Fed has no power at zero rates (the Dems) or the Fed can only affect inflation whereas tax cuts affect real growth (the GOP).  Bernanke knows they live in this dream world, and hence understands that he must address them like second-graders.

This isn’t a post about whether the fiscal multiplier is positive.  Regardless of your view on that issue, you should find it strange that the Fed is unable to honestly lay out its thought process about policy contingencies, which might prove useful for our fiscal policymakers as they deliberate.  The fact that he cannot do so goes a long way to explaining we why haven’t yet recovered (in 2012) from a recession that began in 2007.

PS.  Don’t tell me that the Dems favor fiscal stimulus because they like big government. The payroll tax cut will make it a bit more difficult to expand the size of government in future years.  (As Clinton found in 1993, when he was told the “bond markets” (i.e. the Reagan tax cuts) wouldn’t allow him to enact all his policy ideas.

PPS.  I favor QE3 with or without the payroll tax cut, but also think it would have only a modest effect.


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41 Responses to “An odd question”

  1. Gravatar of Morgan Warstler Morgan Warstler
    4. February 2012 at 06:21

    Scott, this is getting back to the good stuff…

    BUT, you were not complete:

    Dems favor fiscal stimulus… but they want to be gvt. spending (big government), not tax cuts.

    The real choice right now is payroll tax cut OR QE3.

    Right now Dems preferred method would cash transfers to states, so public employees don’t get fired.

    And very soon we will see a simple argument made by the GOP – that as we have been cutting government workers, things have been getting better.

    That will happen the moment it is obvious things are getting better. We aren’t there yet.

    Note the GOP’s budget to save military spending falls entirely on public employee job cuts and pay freezes till 2015.

    —-

    The point here is Ben would actually PREFER to see public employees cut, and the money be put to something else like propping up housing prices (the Fed’s biggest concern).

    So if we’re going to have Ben play god, why not have him be far more SPECIFIC about what he thinks is best – congress doesn’t have to follow it.

    Last time we covered this, I said I like NGDP level targeting because it makes these choices far more clearly for Congress. Suddenly, they are REWARDED when the force public employees to be more productive – it puts downward pressure on NGDP and allows cheaper money for the private sector to hoover up.

    So you might confirm for folks that your plan would force Congress into even more of a prone position… because without the personal embodiment of Ben (a dictator) for Congress to scream about, instead it would just be Sumner’s damn rules, and a populace screaming for public employee cuts.

  2. Gravatar of William J McKibbin William J McKibbin
    4. February 2012 at 06:41

    Regretfully, the US Federal Reserve and ECB have essentially abandoned the notion of further monetary expansion. Moreover, Dr Bernanke’s recent statements about “do not harm” are a clear signal to Congress NOT to cut government jobs and defense, and NOT to raise taxes on the top 1% as such measures would hurt investment, growth, and employment. The only other fiscal reforms that are left are raising taxes on wage earners given that the American people will not tolerate drastic cuts to Social Security and Medicare. Dr Bernanke is not a man of ideas or imagination, but rather a man of “what not to do.” When you rule out everything that Dr Bernanke says NOT to do, the only fiscal reforms that are left are dramatic tax increases for wage earners. That’s the Fed’s plan at this point, at least as far as Dr Bernanke is concerned…

  3. Gravatar of Kirk Kirk
    4. February 2012 at 07:06

    Good post Scott – I worked at the central bank of Australia (the Reserve Bank of Australia or RBA) for a few years and in this country anyway, there really isn’t any doubt that monetary policy reacts to government spending. Indeed John Howard, the previous prime Minister, used to base his election campaigns on the idea that he had paid off/was paying off the government’s debt thus putting downward pressure in interest rates. See here:

    http://www.youtube.com/watch?v=UMeoct4REXo

    His campaign theme of running a government surplus (and paying off the debt) thus putting `downward pressure on interest rates’ was a major strategy of his for a number of elections, and he was the country’s most successful prime minister for 50 years in terms of electability. Why? Probably because the median voter in Australia is someone with a big floating rate mortgage who cares a lot about interest rates. I can’t overemphasise both how mainstream your views would be in Oz, and how strange I find it that conservatives in the US wouldn’t use this as a populist argument in favour of lowering government spending. Surely people with big mortgages are still an important voting block in the US, even post sub-prime?

