Krugman vs. Barro

Paul Krugman has come in for a lot of criticism for this comment:

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!

Especially because his textbook says that UI is a disincentive to work.  I tend to agree with Robert Barro’s argument that extended UI benefits will raise the unemployment rate. However in this case I’m going to defend Krugman against Barro and Bob Murphy and Russ Roberts and David Henderson and lots of other guys I often agree with.  Here’s my problem with Barro’s article (or at least the version I found, I’m blocked from the WSJ.)  Barro correctly points out that there isn’t any good evidence of more transfer payments boosting GDP, and thus he’s very skeptical of the multiplier.

But in mocking “aggregate demand,” Barro never really says whether he agrees with people like Milton Friedman and Robert Lucas, who have argued that a big drop in NGDP will raise unemployment, or whether he disagrees with this view.  He simply dodges the issue.  But it’s a really important issue, as in my view the evidence for the claim of monetary offset (fiscal stimulus doesn’t boost NGDP) is 100 times more powerful than the view that AD doesn’t matter (i.e. more NGDP fails to boost RGDP.)  It’s especially disappointing because I recall an earlier Barro piece on fiscal stimulus where he said something to the effect that if falling AD is the problem then just print more money (I’ve forgotten the exact words.)

I’ve noticed an increasing tendency for people on the right to dodge the issue of whether nominal shocks matter.  And this is why I increasingly identify with people like Irving Fisher and Milton Friedman, but with hardly any living economists.

I suppose it’s possible that Krugman is sending a dog whistle to his liberal readers that Barro is a big bad conservative who thinks poor people are lazy.  But as I read the Krugman comment the plain meaning seems to be that Krugman was complaining about his views (that AD matters) being ridiculed by Barro, whereas as Krugman correctly points out the vast majority of economists do believe AD matters.  Barro didn’t literally say “Hahahaha” but he used metaphors like “bloodletting” that gave that impression.

Maybe I’m being too generous to Krugman, but when I saw that post I simply didn’t see the unfairness that others see.  Krugman always writes in an aggressive style, which in my view made other conservatives misinterpret him this time.

In other news, a man was just caught biting a dog.

PS.  I’m guessing other conservatives won’t buy my argument.  Here’s Russ Roberts:

How do you write a post on unemployment benefits without conceding the possibility that your opponents might be right, given that you have made a similar argument to theirs?

I don’t think Krugman’s post is about UI; I think it’s about AD.  The post is actually directed at what he sees as conservative denial that AD matters.  Krugman is just using UI as an example, but the real focus is on AD.  He’s trashing Barro for his views on AD, not his views on UI.   I think that’s why other bloggers had a different view.  The key phrase is “self-evidently absurd.” Krugman’s not unhappy that Barro has a different view on UI, he’s unhappy because Barro completely denies the importance of AD, and if you do that then Krugman’s view on UI would be self-evidently absurd. So AD is the real issue that bugs Krugman here.  Krugman’s not saying Barro’s view on UI is crazy; he’s saying the reasoning process (AD doesn’t matter) is crazy.  I’m not sure Barro actually believes AD doesn’t matter (my earlier NGDP/RGDP question), but he left that impression.

PPS.  With so many differing views we need a neutral observer here.  Josh?


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82 Responses to “Krugman vs. Barro”

  1. Gravatar of Tyler Cowen Tyler Cowen
    20. January 2014 at 19:03

    What’s the evidence that Robert Barro doesn’t understand aggregate demand? That he put quotation marks around the term? Forty years of articles shows he understands the concept pretty well.

  2. Gravatar of Geoff Geoff
    20. January 2014 at 19:19

    What if plunging NGDP causes unemployment not because wages are sticky, but because business costs are sticky?

    For example, suppose I expect to receive revenues of 1000 units of money over the course of next year. Concomitant with this expectation, I invest 800 units of money today, for a return on investment of 25% (1000 – 800)/800 = 0.25 over the course of the year. Suppose for the sake of argument that out of 800 units of investment, 400 are wages and 400 are capital goods.

    Now suppose the year gets going, and instead of 1000 in revenues, I earn only 500 in revenues.

    Regardless of what factor prices I offer the sellers of those factors going forward, in response to this unexpected fall in demand for my products, I will incur 800 in costs. These costs are not only “sticky”, but perfectly rigid and unchangeable.

