Three Times/Don’t solve problems/Now more than ever/Johnny come lately

Here’s a few observations that might be loosely viewed as responses to thoughtful conservatives who are skeptical of the need for monetary stimulus:

1.  Three times

Consider the following three dramatic declines in NGDP growth:  1929-30, 1981-82, and 2008-09.

Now think about what the sticky wage model would predict in each case.  I’d say a sharp fall in RGDP.  And that’s what happened in all three cases.  Then what?  Here’s where things get interesting.  The 1929-30 NGDP decline was followed by an even bigger plunge, so that by early 1933 NGDP was at less than 1/2 of its 1929 peak.  In 1983 and 1984 NGDP soared, rising at an 11% rate in the first 6 quarters of recovery.  After mid-2009, NGDP grew below trend, roughly 4.2%/year.

Now let’s think about what kind of recovery you’d expect in each case if the sticky wage model was true.  I’d expect a further fall in RGDP after 1930.  I’d expect very rapid growth in RGDP in 1983-84, and I’d expect modest growth in RGDP in the period after mid-2009.

And that’s exactly what happened!  If you are a sticky wage skeptic, tell me what sort of RGDP path you think the sticky wage model would have predicted in each case.

2.  Don’t solve problems

We should not use monetary policy to solve problems.  I believe we should have stable NGDP growth at about 5% per year, in order to avoid creating problems.  If NGDP growth had averaged 5% over the past 4 years, and unemployment was now 11%, I would not be calling for monetary stimulus.  Indeed even if it had averaged 4% I would not be making any great effort to promote monetary stimulus (although I wouldn’t oppose a bit in that case.)  But in fact NGDP growth since 2008 has been the slowest since Herbert Hoover was President, about 2%.  I don’t want monetary policy to be used as a tool to solve problems.  I want to avoid creating them with stable policy.

3.  Now more than ever

One often hears people using a crisis, especially one where the cause is rather murky, as an excuse to press for something they’ve favored all along.  High speed rail.  Break up the big banks.  Radical liberalization of the eurozone economy.  Lower tax rates on capital.  Less restrictions on occupational entry.  I favor some of these proposals.  But that’s not the problem we face.  I’ve followed the US business cycle since LBJ was president and I don’t recall there being even a hint of evidence that 8.2% unemployment in the US is caused by regulations, taxes, lack of high speed rail, big banks, or anything else other than tight monetary policy.  In 1982 the tight money was justified because inflation was a big problem.   It wasn’t “overly” tight. That’s clearly not true today.

4.  Johnny come lately

I hear people say; “Yes, we all agree that money was too tight in 2008-09 when NGDP fell 4% peak to trough, but it’s no longer too tight.”  It’s interesting that “we all agree” because when I was running around like a chicken with its head cut off in late 2008 I don’t recall anyone agreeing with me (that tight money by the Fed was creating a disastrous fall in NGDP.)  I recall attending an economics convention in late November 2008, and there was a 5 person panel that was dismissive of the need for easier money.  And that was during the worst of the crisis, when markets clearly showed the global economy falling off a cliff.  Even if I remembered who they were it wouldn’t matter, as there’s no reason to single them out.

Progressives often say; “at least we weren’t opposing monetary stimulus.”  Yes, but silence turned out to be just as damaging.  It would be interesting for someone to go back and investigate how many op eds were written by academic economics in the second half of 2008, and early 2009, castigated the Fed for driving NGDP much lower with tight money.  Op eds in an any major publication (NYT, FT, WSJ, WaPo, The Economist, etc.)  I predict roughly zero.  The first articles I do recall reading we in 2009 and were written by:

1.  Robert Hetzel.

2.  The late Earl Thompson

3.  Tim Congdon

All somewhat conservative economists.  And of course out of the limelight were market monetarists like Beckworth, Hendrickson, etc.  I wasn’t even reading many blogs in late 2008, so I may have overlooked a few voices.

My point here is this:  If now “we all agree” money should have been much easier in late 2008, and virtually 100% of the very few people who realized that at the time were market monetarists and their fellow travelers, doesn’t that suggest our current policy views ought to be taken pretty seriously?

5.  And if that’s not enough

The US and global economies appear to be deteriorating (we’ll have better data by Friday.)  It’s likely that we need additional monetary stimulus just to keep NGDP growing at the current pathetic 4% rate.  Any good arguments for not doing at least that much?

PS.  ”Three Times” is one of the great films of this young century.  Earlier this evening I saw a Korean film called “The Day He Arrives.”  When Woody Allen sees this movie he’ll probably say to himself; “If only I could make a film like that.”  And yet his newest will draw 100 times more viewers.


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53 Responses to “Three Times/Don’t solve problems/Now more than ever/Johnny come lately”

  1. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 06:36

    What, no response to thoughtful conservatives who are skeptical of the need for more monetary stimulus distortions of economic calculation and malinvestment?

