My commenters let me down. My previous Summers “bleg” was unable to turn up a single instance of Summers criticizing policy as being too tight over the past 5 years. He seems to think the slowest NGDP growth since Herbert Hoover was president is just fine. Or else the Fed can do nothing about it. I’m not sure which view would be worse.
In this column Summers falls into the trap of thinking low interest rates mean easy money, so what’s the point of doing more? That view has been discredited by Friedman, Mishkin, Bernanke, and many other monetary economists. How does Summers not know this? The entire piece is an exercise in reasoning from a price change.
Even worse, in an Ezra Klein column he suggests they couldn’t do more stimulus even if they wanted to:
But the policymakers who would have needed to create that inflation aren’t so sure. “It’s difficult, if not impossible, to create persistent inflation without demand exceeding potential supply over an extended period,” says Donald L. Kohn, who served as vice chairman of the Federal Reserve Board until 2010. “Yes, changing expectations might push inflation higher, but why would expectations change materially and persistently under current circumstances?”
. . .
Summers, who had the inside track to chair the central bank if the Obama administration decided against renominating Bernanke, echoes Kohn’s skepticism. “In the model I understand,” he says, “inflation is mostly driven by demand, and when you increase demand, you increase inflation. And if you don’t increase demand, you don’t increase inflation. But if you’ve solved demand, you’ve solved your problem.”
Update: The original post left out the comment from Summers–my apologies.
Um, maybe because the Fed promised a more expansionary policy in the future? I wonder why Summers thinks the Japanese markets responded so strongly to the increase in their inflation target? Why does he think Bernanke keeps saying the Fed can do more?
BTW, don’t assume things are getting any better just because Summers has left the Obama administration. Treasury Secretary Jack Lew has a memo to the G20 urging faster growth in AD. So far so good. But the discussion is all fiscal policy. He doesn’t even criticize the ECB, which raised interest rates several times in 2011 (so this isn’t just about the zero bound.) Here’s his only comment on the Fed:
The Federal Reserve has provided the US economy with vital support tied to its dual mandate of full employment and price stability.
That’s like saying Captain Schettino of the Concordia provided the passengers with vital support in their endeavor to reach port safely.
Obama’s defenders often tell me that the economy is not Obama’s fault, as he doesn’t control monetary policy. And yet he appointed 6 of the 7 members of the Board, and there is no indication that the Fed’s policy is at all different from what the Obama administration prefers.
Some have asked me who I favor for Fed chair. I don’t really have strong views, but I certainly would prefer Yellen over Summers. Here are a few names that would be even better than Yellen, in no particular order:
Lars Svensson, Mark Carney, Michael Woodford, Christina Romer, Robert Hetzel, Nick Rowe, anyone from the Reserve Bank of Australia, even the janitor.
Greg Mankiw has kept quiet recently, but I suspect he’d be good. I suppose I could even add Krugman, but (like me) he probably doesn’t have the right personality.