    I will likely lay off workers if my demand is only 500, not because there is something stopping me or my workers from agreeing to a reduced wage rate, but rather because I am incurring 800 in costs with only 500 in revenues. Even if my employees and I agreed to a lower wage rate, it would not allow me to avoid incurring the perfectly sticky costs of 800.

    The question therefore becomes, given that I invested 800 units of money, what is the reason for why there should be a money printer to ensure that me, and most other employers around the country, do not experience revenues below our expected costs? Why can’t myself and many other investors be “punished” for making such a bad expectation of our future revenues?

    If the response is that my own particular investment should not be boosted by inflation to prevent me from incurring losses, then by logical extension, since I am just an individual investor among many, the same thing should apply to every other individual investor. They too should not be “rescued” by a central bank to ensure that their revenues are sufficiently high relative to their perfectly sticky costs.

    Where does the MM justification for inflation come about? If it doesn’t apply to me personally, and it doesn’t apply to any other investor personally, then who does it apply to?

  3. Gravatar of Gordon Gordon
    20. January 2014 at 19:29

    Scott, the WSJ article that was cited doesn’t touch upon AD just UI. The WSJ pay wall will often let you through if you’ve been redirected to an article via the Google search engine. So if you follow a link and the article is not free, you can enter the article title in quotes and add “wsj” to a Google search and then often one of the results that links to wsj.com will let you in to read it.

  4. Gravatar of TravisV TravisV
    20. January 2014 at 19:34

    Tyler Cowen doesn’t get it.

    The “Forty years of articles” is irrelevant. Republican Party elites are far crazier than they were during those 40 years. And Robert Barro is a famous, ambitious right-wing economist. Therefore, I expect him to downplay the importance of AD in an effort to curry favor with Paul Ryan, Ted Cruz, Scott Walker, etc. etc.

    At Robert Barro’s level, tribal allegiance trumps objectivity. Just ask Noah Smith!

  5. Gravatar of ssumner ssumner
    20. January 2014 at 19:34

    Tyler, I have no doubt that Barro understands AD extremely well, but the article implies he doesn’t think it affects RGDP.

  6. Gravatar of Geoff Geoff
    20. January 2014 at 19:35

    Even if we suppose we’re “in a slump”, and more “spending” will put “spending” back on some historical trend, it does not follow that more spending on products financed by UI benefits, succeeds in increasing unemployment.

    Spending on products is not spending on labor.

    One is not raising employment by a single hour, nor is one raising wage payments by a single penny, in the act of spending money on products.

    Indeed, a sufficiently high rise in spending on final output is capable of totally wiping out all demand for labor. This is because spending on products is in competition with spending on labor.

  7. Gravatar of ssumner ssumner
    20. January 2014 at 19:37

    Gordon, Isn’t this the article?

    http://online.wsj.com/news/articles/SB10001424053111903596904576516412073445854

    It mentions AD.

  8. Gravatar of Geoff Geoff
    20. January 2014 at 19:37

    TravisV:

    Because that’s how you think, isn’t it?

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. January 2014 at 19:41

    Krugman is clearly arguing that government spending will expand aggregage demand. Unfortunately for him, he also admits that this is only true under ‘depression conditions’. And, we aren’t in depression conditions, we’re in a recovery. An anemic one, but it’s a recovery.

    I love this;

    ‘You’d never know, either from the WSJ or from people like Barro, why anyone ever felt that regular economics — the economics of supply and demand and all that — was inadequate.’

    Except that it is adequate almost always. I know because Milton Friedman wrote to me once to say that he agreed with me that it was so.

  10. Gravatar of John Becker John Becker
    20. January 2014 at 19:44

    AD is just like GDP: Grossly Deceptive Partitioning. You cannot disentangle monetary policy from the “real economy” or the demand side from the supply side. They are an integrated whole. Business failures due to a change in regulation will have monetary and nominal effects. The piece that really crystallized this idea for me was this episode of Econtalk on the Great Depression.

    “Rustici on Smoot-Hawley and the Great Depression”

    http://www.econtalk.org/archives/2010/01/rustici_on_smoo.html

  11. Gravatar of Geoff Geoff
    20. January 2014 at 19:46

    John Becker:

    “They are an integrated whole.”

    That’s exactly right. I disagree with the artificial dichotomy between “real” and “nominal” factors.

