All hail Pete Klenow

Fifty elite economists were asked what I thought was a very simple question:

Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

And only Pete Klenow got it right:

Agree.   Caveat: how much was it offset by less aggressive (than otherwise) unconventional monetary policy?

You might be thinking “Wait a minute Sumner, I thought you disgreed.”  You guys forget I’m a teacher.  I grade answers based on whether they used proper reasoning, not whether I happen to agree with the conclusion.  (Yes, I know some other professors don’t do things that way, but I do.)

Pete Klenow was the only one of 50 who seemed to understand the question.  They were asking if fiscal policy lowered unemployment, i.e. boosted RGDP.  But the standard model says that only occurs if it boosts AD.  And that only occurs if NGDP rises.  And the standard new Keynesian and monetarist and new classical models all agree that monetary policy drives NGDP.  So it’s really asking if the 2009 fiscal stimulus in some way caused NGDP to evolve differently than otherwise, which is inescapably a question about how monetary policy would have evolved in the absence of the ARRA.  And only one guy seemed to understand that.

The correct answer was; “What kind of question is that!  How the hell can I answer that if you don’t tell me the monetary policy counterfactual.”

Matt Yglesias recently made the following comment:

Doug Elmendorf, on the CBOBlog: “Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO’s judgment.”

This is correct. Strangely the subsequent discussion completely neglects monetary policy as relevant to demand.

It may be strange, but we no longer should be surprised.  People who read economics blogs live in a sort of bubble, where there is widespread understanding of the failure of monetary policy.  But out in the real world things are very different.  Ever since NGDP collapsed in 2008, the profession has largely ignored monetary policy.  In the previous post I pointed out that our profession was to blame for the severe recession.  Every day that goes by brings more and more evidence supporting that sad conclusion.

PS.  I will go to my grave wondering why almost every macroeconomist in America wasn’t loudly calling for more monetary stimulus in late 2008.  Instead almost none were.  Epic fail.

PPS.  Commenter Liberal Roman in the previous post:

Recently, I have taken a break from Scott’s site and the whole market monetarist blogosphere just to see if anything has changed out there in the mainstream. And I am sad to report that nothing has. On the right, it’s the same old argument that companies and people aren’t spending because we have a Kenyan Nazi socialist as a President. And on the left, it’s people aren’t spending because we are not forcing companies to pay them enough so that they can spend. I have spent so much time engrossed in the market monetarist blogosphere that I felt like we actually are having some impact. But once you peek your head back out into the mainstream, we are barely causing a ripple. When I bring up NGDP targeting in comment threads, I get the worst response: nothing. No rants against me, just deafening silence.

Of course the good news is that we don’t have to convince the masses. As Scott points out, we just have to convince the average macroeconomist.

We see people like Krugman/Romer/Cowen/DeLong/Yglesias/etc saying good things about NGDP targeting, and think we are winning.  But we are surrounded by two much bigger groups.  Those who don’t see a need for more spending (wrong, but logically defensible), and those who see a need for more demand, but for some odd reason don’t see the key role of monetary policy in driving NGDP.  I fear the latter group represents the mainstream of our profession.  So we have our work cut out for us.

HT:  Marcus Nunes


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58 Responses to “All hail Pete Klenow”

  1. Gravatar of JJA JJA
    19. February 2012 at 06:39

    I think that the omission of monetary policy from the discussion is very, very strange from the practitioner’s point of view. Although we have been profitable all the time, our corporation almost went under during the worst days after Lehmann. The reason was not lack or orders or lack of profit. The problem was the lack of cash, at least in some markets.

    Normally we have short-term loans coming and going all the time. During the worst time it was very difficult to get those loans. How to pay your commitments without cash? Money was very, very tight.

    For us the real economy was not the problem, but short-term money was. In some countries in Eurozone it is still difficult to get short-term money even if your order-books are fairly full… And we are not talking about a small corporation.

  2. Gravatar of marcus nunes marcus nunes
    19. February 2012 at 07:15

    And here´s a nice “confrontation” over a long time span: Friedman “confronts” Krugman in, of all places, Playboy Magazine:
    http://thefaintofheart.wordpress.com/2012/02/19/two-economic-popstars-one-libertarian-the-other-progressive-talk-to-playboy-39-years-apart-milton-friedman-in-1973-four-years-into-the/

  3. Gravatar of marcus nunes marcus nunes
    19. February 2012 at 07:22

    And related to the topic, I found it interesting that The General Theory did not make Christy Romer´s book list on “Learning from the Great Depression”:
    http://thefaintofheart.wordpress.com/2012/02/18/keynes-general-theory-didn%C2%B4t-make-christy-romer%C2%B4s-book-list-on-learning-from-the-great-depression/

  4. Gravatar of ssumner ssumner
    19. February 2012 at 07:27

    JJA, Technically that’s tight credit, not tight money. But your basic point is right, as the Fed’s tight money policy made it much harder to get loans.

    Marcus, Thanks. I saw the Krugman interview and wrote a post yesterday, which I’ll put up later today.

  5. Gravatar of JJA JJA
    19. February 2012 at 07:38

    Scott, Thanks for setting my terminology right. I learn something every day. :D As I said, I think it very, very strange that the effects of tight money policy have not been discussed more.

