Why are hummingbirds becoming extinct?
I’ve argued that the Summers/Yellen choice isn’t really about hawks and doves, it’s about those who think monetary policy should steer the economy at the zero bound, and those who don’t. Matt Yglesias has an interesting new post on this theme:
The old debate between inflation hawks and inflation doves doesn’t matter right now in the United States. When a country is facing weak growth and a somewhat undesirable level of inflation, that’s the time for the hawks and doves to fight it out. Do you tolerate some inflation in hopes of fixing the real economy, or will that only make things worse? But in America today growth is sluggish and inflation is low so hawks and doves is irrelevant. The question that does matter for the Federal Reserve is the dispute between turkeys and hummingbirds.
Monetary turkeys think that if you’re at the zero bound and unemployment is high you actually can’t generate inflation. They think the central bank has become flightless. Hummingbirds think central banks have superpowers and unlike other birds can even fly backwards if they want to.
. . .
Part of what’s interesting about this is that almost nobody is a full-fledged turkey. People seem to agree that the hummingbirds are right about small countries, where exchange rate devaluation and the net exports channel is extremely powerful. An Israel or a Sweden can conjure up price increases any time it wants. But you get disagreement about larger countries like the United Kingdom and Japan. And the conventional wisdom has it that the United States is far too large and lumbering to take flight. Hard-core hummingbirds like David Beckworth and Scott Sumner are a distinct minority. Personally, I throw in with the hummingbirds.
What puzzles me is that as recently as 2007 hummingbirds used to dominate the upper levels of monetary economics. The number one textbook (Mishkin) taught our students that monetary policy was “highly effective” at the zero bound. Svennson talked of “foolproof” methods of monetary stimulus. Bernanke ridiculed the idea that the BoJ could not inflate. Bennett McCallum. James Hamilton. Robert Hall. Milton Friedman. Etc. Etc.
Now suddenly we are almost extinct. And yet nothing about the world has changed in the past 15 years that would tend to discredit the hummingbird view, indeed just the opposite. I only know of one economist who has explained why he has moved in the turkey direction over the past 15 years, and that’s Paul Krugman. And yet the reasons he provides are based on “facts” that are false. For instance, he claims that the BoJ tried to inflate, and failed. That’s false; it tried not to inflate (until recently). He claimed the Swiss National Bank could not hold down the value of the SF. Just months after making that claim, it was falsified by the SNB. And let’s not even talk about the yen.
Other than Krugman, I know of no reasons why the profession went from viewing the liquidity trap as a crackpot theory in the 1970s and 1980s, to being the dominant theory today. And I’ve probably been blogging, speaking, writing, debating monetary economics as aggressively as anyone else alive over the past 5 years. if there was a coherent explanation, I think I would have heard it by now.
PS. In the past I’ve argued that Britain’s problems are at least 75% supply-side. I’m about 95% agreement with this recent post on Britain by Tyler Cowen. All I would add is that (despite high inflation) British NGDP is still a bit too low.
PPS. Matt’s implied criticism of those who think liquidity traps even apply to small countries could be viewed as a jab at Krugman’s views on Switzerland. But don’t expect the sort of post Krugman wrote criticizing me. Like Noah Smith, Matt’s a “good guy.” A gentle slap on the wrist should suffice.
Tags:
2. August 2013 at 07:01
There´s a ‘hummingbird’ lurking ‘underneath’ the ‘turkeys’:
http://thefaintofheart.wordpress.com/2013/08/02/the-pretenders-an-outsider/
2. August 2013 at 07:47
I don’t like focussing on supply side problems in monetary policy. The question should alway be ‘will a marginal extra dollar of NGDP generate mainly output or mainly inflation?’ As long as the answer is output, you should do stimulus. I.e. stimulate ‘demand side inflation’ at two percent and ignore supply side inflation completely. Duncan brown/Lars Christensen did some good posts in the UK which show that ‘demand side inflation’ has been muted as in the US but ‘supply side inflation’ has been high and volatile. As a smaller economy the UK price level is more vulnerable to changes in trade flows than the US. Anyway check out http://marketmonetarist.com/2013/04/06/duncan-browns-interesting-ngdp-wonkery/ and pots linked therein. You will find them interesting if you did not already read them.
