If policy won’t succeed, does that mean policy can’t succeed?

Early on I decided that it was very unlikely that Fed policy would rescue the economy.  The markets predicted that Fed policy would remain suboptimal, and the markets are usually right.  So what implications can we draw from this pessimism?

1.  Some argue that the Fed is too hawkish to change its policy, and even if it did the new policy wouldn’t be credible.  Thus we needed fiscal stimulus.

2.  Of course Congress is much too deficit-phobic to enact effective fiscal stimulus, and the Fed’s 2% inflation target would neutralize it even if they did.  So any sort of demand stimulus is futile.

3.  Some argue that this means we should focus on structural changes, supply-side reforms like a simple, loophole-free consumption tax.  But of course Congress is much too corrupt to ever do that, so there is no prospect of supply-side reforms.

4.  Some argue that there’s no point in even getting out of bed in the morning.  After all, life is just M iterations of N events with K degrees of intensity.  Life has no meaning.  In any case, we have no free will, so we are merely going to play out the motions that the atoms in our bodies are compelled to undertake according to the laws of physics plus quantum randomness.

Or . . .

Or we can pretend that the universe is charged with meaning.  That our actions do make a difference, that my blogging might lead Richard Fisher to have a road to Damascus experience, where he wakes up one morning exclaiming “Yes, I see the light, Scott Sumner has been right all along.”

I’ve spent my life studying the Great Depression, so I fully understand that my crusade will likely fail, at least in the short run.  If Keynes failed when he was alive, why should I expect to succeed?  So why keep blogging?  I suppose because if I stop blogging that means there is no hope for communicating with my fellow economists, indeed my fellow human beings.  In that case there really would be no reason to get out of bed in the morning.  I have to hope that someday, even if 100 years from now, these ideas will be accepted by the profession.  And when that happens, the monetary-policymakers will surely follow, as they always do.   The Fed has always stuck close to the consensus views of macroeconomists, and always will.

All this was triggered by a recent Tyler Cowen post sent to me by David Levey, which seems to confuse what will happen with what can happen:

4. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long. Putting aside the more general and quasi-metaphysical issues with precommitment, just look at the key players. Bernanke leaves the scene in 2014 and is a lame duck at some point before then. Obama could be gone by the end of this year, and in any case is unlikely to be reelected with a thundering mandate. Romney’s actual views on monetary policy are a cipher. Either house of Congress could change hands. There is less public support for a consensus view of the Fed today than in a long time.

On this issue I feel Scott Sumner is insufficiently Sumnerian. He correctly stresses the role of expectations and credible commitments, but I still do not understand why he does not accept the implied pessimism in this, at least for May 2012. 2008-2009 was the time to act, in a Ludwig Erhard/Douglas MacArthur/Alexander Haig “I’m in charge now and we’re doing ngdp targeting try to challenge me in the chaos and confusion” sort of way.

Oh I do accept the implied pessimism, but I’m playing a much longer game.

Let’s return to this “quasi-metaphysical” issue of commitment.  Paul Krugman has famously argued that the BOJ can’t inflate, because any commitment to inflate wouldn’t be believed.  And why wouldn’t it be believed?  Because everyone knows they don’t want to inflate, and would renege on any promises at a future date.  OK, but what if they really changed their minds about the desirability of higher inflation?  Krugman would argue that the markets would not believe them.  Actually that’s wrong, as there’s all sorts of things they can do right now to show the “change of mind” (such as currency depreciation.)  And it’s wrong because the markets know the “mind” of the central bank much better than the central bank knows it’s own mind.  But let’s say he was right.  I’d still say he was confusing can’t with won’t.  The only solution to a central bank bound and determined to produce deflation is to change them (via change in attitude or change in mandate or change in personnel) into a central bank that isn’t bound and determined to produce deflation.  It does no good to throw up one’s hands and say “they can’t because they won’t.”  In legal terms that’s called “the insanity defense.”  Have we reached the point where we are going to judge monetary policymakers “not guilty due to insanity?”

If I had to summarize my blog in one word, it would be “j’accuse.”  (Or is that two words?)