  4. Gravatar of DonG DonG
    4. February 2012 at 07:20

    I watched some of Bernanke testifying before the House committee. Paul Ryan just hammered him on inflationary expansion. I do think the FOMC is very responsive to Congress and I thus expect the FED to be happy with 1-2% inflation.

    I do think the recent jobs report (well hyped) will make it harder to extend payroll tax cut. I do expect that to pass, but with GOP strings attached. I don’t think the GOP cares what Bernanke says about QE3. Some, like Rick Perry, already want to “treat him rough”.

    Any reaction to this article about debt cycles:
    http://www.fxstreet.com/fundamental/analysis-reports/market-comment/2012/02/03/

  5. Gravatar of PrometheeFeu PrometheeFeu
    4. February 2012 at 07:31

    I wonder if maybe Bernanke has private meetings with some Reps and Senators telling them that very thing. There surely must be a couple of adults who could then steer the kids.

  6. Gravatar of Morgan Warstler Morgan Warstler
    4. February 2012 at 07:44

    I don’t disagree with William on Ben not wanting to cut gov jobs now… my point is that that Ben would cut gov jobs and use the spending to prop up home prices if he could.

  7. Gravatar of Jeff Graver Jeff Graver
    4. February 2012 at 08:20

    Scott, as a longtime lay reader, first time commenter, let me say “thanks” for this post. I know you resist speculating in any detail on the relationship between Congress and the Fed, but this little insight gives me a better understanding of your arguments about fiscal multipliers.

  8. Gravatar of Gordon Gordon
    4. February 2012 at 08:56

    Looks like you are making an argument against the possibility of a central bank and a legislature both using public reasons. One of the two needs to follow an algorithm without input from the other.

  9. Gravatar of SG SG
    4. February 2012 at 09:27

    Scott, the only thing I don’t like about your blog is that comments like these will probably keep you from holding a major policy position in the future (not like that’s what you’re interested in…). Great post, though.

  10. Gravatar of Major_Freedom Major_Freedom
    4. February 2012 at 09:39

    The Fed is already politicized.

    The record shows a tendency for the Fed to generate false booms during Presidential elections.

    “It also seems obvious that the Fed should occasionally make that sort of statement, if we had a policy regime run by grown-ups that took seriously the notion that fiscal and monetary policy impact aggregate demand. I happen to think Bernanke is a “grown-up.” So what’s the problem? The problem is that the other half of our policy regime is not run by grown-ups. So Bernanke is forced to talk to Congress in much the same way I used to talk to my daughter about the tooth fairy. He can’t simply go to Congress and lay “the facts of life” out on the table, because they can’t handle the truth.”

    Hahaha, Sumner thinks the Fed contains grownups whereas Congress contains children.

    I think both the Fed and Congress are groups of children who can’t handle “the facts of life” of a free market economy based on absolute private property rights.

    To see those who coddle behind one group of children, yet call them “grown-ups”, and then pretend to be in a position to say another group of children can’t handle “the facts of life”, reminds me of schoolyard girls calling schoolyard boys “immature.”

    Grown ups, real grown ups, are willing to be individually independent and engage with others by respecting their individual private property rights. Unless and until both the Fed and Congress cease being afraid of living as independent grown ups who engage with others according to the free market process, then sorry, they will be and they will remain children, and those who seek help from any of them, those who lower their own self-worth and the self-worth of other individuals, who want others to be treated as children to either the Fed or Congress, are even more childish.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. February 2012 at 09:41

    I imagine Bernanke wishes to avoid being the messenger bearing the bad news as much as the next guy.

  12. Gravatar of ssumner ssumner
    4. February 2012 at 10:45

    Morgan, You are right that it would remove some of the arguments for more spending. But you also seem to be assuming Congress is rational. I’m not even sure the tax cut the Dems support is in their own interest.

    William, I’m not sure what Bernanke wants. His call for easier fiscal policy now and tighter in the future is not likely to work.

    Kirk, There’s a reason you guys haven’t had a recession since 1991–you guys are smarter than we are.

    DonG, Can you summarize the article?