  6. Gravatar of Daniel Kuehn Daniel Kuehn
    19. February 2012 at 08:24

    Could you name some people who think we need more spending but don’t see the key role of monetary policy in driving NGDP?

    You’ve made statements like this before and I am always confused by them. I don’t know of anyone who thinks we need more spending that doesn’t see eye to eye with you on the key role of monetary policy. I can’t think of a single one.

    Now, they may disagree with you on the extent to which we can count on monetary to do that job. You might have some disagreements over ZIRP and things like that.

    But I don’t know anyone out there who says “we need more spending, but the Fed should really tighten up”.

    Perhaps there are those that are willing to give the Fed more of a pass than you are, but again – I think that’s an honest disagreement. They’re thinking of how bad it COULD HAVE been.

    But I just don’t know who could possibly think we need more spending and not agree on the key role of monetary policy.

    Can we have some names??

  7. Gravatar of David Pearson David Pearson
    19. February 2012 at 08:53

    Scott,
    Great reading for the (long) weekend:

    Gorton, Gary B. and Metrick, Andrew, Getting up to Speed on the Financial Crisis: A One-Weekend-Reader’s Guide (January 11, 2012). Available at SSRN: http://ssrn.com/abstract=1974662 or http://dx.doi.org/10.2139/ssrn.1974662

  8. Gravatar of DonG DonG
    19. February 2012 at 09:25

    Did you say that RGDP can only rise if NGDP rises?

    As far as the propaganda war results, I the the NGDP voice is getting louder, but the anti-FED crowd is still very loud. Also, the gold bug folks are a for-profit business and do advertise (“Gold is protection against the coming inflation…”). It is very hard for a reasoned approach to be heard over a large profitable industry.

    I think the NGDP-targeting evangelizing needs to happen towards the GOP, since they seem to care more than the Dems.
    So, who are the top influences of GOP economic policy?? I’ll have to start posting replies there;)

  9. Gravatar of ssumner ssumner
    19. February 2012 at 09:33

    Daniel, Some like Joe Stiglitz are opposed, but the much bigger problem (as I indicated) is the apathetic.

    There’s one reason and one reason only that my blog caught on in early 2009. I was calling for monetary stimulus when almost no one else (except a few other MMers like Beckworth) were doing so. That’s why my blog was considered a novelty. It’s a disgrace that my blog became so popular, as it shows there was a huge gap in the profession. I reached out to Paul Krugman asking him to support monetary stimulus, and he refused. I published a comment in The Economist’s Voice (January 2009) that was highly critical of a Brad DeLong article claiming monetary policy was ineffective when rates hit zero.

    A year ago The Economist said my blog played a big role in convincing the profession that monetary policy could do more and should do more. Obviously the blogosphere has changed. But get outside that bubble and there’s still great apathy about monetary policy. Most economists are Keynesians, but the vast majority (in polls) oppose more QE. Very few economists outside the blogosphere even know my blog (or market monetarism) exists.

    I’d guess 90% of Keynesians would oppose this deal:

    Don’t do the payroll tax cut, but have the Fed offset that drag with an equal amount of monetary stimulus.

    I hope I’m wrong, but I don’t think most economists would go for that policy.

    Thanks David.

  10. Gravatar of DonG DonG
    19. February 2012 at 09:33

    Scott,

    If you could ask those 50 economists a 3rd question, what would it be? Assume it is sent to those 50 and the responses will be compiled and published here in a new post. Furthermore, assume that SEO techniques are applied to boost readership of that one topic. What would you ask?

  11. Gravatar of ssumner ssumner
    19. February 2012 at 09:34

    DonG, You asked:

    “Did you say that RGDP can only rise if NGDP rises?”

    No. Japan has seen higher RGDP without higher NGDP.

  12. Gravatar of ssumner ssumner
    19. February 2012 at 09:38

    DonG, “Should the Fed target the forecast?”

    I don’t understand your second question.

  13. Gravatar of Becky Hargrove Becky Hargrove
    19. February 2012 at 10:03

    I got a glimpse of what Liberal Roman feels, last week, on a comment thread where I was basically told (by a layperson) that the average layperson doesn’t care about individual economic empowerment and would just as soon leave it to the professionals to sort it all out. Fine, but sometimes the professionals could use a little help from the public! I would have been just as happy as the next person to follow the crowd (and consequently not think too much about these things) for the rest of my life if in fact it had been possible. When most of us can ‘follow’ the other paths set out before us, there is not a lot of need to question authority at all. But when too many people have to get out of the way, all bets are off. I wish that more people could look at Greece today and understand the story it would tell. This is why I believe the empowered individual and the empowered state have to be able to reinforce one another for long term stability.

  14. Gravatar of Jon Jon
    19. February 2012 at 10:42

    Scott,

    There does seem to be a large barrier to overcome. The underlying issue is that economics has been used to a shroud around certain policies whose support originates from a moral rather than an objective analysis. That makes it especially hard to extinguish bad doctrine.