I’m going to make 4 arguments for ignoring Tyler’s advice and charging ahead with my Fed/ECB/BOJ bashing:

1.  Public pressure is part of the policy process

2.  Failure is a matter of degree

3.  Educating the public

4.  Playing the long game

Some people have pointed to Fed officials indicating (sotto voce) that they’d like to do a bit more, but there’s oh so much public pressure from the inflation hawks.  This argument is apparently supposed to make me see that my crusade is futile.  But it does just the opposite.  If hawkish pressure is restraining the Fed from easing, then market monetarist and enlightened Keynesian pressure can push back the other way.  No one can deny that reporters are increasingly pressing Bernanke at his press conferences on the obvious inconsistency between the Fed’s unemployment objective of 5.6% and inflation objective of 2%, with a policy that is currently expected to undershoot on both jobs and inflation.  But there’s much more work to be done.  We still need to educate roughly 50% of economists, and President Obama, and much of Congress, all of whom support more stimulus but think the Fed’s out of ammo.

Even if we don’t “succeed” perhaps we’ll cause the Fed to fail a little less badly.  Tyler’s right that there are no longer $1 trillion bills lying on the sidewalk, as in 2008-9.

I still believe in a looser monetary policy, I just think that what we can get for that now is much much less (a fifth? a tenth?) of what we could have received in 2008-2009.

But that means there are still $100 billion bills lying around, well worth picking up.  Heck, I’m old enough where I still pick up non-copper coins.

Some people say “yes, we see your point, but there’s nothing that can realistically be done at this point.”  Actually, people don’t agree with me.  Few agree that tight money caused the recession.  Few agree that the fiscal multiplier is zero, although the idea is beginning to appear in unexpected places.  Few agree with me that saving is not contractionary.  Indeed here’s Tyler:

3. As banking and finance heal, debt overhang is less of an AD problem. The debt repayments get rechanneled into investment, rather than falling into a black hole.

Yes, saving can be deflationary under money supply or interest rate targeting, but that’s not Fed policy.  Bernanke is targeting inflation at 2%, with perhaps some weight given to employment.  Under inflation targeting saving is not contractionary, regardless of the weight given to jobs.

Many people wrongly think that monetary stimulus would hurt older people.  Not so, Social Security recipients are protected via indexing, and those living off capital will do better is a healthy economy where returns to capital are higher.  If part of the cause of our malaise is public pressure caused by false theories, then correcting those false ideas has real value.

And then there’s the long game.  My hope is to get market monetarist ideas into the textbooks, where they might influence the next generation.  (Soon I hope to be able to announce progress on that front.)   I’m shocked when people say that there’s no hope of convincing the world’s central banks that NGDP targeting is a good idea.  It was only a few decades ago that the economics profession convinced the world’s central banks that inflation targeting was a good idea.  Furthermore, many central banks already do “flexible inflation targeting,” which is really close to NGDP targeting.  Furthermore, until the interest rate hit the zero bound in 2008 the Fed has been doing something pretty close to NGDP targeting for 25 years.  Furthermore the idea of a single target that addresses both sides of the dual mandate has great appeal, as both the left and the right now agree that the discretion associated with the Fed’s current approach to the dual mandate leads to undesirable policy uncertainty.  Furthermore NGDP targeting has already been praised by lots of well known conservative economists and lots of well known liberal economists.  And after all this we are to believe it can never happen?  People need to use their imaginations a bit more.  Change is the only constant in the world of central banking.  Never say never.

Tyler also has this to say:

This will sound counterintuitive, but we should be debating real factors more and nominal factors less, all the more as time passes.

Circa 2012, monetary policy matters less every day. You might feel outraged by that reality, and by the policy omissions from the past, but still monetary policy matters less every day. That point follows from basic insights from Milton Friedman and Irving Fisher, or for that matter modern most mainstream neo-Keynesian models. By the way the labor force participation rate declined in the latest round of data, and will likely remain low for a good while, so I am not convinced by graphs which beg the question about the size of the output gap.