2. August 2013 at 07:54
Marcus, your link led me to an article by Christy Romer titled “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter.” http://elsa.berkeley.edu/~cromer/Dangerous_Idea.pdf
It’s amazing to think that most economists have embraced this dangerous idea once again in the slightly tweaked form of “monetary policy doesn’t matter at the zero bound.” It is depressing to think that the leading contender for Fed Chairman is one of these people.
2. August 2013 at 08:01
Correct me if I’m wrong, but Krugman isn’t a turkey. He says that a central bank can get below zero by indicating that it will keep the interest rate below what it otherwise would be at once a recovery begins. A central bank needs to “credibly promise to be irresponsible”.
I do think he owes you a mea culpa on the Swiss franc, at least for the time being.
2. August 2013 at 08:01
Scott N
That´s why I can´t understand why she got zero votes in a recent poll!
2. August 2013 at 08:03
I don’t think it’s quite as straightforward as Yglesias makes it out to be. I think a lot of the turkeys, first, don’t really have a coherent theory of macroeconomis or what the central bank is trying to do. And many of them are part of the fed. Richard Fisher is an example. His public comments on the situation shift from arguing that inflation is really happening already, it’s just around the corner to more monetary stimulus having bad vague consequences. I don’t think there’s a real theory in there other than a tight money impulse at pretty much all times. I think for some other turkeys they just got scared once they got to the zero bound and were contemplating something fairly new: substantial asset purchases by the fed. Honestly, that’s not totally crazy. It’s just the work of a conservative temperment. Even if they had argued for this practice in theory, once it came time to do it for real, they took a toe in the water first approach. That’s not really an economic theory based shift. So I’m not sure how many hummingbird’s changed their view of the theory so much as they just got really conservative about what they wanted to recommend.
2. August 2013 at 08:36
http://video.cnbc.com/gallery/?play=1&video=3000187092
Lars Christensen endorses Chuck Norris for Fed Chairman.
Interview by Kelly Evans on CNBC.
2. August 2013 at 08:38
Scott Sumner,
Great post.
The Krugman article looks absolutely awful now, in light of recent history in Switzerland and Japan.
2. August 2013 at 08:41
JP Koning,
Scott’s right for now and the forseeable future, because the Euro-SF exchange rate isn’t even close to the floor right now, and hasn’t got close to 1.21 for nearly a year. It looks like speculators picked a fight with the Bank of Switzerland and lost badly.
2. August 2013 at 08:46
Scott N,
Christina Romer again reminds me why I think she’s one of the best living economists. I see her in the Friedman-Schwarz tradition of economic history, most obviously because of the importance of monetary policy, but also because she’s great at not confusing data with what happened and at rigourously testing ideas that have great apparent plausibility e.g. her work on tax cuts and government spending.
2. August 2013 at 09:51
Phil, I don’t agree. You should shoot for 5% NGDP (or whatever the target is) regardless of how much is prices and how much is RGDP growth.
JP, Yes, he’s not a turkey. That’s why I said “moved in the turkey direction” but maybe I should have been clearer.
He doesn’t owe me anything, he owes his readers a mea culpa (once and a while, since he does so many “I told you so” posts)
Marcus and W. Peden, Yes, the more I think about it, the more Romer seems like the best choice.
mpowell, There are turkeys on both sides, and yes conservatives often have a schizophrenic view on this issue.
Steve, Good video. I think Nick Rowe used that example as well.
W. Peden. But Krugman can’t have been wrong, because he’s been right about everything.
2. August 2013 at 10:14
The hummingbirds in my yard feast on jewel weed. Perhaps you should look for the monetary equivalent and see if someone is hitting it with Roundup?
2. August 2013 at 10:31
The problem is not that humming birds are extinct and turkeys grow more. The very problem is once humming birds, John Taylor, Alan Meltzer, etc. have been devolved into dinosaurs, saying that flying (inflationary monetary policy) is dangerous when it is necessary.
