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