The media in wonderland

There’s certainly plenty of blame to go around for the recent recession.  I’ve been pretty hard on my fellow economists, who almost totally ignored the need for monetary stimulus in late 2008; enough stimulus to keep 2009 NGDP growth expectations around 5%.  But the press has also played a role.  Back in early 2009 my worst nightmare was that the Fed wouldn’t try to create enough AD for the economy to recover to its previous 5% growth trajectory, but rather would be content to resume growth along a new 5% growth trajectory that was 9% lower than the old one.

What actually happened even was worse than my worst nightmare.  We aren’t even recovering at 5%, a number that would now seem pretty good.  In the 4th quarter of 2011 NGDP grew a measly 3.9%, a number which would normally be viewed as substandard, even if we weren’t in recession, even if we weren’t trying to recover.  Ed Dolan recently suggested that trend growth has fallen to 2.3%, implying a 4.3% path for NGDP—but we’re even below that.  And how did the press treat this disgraceful number?  They called it “strong.”  It represented “good news.”  The economy finally seems to be showing some strength.  Talk about low expectations!   How can 3.9% NGDP growth during a so-called “recovery” be a number that leads journalists to suggest that it makes monetary stimulus less likely?  And I’m not just talking about conservatives; even liberals treated it as if it was an indication of adequate growth in aggregate demand.  Bernanke said NGDP growth is how the Fed should be judged—OK, let’s start judging them on that basis.

This really is a lot like the Great Depression.  During the 1930s people started to think of even severely depressed periods like 1936 as “boom years.”  Here’s Lewis Carroll:

‘When you say “hill,” the Queen interrupted, I could show you hills, in comparison with which you’d call that a valley.’

‘No, I shouldn’t, said Alice, surprised into contradicting her at last: ‘a hill can’t be a valley, you know.  That would be nonsense-’

And speaking of the press and nonsense, here’s a Bloomberg article on Ben Bernanke testifying to Congress:

“You want to make a credible, strong plan, but one that phases in over a period so that the economy will not hit a huge pothole,” the Fed chairman told the Senate Budget Committee in Washington on Feb. 7. “If no action is taken on Jan. 1, 2013, between expiration of tax cuts, sequestration and a number of other measures, there will be a very sharp change in the fiscal stance of the federal government, which by itself, with no compensating action, would indeed slow the recovery.”

If you were a Congressman what would your follow-up question have been?  I searched the rest of the article and could find no evidence that Bernanke was even asked what his “compensating action” would be if Congress failed to extend the tax cuts.  But there was this comment from a former Fed economist:

Bush-era tax cuts and expanded unemployment benefits are set to expire at the end of the year, and a deficit-reduction law requiring $1 trillion of cutbacks also kicks in if lawmakers can’t agree on a new plan. The Fed may keep rates low for longer because the budget-balancing measures slated for 2013 — including those automatic cuts, known as sequestration — threaten to weigh on expansion, said Ward McCarthy, chief financial economist at Jefferies & Co.

They “would certainly take a bite out of growth,” McCarthy, a former senior economist for the Federal Reserve Bank of Richmond, said in a telephone interview from his New York office. “The fact that we have a dysfunctional fiscal policy is a contributing factor to why we have such extraordinarily accommodative monetary policy.”

McCarthy’s obvious right that Fed policy would be more contractionary if fiscal stimulus had been more expansionary, it doesn’t take a rocket scientist to figure that out (although I must say lots of Keynesian economists still haven’t figured that out.)  The real question is why isn’t the Fed doing even more?

The press seemed to improve slightly at the January Bernanke press conference, asking some pointed questions.  But what they really need to do is pin Bernanke down whether he would let a change in fiscal policy affect the long run inflation rate, or whether he’d have the Fed take offsetting action to keep inflation on target.  And if he wouldn’t take offsetting action, would it be because the Fed was OK with growth faltering, or because they were out of ammunition?


Tags:

 
 
 

38 Responses to “The media in wonderland”

  1. Gravatar of Joe Joe
    6. March 2012 at 07:04

    I’m a little confused because in the last paragraph you ask whether the Fed is OK with growth faltering, or if they are just out of ammunition. In the prior paragraph, you seem to assume that the Fed is OK with lousy growth, otherwise why would they remove accommodation to offset fiscal stimulus?