  12. Gravatar of The Market Fiscalist The Market Fiscalist
    20. January 2014 at 20:16

    There are two separate issues here

    1. Does boosting AD have any effect on RGDP ? Seems link there is plenty of empirical evidence that it does.

    2. If it does have an effect then is boosting AD via means that also (at the margin) decrease the incentive to work the best way policy ? Probably not.

    Reducing income tax or having a negative sales tax would seem more sensible. Maybe even buying up assets with newly created money might work.

  13. Gravatar of The Market Fiscalist The Market Fiscalist
    20. January 2014 at 20:27

    I just read the Barro article. In it he says:

    “There are two ways to view Keynesian stimulus through transfer programs. It’s either a divine miracle where one gets back more than one puts in or else it’s the macroeconomic equivalent of bloodletting”

    He may or may not understand AD – but he clearly does not understand (or pretends not to understand) the concepts behind fiscal stimulus. They are not about transfer programs at all but about addressing AD shortfalls via new money creation.

  14. Gravatar of Geoff Geoff
    20. January 2014 at 20:29

    Are all AD stimulus boosts to a particular level of RGDP good boosts? Desirable boosts?

    Are all AD stimulus boosts to a particular level of employment good boosts? Desirable boosts?

    If yes, why? If not, why not?

  15. Gravatar of Gordon Gordon
    20. January 2014 at 20:37

    “Gordon, Isn’t this the article?”

    No, it was http://online.wsj.com/news/articles/SB10001424052702303670804579233913327613176. The title is “How to Keep Workers Unemployed”. This was the url in the snippet that you took from Krugman’s post.

  16. Gravatar of Bob Murphy Bob Murphy
    20. January 2014 at 20:44

    Scott,

    I realize you are trying to be fair, and I appreciate that (for real). Here is the Barro article to which Krugman linked.

    Now in Barro’s article he:

    (a) Laid out the respective supply- and demand-side considerations,
    (b) Said it was an empirical issue which was stronger in a recession,
    (c) Admitted he himself had once believed in the importance of the latter, but
    (d) Now thought the evidence showed that AD wasn’t a big deal compared to supply-side effects. Oh and
    (e) He never called his opponents “idiots” with a line through the word.

    Krugman in the mirror-image of the above only did (b). And yet Barro is supposed to be the ideological jerk in all of this while Krugman is the evenhanded teacher for the public.

  17. Gravatar of Bob Murphy Bob Murphy
    20. January 2014 at 20:45

    Oops sorry everyone I forgot the link… Here is the PDF of Barro’s 2011 WSJ piece.

  18. Gravatar of Gordon Gordon
    20. January 2014 at 20:45

    Oops, NVM… Sorry about that Scott. I was looking at the first URL and didn’t realize that the link to Barro’s name was a different WSJ article.

  19. Gravatar of Donal Pretari Donal Pretari
    20. January 2014 at 22:12

    “And this is why I increasingly identify with people like Irving Fisher and Milton Friedman, but with hardly any living economists.”

    For Me, add Henry Simons and Frank Knight

    About Robert Barro, here’s a post of his from 2009:

    “As we all know, we are in the middle of what will likely be the worst U.S. economic contraction since the 1930s. In this context and from the history of the Great Depression, I can understand various attempts( YES ) to prop up the financial system. These efforts, akin to avoiding bank runs in prior periods( YES. THAT’S WHY I CALL THEM A CALLING RUN AND A PROACTIVITY RUN. ), recognize that the social consequences of credit-market decisions extend well beyond the individuals and businesses making the decisions.

    But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes’s 1936 “General Theory of Employment, Interest and Money.” The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

    Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates — especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant( TARGETED TOWARDS INVESTMENT. ). On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis( I AGREE ). Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.”

    http://online.wsj.com/news/articles/SB123258618204604599?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB123258618204604599.html

    I left my comments in from a Blog Thing I had back then. When I read this post by Barro, I, in essence, agreed with his points and supported similar proposals. But then He said This:

    “B: So are you not a fan or what Obama is doing?