2. August 2013 at 11:08
@Steve, Scott:
Indeed, the Nick Rowe post on Chuck Norris is, in my view, one of the top 3 blog posts from anyone.
Lars’ idea, yes, but Nick really ran with it:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/monetary-policy-as-a-threat-strategy.html
2. August 2013 at 13:07
Complete Off Topic, this is why Twitter is nothing more than horse dung:
zerohedge”@zerohedge1h
Geithner To Advise Obama On Next Fed Chairman http://tinyurl.com/oy7ecmo
Axel Merk”@AxelMerk
@zerohedge re-check the visitor log. Summers was previous #Fed succession adviser, shouting “me! me!”. Geithner on standby to save the world
zerohedge”@zerohedge
@AxelMerk Check the Summers visitor log at IHOP. Doesn’t mean he is the next IHOP chairman
12:51 PM – 2 Aug 13 · Details
Axel Merk”@AxelMerk
@zerohedge as Fed chair, Summers has less influence over Obama than as IHOP chair from where he can openly play politics.
2. August 2013 at 13:08
Exciting times next week in the UK with Carney’s new monetary policy.
http://www.thetimes.co.uk/tto/business/economics/article3829818.ece
And what’s this in the same story? The most senior monetary economist in the UK and former BoE MPC member calling for RGDP targeting in the UK.
“Charles Goodhart, a professor at the London School of Economics, suggested that the guidance should take the form of a threshold target, such as not raising rates until real GDP has grown at an annual rate of 2.5 per cent. The Office for Budget Responsibility expects GDP to reach 0.6 per cent this year and 1.8 per cent next year.”
2. August 2013 at 13:14
James in London,
Didn’t he dismiss NGDP targeting on the basis that it would mess with inflation expectations?
2. August 2013 at 14:43
Bullard’s presentation today;
http://research.stlouisfed.org/econ/bullard/pdf/BullardBrandeisMunicipalFinanceConference2August2013.pdf
Interesting that the Fed’s balance sheet is smaller (as % of GDP) than BoJ, BoE, and ECB’s.
2. August 2013 at 14:51
@W. Peden
I dont know much about C. Romer but is she not big on fiscal stimulus? Or did her reasoned experiance with it change her mind.
I dont think I could call anybody who belives that ‘best economist’.
2. August 2013 at 14:59
Inflation is higher than Yglesias likely believes.
Stock prices are way up, insurance premiums are way up, tuition costs are way up, food and energy prices are way up, housing prices are rising again, China is stockpiling huge quantities of dollars, etc.
It is foolhardy to look at Core CPI or PCE.
The problem with looking at inflation as rising consumer prices only is that it A. ignores the money supply, which is the actual driver of higher prices. But this of course does not imply that if price inflation is low, that inflation of the money supply is low, and B. It ignores rising prices for everything other than consumer goods.
—————-
“Now suddenly we are almost extinct. And yet nothing about the world has changed in the past 15 years that would tend to discredit the hummingbird view, indeed just the opposite.”
What is discredited is monetarism. It is because of the absolute mess than monetarism has wracked on society. No, it doesn’t matter if the particular monetarist rules that have been in place for the last 30 years are “wrong” according to you. It’s the fact that monetarists have been in charge during the worst depression since the Great Depression that is the reason monetarism as such is discredited, and thus why “hummingbirdism” is discredited.
Fairly or unfairly, that’s the reason.
2. August 2013 at 15:49
nicknik,
I don’t fault someone who believes in fiscal stimulus, if they also don’t believe in liquidity traps, at the level of economic analysis i.e. someone who believes that AD can always be determined by monetary policy and wants fiscal stimulus is wrong at the level of politics, not economics.
2. August 2013 at 16:09
@nickik – There were a lot of things being discussed about Suskind’s book released a few years ago. Most of the discussion settled on if Obama did in fact say “Shot its wad” to a female staffer. But around these parts, the important thing to take from this event is that Romer may have been the only person advising Obama in real-time that monetary policy was, in fact, still effective at the zero bound.
http://althouse.blogspot.com/2011/09/christina-romer-woman-who-was-taken.html
2. August 2013 at 16:33
Geoff,
Did you have a bit of froth dripping from the corners of your mouth when writing that nonsense ?