    I think you’ve consistently maintained that the Fed is not out of ammunition, so is it that you think that the Fed thinks it is out of ammunition? Or is it that you just want to force Bernanke to publicly explain why he’s not pushing for more growth?

  2. Gravatar of Morgan Warstler Morgan Warstler
    6. March 2012 at 07:51

    Morgan Stanley puts in its bet on my “Ben takes one bite at apple to elect Obama” question:

    http://delong.typepad.com/sdj/2012/03/vince-reinhart-at-morgan-stanley-expects-the-fed-to-start-qe-iii.html

  3. Gravatar of Greg Ransom Greg Ransom
    6. March 2012 at 07:58

    Fewer PhDs teaching at taxpayer dime = more PhD journalists in private sector?

  4. Gravatar of Cthorm Cthorm
    6. March 2012 at 09:08

    After watching plenty of Ben’s testimonies in Congress, it’s crystal clear that we can’t rely on Representatives to to push for a rational fiscal/monetary stance. At the same time Ben’s comments, though again not understood by Representatives, seem to imply that he is signaling that the Fed will act to stabilize spending close to our current levels; this is usually interpreted as him asking for an increase in Fiscal stimulus, but it could just as easily be seen as a plea for Fiscal contraction so he can offset with monetary easing. Oblige him. Call your Representative and tell them that you want them to aggressively cut spending of all types but to encourage the Fed to offset (that part can only be done by committee members AFAIK). Not many people call their offices, so those that do can make a difference. Any suggestion on the exact messaging?

  5. Gravatar of D.Gibson D.Gibson
    6. March 2012 at 09:37

    Richard Fisher is out in front trying to put the brakes on monetary policy. We are doomed to tight money until Democrats connect unemployment directly to FOMC policy. I have no hope for GOP.

    http://www.businessweek.com/news/2012-03-05/fisher-says-investors-should-prepare-for-less-fed-easing-as-data-improve

  6. Gravatar of Liberal Roman Liberal Roman
    6. March 2012 at 10:13

    It seems like Bernanke has made your nightmare even worse today. Rumors of Fed tightening and putting further stimulus out of the question seem to be having their effect today.

    If I am not mistaken it seem likes every spring for the last 3 years, almost on cue, he starts sending out tightening rumors out there to see what would happen. And every spring the market has reacted negatively.

  7. Gravatar of Gabe Gabe
    6. March 2012 at 10:39

    Sorry to break it to you, but the Fed only created this little media show for PR purposes. The media who gets to attend are sfficiently filtered to make sure that they do their job of carrying on the theatre.

    Do you really think the Fed gets questions from the media, then re-thinks its actions based on those questions and creates new monetary policies? I honestly feel sorry for anyone naive enough to believe that is the world we live in.

    Why does thee media praise the horrible growth numbers you mention? because it is their job to spread propaganda for the elite in order to maintain the existing power structure.

    The media is free to pick one of the two approved left-right phony political party talking points…because either line of pre-approved talking points will help reinforce the elite power structure.

    Current approved right(austerity) logic = cut social spending, always pay bankers on time, never question the legitmacy of a corrupt government borrowing money to pay for BS and then taxing working people more to pay for it. Advocate the Fed worry about inflation, but never never never question the logic of giving power of printing press to secretive group of rich people.

    Current approved left logic: Growth is coming back!…Obama is fixing things…Look how great things are now and they will only be better after 4 more years of this. Central planning of money supply is obviously needed. Marx was right and the grumpy old free marketers are wrong.

  8. Gravatar of Gabe Gabe
    6. March 2012 at 10:44

    More current approved left logic: these are wars for humanity…and civil liberties aren’t really important, we were just mad for no reason, sorry georgie …accumulation of new presidential powers is important for our safety.

    When can we raise taxes? these rich people making 100k a year are the cause of most of our problems…see even warren buffet and George Soros wants to raise taxes on the rich…they are so generous.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. March 2012 at 11:06

    ‘Media in Wonderland’ is redundant. What can you expect from a model that trains kids in ‘communications’ (or, as we used to say, English), and then sends them out into the world to interview scientists, businessmen, or even baseball players, to report back to a readership what they found out?