    RB: I think the stimulus package was very stupid; it was awful. It’s just a tremendous waste of money and it’s going to cause some trouble in terms of a bigger public debt, it’s just wasting resources. But the more important thing is the financial system, and somewhat the housing related aspects. So on that, despite a lot of floundering around, mostly I think what they were doing is in the right direction. Since the Lehman disaster – I think they made a big mistake by not bailing out Lehman Brothers, I think they recognized that two days later. I think that was Paulson’s individual fault and responsibility from what I can gather.”

    http://marginalrevolution.com/marginalrevolution/2009/05/interview-with-robert-barro-on-the-new-deal-and-great-depression.html

    Now, here’s a Bubble Chart, I guess it’s called, of the ARRA of 2009:

    http://en.wikipedia.org/wiki/File:Investmentbubble.jpg

    Now, look at Infrastructure & Science, and then scan the rest of the Chart. I simply could not understand Barro’s assessment of this Act. Given what He and I say we’re in favor of, this is a pretty good mix, and a very good Politically Pragmatic Mix, in my view. I’m a Democrat and He’s not, but that doesn’t explain our different views of the ARRA. It does look to me like Barro couldn’t take Yes for an answer to as Politically Acceptable Response a response to our joint concerns as we could expect. We do, however, disagree about the Level of Debt. It was a good idea in my view.

    I hesitate to get involved in these debates since I don’t really feel the need to defend Keynesian Economics. However, I would be more than happy to defend Keynes, but that’s another issue.

    PS. One of My Favorite Ideas, a Dated Coupon, I got from Gary Becker.

  20. Gravatar of Ralph Musgrave Ralph Musgrave
    20. January 2014 at 22:55

    Good to see Scott trotting out “monetary offset” again. That’s the idea (as I understand it) that central banks negate fiscal policy. By the same token, chucking dirt on a car that someone is trying to clean, negates the cleaning efforts, ergo cleaning cars is pointless.

    A second flaw in “monetary offset” which is of truly monster proportions is that fiscal stimulus was implemented so as to deal with the crises three or four years ago, and central banks far from “offsetting” it, actually AUGMENTED that fiscal stimulus with interest rate cuts.

    And a third monster flaw in the idea is that unless monetary stimulus is matched dollar for dollar by fiscal stimulus, then in the long run the national debt disappears (assuming it’s government debt that the central bank buys rather than other assets). And at that point, pure monetary policy is no longer possible – unless the central bank starts buying other assets. But what happens when it’s bought every stock exchange share and every house in the country? This lunacy, or reductio ad absurdum if you want it in Latin.

  21. Gravatar of andrew’ andrew'
    20. January 2014 at 23:54

    I’ve posted this everywhere and never gotten an answer. Scott, Google images “fed funds rate and prime rate.”. The real monetary offset to me is there inability make up for their own damage.

    Secondly, John hussman claims(as I have,again with no response) that the suspension of FASB 157 credible commitment is the exact day of the bottom of the stock market.

    Third, Austrians believed in nominal shocks. How do you differ?

  22. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 00:49

    “But in mocking “aggregate demand,” Barro never really says whether he agrees with people like Milton Friedman and Robert Lucas, who have argued that a big drop in NGDP will raise unemployment, or whether he disagrees with this view.”"

    Perhaps you are trying to emulate Krugman’s style, but I see no evidence of any mockery in that op ed. More importantly, your argument here is off base. Barro was talking about the consequences of failing to extend unemployment benefits to 99 weeks in the current environment. You need read no further than the subtitle and the first paragraph to know that. It’s an Op-Ed Scott on that specific current topic, not a treatise.

    Scott, you seem to have violated two of your own rules here. First, you’ve misrepresented what Barro has written and the context it was written in, and on the other hand you’ve tried to read something in to Krugman’s statement that isn’t there:

    “the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!”

    Barro’s article was written recently in the clear context of extending unemployment benefits (again) to 99 weeks. So, the question really is: “Do you think you can reduce unemployment by passing a bill *tomorrow* that pays people not to work for 99 weeks”?

    And, with respect to the Krugman quote, how many times have you written here to accept what one was written and not what you think one has written? Does that rule only apply to what you write?

    Most importantly, please explain to me (and other readers here) how this (failure to extend UI benefits tomorrow) would cause “a big drop in NGDP”, which appears to be your trigger for justifying the extension of unemployment benefits to 99 weeks. Following that, I would like to know 1) how extending EUI benefits to 99 weeks would fully offset that “big drop in NGDP” (and then some?); and 2) how this netting out of NGDP effects would also offset the undeniable disincentive that those 99 weeks of paid idleness have on the recipients to seek and accept employment.

  23. Gravatar of c8to c8to
    21. January 2014 at 01:07

    Economists can be so obtuse, just print the money and mail it to the unemployed..

  24. Gravatar of Benjamin Cole Benjamin Cole
    21. January 2014 at 01:22

    Excellent blogging.