Were you overflowing with righteous anger ?
2. August 2013 at 16:55
Romer was the face of everything that went wrong with Obama’s economic policy in his first two years. “The Stimulus”, “Jobs Created or Saved”, “8% unemployment with this stimulus”, “the reason the stimulus didn’t work was that it wasn’t big enough.”
She has no chance.
How about Bill Dudley? I haven’t heard his name mentioned at all.
How about as a subject for a series of blog posts, profiles of all the contenders, and Ssumner’s opinion on each?
2. August 2013 at 17:51
The effect of the long-term target is probably larger than commonly believed. That’s why QE doesn’t produce a lot of inflation — everyone expects the Fed to pull back, and why make a losing bet?
If they don’t change the target, they aren’t really trying to inflate. To believe otherwise you’d have to think they’re telling the markets not to believe their own stated target.
(Granted, CBs have often lost credibility, but Fed/BOJ/ECB don’t have that problem, at least not yet.)
2. August 2013 at 19:19
James, And he was in the audience in Milan when I explained the need for NGDP targeting!
2. August 2013 at 20:14
Why did hummingbirds go extinct?–Scott Sumner.
From my layman’s review of the profession, something happened in the last 10-15 years (especially among those concerned with central banking) and that was the development of a squeamish obsession, a fetish, a peevish fixation on inflation. By the mid-2000s, even a Yellen was suggesting that a 1 percent rate of inflation was a desirable target. Otherwise sane economists even suggested the ideal was minor deflation, based on rising productivity.
You would think the purpose of macroeconomics is not prosperity, but price stability.
This zealous tunnel-vision on inflation continues, with a recent Paul Volcker piece in the NY Review of Books, in which he suggests an independent Fed free itself of the noisome dual mandate, and be only obligated to kill inflation. Central banker nirvana! With each passing year of independence, central banks and their denizens become more insular, cloistered, arrogant.
Concurrently, there has been a hardening of political battle lines. A John Taylor could not longer “come out” and support QE, as it was seen as providing cover for Obamonomics. Never underestimate social norms or partisan agendas.
What is sad is that we now have a bona fide need for aggressive expansionism on the part of the Fed, but that sensible argument is obscured by politics and the current perverted obsession with inflation.
Jeez. remember that day long, long ago, in the so very ancient past when the Wall Street Journal chided Paul Volcker for being “too tight” with inflation around 5 percent? Was that 1983?
But, to the modern economics profession, keeping inflation under 2 percent is more important than prosperity. Central bankers would like to be totally unconcerned with prosperity, as testified by the recent Paul Volcker piece.
Really, is central bank “independence” working out?
2. August 2013 at 21:31
Scott, as far as I can tell, required base money goes to infinity as absolute zero rates are approached. The move from 25bp to 0bp would necessitate huge multiples of Fed balance sheet expansion, compared with the base money needed from 2%-1% or other target shifts. 25-0 bp is is a world of immense monetary policy force.
If reserves get siphoned off into currency at the ZLB, all the better. There is no liquidity trap, only a refusal to press on to absolute zero.
The chart below is 3m t-bills yield versus base/ngdp: approaching zero calls up huge base money production at the ZLB. Might want to tell PK.
http://research.stlouisfed.org/fred2/graph/?g=l98
3. August 2013 at 02:11
Goodhart is, remarkably, and to his credit, changing his views. I don’t think you get to be a top academic monetary economist by being dogmatic. I think it takes time to realise that your life’s work creating an inflation-targeting regime may have outlived it’s usefulness, or become outdated, or to simply recognise that a better idea has come along.
It really is a case of old generals fighting the current war with the weapons and strategy of the last war. Scott will know more, but surely the depth of the 1930s depressions was partly due to the psychological scarring from the 1920s hyperinflations. Those episodes were only ten years apart, but we all live longer nowadays and so many of those in charge of monetary policy in the 2000s were brought up and made their names fighting the (not so hyper-) inflation of the 1970s.