    Nonetheless, there is some glimmer of hope as the right ideas are making their way into the stories, just not in the first paragraph. (http://online.wsj.com/article/SB10001424052970204792404577227273553955752.html)

    This essay doesn’t fully integrate the ideas:

    “Fiscal consolidation typically has a contractionary effect on output. A fiscal consolidation equal to 1% of [gross domestic product] typically reduces GDP by about 0.5% within two years and raises the unemployment rate by about 0.3 percentage point,” the IMF said in its 2010 World Economic Outlook:
    ….
    That suggests that, where bond markets give governments the choice, there is a legitimate debate to be had about timing of austerity. The IMF economic models suggest it will be five years before the “break-even” point when the benefits to growth of cutting debt start to exceed the “Keynesian” effects of austerity.

    Each side of the debate invokes its own favored study. Support for the “German hypothesis”…. But their critics, who include Mr. Ball, say their sample includes many irrelevant episodes …

    Very near the end of the article after much moral equivocation between the two sides, we reach the gem:

    Second, the pain is greater if central banks can’t offset the fiscal austerity through a stimulus in monetary policy.

    To me, this article shows that the ideas are penetrating, if slowly. The trouble is that a lay reader will not put two and two together here. The entire framing of the article is that the two sides both of evidence in their favor but that the debate is ‘unresolved’.

    The author’s email is at the bottom: “Write to Stephen Fidler at stephen.fidler@wsj.com

    Want to make a difference? Send a version of this post to him and explain the framework to understand the two sides and two sets of studies aren’t inconsistent.

  15. Gravatar of Daniel Kuehn Daniel Kuehn
    19. February 2012 at 11:19

    re: “I’d guess 90% of Keynesians would oppose this deal:

    Don’t do the payroll tax cut, but have the Fed offset that drag with an equal amount of monetary stimulus.”

    I would think 90% of Keynesians would respond: “why in the world would someone who claims to care about nominal spending make us choose between the two? Can’t we do both?”

  16. Gravatar of Benjamin Cole Benjamin Cole
    19. February 2012 at 11:39

    Only one out of fifty “elite” economists can think about monetary policy while considering fiscal policy?

    I am glad I am a layman.

  17. Gravatar of Major_Freedom Major_Freedom
    19. February 2012 at 12:54

    Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.

    That’s just assuming the theory is true and relying on counter-factual arguments, which is fine, but when I see graphs like this:

    http://i.imgur.com/Q0qLo.jpg

    The theory that the stimulus made things worse has a compelling consistency with the empirical data.

  18. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2012 at 13:09

    “It may be strange, but we no longer should be surprised. People who read economics blogs live in a sort of bubble, where there is widespread understanding of the failure of monetary policy. But out in the real world things are very different. Ever since NGDP collapsed in 2008, the profession has largely ignored monetary policy. In the previous post I pointed out that our profession was to blame for the severe recession. Every day that goes by brings more and more evidence supporting that sad conclusion.”

    This reminds me about he joke about the Christian sitting on his roof during the flood who keeps waving off help insisting god will help him.

    Scott, stop looking my ministrations in the face.

    IT IS YOUR FAULT.

    If you would pick up the small government banner like Uncle Milty did and at every opportunity hold forth on the evils of govt. and then oh-by-the-way smarter monetary policy will SHRINK govt…

    If you would PUT THE MEAT IN THE WINDOW….

    You would actually have a following outside the bubble.

    But you are afraid that your arguments will no longer be considered by the people who don’t matter – DeKrugman, Matty, Thoma, etc.

    It is one thing to be afraid of courting the right, it is another to pretend you do a good job of selling it.

  19. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 15:36

    I am not sure why Morgan is so confident that conservatives are really in charge in America. Perhaps he lives in a very red state, but out here in the mainstream, the Tea Party is all but dead. In fact, we are reverting back to what you would suspect would happen after a financial crash, a deep suspicion of capitalism.

    Yesterday, I went to the mall and there were people collecting signatures to raise the minimum wage in my city, San Jose, to $10 an hour. People were signing up. Against my better judgement, I couldn’t resist asking them why not $20? Or $30? Or $40? Needless to say, my comments weren’t much appreciated.

    Statism is on the march. And our only hope to stop it to return to prosperity as soon as possible. Hate to go all Matrix on you, but the Tea Party was an anomaly. An artifact of the fact that Obama took power just BEFORE the big job losses began to happen. Morgan, your thesis that this recession is an opportunity to push through free market reforms could not be more wrong.

  20. Gravatar of dwb dwb
    19. February 2012 at 15:38

    you forgot the “monetary policy is impotent crowd.” I can appreciate that velocity dropped, but it did not drop to zero!

    I was heartened by the fact that the reporters at the jan 25th Bernanke press conference actually asked some tough questions, like well if inflation is below target, and unempoyment is below target why aren’t you doing more QE. It’s not all bad. maybe someday, they’ll ask hey Mr. Chairman, are you going to lean against the upcoming deficit and raise rates….

  21. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2012 at 16:05

    “Morgan, your thesis that this recession is an opportunity to push through free market reforms could not be more wrong.”

    That’s the bet Roman.

    I made my bed, and if Obama wins, I am adopting Scott’s approach to Monetary conservatism. I’ll focus on my Guaranteed Income (auctioned the unemployed) and GOV2.0 and accept more state than I personally am comfy with so the proles don’t get riled up.

    But mainly I’ll tell the GOP to focus endlessly on level targeting NGDP.

    BUT when I win, Scott will admit that he was wrong, that his policy is only important if it serves the explicit interests of the private sector and liberals HATE him like they hated Friedman.