    Prometheefeu, I doubt it. Even the leaders are clueless on monetary policy.

    Thanks Jeff.

    Gordon, Logically you’d have the Fed move last, as tax changes tend to last quite a while. So the Fed should tell Congress its reaction function.

    SG, That’s the advantage I have over Mankiw–I can say whatever I feel like saying.

    Major Freedom, You said;

    “The record shows a tendency for the Fed to generate false booms during Presidential elections.”

    Like 2008? Or 1992? Or 1980?

    Patrick, Then he shouldn’t have taken the job.

  13. Gravatar of Ken Ken
    4. February 2012 at 10:53

    ” I favor QE3 with or without the payroll tax cut, but also think it would have only a modest effect.”

    It would only have a modest effect because it would be insufficient? Because QR doesn’t change expectations as efficiently as an NGDP target? Or because we are at the limits of monetary policy?

    I’m assuming 1 and 2, but I thought I’d check.

  14. Gravatar of D.Gibson D.Gibson
    4. February 2012 at 10:59

    Check this out at the 44:20 mark:
    http://www.c-span.org/Events/Bernanke-Tells-Lawmakers-Economic-Recovery-quotFrustratingly-Slowquot/10737427842/

    Rep. Garrett scolding Bernanke for the FED having a white paper that coincided with a legislative topic. He goes on to scold two FOMC gov. for having public opinions.

    Before that Bernanke declines to comment, when directly asked to comment on extending payroll tax cuts.

  15. Gravatar of Major_Freedom Major_Freedom
    4. February 2012 at 12:10

    ssumner:

    “The record shows a tendency for the Fed to generate false booms during Presidential elections.”

    Like 2008? Or 1992? Or 1980?

    2008 wasn’t even a re-election year. The Fed could not have gotten Bush re-elected anyway. They could collapse the economy during the end of Bush’s term.

    http://www.jstor.org/pss/1059330

    This paper shows evidence that the Fed engages in a 16 quarter money growth corresponding to Presidential elections.

  16. Gravatar of Benjamin Cole Benjamin Cole
    4. February 2012 at 12:15

    I think I disagree with Sumner, for a change.
    I think a sustained QE program, with some heft, in combination with reduced IOR and a sense that the Fed is targeting growth (not inflation-fighting), could have a large effect. It might be enough to really jell the economy.

    The Fed could (very justifiably) say with unit labor costs flat to down for four years, and the least three CPI reading flat or down, we have beaten inflation for this cycle and need to concentrate on growth now. A robust economy would be good for everyone, and would help everyone deleverage as well.

    What is “odd” is who would argue against this approach? Why all the hysterical sniveling about inflation?

    In general, I think the fed should act transparently and with clarity. I do not think they should say to Congress, “If you do this, we will do that.” That might lead into bitter politics.

    The Fed should announce NGDP targets, and pursue them regardless of Capital Hill or the President.

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. February 2012 at 12:21

    ‘Patrick, Then he shouldn’t have taken the job.’

    Whoever takes the job will face the same incentives.

  18. Gravatar of Tommy Dorsett Tommy Dorsett
    4. February 2012 at 12:26

    Scott — Wouldn’t the Fed saying the current balance sheet/base is permanent have more of an impact than another round of, presumably temporary, QE? If so, isn’t this sort of what they just did with the Woodfordian commitment to keep rates pinned near zero for three more years? And also by recycling maturing securities into longer dated bonds? I was at first skeptical of this policy, but maybe the better economic numbers are a sign the Fed is — finally — getting some traction? Having the entire Treasury curve 200 bps or more inside expected future NGDP growth may be creating a self-reinforcing Wicksellian feedback loop. Or maybe I’m dreaming….

  19. Gravatar of anon/portly anon/portly
    4. February 2012 at 12:42

    “They aren’t mentally equipped to deal with the reality that fiscal and monetary stimulus are two ways to boost AD, and if they do more the Fed will probably do less.”

    Where’s the public choice model? I would have guessed that the “reality that fiscal and monetary stimulus are two ways to boost AD” is of little interest to Congresspersons of any variety, simply because there is no way for them to translate a recognition of this reality into an increase in their re-election chances. (To say nothing of enhancing their status generally).

