I can’t say I am surprised by what people are writing. But it’s still disappointing. Let’s review the past 6 months:
1. The Fed sees fiscal austerity on the horizon in late 2012, and tries to offset it with several monetary initiatives. They even say they are doing the stimulus with the intention of shielding the economy from austerity. Monetary offset.
2. The fiscal austerity that the Fed was worried about does happen.
3. The Fed forecasts 3% to 3.5% RGDP growth over the next couple of years, knowing full well that fiscal austerity was on the way.
4. Over here at TheMoneyIllusion I am skeptical that we’ll get 3% to 3.5% RGDP growth, based on market indicators. I claim that the Fed actions are a modest plus (again based on market reactions) but anticipate that it will probably just roughly offset the fiscal austerity, leaving RGDP and NGDP growth in 2013 about the same as 2012.
5. So far it looks like I was right and the Fed was wrong. Admittedly things could change, but Fed officials are already in full CYA-mode, blaming fiscal austerity for the slowdown, despite the fact that they anticipated fiscal austerity when they made their forecasts in late 2012. You don’t hear them say; “Sumner was right, we never should have forecast such robust RGDP growth in the first place.”
6. Meanwhile the anti-austerians predicted a 1.5% hit to RGDP, some even mentioned 2%, and yet those predictions also look off base so far, as 2013 will look much like 2012. Yet the press has an overwhelming Keynesian bias, so any facts are assumed to support the Keynesian model, no matter how much at variance. For instance, the US is doing more fiscal austerity that Europe, and yet David Beckworth showed that it’s Europe that has the big slowdown, not the US. And let’s not even talk about the fact that the biggest surge in public debt in global history—-Japan since 1993, has been associated with FALLING NGDP!!!! That’s right, the biggest surge in public debt is associated with the worst 20-year performance for AD in all of global history. Of course “correlation doesn’t prove causation,” unless it supports the Keynesian model.
Karl Smith quotes Jeremy Stein, showing that it takes a PhD in economics from an elite school to concoct a theory that a central bank with a monopoly on the printing of money is somehow unable to debase its own currency:
Moreover, . . , absent policy action, progress on reducing unemployment will likely be slow for some time. Meanwhile, inflation is subdued, running at or below our long-run objective of 2 percent, while inflation expectations remain well anchored. If the federal funds rate were at, say, 3 percent, we would have, in my view, an open-and-shut case for reducing it.
The complication, of course, is that the federal funds rate is essentially at its lower bound, which means that we cannot do more simply by turning that dial further. Instead, we have to use unconventional tools, such as LSAPs and guidance about the future path of the federal funds rate.
OK not unable, just afraid that a policy that produces a million new jobs for the desperately unemployed might lead to a trillion dollar capital gain for the Federal government. Why would that be a problem? Because it might be composed of a $200 billion loss to the Fed, and a $1.2 trillion gain to the Treasury, and we all know that the Fed is an independent part of the government, which must never, ever incur a loss, no matter how vast its profits have been in recent years. (Yes, I’m being sarcastic.)
Here’s what Stein is actually saying, if you translate:
We are going to allow a million workers to remain unemployed, because we are too timid to switch from growth rate targeting to level targeting.
This requires some explanation. Under growth rate targeting it’s perfectly possible to miss your implied NGDP target of 5.5% by 1.5% each year, leading to 4.0% growth, year after year. That’s not far from what’s happened since 2009.
Under level targeting (5.5% trend line) if you miss your target by 1.5% each year, the actual NGDP growth rate will still be exactly 5.5%, in all but the first year. (Think about it.)
Why is this crucial? Because the demand for base money is negatively related to the NGDP trend growth rate. So under NGDPLT, a more expansionary policy (higher target NGDP growth) actually leads to less monetary base as a share of QE (Australia’s a good example here) and thus less of that QE that the Fed is so afraid of doing.
Here’s the great irony; the Fed thinks easy money is too risky, and yet the things it (falsely) thinks are risky about easy money (a bloated base) are actually associated with the low NGDP policies of the US and Japan, not the high trend NGDP policy of Australia (6.5% per year since 1996.)
When I think of all the damage being done by these conceptual errors it makes me want to cry.
PS. Leaving “rant mode” for a minute; I do concede the Fed didn’t forecast 100% of the recent sequester, and hence Q2 NGDP growth will likely fall a bit below “Sumner Critique” predictions. I address that issue in this recent post, which some commenters seemed to misinterpret as support for fiscal stimulus.
PPS. Why is the Fed afraid of level targeting? Because it’s a powerful tool. Here’s an analogy. I’ve got gangrene throughout my left leg. I ask the doctor for advice. He suggests a large axe. I say “how about some drug therapy instead?” Why am I afraid of the axe? Because it really will work, it really will get rid of my gangrene leg.
PPPPS. Is there anyone out there who has drunk so much Keynesian Koolaid that they think that, in the absence of fiscal austerity, in late 2012 the Fed would have been predicting 5% RGDP growth going forward?