I also stress that I haven’t changed my views at all, not since 2008-2009, and not since my early column on Scott Sumner (someday I’ll do a post on why I wrote that column in terms of prices rather than ndgp). Same views, but I do see the clock ticking on the wall.

This entire point is hardest to grasp in a mental framework of “accumulated blame,” easiest to grasp within a disciplined, non-moralizing look at marginal products.

He doesn’t realize that he’s preaching to the choir (with me, not Krugman.)  I recently wrote in the comment section that Tyler hadn’t changed his views.  I have consistently argued that monetary stimulus becomes less effective as more time passes.  I’ve gone from recommending we go all the way back to the trend line to (more recently) only 1/3 of the way back.  I do occasionally post on supply-side issues, and agree that they are what really matters in the long run, what separates North and South Korea. But I have no special expertise in non-monetary areas of economics.

I only have two choices.  Keep focusing on those $100 billion bills on the sidewalk, or give up blogging and go back to being an obscure prof at Bentley, playing out the string while watching contemporary Asian art films.  M iterations of N events with K degrees of intensity.  A blob of buzzing sub-atomic particles in a universe too perplexing to understand.

So what shall I do, Tyler?


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36 Responses to “If policy won’t succeed, does that mean policy can’t succeed?”

  1. Gravatar of Tyler Cowen Tyler Cowen
    5. May 2012 at 12:41

    Note by the way that my text with Alex is influenced by your ideas as well as by the broader Fisherian tradition in which they are embedded.

  2. Gravatar of Tyler Cowen Tyler Cowen
    5. May 2012 at 12:53

    p.s. I also fully agree you are consistent on all of these points and I think also correct. I didn’t mean to be lecturing you. That said, I would like more posts on Asian cinema, without fewer posts of other kinds.

  3. Gravatar of dwb dwb
    5. May 2012 at 12:57

    I prefer to quote #2 from Clarkes 3 laws:
    “The only way of discovering the limits of the possible is to venture a little way past them into the impossible.”

    http://en.wikipedia.org/wiki/Clarke%27s_three_laws

  4. Gravatar of Left Outside Left Outside
    5. May 2012 at 14:13

    Good post. One query…

    “It was only a few decades ago that the economics profession convinced the world’s central banks that inflation targeting was a good idea.”

    I thought inflation targeting originated in a central bank (New Zealand?) and only later became a common academic proposal. Have I got the history wrong?

  5. Gravatar of Mike Sax Mike Sax
    5. May 2012 at 14:33

    Though we do disagree on some important stuff by all means my vote is that you keep blogging. Know what they say keep your friends close and your frenemies closer…

    Interesting point that the Fed is kind of a trend follower-not setter, so that they pick up an idea after 50% of the Marcro profession does.

    The key to the ability to get up in the morning is to put a check on one’s introspecdtion.

  6. Gravatar of Jim Jim
    5. May 2012 at 14:43

    You have no free will, but your deterministic destiny is still to keep blogging. So I’m not worried (as if I had a choice).

  7. Gravatar of kaiser soze kaiser soze
    5. May 2012 at 15:12

    Scott, pls keep blogging……….”the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the WORLD IS RULED BY LITTLE ELSE. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” JM Keynes

  8. Gravatar of kaiser soze kaiser soze
    5. May 2012 at 15:20

    Scott…u da man…pls don’t stop blogging !!!!

    “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” JM Keynes

  9. Gravatar of marcus nunes marcus nunes
    5. May 2012 at 15:39

    Scott

    In 1924, when asked why he wanted to climb Mount Everest George Mallory gave the immortalized reply: “Because it´s there”. In August of that same year Mallory and his partner disappeared on the way to the summit. The large scope of public grief over their demise marked the beginning of Everest´s allure and fascination…
    In your case, you blog on MM issues because you believe in them. And over the past year alone how many others, some of them important, have “embraced the allure and fascination”? And you didn´t even have to “disappear” to do it. So “keep (walking)blogging”.