    “Don’t tell me that the Dems favor fiscal stimulus because they like big government. The payroll tax cut will make it a bit more difficult to expand the size of government in future years.”

    Does the payroll tax cut make it more difficult to be *in favor of* expanding the size of government in future years? Similarly, a payroll tax cut makes it more difficult to reduce the national debt. But does make it more difficult (for GOPers) to be in favor of reducing the national debt?

  20. Gravatar of Crush Crush
    4. February 2012 at 12:55

    Would added QE result in more money (bank lending) or affect money velocity?

  21. Gravatar of Mike Sax Mike Sax
    4. February 2012 at 14:23

    “I do think the recent jobs report (well hyped) will make it harder to extend payroll tax cut. I do expect that to pass, but with GOP strings attached. I don’t think the GOP cares what Bernanke says about QE3. Some, like Rick Perry, already want to “treat him rough”.

    You may well be right Don G that it will make it harder to extend it-which is not to say I think it should. Still the GoP has to be careful here, they badly lost the last round in December and at least till yesterday had said they weren’t loooking for another big showdown for the rest of the year.

    I agree Scott it would be great if Bernanke would make a statement on this as we have all talked so much about this question of the effect of fiscal on monetary policy.

    I don’t know why just once we can’t err on the side of doing a little too much-even if the numbers are indicative that things are getting better-to an extent they certainly are though how much so remains to be seen and how much the European problems might in the future damage us again; even here my guess is it may not as Europe seems to have at least begun the procedure to get this problme in hand and maybe we in the US will end up brining Europe up to our level rather than the reverse-why not just nail it down by doing the payroll tax cut and QE3?

    Might that not at least make the recovery bloom quicker? The GOP is mostly against Bernanke becuase a Democrat is in hte White House I have to think. They even opposed the payroll tax cut for the employer side-not at all like them.

  22. Gravatar of Mike Sax Mike Sax
    4. February 2012 at 14:25

    When I say the GOP is not looking for a showdown for the rest of the year I mean for the extension on the payroll tax cut for the rest of the year.

    Scott is right that they may actually in the future use the payroll cut as a reason to cut spending.

  23. Gravatar of Charlie Charlie
    4. February 2012 at 16:48

    Has Bernanke changed his position on fiscal stimulus or does he still support it? If Ben really thinks that he has monetary policy where he wants it, he should no longer support fiscal policy. It still seems he’s hoping each quarter to get more NGDP than he expects.

  24. Gravatar of Thomas Hutcheson Thomas Hutcheson
    4. February 2012 at 17:34

    I have not heard that “Democrates” think the Fed is powerless. I think they think it will not use it’s power to stimulate the economy, but will not thwart Congress from trying to do so.

  25. Gravatar of dwb dwb
    4. February 2012 at 18:19

    1 year breakeven inflation expectations are about 2.5 %.
    I think the market already expected a payroll tax cut extension even before any QE.
    PCE inflation has been declining and has been below 2% since August. If I were Bernanke I would want the tax cut if only to to add some cushion – either jobs will pick up or more qe is on deck. The next fed meeting is 3/13 (minutes on 2/15) so we’ll have feb reports too. The “recovery” has been bad punctuated with a few good reports – so sad that we’re all getting giddy over a report that 3years ago would have been between tepid or mediocre. Our expectations certainly have been lowered. I guess we’ll find out if 2% is truly symmetric if PCE declines below 2% and no QE.
    We are just one adverse shock from 9.5% UE again. Me,I’d be punching the gas to get in the air before we stall again.

  26. Gravatar of Aaron Aaron
    4. February 2012 at 19:05

    I might not tell you that the democrats favor big government. However, then I might ask what is President Obama’s strategy to bring federal government spending as a percent of GDP back down to 19 to 20 percent of GDP. If there is no plan than this is a pretty good indicator that this Democrat President does in fact want to expand government, so he favors a bigger government than what we used to have.

  27. Gravatar of Charlie Charlie
    5. February 2012 at 00:18

    Ben Bernanke’s recent words to the House: “Even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. Fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible-indeed, they are mutually reinforcing.”