    Note: I’m also happy with the far more brutal outcomes in Europe, they had farther to fall. Things are going really well over there as well.

    Politically, California can fall into the ocean as far as I’m concerned. It’s going to have to suffer for another 20 years before I think it will have anything meaningful to add to US politics. I loved my 15 years there, but it was so damn hard to do business, and once I had daughters, I wanted to leave for all the reasons I wanted to move there.

    Even the Valley is starting to feel the kind of negatives that force companies to move.

  22. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 16:15

    Speaking of that Krugman Playboy interview, it seems that Krugman has now adopted the conservative strategy: push ideas that you know are false, because your base likes to hear them. Here is Krugman:

    “We should go to Mark Zuckerberg and ask, “How much did you think about the capital gains tax rate when you were starting Facebook? Did you even know what the capital gains tax rate was when you were starting Facebook? Do you know what it is now? This is a psychodrama that people imagine is playing out in the heads of businesspeople, and it’s not happening. It’s all in the minds of the political flacks.”

    When I read that I wonder does he truly believe this or is he saying this because he knows his crowd likes to hear it? Because I would think he would know that perhaps Mark Zuckerberg didn’t think about the capital gains tax, but I think that Accel Partners & Greylock Partners and maybe even Peter Thiel thought about it when they gave him venture capital funding.

    And even if they didn’t think about it with him, not every business idea is a blow it out of the park blockbuster like Facebook. For many marginal ideas, capital gains taxes could be a deal breaker. I mean seriously, do I really have to lecture a Nobel prize winning economist about this? This is why I think he is being cynical and just saying what his liberal crowd wants to hear.

  23. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 16:40

    Here is my update for you Morgan on the Valley’s and California politics. I have an optimistic take:

    The worst thing about San Jose is its stupid zoning and land development rules which drive housing prices through the roof. The best thing is that the mayor (Chuck Reed), although a Democrat, is hell bent on crushing the cities’ unions. In fact, the Occupy crowd briefly considered him a target.

    I don’t think he is doing it because of his free market instincts. The problem is he gets into office, has wild ideas about public transit, expanding city services, parks, etc., etc. and then he looks at the budget and sees 50% of it is going to covering pension fund short falls. This June, because of the mayor, the city of San Jose will have a chance to vote on a proposal to change the pension system. If it passes, all new employees will be on a hybrid-401k system. And all existing employees will have a choice to switch to this system or pay a lot more from their paycheck to stay on the current system. So, I am hopeful about San Jose.

    As for the state of California, I am still hopeful because Jerry Brown is not a hard-left Democrat. In the recent Assembly session he vetoed most of the crazy bills that passed. His Democratic successor to be, Gavin Newsom isn’t too anti-business either. Also, California’s support for illegal immigration effectively nullifies some of its awful labor regulations.

    What is scary is that the recently redrawn congressional districts seem to give the Democrats an easy path to a 2/3 majority. Which will allow them to path tax increases without any Republican support.

  24. Gravatar of Shane Shane
    19. February 2012 at 16:43

    What you should know before setting foot in an econ. classroom: If the Fed is too loose, and people borrow too much and spend too much, the result is inflation.

    What most policy elites and econ. PhDs currently know: If the Fed is too loose, and people borrow too much and spend too much, the result is deflation and depression.

  25. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 16:46

    Sorry to take over Scott’s blog w/California state politics, but Morgan hit a nerve. Here is a recent letter to the editor from Jerry Brown at the LA Times:

    “Contrary to the impression left by your story, the recent personnel changes at the Department of Conservation did not undermine California’s strict environmental laws. Rather, these changes were made to clean up a regulatory bureaucracy that was steadfastly blocking oil production permits even for projects that satisfied our stringent federal and state environmental laws.

    California needs a healthy and vibrant oil and gas industry, which brings good jobs and revenue to our state. Before I stepped in, the department was delaying routine permits for months and months for no good reason. People have a right to expect their government to be reasonable. Not every regulatory idea is sound, nor is every regulator sensible.

    Managing oil drilling, like everything else in life, requires balance. That was absent at the Department of Conservation, and I took action to fix it. That’s what I was elected to do.

    Jerry Brown”

    He seems to be channeling George W. Bush.

  26. Gravatar of Morgan Warstler Morgan Warstler
    19. February 2012 at 17:49

    Roman,

    ROFL.

    If it isn’t as easy to drill in CA as TX it is WRONG.

    Stop dicking around man, CA Dems are worthless, the place is dying on the vine like a grape covered in fungus.

    This is the only path:

    “The cuts, including a reduction in the minimum wage, mass redundancies within the public sector, and a slashing of the health and defence budgets, sparked rage on the streets of Athens last week, with buildings set on fire amid angry protests.

    But the country’s politicians are resolutely trying to sound upbeat. “The Greek people have done everything they can and we are determined to make good on our commitments,” said Christos Papoutsis, public order minister.”

    http://www.telegraph.co.uk/finance/financialcrisis/9091021/Germany-drawing-up-plans-for-Greece-to-leave-the-euro.html

    NOTE: in this situation GERMAN pols have different ideas.

    But none think the Greeks shouldn’t make those life altering sacrifices.

    Jerry Brown is not yet one of those pols.