    Many aspects of modern USA economics are pathetic; one is that “economics” has become politics in drag, behind dresses of calculus and skirts of models that purport to reach objectively the results that are really the not-dso-hidden agenda of the authors.

    Thus we have a John Cochrane or a Paul Krugman twisting and straining and becoming increasingly shrill in their observations—when it seems obvious that more AD is the answer, and that an aggressive growth-oriented monetary policy would be effective in returning us to good economic growth.

    The left wing is sad; but the right-wing is even sadder in that for reasons relating to econo-shamanism, or voodoo-nomics, they have become zero inflation cultists ever braying for tight money, or even a gold standard. Even John Cochrane says zero inflation should be the Fed’s only target.

    In other words, the right-wing has decided to lose the battle for economic prosperity, and also lose the political battle, to serve some sort of creationist theory of economic growth.

    Sumner recently absolutely crushed the “supply side is the only answer” argument, by pointing out industrial production has risen 25 percent or so from its recent nadir. It might also be noted the Dow is up 30 percent in the last year, a sign the market is not buying into supply-side constraints.

    I would welcome improvements on the supply-side; every sensible economist does.

    The saddest story: If the right-wing had embraced Market Monetarism, we could have economic growth, and very good arguments for limiting social welfare programs of all types.

    But an obtuse, encrusted, myopic, enfeebled PC brand of right-wing economist seems to represent that wing of politics today.

    As Sumner says, “Where is Milton Friedman?”

  25. Gravatar of WP Knabe WP Knabe
    21. January 2014 at 04:20

    Baro’s main argument was a criticism of the multiplier for transfer payments, and the claims by supporters of UI that there is a multiplier.

    Krugman, as usual, ignored the argument, and ranted about something else.

    Scot-Why comment on something if you haven’t read it?

  26. Gravatar of Daniel Daniel
    21. January 2014 at 04:23

    What if plunging NGDP causes unemployment not because wages are sticky, but because business costs are sticky?

    What if Geoff weren’t a moron and, for a change, actually looked at the facts ?

    He wouldn’t be Geoff any more.

    But thank you for a fine example of praxeology in action. “Tell you what, guys. I’ll falsify the sticky wages model by supposing wages aren’t sticky. Yeah, that’ll show ‘em.”

  27. Gravatar of Bob Murphy Bob Murphy
    21. January 2014 at 04:50

    Oh, duh, sorry Scott I see now that you had the same link to the PDF of Barro’s piece as I did (in the comments above). Because you were talking about the paywall in the post, and people were wondering about whether Barro had even used “aggregate demand” in the comments, I thought nobody had a usable link to his piece.

  28. Gravatar of stuart stuart
    21. January 2014 at 05:03

    Krugman says “You could, I suppose, muster various arguments against this proposition, or at least the wisdom of increasing UI. You might, for example, be worried about budget deficits.”

    You say the Barro’s article implies he doesn’t think it’ll affect RGDP. Well this quote implies that Krugman did NOT think disincentive effects would cause unemployment while all his defenders think it’s obviously he’s already taken that into account.

    Krugman knew what he was doing. He was trolling.

  29. Gravatar of ssumner ssumner
    21. January 2014 at 05:36

    Travis, I certainly would not call Barro “tribal.”

    Patrick, Yes, he probably believes it boosts AD. But the article clearly implies it does not boost RGDP. If he thinks more AD boosts RGDP, then the article would make no sense.

    Market Fiscalist, Fiscal stimulus does not imply new money creation. it implies larger budget deficits (cyclically adjusted.)

    Gordon, There are two links, I used the one under Barro’s name.

    Bob, We must have read different links. Barro was pretty sarcastic in the piece I read. And he basically implied AD has no effect in the piece I linked to.

    Donal, I wish Barro would focus more on the role of monetary policy. But I know he doesn’t agree with me because I’ve discussed these issues with him in person.

    Ralph, All your three “monster problems” show is that you don’t have a clue as to what monetary offset is. You might want to read my Mercatus piece explaining the concept.

    Andrew, I’m not an Austrian. You can read my papers linked to in the right column if you want to know how I differ. Not sure what your other questions refer to. Why is it interesting when something occurs on the exact day of a market bottom? Stocks are a random walk.

    Vivian, No mockery? “Bloodletting?” “miracle?” I’d say he’s mocking the view that AD can boost output. Which is fine, if he wants to go down that road. But then you have to expect Krugman to reply in kind.

