Here’s Josh Barro:
After today’s good jobs report, my colleague Ramesh Ponnuru needles Paul Krugman: “So, I assume Krugman will now concede that market monetarism is working.”
Not quite, because the Fed is not yet targeting NGDP. But the next part of Barro’s post explains what Ponnuru was referring to:
Market monetarism, as advanced by Ponnuru and the economist David Beckworth, among others, holds that aggressive monetary policy is a sufficient force to smooth out business cycles. They favor aggressive monetary action and fiscal austerity, on the ground that monetary forces can offset any fiscal contraction.
The Fed should have done more in late 2012, but did enough to offset the expected fiscal austerity:
The results so far are good but not great. Job growth is steady and economic growth is modest but positive. Sequestration’s human impacts are real, but a macroeconomic drag is not yet apparent. This looks a lot better than Europe, where the central bank hasn’t been so aggressive and many economies have slid back into recession.
Yet we should worry about the limits of the market monetarist approach. Monetary and fiscal policy are both constrained by political forces, not just economic ones. A full year of sequestration cuts amount to 0.5 percent of gross domestic product, which is significant but substantially less than the degree of fiscal tightening than Ponnuru and Beckworth advocate.
This is misleading, as the main issue in late 2012 was the fiscal cliff. The tax increases were expected to shave about 1.5% off growth. The sequester came later, and may have been partially unanticipated by the Fed. It’s now pretty clear that economic growth in 2013 is not going to fall by 1.5%, rather it looks like it will be similar to 2012. Indeed so far job growth is ahead of the 2012 pace. Of course other things are never equal, but the main “other thing” has been the very disappointing performance of Europe, even worse than expected. That’s a “headwind.” It’s increasingly clear that the main difference between the US and Europe is monetary policy. So why not do even more?
Josh Barro agrees:
Ponnuru admits their case isn’t won yet either: “I don’t think the latest growth number is strong evidence for the arguments Beckworth and I made about the primacy of monetary policy, but it is certainly not evidence against them.” That tentativeness is right — and it’s a reason to act on market monetarists’ calls for more monetary easing and see how that works before trying their proposed fiscal tightening.
Yes, please do more monetary stimulus, until nominal rates are positive, and then even the (smarter) Keynesians like Paul Krugman won’t be concerned about fiscal austerity.
I think the recent jobs numbers are a huge embarrassment to Keynesians. If we’d gotten 50,000 jobs a month for the first 4 months, they’d be crowing that their model is vindicated. So what’s the criterion for testing it? Are we to assume that favorable data can prove Keynesianism and discredit other models, but unfavorable data is inconclusive? That’s a recipe for never rejecting Keynesianism. Which is exactly the point I guess.
On the other hand it doesn’t prove market monetarism is correct. The Fed offset the austerity this time, but perhaps on other occasions they won’t. And it doesn’t prove NGDPLT is a good policy regime. Market monetarism has many more battles to fight, but this is a huge victory.