    It’s likely that we need additional monetary stimulus just to keep NGDP growing at the current pathetic 4% rate.

    Woops, almost missed it. There it is!

  2. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2012 at 06:37

    Conservative answers:

    “The US and global economies appear to be deteriorating (we’ll have better data by Friday.) It’s likely that we need additional monetary stimulus just to keep NGDP growing at the current pathetic 4% rate. Any good arguments for not doing at least that much?”

    Nov. 2012.

    This is of course the TRUMP card argument, since we are VERY CLOSE to an election with a very good shot of toppling Obama and Obamacare.

    It is 4 MONTHS AWAY.

    What fool would think ANY conservative who has a job, a house, and a future would pretend that doing what Sumner wants today is MORE IMPORTANT than ending Obama and Obamacare?

    Are you INSANE? If you aren’t sane enough to talk to conservatives in the voice they they actually THINK TO THEMSELVES about, why waste you time with 5 specious non-responses???

    “he 1929-30 NGDP decline was followed by an even bigger plunge, so that by early 1933 NGDP was at less than 1/2 of its 1929 peak. In 1983 and 1984 NGDP soared, rising at an 11% rate in the first 6 quarters of recovery. After mid-2009, NGDP grew below trend, roughly 4.2%/year.”

    Reagan said in 1981, “I did not come here to balance the budget — not at the expense of my tax-cutting program and my defense program.”

    This was a policy of growth and ending the Cold War.

    Cut taxes and govt. enough and you can overcome sticky wages, you can also overcome them by AUCTIONING THE UNEMPLOYED.

    2. Professor Sumner, we conservatives REALLY WANT to like your 4.5% NGDPLT plan, especially th epart about not caring AT ALL about 11% unemployment!

    What we can’t figure out is why if your plan of stability is so great for the economy, you be willing to unleash it after Obama and Obamacare.

    It appears you are un-trustworthy and don’t recognize that the most important thing is less govt. and lower taxes, and YOU and YOUR IDEAS have to FIGHT FOR OUR TEAM, or we won’t trust you.

  3. Gravatar of Benjamin Cole Benjamin Cole
    23. July 2012 at 06:41

    Great blogging.

    Yes, I want lower taxes and less regulations too–but even if we get those, we will still be asphyxiated by tight money, unless the Fed changes. Japan in fact reformed many sectors in the last 20 years, but that added to deflationary momentum, that was crushing on property markets).

    The right wing has let orthodoxy become dogma, when it comes to monetary policy (or else they are just trying to make Obama lose).

    The left wing is out to lunch.

    Side note: You often hear justified ridicule on the right for Obama’s renewable, or green energy programs and projects, many of which have flopped.

    But what is the largest federal, most subsidized, mandated and socialistic renewable, greenie-weenie energy program by 91 country miles? And the definition of structural impediment?

    Ethanol! GOP moonshine.

    Corn farmers received subsidies, and then the use of ethanol is mandated. If that is not galloping socialism, than I do not know what is.

    But you will never hear boo about ethanol. It is part of the Red State Socialist Empire.

    One reason to hope for a Romney win is that we may see a sudden conversion to Market Monetarism by the right-wing, and then USA prosperity. Oh, they may have a fig leaf, and say something like “With regulatory barriers going down, the extra money will result in more production” or something to that effect. If Romney gets us into another war, then of course monetary policy will become accommodative. Romney has been talking very, very tough on Iran….

  4. Gravatar of dwb dwb
    23. July 2012 at 06:47

    “We should not use monetary policy to solve problems. ”

    exactly, i think many people (including economists) think monetary policy solves problems or can be used as a bludgeon to make the economy more “flexible.”

    Stabilizing nominal gdp is not an end in itself. it is only good to the extent it is able to stabilize the economy around the full-information flexible price level. Despite 30 years of disinflation, nominal rigidities seem to have gotten more (not less) sticky (as measured by the time it takes for employment to recover to post-recession levels).

    The idea that monetary policy can “wring out” rigidities has proven false (and i would say as the ECB is about to find out, the idea that it can effect political change will prove false as well).

  5. Gravatar of StatsGuy StatsGuy
    23. July 2012 at 06:55

    “Now let’s think about what kind of recovery you’d expect in each case if the sticky wage model were true.”

    In each case, I believe you would expect the same kind of recovery that a sticky debt model would expect.

    Are there any historical cases that offer clearly different predictions for sticky debt vs. sticky wages?

  6. Gravatar of Jon Jon
    23. July 2012 at 07:14

    Did you see: Blinder just endorsed negative ior in the WSJ. First sensible column he has written there in a while.

  7. Gravatar of Bonnie Bonnie
    23. July 2012 at 07:15

    Scott:

    Just for a point of clarity:

    “After mid-2009, NGDP grew below trend, roughly 4.2%/year.”

    “But in fact NGDP growth since 2008 has been the slowest since Herbert Hoover was President, about 2%.”