    I’m thoroughly convinced that Scott understands monetary policy very deeply. There is no one’s opinion I’d rather have (well maybe if Woodford blogged… 🙂 ). But I don’t think we have a good understanding of what Bernanke is thinking. How can Ben be confident that the Fed has monetary policy where it prefers and still be against fiscal headwinds. Bernanke seems to hate unorthodox monetary policy. But, why?

  28. Gravatar of An odd question « Economics Info An odd question « Economics Info
    5. February 2012 at 01:00

    […] Source […]

  29. Gravatar of James in London James in London
    5. February 2012 at 05:23

    William McKibbin, the ECB is now moving. Not sure if you are in the US or Europe, but if in Europe and any awareness of financial markets you should know the powerful impact of the first 3yr LTRO, the expectations for the upcoming 2nd 3yr LTRO in February and the (ECB-sponsored?) rumours of further LTROs to come, even 5yr ones. This is classic expectations management, and very new for the ECB, sponsored by the new ECB chief Draghi.

    Scott’s post here wonders about what Bernanke can and can’t say, just like Draghi and King. All three are now managing expectations, similar to market monetarists demands – even if not quite as explicitly as they desire.

    The reason they can’t do exactly as market monetarist want is because the rightly fear the zero-fiscal policy response from the politicians.

  30. Gravatar of ssumner ssumner
    5. February 2012 at 06:04

    Ken 1 and 2.

    D. Gibson. You misunderstood me. I’m not saying he should offer any opinion on the wisdom of the tax cut. Merely describe how the Fed would respond to each contingency. Surely they wouldn’t object to that?

    Major Freedom, So you aren’t even saying the Fed is biased in favor of the incumbent party, but merely some individual? Why would that be?

    Ben, You said;

    “I think a sustained QE program, with some heft, in combination with reduced IOR and a sense that the Fed is targeting growth (not inflation-fighting), could have a large effect. It might be enough to really jell the economy.”

    I agree, but if the Fed does QE3 it’s very unlikely to be what you describe here. I was talking about the actual likely version of the policy.

    Patrick, Yes, they’d all face those incentives. But if I had the job I’d ignore those incentives.

    Tommy, You said;

    “Wouldn’t the Fed saying the current balance sheet/base is permanent have more of an impact than another round of, presumably temporary, QE? If so, isn’t this sort of what they just did with the Woodfordian commitment to keep rates pinned near zero for three more years? And also by recycling maturing securities into longer dated bonds? I was at first skeptical of this policy, but maybe the better economic numbers are a sign the Fed is “” finally “” getting some traction?”

    They didn’t actually do a Woodfordian policy, as the interest path is not made contingent on macro outcomes. But I agree they moved somewhat in that direction, and that recent moves were probably a modest plus for the economy. BTW, despite the recent jobs number I still think growth is rather slow. It looks like NGDP growth is still below 5%.

    anon/portly, You said;

    “Does the payroll tax cut make it more difficult to be *in favor of* expanding the size of government in future years? Similarly, a payroll tax cut makes it more difficult to reduce the national debt. But does make it more difficult (for GOPers) to be in favor of reducing the national debt?”

    Yes and yes.

    The public choice model has no bearing on my critique of the Fed. Without at least somewhat idealistic officials there is no hope for America. If we end up like Somalia then the public choice model will offer an explanation for our failure, but it doesn’t tell us which monetary policy should be done if we hope to succeed. It just tells us that this policy might fail to win support.

    Crush, Not sure about lending, but in my view more lending should NOT be the goal of monetary policy. The goal should be higher NGDP. QE would almost certainly reduce the velocity of money, if money is defined as the monetary base.

    Mike Sax, You said;

    “I don’t know why just once we can’t err on the side of doing a little too much-”

    Yes, and I’d go even further. An optimal monetary policy would err 50% of the time in the direction of doing too much, and 50% too little. That’s not been true since 2007.

    Charlie, His views are inconsistent, as you say. I think that’s because privately he doesn’t fully support official Fed policy. His press conference on the 25th made that pretty clear.

    Thomas, Then you haven’t been paying close enough attention. Obama said the Fed was powerless and top Dems in Congress have said similar things. The “liquidity trap” is widely accepted by progressives.

    The Fed is not passive, so I don’t buy your argument that they wouldn’t sabotage fiscal stimulus–they’ve been doing just that since 2008.

    dwb, I agree.