  10. Gravatar of Major_Freedom Major_Freedom
    6. March 2012 at 11:10

    Patrick:

    ‘Media in Wonderland’ is redundant. What can you expect from a model that trains kids in ‘communications’ (or, as we used to say, English), and then sends them out into the world to interview scientists, businessmen, or even baseball players, to report back to a readership what they found out?

    Isn’t that how training economics students at Monetarist and Keynesian faculties at universities operates? They learn monetarist models, then they go work and Wall Street, the Fed, and the Treasury, and then crash the economy, reporting back to their faculties for teaching positions?

  11. Gravatar of Steve Steve
    6. March 2012 at 11:21

    @LiberalRoman

    “If I am not mistaken it seem likes every spring for the last 3 years, almost on cue, he starts sending out tightening rumors out there to see what would happen.”

    That’s because every spring gasoline prices rise due to seasonal demand and environmental rules.

    And the Fed’s job (as they see it) is to produce stable gasoline prices!

  12. Gravatar of Gabe Gabe
    6. March 2012 at 11:46

    Time for the media refrains of “high gas prices are good, it means the economy is picking up!”

  13. Gravatar of Gabe Gabe
    6. March 2012 at 11:50

    although for me high gas prices would be good(I work in energy business)…I would also like Scott Sumner to be the next head of the Fed. I think we could actually trust him to inflate more predictably instead of leaving us market participants guessing.

    I read Ben’s books years ago and thought he would predictably inflate as well;(wrong)…instead he seems to be taking orders to crash the economy for the benefit of insiders who can profit and accumulate power during crisis…sooner or later he will get NGDP up higher right? Is this really it?

  14. Gravatar of John Thacker John Thacker
    6. March 2012 at 12:17

    Gabe:

    I understand a lot of what you’re saying, but the current Fed policy doesn’t produce winners among the rich. Recession makes the rich worse off not only in absolute terms but even in a relative sense. Inequality decreases during recession and increases during growth.

    So for those reasons, the “printing press controlled by a cabal of the rich” theory just doesn’t make sense. Unless, of course, the rich are also badly mistaken about the economics.

    But if the rich are mistaken (and they control the Fed), then educating them about the truth would cause them to favor monetary expansion to get NGDP back to trend, because that would help them both absolutely and in relative terms.

    So no matter what, spreading the truth is the answer, not conspiracy theories. If the conspiracy theory were true, we’d be getting more stimulus. I think that the only answer is confusion and ignorance.

  15. Gravatar of Major_Freedom Major_Freedom
    6. March 2012 at 12:34

    What actually happened even was worse than my worst nightmare. We aren’t even recovering at 5%, a number that would now seem pretty good. In the 4th quarter of 2011 NGDP grew a measly 3.9%, a number which would normally be viewed as substandard, even if we weren’t in recession, even if we weren’t trying to recover.

    The belief that going from $20 trillion NGDP to $20.78 trillion NGDP (3.9% growth) instead of $21 trillion NGDP (5% growth), which is a difference of just $22 billion, to be a “worst nightmare” and “measly”, is, ladies and gentlemen, a textbook example of quantophrenia.

    Sumner is like a modern day Pythagoras, but without the inventiveness.

    What, should the central bank have bought even more US debt, and should the Treasury have financed yet another few drone bombers and maybe an F-14, thus getting NGDP to the magical 5% growth rate? Would that have finally stopped the economy’s problems cold and turned your nightmare into a dream? This is hilarious. Absolutely absurd economic worldview.

    What if I printed $22 billion in my counterfeiting operation out of my basement, and then spent that money on, oh I don’t know, food and medicine that will then throw into the ocean? That would have gotten NGDP up to the magical 5% level, and so you should praise me as saving the US economy.

    Oh, and before the expected response comes my way, while you’re clearly implying above that anything the state spends money on that happens to be a part of a below target NGDP, and is at least needed and should not be reduced, and that if you’re directly asked, you’ll have your own subjective opinions on where that new money should be spent, I’ll just say that your worldview doesn’t allow for types of spending. It just has room for spending. So you have to view my actions as helping the economy! I’m bringing about more spending that you wanted! No mention of real anything in the NGDP market monetarist world. The market is efficient and nothing bad can happen with counterfeiting.