    I understand what you mean here, but had to read it twice to understand the difference between the statements.

    Morgan:

    You forget about the Sumner Critique. Even if there is QE3, if they keep tightening when inflation expectations get up to the 2% ceiling, if not sooner, it doesn’t matter what kinds of promises come with it. It’s just an exercise in rearranging the deckchairs on the Titanic – which is something Romney is going to have to be concerned about if he does win or he’ll be just as fit to be forked in 2016 as Obama is now. By then people like you will be as useful as mammary glands on a boar and I really hate to consider what the far left of the Democratic Party will do to us next.

  8. Gravatar of NGDP level targeting – the true Free Market alternative (we try again) « The Market Monetarist NGDP level targeting – the true Free Market alternative (we try again) « The Market Monetarist
    23. July 2012 at 07:24

    [...] (July 23 2012): Scott Sumner once again tries to convince “conservatives” that monetary easing is the [...]

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. July 2012 at 07:28

    The ultimate sticky wage story;

    http://seattletimes.nwsource.com/html/larrystone/2018743207_stone22.html

    ‘The solution seems simple: The Mariners honor Ichiro for his tremendous legacy, but make the prudent decision that the time has come to move on without him. They plug Casper Wells into right field, use the $18 million in salary relief to plug several other holes, and live happily ever after.

    ‘But since the player in question is Ichiro, the answer, of course, is not so simple. There are increasing rumblings that the Mariners intend to bring back Ichiro in 2013 for his 13th season with the ballclub, perhaps even on a multi-year deal.’

    Millions for tribute, for a guy who can’t even get on base 30% of the time.

  10. Gravatar of Saturos Saturos
    23. July 2012 at 07:31

    Is Asian cinema simply better? (Seems plausible to me, based on my limited experience.)

  11. Gravatar of Becky Hargrove Becky Hargrove
    23. July 2012 at 08:17

    Regarding #2,
    It is the neutrality of money that would give us the clean slate and the clarity we so desparately need now. #3 is mostly noise until that happens. Of course, as Glasner just pointed out, IOR makes way too much noise as well.

  12. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2012 at 08:21

    Bonnie,

    Should Romney win:

    1. We’ll get some healthy deflationary productivity gains for GUTTING PUBLIC EMPLOYEES – this allows us much more room under the 2% target.

    2. After #1 and the regulatory rollbacks and the ending of Obamcare, no one will CARE if inflation goes over 2%.

  13. Gravatar of Steve Steve
    23. July 2012 at 08:53

    Some of us were market monetarists in 2008 without realizing it. Late in 2009 someone suggested I take a look at Scott Sumner’s MoneyIllusion blog. My response: Scott who?

    Here’s an interesting blog post. It’s not just currencies or bond markets; European NON-Euro stock markets are significantly outperforming Eurozone stock markets, even in local currency terms.

    For example, Sweden, Norway and Denmark are up YTD, while Finland is down. Switzerland and Poland are up, while Slovakia, Slovenia and Austria are down.

    http://soberlook.com/2012/07/european-stock-markets-outside-euro.html

  14. Gravatar of Bill Ellis Bill Ellis
    23. July 2012 at 09:05

    Scott says…

    If NGDP growth had averaged 5% over the past 4 years, and unemployment was now 11%, I would not be calling for monetary stimulus.

    But you do believe that our current unemployment problem would be solved (more or less) with the right NGDP Targeting…Right?

    But if we did have a situation with 11% and the right targets… What would be causing the unemployment ? Structural problems ?

    So If the hypothetical unemployment is structural I don’t see how higher NGDP targeting would help much, anyway… but it could cause inflation…So I would agree with you.

    But what if it was not structural ?
    Wouldn’t that challenge your M&M thesis ? Wouldn’t that give strength to the Keynesian thesis that we have “Magneto trouble” ?

    After all, if we did get the Right NGDP targeting now…and it did not cure our unemployment problem, you would not switch to blaming our unemployment on structural issues would you ?

  15. Gravatar of johnleemk johnleemk
    23. July 2012 at 09:10

    You may have seen this already, but if you have not, here is the AEI’s blog giving airtime to market monetarist Michael Darda on the Eurozone crisis: http://www.aei-ideas.org/2012/07/does-the-eu-have-a-debt-crisis-or-a-nominal-gdp-crisis/

  16. Gravatar of Bill Ellis Bill Ellis
    23. July 2012 at 09:50

    Benjamin Cole says…

    One reason to hope for a Romney win is that we may see a sudden conversion to Market Monetarism by the right-wing, and then USA prosperity. Oh, they may have a fig leaf, and say something like “With regulatory barriers going down, the extra money will result in more production” or something to that effect. If Romney gets us into another war, then of course monetary policy will become accommodative. Romney has been talking very, very tough on Iran….