  10. Gravatar of Dennis Dennis
    5. May 2012 at 15:52

    Rather than insanity, I prefer the phrasing “not guilty due to mental disease or defect”

  11. Gravatar of Becky Hargrove Becky Hargrove
    5. May 2012 at 16:01

    There’s an odd feeling about current times in which – like Tyler said – one is aware of the clock ticking…it feels so imperative to do what needs to be done, somehow, immediately. And yet, it really is about the long term, the years when we are no longer here, that we hope the younger generations won’t continue to be as mad at us as they are now because we were (hopefully) able to leave them something good, after all.

  12. Gravatar of ssumner ssumner
    5. May 2012 at 17:29

    Thanks Tyler. And no, I didn’t view your post as lecturing me. You are always quite polite.

    dwb, Excellent quotation.

    Left Outside, Yes, I’ve heard that too, but people had been talking about price level targeting way back in the Depression. I’d still say that it was the influence of economists that helped the major central banks to go that route.

    Thanks Mike and Jim.

    Marcus, But if I keep this up I’ll disappear into blogging like Mallory disappeared into a snow drift.

    Dennis, I’m not sure that sounds much better, but OK.

    Becky, Yes, I think they’d be appalled by lots of stuff that is going on now–but I suppose that’s true of every new generation.

  13. Gravatar of ssumner ssumner
    5. May 2012 at 17:31

    Kaiser Soze, Don’t worry, I’m addicted. BTW, are you still in hiding?

  14. Gravatar of TGGP TGGP
    5. May 2012 at 19:14

    “That said, I would like more posts on Asian cinema, without fewer posts of other kinds.”
    Who do you think he is: Tyler Cowen?

  15. Gravatar of Morgan Warstler Morgan Warstler
    5. May 2012 at 19:31

    What Tyler needs is for you… is to get very serious about my Guaranteed Income plan.

    Then, you are actually SOLVING for the structural problems with the very technology that caused the structural problems.

    Then, you are following in Friedman’s footsteps and not just arguing Monetary policy, you are arguing a far better version of his Negative Income tax.

    And finally, THEN you are gaining more credibility from other innovative and compelling economic ideas – you are not a one trick pony…. which OBVIOUSLY furthers your long play.

    —-

    This is not to say you should just accept my thinking and endorse it, no, no – you should vet it, beat it up, abuse it, make it dance.

    And then when you have made it your own, you should normalize it for economic discussion in the hallow halls of eggheadedness.

    Because I want to keep pissing on the heads of liberals from up on high.

    And my idea deserves your attention.

  16. Gravatar of Benjamin Cole Benjamin Cole
    5. May 2012 at 20:11

    “Paul Krugman has famously argued that the BOJ can’t inflate, because any commitment to inflate wouldn’t be believed.”–Scott Sumner.

    Some right-wingers are saying this too. When the Fed buys bonds, the money just goes into banks and sits there, they say.

    Okay. Okay–if true, we have an incredible and historic opportunity right now, and any smart businessperson would seize it. We have an opportunity to monetize debt and suffer no inflation.

    The Fed should buy $100 billion a month in Treasuries, consistently.

    If no inflation results, okay, just keep buying. We will hand to our children a deleveraged nation. Remember, bondholders have been paid off. They received cash for their bonds. They can’t cry. The Fed can retire the debt, or just keep it on the books, and forward the interest to the taxpayers.

    If the bond buying eventually results in more AD and then inflation, we win again.

    Comments?

  17. Gravatar of Saturos Saturos
    5. May 2012 at 21:58

    “If I had to summarize my blog in one word, it would be “j’accuse.””

    I understand that you’re Zola and Bernanke is Faure. But who’s Dreyfus? And Zola was prosecuted for his letter, whereas you haven’t been, as yet (touchwood).

    I followed the link to Tyler’s 2009 NYT op-ed, in which he mentions you were doing a book:
    “The Midas Curse: Gold, Wages, and the Great Depression”.
    Is that still happening? What do you think of the Amity Schlaes book?

    “Few agree that the fiscal multiplier is zero, although the idea is beginning to appear in unexpected places.”