3. August 2013 at 04:55
James in London,
That’s a good point. One of the reasons I like NGDP targeting is that it’s a policy for all seasons: since productivity is procylical, RGDP growth as a proportion of NGDP growth will be higher in booms, and therefore inflation will be lower. Under such circumstances, NGDP targeting tells one to toughen up and keep NGDP growth on track.
If NGDP targeting were just an answer to low AD situations, then I wouldn’t support it. However, it’s actually a better anti-inflationary policy than inflation targeting, at least in any realistic model of how inflation targeting will take place.
3. August 2013 at 05:45
I also think that there has been a very malign influence from bond market professionals; bond originators and brokers and their pet in-house economists, plus bond investors (eg the “legendary” Bill Gross at PIMCO) and their pet in-house economists. They’ve dominated equity investors for some time, especially in Europe. And their great track record versus equity investors, outperformance with lower volatility has given them a lot of “authority”.
Actually, all these bond market types have done is ride the “great moderation” of falling and low inflation and interest rates (rising bond prices). They have a truly huge, massive, self-interest in seeing inflation and growth stay low and bond prices high. Central Bankers have listened to them, as have treasury officials worldwide needing to issue government debt.
As Scott has expliained these rentiers will ultimately lose big-time if we stick to inflation-targeting with a 2% maximum. Greece and Cyprus (and Detroit) should be huge warning signs. But these bond market types fear inflation and falling bond prices more.
They are a big part of the problem and have corrupted the debate around inflation in financial markets, and their buying power has corrupted academia and central banks too. The frequent moves from academia and from central banks to financial institutions is evidence of the decreasing independence of academia, and central bank economists.
Despite all this pessimism I still believe in the power of ideas to overcome such vested interests, particularly when the costs of their malign influence grows too large. Rock on, market monetarism!
3. August 2013 at 06:57
x2 for Benjamin Cole and James in London for “Extinct Hummingbirds”
I primarily blame the very vocal members on the right who parrot a simple (and wrong), but morally powerful, narrative on the Fed’s “just printing money” to solve all our problems.
3. August 2013 at 06:59
Ben, I’m not saying doves are almost extinct, I’m saying hummingbirds are almost extinct.
jknarr, What does “required” mean? Is that quantity demanded?
James, All very good points.
3. August 2013 at 09:59
Scott – probably both supplied and demanded. Quantity.
James – bond market professionals likely helped stop/impede abenomics. Deflationary debt interests own the Fed, BOJ and others.
3. August 2013 at 11:07
Daniel:
“Did you have a bit of froth dripping from the corners of your mouth when writing that nonsense ?”
No. I had a LOT of froth. And googly eyes. And I was making random noises. Oh, and I was jumping up and down hysterically. I do believe I was fulfilling the exact mental image you have of someone who has the gall, the nerve, the gumption, to say what I did. I should have been more respectful of the monetary overlords.
“Were you overflowing with righteous anger ?”
Oh that’s right! I totally forgot. I was super duper angry too. Like my face was red, I was sweating, you may have also even seen steam coming out of my ears. Oh the rage. Oh no. Oh no. please stop. and so on.
3. August 2013 at 17:52
Scott_
I don’t know if you are reading anymore, but yes, I understand you meant hummingbirds.
The anti-inflation DDT was sprayed so heavily that doves and hummingbirds both got hit.
3. August 2013 at 18:04
Jknarr, Then I’m afraid you lost me.
Ben, OK, I get what you are saying.
4. August 2013 at 09:08
[…] Also check out my earlier post. […]
6. August 2013 at 17:43
[…] Other than Krugman, I know of no reasons why the profession went from viewing the liquidity trap a… […]
6. August 2013 at 23:26
Well this article and the comments misses the whole point. And the point is – Technology Cycles. Or for the classicists among us Kondratieff Cycles.
If there is nothing out there that will significantly reduce costs then no amount of “free money” will change anything. Actually there are things out there. But their magnitude currently is insufficient.
Short version – the computer revolution and the communications revolution have pretty much run their course. They are now commodities.