    Two things…
    One…
    Like you said…”The right wing has let orthodoxy become dogma, when it comes to monetary policy (or else they are just trying to make Obama lose).”
    So it sounds to me like when you hope that a Romney win will result in a change of policy that you are hoping that the Fed is using monetary policy as a tool to keep the economy bad so Obama loses.

    Do you find the notion that the FED is placing politics over fixing the economy outrageous ? I do.

    (An aside.. Romney has said he would get rid of Ben because he has been to loose . So you are hopeful for a Romney win, hoping that Romney is lying, and hoping that the Fed has been politicized… That does really give your side much to get excited about. )

    ANd Two….
    Why would the Fed be more accommodating if we went to war with Iran ? (Not that we will.) We were at war and the Fed did not loosen up.

  17. Gravatar of Steve Steve
    23. July 2012 at 09:59

    Bill Ellis wrote: “hoping that Romney is lying, and hoping that the Fed has been politicized…”

    I hope that the sky is blue and that rain is wet.

  18. Gravatar of Saturos Saturos
    23. July 2012 at 10:31

    Glasner sees IOR as the biggest problem: http://uneasymoney.com/2012/07/22/blinder-talks-sense-to-bernanke-stop-paying-interest-on-reserves-now/

  19. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 10:32

    “If now “we all agree” money should have been much easier in late 2008, and virtually 100% of the very few people who realized that at the time were market monetarists and their fellow travelers, doesn’t that suggest our current policy views ought to be taken pretty seriously?”

    Did you see the WSJ had Blinder on to advocate for ending IOER? As close as the WSJ has gotten to a MM argument

  20. Gravatar of 123 123
    23. July 2012 at 10:40

    “Glasner sees IOR as the biggest problem”
    Two weeks ago the ECB has stopped paying IOR. It helped, but only just a little bit…

  21. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 10:42

    “It helped, but only just a little bit…”

    Judging by how the euro zone looks today it’s a sobering thought if you’re telling me it could have been worse if it was still paying IOR

  22. Gravatar of Bill Ellis Bill Ellis
    23. July 2012 at 11:07

    From the article Saturos linked to above….

    “In Monday’s Wall Street Journal, Alan Blinder patiently explains why the most potent monetary tool in the Fed’s arsenal right now is to stop paying interest on reserves. The Fed apparently resists the idea, even though for almost a century it never paid interest on reserves, because not doing so would result in some inefficiencies in the operation of money market funds. Talk about tunnel vision. (bold mine)

    Funny, I had just assumed the reason the Fed started paying interest on reserves was to help out the banks with their balance sheet problems.

  23. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 11:35

    Saturos I see we got almost the same thought at the same minute

  24. Gravatar of Jim Glass Jim Glass
    23. July 2012 at 12:07

    Glasner sees IOR as the biggest problem

    He forgets the Sumner Critique. If the Fed hadn’t used IOR it wouldn’t have increased the base nearly as much, in order to produce as close to the same result as possible. The Fed moves last even against itself.

  25. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 12:24

    See Morgan, this is why I say you’ve been on edge lately. Do you really think you’re going to get Sumner to change his strategy at this point? I mean saying stuff like this misconstrues him:

    “This is of course the TRUMP card argument, since we are VERY CLOSE to an election with a very good shot of toppling Obama and Obamacare”

    “Cut taxes and govt. enough and you can overcome sticky wages, you can also overcome them by AUCTIONING THE UNEMPLOYED.

    “2. Professor Sumner, we conservatives REALLY WANT to like your 4.5% NGDPLT plan, especially th epart about not caring AT ALL about 11% unemployment!”

    Yeah! Screw the unemployed! Party!

    “What we can’t figure out is why if your plan of stability is so great for the economy, you be willing to unleash it after Obama and Obamacare.”

    “It appears you are un-trustworthy and don’t recognize that the most important thing is less govt. and lower taxes, and YOU and YOUR IDEAS have to FIGHT FOR OUR TEAM, or we won’t trust you”

    I don’t necessarily share Sumner’s agenda but I see that he’s a sharper strategist than you. You want him to put all his eggs in one basket. So if Obama wins what then? He wants to win regardless of which party wins. He knows that if he just becomes the Rush Limbaugh-or Andrew Breitbart-of monetary policy he becomes marginalized. Fox news might love him but that’s about it. True Friedman was more directly associated with the Republican party than Sumner is but that was a different time as well. Back then the GOP was on the ascent. You don’t know it yet but they aren’t anymore-they topped in 2004.

    His pragmatist argument makes some sense. Look I don’t really think it matters. But you don’t sound like your read the whole post:

    “I’ve followed the US business cycle since LBJ was president and I don’t recall there being even a hint of evidence that 8.2% unemployment in the US is caused by regulations, taxes, lack of high speed rail, big banks, or anything else other than tight monetary policy.”

    It’s pretty clear he thinks NGDPT is more important than killing Obamacare. Which makes logical sense. Obamacare hasn’t even taken hold yet-it won’t until 2014 so how could it?