  16. Gravatar of Major_Freedom Major_Freedom
    6. March 2012 at 12:34

    Sorry, $220 billion.

  17. Gravatar of marcus nunes marcus nunes
    6. March 2012 at 12:35

    As usual, the Economist is a bit “avant garde”. From 3 months ago:
    The situation is not yet beyond repair. But the task of repairing it grows harder the longer it is delayed. The lessons of the 1930s spared the world a lot of economic pain after the shock of the 2008 financial crisis. It is not too late to recall other critical lessons of the Depression. Ignore them, and history may well repeat itself.
    http://thefaintofheart.wordpress.com/2011/12/11/that-30s-show/

  18. Gravatar of marcus nunes marcus nunes
    6. March 2012 at 13:31

    On topic: Ryan Avent “comes around”:
    “In other words, I seem to have been wrong about the Fed’s intentions. It has come no closer to effective policymaking at the zero lower bound, and Americans can expect growth between 2% and 3% at best while this regime persists. That is all that the Fed is prepared to engineer or allow”.

    http://thefaintofheart.wordpress.com/2012/03/06/ryan-avent-i-knock-out-on-fourth/

  19. Gravatar of ChacoKevy ChacoKevy
    6. March 2012 at 14:01

    @Gabe: “More current approved left logic: these are wars for humanity…and civil liberties aren’t really important, we were just mad for no reason, sorry georgie …accumulation of new presidential powers is important for our safety.”

    Errrrr….what? You just made that up.

  20. Gravatar of D.Gibson D.Gibson
    6. March 2012 at 14:16

    Major, have you recanted? $220B is $2K/household–real money.

    My question: I see people pushing tight money and 0% inflation, but I don’t know why? Do they think that anything >0% will lead to 1000% inflation (ie stupid)? Do they just hate Obama (ie smart and sly)? Are they huge creditors and seeking personal gain (ie greedy)?

    –DonG

  21. Gravatar of Jason Jason
    6. March 2012 at 14:26

    Reading this I thought of these:

    http://en.wikipedia.org/wiki/Peak-end_rule

    http://en.wikipedia.org/wiki/Duration_neglect

    Humans probably judge/will judge how bad this recession is/was by how bad it seemed at its worst point.

  22. Gravatar of Steve Steve
    6. March 2012 at 16:10

    @Major_Freedom

    Major_Freedom wrote:
    “which is a difference of just $22 billion”

    Major_Freedom
    “Sorry, $220 billion.”

    What’s $198 billion between friends? Just a rounding error, eh?

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. March 2012 at 02:28

    A nice lots-of-revealing-graphs post is here. Shows the severity of the 2008 downturn nicely. Also how the US shifted from Japan-level unemployment to Eurozone-level unemployment. And that Australia continues to be a different economic place.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    7. March 2012 at 05:14

    Black Hole Sun Want You Come?

    “In my eyes, indisposed
    In disguise as no one knows
    Hides the face, lies the snake
    The sun in my disgrace
    Boiling heat, summer stench
    ‘Neath the black the sky looks dead
    Call my name through the cream
    And I’ll hear you scream again

    Chorus:

    Black hole sun
    Won’t you come
    And wash away the rain
    Black hole sun
    Won’t you come
    Won’t you come

    Stuttering, cold and damp
    Steal the warm wind tired friend
    Times are gone for *honest men*
    And sometimes far too long for snakes
    In my shoes, a walking sleep
    And my youth I pray to keep
    Heaven send Hell away
    No one sings like you anymore

    Chorus

    Hang my head, drown my fear
    Till you all just disappear”

    http://www.youtube.com/watch?v=M29x4LFkWkg

  25. Gravatar of ssumner ssumner
    7. March 2012 at 06:08

    Joe, You said;

    “Or is it that you just want to force Bernanke to publicly explain why he’s not pushing for more growth?”

    Yup.

    Morgan, I thought you said the Fed was Republican?

    Cthorm, I have low expectations for Congress, but I do expect more of the press, then need to pin him down at press conferences.

    D. Gibson. I’ve noticed that too. Fed Presidents are like commenters–the louder and more annoying, the less well informed they are.

    Liberal Roman, They are slow learners.

