This post title is borrowed from a recent article in The Economist:
IMAGINE that the world’s best specialists in a particular disease have convened to study a serious and intractable case. They offer competing diagnoses and treatments. Yet preying on their minds is a discomfiting fact: nothing they have done has worked, and they don’t know why. That sums up the atmosphere at the annual economic symposium in Jackson Hole, Wyoming, convened by the Federal Reserve Bank of Kansas City and attended by central bankers and economists from around the world*. Near the end Donald Kohn, who retired in 2010 after 40 years with the Fed, asked: “What’s holding the economy back [despite] such accommodative monetary policy for so long?” There was no lack of theories. But, as Mr Kohn admitted, none is entirely satisfying.
I’d like to solve the mystery that perplexed the greatest minds of monetary economics. Money has been ultra-tight since mid-2008.
The real mystery of Jackson Hole is why the greatest minds in monetary economics fail to recognize this fact. Milton Friedman understood. Ben Bernanke explained in 2003 that neither interest rates nor the money supply were reliable policy indicators, and ultimately only NGDP growth and inflation could tell you whether money was easy or tight. By those indicators (averaged) money’s the tightest since Herbert Hoover administration.
I’d like to offer a conjecture. If the monetary economists understood that monetary policy since mid-2008 had been ultra-tight, they would have a very different view as to what sort of policy is appropriate today.
Lots of economists have offered rebuttals to the market monetarist claim that easier money would help right now. For instance, George Selgin and Eli Dourado offered critiques of the sticky wage explanation for persistently high unemployment. But I’ve yet to see a single economist take on my claim that money’s been very tight. I don’t expect economists to take what I say all that seriously, but I do expect them to notice when Bernanke blatantly contradicts his 2003 definition of the stance of monetary policy, with no justification provided. This issue is far more important than whether his recent policy is inconsistent with his advice to Japan, and yet he has not been asked about the contradiction. Even worse, almost all economists accept the definition offered by the political Bernanke, not the academic Bernanke. Which do you think more likely represents his actual views?
PS. Some commenters asked me about the Dourado post. I addressed the plausibility of sticky wages here, and in numerous other posts in reply to Tyler Cowen and George Selgin. I’d also point out that there is lots of cutting-edge research that tells us that the “common sense” approach to the wage stickiness hypothesis is not reliable. By common sense I mean; “Come on, wouldn’t the unemployed have cut their wage demands by now.” Yes, they would have, but that doesn’t solve the problem. This is partly (but not exclusively) for reasons discussed in this recent Ryan Avent post.
Update: Saturos directed me to an excellent Bryan Caplan post on wage stickiness.