    Let me guess, the uncertainty of 2014 is so great that this by itself has frozen up the economy.

  26. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 12:33

    To put it in Macro terms Morgan you are good at model building. However, certain of your assumptions are faulty.

    The assumption that is most faulty is that you hold all the cards. You get that the Repugs flipped the switch starting in 1968 but what you don’t get is that it might have changed.

    Just as liberals in 1968 probably thought it would always work as it had before I read you as too confident. You think it will be 1980 forever. The Republicans got all the low hanging fruit already.

    This is why I won’t take your offer-that you think I’m being unrealistic in not accepting. No. It’s just that I see my position is better than you think it is.

  27. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2012 at 13:21

    Saxie, this gets deeply to my bet with Scott…

    “By more than 2-1, 63%-29%, those surveyed say Romney’s background in business, including his tenure at the private equity firm Bain Capital, would cause him to make good decisions, not bad ones, in dealing with the nation’s economic problems over the next four years.

    The findings raise questions about Obama’s strategy of targeting Bain’s record in outsourcing jobs and hammering Romney for refusing to commit to releasing more than two years of his tax returns. Instead, Americans seem focused on the economy, where disappointment with the fragile recovery and the 8.2% unemployment rate are costing the president.”

    http://www.usatoday.com/news/politics/story/2012-07-23/poll-romney-obama-economy/56439758/1

    I argue that we have DEEPLY ALTERED the American mindset from 1980 on ward.

    Like As big a mental change as 1913-1950′s when we went from no income tax to 90%.

    Americans have become a new people, a smarter people, just as they were smarter in 1913 than 1860.

    I don’t think of it as a wide swinging pendulum, I think of it as HST did:

    “San Francisco in the middle sixties was a very special time and place to be a part of. Maybe it meant something. Maybe not, in the long run, but no explanation, no mix of words or music or memories can touch that sense of knowing that you were there and alive in that corner of time and the world….There was a fantastic universal sense that whatever we were doing was right, that we were winning. And that, I think, was the handle – that sense of inevitable victory over the forces of Old and Evil. Not in any mean or military sense; we didn’t need that. Our energy would simply prevail. There was no point in fighting – on our side or theirs. We had all the momentum; we were riding the crest of a high and beautiful wave. So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water mark – the place where the wave finally broke and rolled back.”

    Saxie, I don’t think we ever go back to 1968.

    Scott was wrong in his assumptions on 2010, and I still think he’s wrong on 2012.

    Ths difference is IF I’m wrong in 2012, I’ll change.

    I don’t think your side is smart enough to begin to alter their strategy not yet, I think they’d have to lose Obama, go through another guy like Clinton who throws liberals overboard, and then maybe in the next 20 years, decide they need to run in the other direction towards state rights.

    But Saxie, in 20 years time, the whole world will change, the talent and capital will float like a breeze wherever it is best treated.

  28. Gravatar of StatsGuy StatsGuy
    23. July 2012 at 13:32

    Morgan, please note – the most important thing is clean government, not less government. If you look the examples that Scott always brings up, there are two things in common.

    1) They are small
    2) They are clean

    In general, I think they are clean because they are small. There’s a large literature on the increase in oversight costs in principal agent problems as the scale of an organization increases in size and scope. But the driver, really, is clean government.

    (Note – it may be, by the way, that on average clean govt and govt size are not correlated, but that – much like school performance – smaller institutions have more variation than larger ones, and therefore appear more frequently on BOTH ends of the spectrum.)

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. July 2012 at 13:33

    ‘If the Fed hadn’t used IOR it wouldn’t have increased the base nearly as much….’

    Bernanke even said so in testimony to congress, that IOR ‘sterilized’ the base increase.

  30. Gravatar of Jim Glass Jim Glass
    23. July 2012 at 13:33

    I had just assumed the reason the Fed started paying interest on reserves was to help out the banks with their balance sheet problems.

    Initially the IOR rate was up with the Fed Funds rate, around 1.75%, IIRC, in order to keep the expansion of the base from being inflationary while it helped the banks.

    Now they are refusing to drop the IOR rate to 0% purportedly because of the effect on money funds. Different rationales for keeping it up at different times.

  31. Gravatar of Jim Glass Jim Glass
    23. July 2012 at 13:36

    BTW, speaking of IOR then and now, what Bernanke was telling the world five years ago:

    http://blogs.wsj.com/economics/2012/07/18/oops-what-bernanke-said-five-years-ago-today/

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. July 2012 at 13:38

    ‘… the most important thing is clean government, not less government.’

    We managed to go from a few sparsely populated colonies on the east coast to the richest, most powerful nation on earth with corrupt, but small government. We survived Jacksonian spoils, Tammany Hall, Credit Mobilier, Tea Pot Dome, and lots more.

  33. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 14:47

    Jim Glass:

    I had just assumed the reason the Fed started paying interest on reserves was to help out the banks with their balance sheet problems.