    Gabe, You said;

    “Do you really think the Fed gets questions from the media, then re-thinks its actions based on those questions and creates new monetary policies? I honestly feel sorry for anyone naive enough to believe that is the world we live in.”

    And I honestly feel sorry for people who don’t know how to read what I wrote.

    Patrick, I’m a bit more forgiving than you, given I feel the same way about my fellow economists–but that’s coming up in a few minutes in my next post.

    Major Freeman, You said;

    “The belief that going from $20 trillion NGDP to $20.78 trillion NGDP (3.9% growth) instead of $21 trillion NGDP (5% growth), which is a difference of just $22 billion, to be a “worst nightmare” and “measly”, is, ladies and gentlemen, a textbook example of quantophrenia.”

    I never said that, why can’t you and Gabe learn how to read?

    Thanks Marcus, I have that Avent link in my next post, which come sup soon.

    Jason, I think the length will also figure in. This will be remembered as worse than 1982, despite a lower peak unemployment rate.

    Lorenzo, Thanks for the link.

    Mark, You need to listen to more upbeat music.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    7. March 2012 at 06:19

    “Mark, You need to listen to more upbeat music”

    I will, when there’s a reason for it.

    Actually I take “Black Hole Sun” as a metaphor for NGDP targeting.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    7. March 2012 at 06:35

    “Washing away the rain” might be a good thing.

  28. Gravatar of Gabe Gabe
    7. March 2012 at 08:07

    ” Recession makes the rich worse off”.

    John Thacker it depends on your definition of the rich…this is intentionally confused in the media all the time…yes the great majority of “the rich” don’t want recession.

    The old really big and connected money that can buy up cheap assets from the new rich are happier than ever in a recession.

    The guys who can call up Ben Bernanke and tell him what to do are happy to accrue more power to the Fed and that was the main reuslt of the crisis.

  29. Gravatar of Cthorm Cthorm
    7. March 2012 at 08:27

    Scott,

    I have low expectations of Congress too, but I have even lower expectations for the bulk of the press. I’m not old enough to say whether it was ever any different, but ‘Journalism’ does not exist for most topics in this country. What the press practices is Public Relations, they uncritically repeat claims from press releases and media events. At best they’ll bother to quote some ‘expert’ from each side of an issue, but at least one of them is as full as shit as can be. Politics and sports are practically the only things the press reports on at a level approaching competence.

    Not to get off on too much of a tangent, but I see the same problem in education at all levels. Again, I’m not sure if it was ever really any different. There is a mismatch between the expectations of the public/parents/students and the practices of institutions/press/educators. People seem to expect that going to school and doing most of their homework will teach them what they need to know; I see this everyday even with relatives, who protest loudly “they didn’t teach us that!” or “that wasn’t covered!” In the end the only people who are succeeding are autodidacts and those who are deeply interested in the subject. Anyway, as a parent I plan on doing my part by exposing my kids to as much material from the best, most enthusiastic teachers (Richard Feynman, Milton Friedman, Carl Sagan, Neil DeGrasse Tyson…) in hopes of instilling deep curiosity, which I regard as the single most important ingredient in an education.

  30. Gravatar of The media in wonderland « Economics Info The media in wonderland « Economics Info
    7. March 2012 at 11:02

    [...] Source [...]

  31. Gravatar of ssumner ssumner
    7. March 2012 at 18:20

    Cthorm, I’m less pessimistic, I see some excellent journalists out there like Ryan Avent. And tomorrow I’ll try to link to a great new article in The Atlantic.

  32. Gravatar of Major_Freedom Major_Freedom
    7. March 2012 at 21:48

    ssumner:

    Major Freeman, You said;

    “The belief that going from $20 trillion NGDP to $20.78 trillion NGDP (3.9% growth) instead of $21 trillion NGDP (5% growth), which is a difference of just $220 billion, to be a “worst nightmare” and “measly”, is, ladies and gentlemen, a textbook example of quantophrenia.”

    I never said that, why can’t you and Gabe learn how to read?

    Yes, you did say that. You wrote:

    “What actually happened even was worse than my worst nightmare. We aren’t even recovering at 5%, a number that would now seem pretty good. In the 4th quarter of 2011 NGDP grew a measly 3.9%”

    Why are you saying you never said that when you clearly did?