    Only when CA public employees HATE their lot in life will things get better. They have to suffer, you can measure their suffering and judge the economy.

  27. Gravatar of ssumner ssumner
    19. February 2012 at 18:54

    Becky, Well put.

    Jon, That’s a small glimmer of hope.

    Daniel, Why not eliminate the payroll tax cut, and increase the monetary stimulus ten-fold? I don’t get he purpose of the payroll tax cut.

    Ben, These days it might be an advantage.

    Major Freeman, I’m half with you–neither the pro nor the con argument is compelling.

    Morgan, Prepare to become a market monetarist after November–the GOP is imploding right now.

    Liberal Roman, I agree.

    dwb, And the big story that most people missed is that there were two anti-Fed hostile questions, and in both cases Bernanke sort of half agreed with the thrust of the question.

    He definitely wants more stimulus, it’s a question now of how hard he’ll push.

    Liberal Roman, Yes, Krugman’s weak spot is taxes, he still doesn’t understand taxes on capital (that they represent double taxation of wage income.)

    I have a question about San Jose. As I recall there is open farmland south and east of the city. Does zoning prevent the development of that farmland? If so, why? It doesn’t have any scenic beauty, does it?

    Shane, ????

    Liberal Roman, That letter seems almost too good to be true. Like a dream that I would quickly wake up from.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 19:22

    “how much was it offset by less aggressive (than otherwise) unconventional monetary policy?”

    Indeed.

  29. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 20:01

    Oh man Scott. You are really pushing my buttons now. Nothing gets me more riled up than talking about San Jose’s zoning policies.

    I don’t know if you have read Ryan Avent’s “Gated City”, but in it San Jose is cited as the best example of a city with terrible land use and development policies.

    Actually, it’s not the city, but the county that has established what is known as the “Open Space Authority” (Everyone, write your hate mail to here: http://www.openspaceauthority.org/) Basically, it’s exactly what you imagine. The county “protects” certain areas from development.

    Recently, the first director of the agency was on a local talk radio show. I didn’t even know the history behind the agency, but apparently it was challenged in court upon its inception. Of course, the director described the virtues of the agency and how many trails they have built in the woods around San Jose and how horrible it was working under the cloud of all those legal challenges. I hate calling into these shows, but I made an exception in this case. Of course, I was written off as a fringe right-wing idealist for suggesting that maybe, possibly these open space policies create a shortage of housing in the area.

    But yes, to answer your question, huge swathes of land around San Jose are just declared closed for development. There is an area just 15 minutes South of downtown that is a cattle ranch. Remember, this is not some rural town. This is the capitol of Silicon Valley. Driving around you see just large fields with nothing but a few pumpkin patches and orchards setup. The NIMBYism is out of this world in this city.

    But the true horror stories are actually in Portland where the established “urban growth boundaries” have left
    people holding land that they can do nothing with.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 20:16

    Liberal Roman,
    “I was written off as a fringe right-wing idealist.”

    We had a similar public debate when a substantial amount of land was redistricted here. I was labeled as both a left and a right wing extremist in the press. (Which means ,taking the average, I was precisely right.)

  31. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 21:02

    Mark,

    The worst thing about this is that no one thinks its a problem. At least with taxes, budgets, and pensions everyone realizes there is a problem. No one thinks these zoning policies are a problem. No one finds it odd that there is a cattle ranch 15 minutes South of a town with a million people. It’s just what it is.

    High housing prices & rent are a common topic of discussion around here. But it is literally a problem the area has fallen in love with. In fact, conservatives are arguably more NIMBYist and against development than liberals And if you complain about zoning policies, you are just way out there. No one even understands where you are coming from. “What do you mean there is not enough houses? What about all those new condos on street XYZ?” or “Yea, it’s those evil developers” or recently there was this gem to Matt Yglesias’ suggestion that San Francisco could bring down prices by “Letting supply meet demand”. The person retweeted him “No,that will not help. The newer places are more expensive than the old ones.”

    Its so frustrating, it makes you wish you were just part of the ignorant masses.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 21:15

    “cattle ranch 15 minutes South of a town with a million people. It’s just what it is.”

    Huh? What are you talking about?

    I’m not quarrelling. I’m just curious.

    This is fascinating. And much (nuch) more needs to be said about this.

  33. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. February 2012 at 21:38

    Liberal Roman, Mark Sadowski: If you have not already come across it, you may like this piece.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 21:52

    Lorenzo from Oz,
    Good read. But honestly my own feelings were highly personal. I Did not want land that was till this point undeveloped, developed. I saw my boyhood frontier turned into a wasteland of suburban tractland in the space of less than a decade or so.

  35. Gravatar of Shane Shane
    19. February 2012 at 22:18

    Oops. Forgot my :)

    Anyway, just trying to agree with you, albeit ineffectually. Listening to John Taylor on NPR the other day suddenly made the consensus media explanation of the crash–money was too easy and this made a bubble–seem even crazier. In the past I thought it was at least defensible from some angles and that maybe you were too hard on people for looking to the housing bubble. No longer. He and the hosts basically offered this explanation: loose money caused deflation and a steep recession.