    Aaron, Maybe, but the payroll tax cut makes his job harder.

    charlie, See my previous response to you (above)

    James; You said:

    “Scott’s post here wonders about what Bernanke can and can’t say, just like Draghi and King. All three are now managing expectations, similar to market monetarists demands – even if not quite as explicitly as they desire.”

    How can I put this politely: NO!!!!!!!!!!!! They are telling us that they expect to fail.

  31. Gravatar of OneEyedMan OneEyedMan
    5. February 2012 at 06:58

    I think the fed is reluctant to provide a full menu of monetary-fiscal combinations to congress for two reasons:

    1)Currently the Fed goes last in the monetary-fiscal game. In the event of a full menu, that’s like letting congress go last. Which is okay if the Fed can generate a fully sub-game perfect strategy where there is never a point where they want congress to think they are doing one thing but actually do another. I think that’s an unlikely condition to be met.

    2) The Fed plays a dangerous game with congress. They want to project to the world that they are strong and independent. But congress is the source of their power and independence and could take it away. Therefore, the Fed wants to project to congress their wisdom and downplay their independence, lest they be angered by their delegation. Giving congress a menu of policy choices like this would highlight congressional irrelevance on the economy. Also, It might damage their halo of wisdom by providing multiple fronts on which to second guess them.

  32. Gravatar of Negation of Ideology Negation of Ideology
    5. February 2012 at 08:34

    I think the point that Bernanke is not “a monetary dictator” is the most important point in your post. He could potentially tell Congress it would be easier to push for QE3 on the board if they don’t extend the payroll tax cut, but he can’t guarantee anything.

    I think this brings us to the real difference between monetarists (full disclosure, I consider myself a monetarist) and Keynesians. Monetarists, I believe, think of the central bank as a thermostat. Meaning the Fed should simply measure economic conditions and respond according to their policy target. Then Congress borrowing and spending money is no different then Microsoft borrowing and spending money. If it affects the economy, the Fed will counterect it.

    Keynesians don’t think that way at all – they think the Fed “stimulates” the economy through interest rates or QE. They think the Fed is going to have the same federal funds rate, or dollar value of QE at the zero bound, no matter what Congress does.

    I already gave away that I consider myself a monetarist, but I have to say with the Richard Fisher types on the board maybe the Keynesians have a point. If the Fed was run by a board of Scott Sumner clones, or a computer, then fiscal stimulus would be superfluous, as it should be.

  33. Gravatar of Major_Freedom Major_Freedom
    5. February 2012 at 09:57

    ssumner:

    “Major Freedom, So you aren’t even saying the Fed is biased in favor of the incumbent party, but merely some individual? Why would that be?”

    Because the President wields more power over the Fed than you and other “the Fed is independent” believers seem to realize. Did you read the Grier paper I linked to?

  34. Gravatar of Charlie Charlie
    5. February 2012 at 10:38

    Yes, it is possible that he agrees closely with you, but is constrained by the Fed. I was wondering if you ever heard the following quotes from Krugman about the internal arguments at Princeton. It portrays in some ways a different understanding of the way Fed policy works:

    “It had some effect. Mostly on the expectations side. That is a long story. There was a whole group of us at Princeton, about 10 years ago, who were worrying about, “What do you do if you find yourself in a situation like we are in now, where short-term interest rates are zero and that’s not low enough?” There was a division of views between one side, which is the side that I was on, which said that you have to work through expectations. [b]On the other side was Ben Bernanke. He said that you could do it through expanding the Fed’s balance sheet.[\b] Now we’re very much playing out those arguments in real time. I guess I’d say that QE2 was helpful. I think we forget fairly quickly how much panic there was about the state of the economy last summer. I would be in favour of doing more, though I’m not highly confident that it will do everything we need.”

    “However, one of the Japan worriers, a guy by the name of Ben Bernanke, had a somewhat different take (pdf). He believed that the Fed could gain considerable traction not so much by changing expectations as through the direct effect of nonstandard open-market operations. I was skeptical, as was Mike Woodford. But would the different views ever get tested?”