    Initially the IOR rate was up with the Fed Funds rate, around 1.75%, IIRC, in order to keep the expansion of the base from being inflationary while it helped the banks.

    Now they are refusing to drop the IOR rate to 0% purportedly because of the effect on money funds. Different rationales for keeping it up at different times.

    You just aptly summarized how “middle of the road” central planning leads to unintended consequences which then changes the nature of the intervention. It’s the ratchet effect taking place at the Fed.

  34. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2012 at 14:56

    “We survived Jacksonian spoils, Tammany Hall, Credit Mobilier, Tea Pot Dome, and lots more.”

    this is the nasty fact.

    Clean govt. is NICE to have, but SMALL govt. is CRUCIAL.

    One thing is a parasite, one thing is the host.

    The real issue isn’t AID, it is cronyism – in public employees and govt. picking winners and losers.

    A small govt. doesn’t have the strength of treat its public employees any better than the private market, it doesn’t have the size to subsidize business.

  35. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. July 2012 at 15:14

    I promise never to use my power for evil, only for good;

    http://seattletimes.nwsource.com/html/mariners/2018755284_ichirotrade24.html

    ‘The Mariners traded 10-time All-Star outfielder Ichiro to the New York Yankees on Monday for two minor-league prospects and cash considerations.’

  36. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 15:21

    Ok. Thanks for the pertinent info. We may not have agreed before but I’m a Yankee fan.

  37. Gravatar of Benny Lava Benny Lava
    23. July 2012 at 15:22

    This post reminds me of a favorite quote from Spinoza:

    “prophets have most power among the people, and are most formidable to rulers, precisely at those times when the state is in most peril”

  38. Gravatar of Benny Lava Benny Lava
    23. July 2012 at 15:26

    Patrick,

    I would argue the opposite. The examples of corruption and cronyism you list are fairly trivial compared to the corruption and ineptitude you see in foreign governments. In fact one of the great strengths of America is that it historically seeks to make governance better. As for small, I don’t really see using the army to invalidate land contracts and relocate people so that big business can take over as small government but de gustiblis non est disputatum.

  39. Gravatar of Bill Ellis Bill Ellis
    23. July 2012 at 16:56

    Mike Sax…

    I’m a Yankee fan.

    Dude…I used to like you. ;-)

  40. Gravatar of Mike Sax Mike Sax
    23. July 2012 at 17:58

    C’mon Bill! Gotta love em!

    LOL!

  41. Gravatar of ssumner ssumner
    23. July 2012 at 18:00

    Thanks Ben and dwb.

    Statsguy. The sticky wage model provides a mechanism by which monetary policy can affect RGDP. The sticky debt model does not.

    Jon, He did that last year as well.

    Bonnie, Yes, I suppose that’s poorly worded.

    Patrick, Big mistake.

    Saturos, Over the past 20 years it’s been far better. I don’t know much about earlier Asian cinema, except Japan of course, which has an outstanding cinematic legacy. (Much of it lost, alas.)

    Steve, That’s an interesting pattern, I’m not surprised.

    Bill, You asked.

    “But if we did have a situation with 11% and the right targets… What would be causing the unemployment ? Structural problems ?”

    I would assume we’ve become like all those Western European countries that have 8-10% natural rates of unemployment (even higher in Spain.) Yes, if we had solid NGDP growth and high unemployment remained, I’d blame it on structural problems. I presume Krugman would as well.

    Thanks Johnleemk.

    Saturos, I agree with 123, it’s no longer the biggest problem.

    It was a bigger issue in 2008, now it’s a bit late to do much good. Of course if they went strongly negative that might be different, but no chance of that.

    123, I agree.

    Everyone, Blinder made a similar call last year.

  42. Gravatar of dwb dwb
    23. July 2012 at 18:22

    “The sticky wage model provides a mechanism by which monetary policy can affect RGDP. The sticky debt model does not.”

    err, not sure i agree with that: sticky price and wage contract models are pretty well understood to imply that monetary policy has real effects (i am thinking of Calvo or Taylor overlapping contracts models for example). Mortgages are nothing more than 30-year fixed-price contracts for housing, and there are about 48 million of them that overlap. One difference is that the effects are asymmetric, so real effects are far more pronounced after an episode of declining ngdp and declining asset prices.

  43. Gravatar of StatsGuy StatsGuy
    23. July 2012 at 19:45

    “Statsguy. The sticky wage model provides a mechanism by which monetary policy can affect RGDP. The sticky debt model does not.”

    Yes it does – remember transaction costs.

    Sticky wages says inefficient wage bargaining causes the market to fail to clear (or to clear at higher than natural unemployment).

    Sticky debt says that inefficient bargaining in the capital markets will cause the market for capital to fail to clear, increasing the real price of money above the natural rate. There are many examples – zombie banks, etc. The cleanest is the credit rating system, which people who default on loans are treated as LESS credit worthy, even though companies that default and restructure are treated as MORE creditworthy. Thus, defaults see credit costs rise (and rates risk, once risk premium is taken into account), and fear of rate rises prevent optimal renegotiation because the rating process is rigid and backward-looking.