    Yeah, Ryan Avent sure is undoing the Economist’s long-standing Keynesianism, and I’m pretty sure his inspiration is… you. How’s that for a long-run impact!

    Benjamin Cole, Ahhh, but of course there will be hyperinflation eventually, and then the Fed will backtrack and make losses, and the economy will go off the rails… What? Target the forecast? What do you mean, don’t you understand, the Fed has no credibility…

  18. Gravatar of Max Max
    6. May 2012 at 04:44

    Ben, treasuries are the worst possible asset to buy, since the Fed will lose money if the economy recovers. In effect the Fed would be placing a wager against itself, which doesn’t inspire confidence.

  19. Gravatar of ssumner ssumner
    6. May 2012 at 05:37

    TGGP, Great observation! That’s not who I am—it’s who I wish I was.

    Morgan, You are like one of those “now more than ever” pundits. Whenever any crisis hits, it’s “now more than ever is the time for my pet policy project.”

    Ben, Yes, and buy them with cash, not interest-bearing reserves. And buy until NGDP expectations are right on target.

    Saturos, I’m actually a Cliff’s Notes sort of intellectual–I’ve never read Zola. I read a lot (or used to), but in narrow segments. I’m not widely read.

    Schlaes’s book is pretty good, but it’s basically micro. She’s not very good at macro. She’s not an economist. I plan to finish revising my book in June (even if I have to stop blogging for a while to do so, and then it’s up to the publisher as to how long it takes.

    Ryan is both very smart and very open-minded. He’s sees what’s going on and draws the obvious implications. So I’m not sure I can take credit for that post.

    Max. What matters is the consolidated government balance sheet (which includes the Fed.) As the Fed loses, the treasury gains. So have no fear about higher rates. In any case, if markets are efficient the factor you anticipate would already be priced in.

  20. Gravatar of Morgan Warstler Morgan Warstler
    6. May 2012 at 07:02

    Morgan, You are like one of those “now more than ever” pundits. Whenever any crisis hits, it’s “now more than ever is the time for my pet policy project.”

    Pot calls kettle….

    For christ’s sake old dog, new tricks!

    Ya know, learning new tricks Scott is moral, it teaches the young that they will forever be growing, it affirms human progress, it speeds up evolution.

    Just start studying it Scott, take the time to truly convince yourself.

  21. Gravatar of Benjamin Cole Benjamin Cole
    6. May 2012 at 09:57

    Max-

    Yes, but isn’t the Fed losing a little money (and it can print more) a small price to pay for robust GDP growth?

  22. Gravatar of Jon Jon
    6. May 2012 at 10:55

    My concern is that the economy doesn’t really appear to have slack. If it doesn’t have slack then you have to be careful about bow you define success. If you define it as unemployment drops to 4%, success cannot be had without a combination of factors.

    First is the understanding that inflation or GDP rate targeting is great for stabilizing the macroeconomy but lacks a mechanism to correct horrendous blunders–small blunders are fixed by normal market healing.

    If you adopt level targeting you may still return to your trend line without having generated the excess real growth to bring unemployment down. The boost in output growth is definitely only a SRAS effect and super neutrality may kick in before full enployment is reached unless you deliberately overshoot your level target by quite a bit.

    Exactly how well policy would work depends on global slacks. Maybe exiting high unemployment is easier with Europe going down.

    I agree with Tyler that we need more focus on the supply side–demand side claims have long been the refuge of the progressives because supply side inefficiencies tend to be due to side-effects of the progressive policy agenda.

    We need to be mindful of pursuing both solutions together. We need a full reform platform. I appreciate your claim Of ignorance though. I started to write a list of supply side reforms only to mutter about not knowing which are theist powerful.