    These quotes are from 2011, but I think PK has been saying it much longer. I’m not trying to play any sort of gotcha. I’m just trying to understand what it says about BB’s underlying model that he thought the balance sheet effect could work through some other mechanism than expectations.

  35. Gravatar of anon/portly anon/portly
    5. February 2012 at 21:48

    “Without at least somewhat idealistic officials there is no hope for America. If we end up like Somalia then the public choice model will offer an explanation for our failure, but it doesn’t tell us which monetary policy should be done if we hope to succeed.”

    I don’t think a public choice approach is necessarily that pessimistic, not at all. But you can only expect so much from elected officials, especially if you’re asking them to take positions that could annoy “the base” and all that. Given the somewhat mixed and frequently off-point messages sent to our elected reps from the macroeconomics profession writ large, I think the following is a little over the top:

    “They live in a happy dream world where either the Fed has no power at zero rates (the Dems) or the Fed can only affect inflation whereas tax cuts affect real growth (the GOP). Bernanke knows they live in this dream world, and hence understands that he must address them like second-graders.”

    Isn’t this “happy dream world” the same happy dream world that many *eminent macroeconomists* occupied, at least for a while? (If I understand Robert Waldmann’s comments correctly, at least one econblogger still lives there). And our Senators and Reps should be chided if they haven’t left yet? I don’t see it.

  36. Gravatar of James in London James in London
    6. February 2012 at 03:24

    Scott, you said: “How can I put this politely: NO!!!!!!!!!!!! They are telling us that they expect to fail.”

    Let’s look and see what the markets think of Draghi. Eurozone stock markets up 15% since Dec 15th, financials up 24%. Credit spreads (ie over Bunds) on peripheral sovereign debt (ex-Greece) much tighter. Even 30yr Bunds are 10bps wider from that point. I don’t think the markets think Draghi is expecting to fail. They are worried in classic market monetarist methodology about the firepower to come until Draghi think he has succeeded (Nick Rowe please note). The BoE is merely a bit of a supporting sidewhow to the drama unfolding at the ECB. A drama you seem to be missing.

  37. Gravatar of ssumner ssumner
    6. February 2012 at 06:31

    OneEyedMan, Perhaps, but the Fed would only commit to the March meeting, right after the Congressional decision. Future meetings would still depend on the economy, so the Fed would still move last.

    Negation, My point applies equally to the full board. They could vote on the issue and present their thinking to Congress, but they won’t.

    Major freedom, Even if the President has lots of power (and Obama sure doesn’t act like he does) it still supports my point. Presidents would want a Fed who helps their party.

    Charlie, I think they are both partly right, but that Bernanke greatly underestimates the importance of expectations.

    But I don’t see this issue as directly relating to my argument in this post. Both Krugman and Bernanke favored QE2, and both thought it helped a bit.

    anon/portly, You said;

    “Isn’t this “happy dream world” the same happy dream world that many *eminent macroeconomists* occupied, at least for a while?”

    Yup, and I’d put many economists into that camp as well, and also the GOP camp. But I don’t think that’s the real world.

    James, That merely means the markets are expecting them to fail a bit less completely than a month ago–but markets don’t expect rapid GDP growth in any of those places.

    Market monetarism says you target the forecast. They aren’t doing that.

  38. Gravatar of Major_Freedom Major_Freedom
    7. February 2012 at 09:41

    ssumner:

    “Major freedom, Even if the President has lots of power (and Obama sure doesn’t act like he does) it still supports my point. Presidents would want a Fed who helps their party.”

    That supports my point, not yours! It casts doubt on your claim that the Fed is not politicized and supports my point that it is.

  39. Gravatar of Alan K Alan K
    7. February 2012 at 11:34

    I’d love to see you break down this article, Scott.

    http://www.forbes.com/sites/charleskadlec/2012/02/06/the-federal-reserves-explicit-goal-devalue-the-dollar-33/

  40. Gravatar of ssumner ssumner
    10. February 2012 at 08:57

    MF, No it supports my point about 1980, 1992, and 2008.

    Alan, I can’t take Forbes seriously anymore. That writer seems unaware of the long run neutrality of money.

  41. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 23:21

    ssumner:

    MF, No it supports my point about 1980, 1992, and 2008.

    No, it supports my point, not yours. I cited the paper.

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