    Were it not for sticky debt, the liquidationists would be correct in their worldview. Asset prices would readjust, new credit would be formed rapidly, and credit expansion would take root. All the bad examples of austerity failing – ALL OF THEM – were ones that were not accompanied by debt adjustment (either monetarily, or through formal legal channels).

    Likewise, the bad examples of debt rejection without wage concession have a name too – it’s called revolution, and it tends to be followed by a long period of capital destruction.

    I’m starting to believe that the class structure economics of the 1950s might actually make some sense.

  44. Gravatar of Jim Glass Jim Glass
    23. July 2012 at 21:06

    The sticky wage model provides a mechanism by which monetary policy can affect RGDP. The sticky debt model does not.

    I don’t understand why not. If the real cost of a debt, lease or factored inventories increases, why is this not deflationary?

    I’m not arguing, I’m asking, I don’t understand.

  45. Gravatar of RebelEconomist RebelEconomist
    24. July 2012 at 00:07

    “I believe we should have stable NGDP growth at about 5% per year, in order to avoid creating problems……I don’t want monetary policy to be used as a tool to solve problems.”

    You do really, Scott; it’s just that you are putting the real activity stimulus on automatic pilot. And I think that, beyond the scope of monetary stimulus to stimulate real activity – say three years (?) – stable NGDP growth would create problems, because it would involve replacing a permanent fall in potential output (which cannot be dismissed, for example for the reasons alluded to in your recent environmental post) with inflation. Even if you do not see this as a problem, other people (eg fixed income creditors) probably would, so you should consider their reaction (eg higher long term interest rates).

  46. Gravatar of Once, very wrong; second time, got it right; but “screwed-up” on the third. | Historinhas Once, very wrong; second time, got it right; but “screwed-up” on the third. | Historinhas
    24. July 2012 at 07:50

    [...] Scott Sumner had this to say: Consider the following three dramatic declines in NGDP growth:  1929-30, 1981-82, [...]

  47. Gravatar of ssumner ssumner
    24. July 2012 at 07:51

    dwb, See the following responses.

    Statsguy, You said;

    “Sticky debt says that inefficient bargaining in the capital markets will cause the market for capital to faidwb, See the following responses.

    Statsguy, You said;

    “Sticky debt says that inefficient bargaining in the capital markets will cause the market for capital to fail to clear, increasing the real price of money above the natural rate.”

    Fine, but that doesn’t cause unemployment, it doesn’t cause the labor market to fail to clear.

    Jim Glass, Sure it can cause deflation. But deflation doesn’t cause unemployment without sticky wages. And with sticky wages you don’t even need to look at debt, just look at monetary policy (NGDP)

    Rebeleconomist, I’ve explained how NGDP targeting is fairer to fixed income recipients at least a dozen times.

    And you still don’t understand my proposal, you wrongly think I favor targeting RGDP.

  48. Gravatar of Saturos Saturos
    24. July 2012 at 08:48

    “Sticky debt says that inefficient bargaining in the capital markets will cause the market for capital to fail to clear, increasing the real price of money above the natural rate.”

    Fine, but that doesn’t cause unemployment, it doesn’t cause the labor market to fail to clear.

    Exactly.

  49. Gravatar of StatsGuy StatsGuy
    24. July 2012 at 11:10

    ssumner:

    “Fine, but that doesn’t cause unemployment, it doesn’t cause the labor market to fail to clear.”

    Scott, it doesn’t have to cause unemployment to affect RGDP. You can have full employment and flat or near-flat RGDP growth (Japan?). It affects RGDP by causing underinvestment. A la cobb douglass. Thus, expected future supply goes down because labor productivity goes down – arguably reduced expected future AS would rebound to affect current AD as well.

    I think your better argument is that the presence of unemployment shows it’s a sticky wage problem. OTOH, the presence of high real interest rates shows it’s a capital markets clearing problem (or, massive risk perception).

    IMHO, it’s both. BTW, we have many historical cases where wages are perfectly flexible, unemployment is high, and risk premia prevent capital investment (impoverished countries with political instability).

    I don’t really know how to pull apart which is doing the causation, but you might consider that your focus on wage rates as the mechanism to fix puts a vastly larger portion of the adjustment costs onto labor instead creditors. There are huge ideological and political implications in your default argument, and I sense that you hold to this argument primarily because this was the dominant intellectual paradigm where you received your education.

    Money illusion in wages are certainly part of the story, but I’d say closer to 40%, not 80%.

  50. Gravatar of Curious Bystander Curious Bystander
    24. July 2012 at 12:44

    ssumner: «Consider the following three dramatic declines in NGDP growth: 1929-30, 1981-82, and 2008-09.