    - eliminate the employer side payroll tax and insurance mandates
    - rollback unemployment benefits to 26 wks
    - rollback regulatory barriers to oil exploration in the US
    - rollback state owned oil companies internationally (mismanagement of oil exploration and extraction is a big issue at most state oil companies)
    - rollback renewable energy mandates
    - lower marginal rates
    - rollback Dodd-frank and sarbanes-oxley
    - rollback employment barriers and enforcement against foreigners
    - open border policies generally
    - rollback Davis bacon work rules particularly the riders since 2006
    - eliminate minimum wage requirements:legalize internships
    - rollback investment taxes
    - rollback hospital antitrust exemptions
    - more public investment in medical schools
    - make the cap of medical residency slots an illegal restraint of trade
    - open medical licensing to foreign trained doctors

  23. Gravatar of The Hat of the Three-Toed Man-Baby The Hat of the Three-Toed Man-Baby
    6. May 2012 at 11:13

    Warstler is some kind of nut, isn’t he?

    And Sumner, you’re not only not an expert of nonmonetary stuff, there is no evidence you’re an expert of monetary stuff either. Where is your grand contribution? What well-cited journal articles have you published? Oh, what was that? You don’t have any? Well color me surprised.

  24. Gravatar of ssumner ssumner
    6. May 2012 at 12:57

    Jon, You said;

    “My concern is that the economy doesn’t really appear to have slack.”

    Tell that to the millions who can’t find jobs.

    You said;

    “I agree with Tyler”

    Then we all three agree–do both monetary stimulus and supply side reforms.

    Man Baby, Where’d you get the silly idea that I claimed to be a well-published economist? Did I ever make that claim?

  25. Gravatar of Ray Lopez Ray Lopez
    6. May 2012 at 13:18

    As a student of the Great Depression, what does Professor Sumner think of the Townsend Plan? Would it have worked? Perhaps it will shed light on whether unrestrained Keynesianism will work. BTW there is a chance that any change might work, short term, akin to those studies that show turning lights brighter will increase factory productivity, and then dimming those same lights will also (temporarily) increase productivity. Change for change’s sake is sometimes efficacious. Townsend Plan notes below, for the casual reader.

    RL

    http://rationalwiki.org/wiki/Townsend_Plan

    To get around this it relied on a requirement that the entire $200 be spent immediately, where it would be taxed at 2%, and claimed the plan would pump so much money into the U.S. economy it would automagically generate all the tax revenue needed to fund it, and get the U.S. out of the Depression all at the same time. (This is called something-d-o-o economics).

    This is disputable, but at least Social Security has survived this long. The Townsend Plan had all the soundness of a pyramid scheme and would have collapsed within a few years if enacted.

  26. Gravatar of Nic Johnson Nic Johnson
    6. May 2012 at 13:37

    Does this mean you’re writing a textbook?!

    (Yes, I’m fan-boying about a textbook.)

  27. Gravatar of Benjamin Cole Benjamin Cole
    6. May 2012 at 15:00

    Another reason I oike the Fed doing QE by buying Treasuries is that it monetizes the national debt, thus giving to our children an unleveraged nation.

    Both righties and lefties say QE will accomplish nothing. Very well—at least it will deleverage America.

  28. Gravatar of Max Max
    6. May 2012 at 15:37

    “What matters is the consolidated government balance sheet (which includes the Fed.) As the Fed loses, the treasury gains. So have no fear about higher rates.”

    This is only true if the average maturity of the debt is held constant (in which case what could QE do?)

    “In any case, if markets are efficient the factor you anticipate would already be priced in.”

    But the idea is to *change* market expectations! If the Fed is happy with what the market is “pricing in”, then there would be no reason to disturb it.

    Ben, it’s incorrect to say that monetizing the debt ‘deleverages’. Money is not a 0% perpetual bond. There’s no guarantee that monetizing the debt would decrease the debt burden on taxpayers (assuming such a burden exists). It depends on the future path of interest rates.

  29. Gravatar of anon anon
    6. May 2012 at 15:38

    Benjamin, Actually, you shouldn’t hold your breath about that. NGDP path targeting, properly implemented, would actually shrink the monetary base; and it would increase rates in the long run. OTOH, it would make it relatively easy to freeze the national debt, or to slowly shrink it by running budget surpluses (see the Clinton years).

  30. Gravatar of Saturos Saturos
    6. May 2012 at 18:42

    Scott, thx for responding. Fyi, extravagant new names usually signal trolling.