  33. Gravatar of Major_Freedom Major_Freedom
    7. March 2012 at 21:56

    D. Gibson:

    Major, have you recanted? $220B is $2K/household–real money.

    First, not all households are going to receive the $220B at the same time. That $2K is a very crude average that masks the wealth transfer which will transfer wealth away from those who receive the new money last to those who receive it first.

    Second, an additional $2K per household won’t mean diddle squat to their standard of living because the $220B will have been created from thin air, thus diluting the value of the money they already have. So sure, households that eventually receive $2K more won’t be wealthier in real terms. In general society won’t be better off, but with that zero gain, some people will gain at the expense of others.

    My question: I see people pushing tight money and 0% inflation, but I don’t know why?

    The same reason you push for 2% inflation.

    Do they think that anything >0% will lead to 1000% inflation (ie stupid)?

    No. Do you think 0% will lead to -1000% deflation?

    Do they just hate Obama (ie smart and sly)? Are they huge creditors and seeking personal gain (ie greedy)?

    Why are you being so divisive? Obama speaks very well and he reformed healthcare. Stop being racist.

  34. Gravatar of Major_Freedom Major_Freedom
    7. March 2012 at 22:00

    Steve:

    What’s $198 billion between friends? Just a rounding error, eh?

    If I were to print $220B in my basement counterfeiting operation, and spend that money on myself and my friends, say I bought some government debt, and some real estate, such that nominal GDP rose by 5% rather than 3%, would other people be better off or worse off because of what I did?

    If you’re a market monetarist, you’d have to consider me a savior. If you’re a market monetarist but you say I will make others worse off, then congrats on seeing the insanity of market monetarism.

  35. Gravatar of The Strongest Argument for a Republican President The Strongest Argument for a Republican President
    7. March 2012 at 23:40

    [...] comes from Scott Sumner (although that’s not what he’s talking about in the post): What actually happened even [...]

  36. Gravatar of Cthorm Cthorm
    8. March 2012 at 10:30

    Hah – don’t get me wrong, I think Ryan Avent is great. The writers at FT Alphaville are also great. But the joke in DC is that “Everyone in DC loves The Economist, but no one reads it.” They are the press for the well-informed. The WSJ/NYT is the press for the marginally informed. Kelly Evans stood out for a reason in that she was willing to come back and learn more about your views. The WSJ/NYT needs more reporters like her, and a lot more Op-Eds from the likes of Ryan Avent.

  37. Gravatar of ssumner ssumner
    9. March 2012 at 07:08

    Major, Please learn how to read. The quote of mine you provide doesn’t even come close to saying what you claim it does.

    Cthorm, I agree that The Economist is a cut above most other outlets.

  38. Gravatar of Major_Freedom Major_Freedom
    12. March 2012 at 10:05

    ssumner:

    Major, Please learn how to read. The quote of mine you provide doesn’t even come close to saying what you claim it does.

    No, it does come very close. It explains it quite accurately actually.

    I don’t need to learn how to read, because I can already read quite well. You did in fact say what I explained you said. Merely hand waving it away isn’t a proper response.

    To you it’s your “worst nightmare” that NGDP rose by a “measly” 3.9% instead of the golden perfect ideal amazing 5%.

    You’re clearly now denying it solely to excuse the sorry state of the economy when you’re really talking about a small 1.1% shortfall in alleged “optimal” NGDP growth.

    Are we to seriously believe that if only NGDP growth were 1.1% higher, that the economy will be all rainbows and butterflies? What do individual investors and sellers care if NGDP grew at 3.9%, rather than 5%? Your worldview would have us believe that if only the state printed and spent another $220 billion on drones and weapons of war, thus getting the magical 5% NGDP growth, that everyone’s lives would have been better off. That is madness.

    Oh, and in before you yammer “Major, I don’t advocate for printing and spending money on weapons and war, but on schools for blind children.” In other words, you’ll contradict yourself and say that it’s not NGDP after all, but particular real projects that improve people’s standard of living, which of course can only be calculated by market process of voluntary exchange, not printing and spending by the state for projects YOU personally value for everyone, as if you’re an all knowing dictator.

Leave a Reply