    But those who would mock Taylor blithely should themselves beware. Even some Keynesians–I think certainly Krugman and Baker, maybe DeLong–who favor monetary stimulus and blame the recession on AD shortfall still in some oblique way cling to the notion that banks loaning too much with Fed support was the ultimate cause. In doing so, aren’t they secretly advancing a RBC-Austrian explanation? In what other universe does loose money lead to deflation and depression? You should do a snarky DeLong style post on the Krugman-Baker-DeLong-Taylor-Marx-Mellon-Schumpeter-Hoover-Hayek axis.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 22:23

    “RBC-Austrian explanation?”

    LOL. I like those two schools linked. As much as people respect the RBC school it’s a boatload of horsedung.

  37. Gravatar of Bonnie Bonnie
    19. February 2012 at 22:29

    So I guess some folks just aren’t kidding when they say they read Playboy just for the articles? *blush*

    I don’t fault people for making wrong predictions, at least ones that are indirectly predicated on the fact the Fed hasn’t let such a huge issue become a huge issue since the 1930′s. Whatever was going on at the Fed as the crisis was unfolding in 2008, I think, came out of nowhere and caught a bunch of people by surprise. It is really interesting that DeLong included that modifier at the end of his statement, which in hindsight, seems more like pointing out the obvious. When he put that in there, it may have been just one of those things stating what would happen if hell freezes over, although I don’t believe he expected hell to actually freeze over. Once it did, the question becomes how do we unfreeze it – and that’s where the herd got sidetracked.

    Solving the problem of what’s going on at the Fed seems a bit more difficult since I realized that the Fed appears far more focused on housing than any reasonable person might suspect; it looks like it is just kind of roaming around like a herd of cats. The most recent speech Bernanke gave regarding housing is sort of a smoking gun, and although anecdotal, it could explain a good portion of the activity in trying to lower real interest rates. Of course, it’s really hard for me to imagine a housing recovery with a 2% inflation target, no matter what happens with interest rates – and so I am still trying to come with a scenario that makes sense, given all of the readily apparent evidence. It would be nice to understand just what the heck is going on there. Once we can do that, it might be a lot easier to make the argument about what the Fed should be doing instead outside of the blog bubble.

  38. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 22:36

    “Once we can do that, it might be a lot easier to make the argument about what the Fed should be doing instead outside of the blog bubble.”

    Once you accept the fact the Fed doesn’t know what it it’s doing you’ll realize why Scott fell impelled to start this blog.

  39. Gravatar of Liberal Roman Liberal Roman
    19. February 2012 at 22:58

    “Huh? What are you talking about?”

    I mean get into downtown San Jose. Get on 87 South and drive 15 minutes South. Get off the highway. Look around you. Enough said.

    At best the city looks like a giant suburb.

  40. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 23:08

    “I mean get into downtown San Jose. Get on 87 South and drive 15 minutes South. Get off the highway. Look around you. Enough said.”

    I would if I could. I’m on the other end of the continent (Delaware). I honstly have no idea what you are talking about.

    I’ve had this conversation in different contexts previously. Most of the country’s economuc problems are concentrated in states bordering California or in Florida-Georgia. Excuse me if I have no idea what you mean.

  41. Gravatar of Matt Waters Matt Waters
    20. February 2012 at 00:25

    I have to agree that zoning and land use policies are the one political area that truly gets me bent out of shape. Well, I shouldn’t say just that. I’m from a coastal area of Florida and anti-gouging laws also get me really, really, really pissed off.

    I told my Aunt, who was talking about driving an hour just to get ice after a hurricane, that perhaps the reason people wouldn’t truck ice to her is that the price of ice was artificially limited by anti-gouging laws. She looked at me like I grew three heads and did a Nazi salute.

    Honestly, how are people so ignorant of the basic functioning of markets? As Ryan Avent argues, land use laws could be a significant cause of “the Great Stagnation.” I’ve seen first hand how bigger and denser metropolitan areas improve productivity and living standards.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. February 2012 at 00:35

    “I have to agree that zoning and land use policies are the one political area that truly gets me bent out of shape.”

    I totally agree. Nothing gets me more riled up.

  43. Gravatar of Daniel Kuehn Daniel Kuehn
    20. February 2012 at 03:32

    re: “Daniel, Why not eliminate the payroll tax cut, and increase the monetary stimulus ten-fold? I don’t get he purpose of the payroll tax cut.”

    Not to belabor the point, Scott, but you’re making my point.

    The disagreement with Keynesians is over fiscal policy. There is no substantial disagreement over monetary policy. The Keynesians are really not the problem on monetary policy. You’re probably one of the few that thinks they are, and I’m not sure why. Disagreements on things like ZIRP that make fiscal policy conceivable for Keynesians provide a reason to go beyond monetary policy, not abandon it or tighten it.

  44. Gravatar of Daniel Kuehn Daniel Kuehn
    20. February 2012 at 03:35

    The biggest obstacles are:

    1. Libertarian/conservative types who – unlike Keynesians – actually think tightening monetary policy is a good idea.

    2. The libertarian types who constantly point out that Hayek supported NGDP targeting, but then never seem to take the time to agitate for expansionary monetary policy,

    and in my opinion

    3. People who recognize the need for increased spending and therefore monetary policy, but for some reason drop the ball when it comes to fiscal policy.

    Why you’re concerned about Keynesians when #1 and #2 are the real roadblocks to recovery is not something I understand at all.