  31. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. May 2012 at 03:46

    Scott: keep blogging! It was your blog that enabled me to get any serious grasp of macroeconomics (which I had dismissed as ad hoc embarrassment, given how it was taught at ANU) and any grasp of monetary economics and policy (which I used to find just too confusing).

    And for any mad Austrians who bother you, just refer them to John Quiggin’s post on Austrian economics. (I am not normally a fan of Quiggin’s, but the post is excellent.)

  32. Gravatar of Steven Kopits Steven Kopits
    7. May 2012 at 07:02

    Scott -

    This is a very somber post. In critical ways, however, we are not living the Great Depression. We have the rise of China and the stagnation of the oil supply; neither characterized the Great Depression. These two facotrs affect virtually every market out there.

    As I see it, there are two ways of looking at the situation. One takes a kind of Laffer curve of debt, and suggests that when debt exceeds some level, economic activity decreases, either because the incentive to work decreases, or because of inherent uncertainty about property rights creates an unstable environment for investing and contracting. Both of these seem plausible to me. If so, then there actually is a pretty strong theoretical case for debasing the currency, in that inflation allows the uncertainty of property rights to resolve (in favor of the debtors). Is this what you have in mind? Or is what you have in mind something different? If so, please be specific: The Fed should (sell/purchase) [name of security] in the value of [$ amount] in the next [period of time], which will have the effect of [impact on NGDP]. Tell us what you want to do, specifically. Surely it must be more than just jawboning about an NGDP target.

    At the same time, keep in mind the US is under enormous pressure on the oil front. The US carrying capacity for oil is around $95 Brent. Above this price, both the recent and historical record shows the US sheds oil consumption. US oil consumption is down 1 mbpd (5%) compared to this time last year. Do you believe the US economy can shed oil consumption at this rate and prosper at the same time? The historical record is not exactly encouraging.

    Thus, if you take the view that we’re contending with a real supply shock (unlike the Great Depression), then the proper response is a reduction in oil consumption–exactly what Volcker did in 1979-1983. US oil consumption declined 4 mbpd in 4 years, and the economy struggled through much of the period. Under Volcker, the US paid the piper.

    Today, we’re now down about 3 mbpd (from 2007) in 5 years. There are, however, two big differences between 1983 and 2012 wrt oil. First, the oil supply increased by 7 mbpd in just four years after 1979. Second, oil demand fell by 6 mbpd in the same period. Thus, by 1983–just four years from the beginning of the second oil shock–the world had 25% excess capacity in the oil supply. This surplus tracked The Great Moderation, and was exhausted around 2003–as was the Great Moderation.

    There has been no meaningful reponse in the crude oil supply since 2005. In the intervening six years, the crude oil supply has increased just 300 kbpd, or 0.3%, despite more than $2 trillion invested in upstream spending in the period. (All petroleum liquids are up about 3 mbpd. Most of this is natural gas liquids.)

    At the same time, demand continues to increase. China’s car sales literally doubled in 2009/2010, to 18 m units. (US is at 14 m). McKinsey puts steady state car sales in China around 50 m units; we put it around 35 m, that is, 2-3x US sales–and this by around 2025. Thus, China is and will continue to place enormous pressure on the oil supply. Without substantial incremental oil supply (about 2.2-2.5 mbpd/year), China will continue to bid away the OECD’s oil supply–just as it has since around 2007. This is the default outcome.

    So, US oil consumption is an will continue to fall. In light of this, how do we adjust? If oil is linked to GDP, then the economy will be affected, and pretending it won’t will be as futile as it was in 1976. If you take this view (I do), you need to accept a lower standard of living as inherent. Don’t try to sustain consumption. Come to grips with reduced possibilities. Perhaps this is the tension I feel in your post: a struggle to comes to grips with reduced possiblities.

    However, we need not be entirely passive. We need alternative fuels–that’s where we have to focus (and well as on increasing oil production). What kind of alternative fuels do we have? Consider: If you were able to fill the tank of your car with compressed natural gas (CNG) at wholesale prices, you could fill it for $4. Not per gallon; $4 for the whole tank. Of course, retail CNG prices are higher, but I think the price signals are pretty clear.