    Now think about what the sticky wage model would predict in each case. I’d say a sharp fall in RGDP.»

    Wait a minute, why is the N(GDP) an independent variable going back and forth of its own volition? But … Go on, please:

    «And that’s what happened in all three cases. Then what? Here’s where things get interesting. The 1929-30 NGDP decline was followed by an even bigger plunge, so that by early 1933 NGDP was at less than 1/2 of its 1929 peak. In 1983 and 1984 NGDP soared, rising at an 11% rate in the first 6 quarters of recovery. After mid-2009, NGDP grew below trend, roughly 4.2%/year»

    Can it be that in the 1930+ the original plunge was followed by some kind of foolish policy which made things worse? I don’t know know, maybe some foolish tarifs, which then lead to a trade war, which basically abolished the Atlantic Ocean? Something like a 66% drop in imports and 61% drop in exports? Can it somehow mattered to the story?

    But, on the other hand, why, why look behind the monetary curtain? Not doing so, leaves us with such nice feeling of NGDP omnipotence.

  51. Gravatar of ssumner ssumner
    25. July 2012 at 18:12

    Statsguy, I agree that money illusion isn’t the only factor with sticky wages. As far as sticky debt, I’m not convinced. Let’s first deal with the unemployment problem. If we still have an investment problem, then that can be addressed most effectively by tax reform–stop taxing capital income!

    Curious, I feel sorry for people who think a routine tariff bill caused the Great Depression. Why didn’t the earlier tariff bills cause Great Depressions?

    And trade fell sharply in the Great Depression? Gee, why would that happen?

    Trade was a small percentage of GDP. We are to believe that modestly higher taxes on trade would cause national income to fall in half? Make sense to me!! Rolls eyes. Oh, and tariffs are inflationary. Did you check the price level between 1929 and 1933?

    Please . . . use some common sense!

  52. Gravatar of Curious Bystander Curious Bystander
    26. July 2012 at 13:29

    ssumner: «Curious, I feel sorry for people who think a routine tariff bill caused the Great Depression. Why didn’t the earlier tariff bills cause Great Depressions?»

    And I feel sorrry of people who insist on remaining before the monetary curtain. Even on AD terms a tariff war, and it was exactly this, will reduce AD, since the exporters will will be unable be left with their products on their hands. Besides this particular tarrif war had rather interesting monetary consequences. A lot of USA exports were agricultural. And when a lot of small farmers found themselved unable to pay their debt to the local banks. What followed is mostly obvious. Bankruptcies, panics, bank runs, contraction of credit.

    And, it wasn’t just the tariffs. As Hoover put it in his memoirs: «We could have been chosen to do nothing”. He didn’t. And he did «Something». From exhorting business leaders to not cut the wages to raising taxes and running defictis.

    Nobody was thinking in 1930 that this IS the Great Depression. And almost everybody was expecting it to be over in a year or two. As it did in 1920-1921.

    «Trade was a small percentage of GDP». – See above. It just happened to an important percentage of GDP. The Panama canal is just small percentage of world GDP. So it would not matter if would disappear, right?

    «We are to believe that modestly higher taxes on trade would cause national income to fall in half? Make sense to me!! Rolls eyes.» – The national income fall before that and, I have to point out, that you have absolutely, no explanation of why it did, in the first place. And are not interested.

    My point is not, that the tariff war, which you insist in calling «modestly higher taxes» caused the Great Depression, after all it happened when GD was already in full swing, but that this and other activist measures prevented the recovery. As later it was Roosevelt New Deal measures coupled with «regime uncertainty» which make it last. A goverment who cannot fix an economy no matter how hard it tries? Shocking, I know.

    And since, finally, I can put it i a few words, I’ll tell why I find your explanations unsatisfactory. To say the least. A fall in NGDP is not the cause of recessions/depressions. Is a manifestation of it. Like unemployment. Or the increased difficulty of paying the debts.

    That’s why your first paragraph makes no sense. You basically are saying: In three case there were bad times. Then in one case the things got worse, in other case those got better, and in the third not so much. Now you see boys and girls how important is prevent bad times.

    Or one can play the same Sith trick using unemployment instead of NGDP. In one case there was unemployment and then it got worse and everything got worse, in the other it got better, in the third so-so. That’s why is so important to keep the unemployment low even if it means that we’ll have to pay people to dig holes and then fill them up.

    «Please . . . use some common sense!» – I cannot not. I’m on an economic blog.

    P.S. Keynes was right: «Employment is easy – productive employment is hard»

    P.P.S. Who I am kidding…

  53. Gravatar of Lars Christensen: NGDP level targeting – the true Free Market alternative | SeekerBlog Lars Christensen: NGDP level targeting – the true Free Market alternative | SeekerBlog
    12. April 2013 at 00:10

    [...] (July 23 2012): Scott Sumner once again tries to convince “conservatives” that monetary easing is the “right” position. [...]

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