  45. Gravatar of Becky Hargrove Becky Hargrove
    20. February 2012 at 07:24

    Lorenzo,
    That article is a fascinating read and is going to take some time to digest. Zoning usage is a subject that hasn’t gotten enough mileage in the U.S., however Megan McCardle has had some good discussions about it (in relation to the wealth of New York) and quite thoughtful comments as well. One thing that was pointed out in your link, was land as a positional good, which I’ve had little time to wrap my head around. While I’ve got plenty of arguments about moving knowledge away from purely positional good status, I don’t even know if that is possible for land of beauty or highly sentimental nature. Who would have thought that cities would become the ultimate luxury good? And who wouldn’t want to take advantage of a free wealth effect? Doubtless I’ll be up in the middle of the night now, scribbling notes of NIMBY nonsense. What do we do when a city says, “I’M FULL”?

  46. Gravatar of ssumner ssumner
    20. February 2012 at 10:44

    Liberal Roman, Thanks for that info. A cattle ranch 15 miles from downtown San Jose really is insane.

    Shane, That’s a good idea. Maybe someone can send me some Krugman/DeLong posts that take an Austrian view of the recession.

    Bonnie, I will say that Playboy has talented photographers–they make Krugman look like a jolly fellow!

    Daniel , You said;

    “The disagreement with Keynesians is over fiscal policy. There is no substantial disagreement over monetary policy. The Keynesians are really not the problem on monetary policy. You’re probably one of the few that thinks they are, and I’m not sure why. Disagreements on things like ZIRP that make fiscal policy conceivable for Keynesians provide a reason to go beyond monetary policy, not abandon it or tighten it.”

    Here are the facts of life:

    1. The median American economist is a Keynesian (probably 70% are.)

    2. The median American economist doesn’t think money is too tight.

    3. The Fed almost always follows the preferences of the median economist.

    If you get away from Krugman and DeLong and get out in the real world you will quickly discover that I am right. That’s not to say conservatives aren’t a big problem, perhaps even bigger than Keynesians. But most conservatives I talk to are Keynesians, they just don’t call themselves Keynesians. I know lots of conservatives who think fiscal stimulus does boost AD, and monetary policy doesn’t boost AD, when rates are at zero. That’s Keynesianism. Look at that survey–there are conservatives saying fiscal stimulus “works.” I’ll bet most would have doubts about monetary stimulus.

  47. Gravatar of Major_Freedom Major_Freedom
    20. February 2012 at 11:11

    Daniel:

    The biggest obstacles are:

    1. Libertarian/conservative types who – unlike Keynesians – actually think tightening monetary policy is a good idea.

    2. The libertarian types who constantly point out that Hayek supported NGDP targeting, but then never seem to take the time to agitate for expansionary monetary policy

    That is a big obstacle to statist/progressive types who – unlike actual libertarians – don’t know that letting monetary policy be dictated according to private contracts only is a good idea, but who want the state to play an even larger role in the economy for the sake of playing a larger role in the economy, using unemployment and idle resources as an excuse (which is proven by the fact even though unemployment and idle resources are minimized when there is minimal state activity, especially in the monetary system, statist/progressive types nevertheless call for more damage to the economy by increasing the extent of non-private contracts based interactions, i.e. violence).

    The real roadblocks to recovery are anti-capitalist statist types who refuse to think of solutions that are market oriented.

  48. Gravatar of Major_Freedom Major_Freedom
    20. February 2012 at 11:16

    ssumner:

    Here are the facts of life:

    1. The median American economist is a Keynesian (probably 70% are.)

    2. The median American economist doesn’t think money is too tight.

    3. The Fed almost always follows the preferences of the median economist.

    1. The median American economist is a Keynesian.

    2. The median American economist did think money was too tight and continually called for more inflation from the Fed post-2008, and have not yet relented.

    3. The Fed followed the preferences of the median economist, and as a result of following their terrible advice, the economy continues to stagnate.

  49. Gravatar of Matt Waters Matt Waters
    20. February 2012 at 11:38

    The median mainstream economist most definitely does not think money is too tight. A good number of economists on the left have (somewhat half-heartedly) switched over to NGDP targeting. The vast majority of economists are still either the Keynesians who think the Fed is pushing on a string or libertarians who think neither monetary or fiscal intervention is necessary.

    Most economists unfortunately still think of monetary policy as just another arrow in the quiver. Meh, it may or may not work. It just lowers interest rates, but there’s no loan demand. And of course if central bankers allow 3% inflation due to an Iran oil embargo, 12% inflation is just around the corner because all central bankers <3 inflation. You know how the BOJ raised interest rates before it got to 1% inflation.

    This debate ironically played out before: through most of the 1970's Milton Friedman was considered crazy that a central bank could reign in inflation by reducing the money supply. Sure, a central bank could help in destroying money, but the wage-price spiral and demand-pull inflation were the clear culprits. America had to work together and figure how to "whip inflation now."

    But yeah, it really was that easy. Given the Fed's ability to destroy nearly every dollar in America, there was never any need for anything other than central bank action. The same is true today for the opposite direction.

  50. Gravatar of Randoms « Foseti Randoms « Foseti
    20. February 2012 at 14:01

    [...] Reading Scott Sumner is weird. For example, 2008 wasn’t that long ago. I remember earning a negative real yield on my savings, while the [...]