    So, be specific about monetary intervention–go off the reservation if that’s what you believe. At the same time, I think you–and economists more generally–would do well to consider the impact of constrained physical mobility on GDP and prosperity more broadly. The problems here may run deeper than just monetary policy.

  33. Gravatar of Major_Freedom Major_Freedom
    7. May 2012 at 15:25

    Lorenzo from Oz:

    And for any mad Austrians who bother you, just refer them to John Quiggin’s post on Austrian economics. (I am not normally a fan of Quiggin’s, but the post is excellent.)

    I love how you interpret Austrians as mad. It is really convincing.

    Quiggin’s article is pedantic, and amateur.

    Quiggin writes:

    But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.

    It’s not “intervention” to protect private property rights, which FRB violates. It’s “intervention” to enforce absolute property rights for one property to one party, rather than converting money into a lottery that harms the interests of third parties.

    Like all such dogmatic orthodoxies, it provides believers with the illusion of a complete explanation but cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections.

    Austrian economics is not “dogma.” And it’s never been empirically falsified. Not even once.

    The rest of the article is just as low quality.

    Is that the best criticism you have? If you want to arm Sumner, at lest give him something more than a shield made from damp cardboard.

  34. Gravatar of Kevin Johnson Kevin Johnson
    7. May 2012 at 19:45

    Bill Gross of PIMCO on Friday’s Bloomberg Surviellance around 4:12 (http://www.bloomberg.com/news/2012-05-04/pimco-s-gross-says-job-data-should-force-reevaluation-audio-.html):

    “…I think the Fed, although they won’t admit it, you know they’re really looking at the nominal (GDP) number because they do tell they us they want 2% inflation and we do know that it’ll take 3% real growth to lower unemployment so that adds up to 5% nominal, of which last quarter we got 3.8, so that’s sub- sub- sub-, it’s sub-stardard, and ultimately not only doesn’t produce jobs but it begins to destroy capital at the margin because the growth rate of nominal GDP isn’t sufficient relative to what’s been programmed over the past 5 or 10 years.”

  35. Gravatar of anon/portly anon/portly
    7. May 2012 at 20:53

    “All this was triggered by a recent Tyler Cowen post sent to me by David Levey, which seems to confuse what will happen with what can happen….”

    Me, I don’t believe Tyler Cowen was writing in full faith in that post. He couldn’t possibly have not antipated the Sumnerian response. I think he just thought the world would be better off if certain points would get forcefully made, by Sumner, yet one more time.

    I’d take having Tyler Cowen teeing them for me over Paul Krugman comparing me to Uncle Miltie, though the latter is pretty cool also.

    If Marginal Revolution was into witty subject tags (like, say, Eve Tushnet) maybe they would have one called “don’t throw me into that briar patch, Scott Sumner.”

  36. Gravatar of ssumner ssumner
    8. May 2012 at 05:11

    Ray, I’m no expert on that. It might have helped a bit, but there were much better ways of addressing the problem.

    Nic, No, I meant some other texts may be planning to add market monetarism.

    Max, I disagree on both points.

    1. The Treasury holds many times more than the Fed holds, so inflation helps the US from a fiscal perspective.

    2. Yes. it’s to change expectations. But they change when the policy is announced, not implemented. If the EMH is true, those selling to the Fed can’t expect above normal profits.

    Saturos, Thanks, but I welcome insulting comments, they are always easy to shoot down—and it’s fun doing so!

    Thanks Lorenzo,

    Steven, No I don’t favor a policy of currency debasement, I favor stable NGDP growth. High oil prices will slow growth, but certainly not bring it to a stop. Look at China. The main reason our consumption is low is the weak economy.

    Kevin, Thanks, that’s a great quotation from Bill Gross.

    anon/portly. Yes I greatly prefer Tyler Cowen’s help to Krugman’s but it’s important to acknowledge help when it occurs, from any source.

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