  51. Gravatar of Shane Shane
    20. February 2012 at 17:53

    Dean Baker is the most persistent advocate of the Keynes-Hayek synthesis (if we can call it that). He believes that the entirety of the collapse came from Fed easy money, with not even much contribution from finance. (http://dailybail.com/home/dean-baker-the-housing-bubble-and-what-greenspan-should-have.html)

    Krugman is second in line. He says that it “would be wrong to attribute the real estate bubble wholly, or even in large part, to misguided monetary policy.” Except then he says that “Greenspan disregarded the clear warning by a member of the Fed board that mortgage lending had become dangerously excessive.” He adds that lack of regulation and trade deficits lead to too much lending. (http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/?page=1)

    Delong is the least guilty, although he admits of a “$500 billion dollar loss from irrational exuberance and malinvestment.” These were multiplied by reckless bank regulation. (http://delong.typepad.com/sdj/2010/11/battered-but-not-beaten.html)

    In all explanations, Fed policy, whether as bank regulator or as monetary agent, blows up bubbles, which creates the panic without which there is no crash. Also, all explanations imply at least some level of supply-side distortion–even Delong will admit some malinvestment. Finally, the differences in terms of the supply-side/demand-side split may be larger than we think due to framing bias. Indeed, some Austrians also distinguish themselves from RBC theorists by arguing that while supply-side reforms should happen, they may not happen if the Fed stimulates again. One Austrian chides Krugman on this topic, warning against “conflating the Austrian theory with a purely “real” business-cycle theory. Austrians understand that monetary influences can have real effects. To repeat, that is the very essence of the Mises-Hayek theory.” (http://mises.org/daily/4993)

    So let’s look at the similarities between the two paradigms: the Fed causes the bubble? Check. The bubble leads to a panic and deflation/declining demand? Check. Monetary shocks have real effects, including some supply-side distortions? Check. The Fed can increase AD? Check (although they each become wishy-washy in their own ways on this question at different times). The policy response should be primarily fiscal in nature? Check. So in the end, it’s only really the direction of those fiscal reforms that separates the two camps.

    We are all Hayekians now.

  52. Gravatar of ssumner ssumner
    20. February 2012 at 19:04

    Matt Waters, Exactly!

    Shane, The difference is that the Austrians claim the Fed created the housing bubble with easy money. Krugman didn’t think money was too easy, rather he blamed them for not having tighter regulation. That’s very different. I think he’s got a stronger argument.

  53. Gravatar of Shane Shane
    20. February 2012 at 20:19

    True, although Baker blames the Fed’s monetary policy a good deal, and Krugman blames monetary policy to a small but non-negligible extent in the NYRB piece. But regardless of the supposed source of the excess lending, shouldn’t the Keynesian argument be: if there was a bubble, a recession was the result because the Fed tightened to combat inflation? Instead, the argument is the bubble caused a recession because the “fake” activity had to collapse under its own weight.

  54. Gravatar of Morgan Warstler Morgan Warstler
    20. February 2012 at 21:54

    “Krugman didn’t think money was too easy, rather he blamed them for not having tighter regulation. That’s very different.”

    No it isn’t.

    The Fed / BOJ / etc. either KNOWS what they are doing or they don’t.

    Choose.

    If they don’t have tighter regulation, there is a reason, a motive, and that is very much the same as having easy money,it is just favoring their favorite.

  55. Gravatar of ssumner ssumner
    21. February 2012 at 18:18

    Shane, I agree, do you have a specific quote from Krugman?

  56. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. February 2012 at 20:03

    Becky H: What do we do when a city says, “I’M FULL”?That they’re lying? Seriously: look at the density of American cities compared to other cities around the world.

    I get that not everyone wants to live in Texan suburbia. But there are ways of managing land use that do not involve giving discretionary power to officials over market entry (ALWAYS a bad idea: there is no such things as a “good” permit raj). Germany provides an excellent example.

  57. Gravatar of Shane Shane
    21. February 2012 at 20:53

    Krugman: “The point here is that while there was irrational exuberance in the 1990s, the Clinton-era expansion wasn’t fundamentally unsound the way the expansion of 2003-2007 — the “Bush boom” — was.” (http://krugman.blogs.nytimes.com/2012/01/24/a-tale-of-two-bubbles/)

    It’s a weird pseudo-structural explanation: deregulation lead to too much lending/debt which made this housing bubble flawed in a deeper way than other bubbles (e.g. dotcom), which is why it caused a recession, even though demand-side policies will fix it now (which makes me wonder: would Krugman admit that the Fed could have *prevented* the crisis–as far as I know he’s never addressed it).

    Politics, of course, is an important factor here. To assign blame, the problem had to be fundamental in some ineffable way–otherwise the Fed did it, not Bush. In other contexts he readily admits that bubbles should have no impact on output (http://krugman.blogs.nytimes.com/2012/02/11/bubbles-and-economic-potential/) For some reason, this time it was different.

  58. Gravatar of Skepticlawyer » Easy Guide to Monetary Policy Skepticlawyer » Easy Guide to Monetary Policy
    6. June 2012 at 21:48

    [...] The failure of the bulk of the economics profession to call them on it (a constant frustration for Scott Sumner) means that the reputation effect continues to militate against policy [...]

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