    Barro knows full well why Keynesians think fiscal stimulus works—it boosts velocity. There is no miracle involved at all. At least no miracle if you think AD matters. Of course if you are a RBC-type and think AD has no effect on RGDP then I suppose it would look like a miracle. So which is it? Does Barro think it would take a miracle to boost V? (which seems absurd) or that it would take a miracle for more V to boost RGDP?

    You asked:

    “Most importantly, please explain to me (and other readers here) how this (failure to extend UI benefits tomorrow) would cause “a big drop in NGDP”, which appears to be your trigger for justifying the extension of unemployment benefits to 99 weeks.”

    I don’t think it would have any such effect. I completely disagree with Krugman on that point. My only point here is that I didn’t really see how Krugman was being unfair to Barro. And I still don’t.

    You seem to think I disagree with Barro on the question of how extended UI affects the unemployment rate. I don’t, I completely agree that it raises unemployment. That’s not what my post was about.

    And it’s not a recent article it’s from 2011.

    WP, I did read it, and I provided a link that works.

  30. Gravatar of TravisV TravisV
    21. January 2014 at 06:21

    Progress in Chinese monetary policy?

    http://www.businessinsider.com/chinas-central-bank-communication-2014-1

    “what is unusual (and encouraging) this time is the use of communication,” added Yao. “Shortly after the fact, the PBoC made the standing lending facilities operation public and informed the market of the reverse repo operations before they took place. Moreover, the central bank announced that it is to start a trial of direct liquidity injections into small and medium-sized financial institutions. However, what is unusual (and encouraging) this time is the use of communication. Shortly after the fact, the PBoC made the SLF operation public and informed the market of the reverse repo operations before they took place. Moreover, the central bank announced that it is to start a trial of direct liquidity injections into small and medium-sized financial institutions.”

    Improved communication has been the popular trend among the world’s central banks like the Federal Reserve, the European Central Bank, and the Bank of England.

    “This is a positive development,” said Yao. “Rule-based monetary policy and its implementation certainly offer a much greater degree of transparency and helps guide and stabilise market expectations. It is one step closer to a desired policy regime. Providing direct support to smaller banks also helps improve the efficiency of liquidity management, especially as big banks increasingly hoard cash to address their own liquidity problem.”

  31. Gravatar of Brian Donohue Brian Donohue
    21. January 2014 at 06:23

    Great post, Scott. My gut says the truth is somewhere between you and Barro. NFDP is important, but not a silver bullet.

    I’d be curious what the numbers below tell you. I’m not an economist, so I’m not sure I’ve done the calculations precisely, but I’m sure Sadowski would be able t produce similar numbers:

    Year NGDP RGDP Deflator
    2003 6.8% 4.6% 2.1%
    2004 6.9% 3.5% 3.2%
    2005 6.5% 2.9% 3.5%

  32. Gravatar of The Market Fiscalist The Market Fiscalist
    21. January 2014 at 06:25

    “Market Fiscalist, Fiscal stimulus does not imply new money creation. it implies larger budget deficits (cyclically adjusted.)”

    Larger budget deficits will create new money. The fact that parallel monetary policy may then allow some of this new money to be converted to other forms of financial wealth (such as govt bonds) doesn’t change that.

  33. Gravatar of Erik Trygger Erik Trygger
    21. January 2014 at 06:35

    In this post it seems to me that Krugman was taking about AD.

    “Everyone agrees that really generous unemployment benefits, by reducing the incentive to seek jobs, can raise the NAIRU; that is, set limits to how far down you can push unemployment without running into inflation problems.

    But in case you haven’t noticed, that’s not the problem constraining job growth in America right now. Wage growth is declining, not rising, and so is overall inflation. A wage-price spiral looks like a distant dream.

    What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant … And the truth is that unemployment benefits are a good, quick, administratively easy way to increase demand, which is what we really need. So right now they have the effect of reducing unemployment.”

    http://krugman.blogs.nytimes.com/2014/01/19/ui-the-nairu-and-the-zlb/

  34. Gravatar of stuart stuart
    21. January 2014 at 06:41

    Perhaps you’ll leave a comment on David’s post at Econlog?

  35. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 07:10

    “And it’s not a recent article it’s from 2011.”

    Really? I think you are confusing days and years. The date on the article in the WSJ by Barro was December 11, *2013*. If you were under the misapprehension that Krugman dusted off a 2011 article by Barro in order to rebut it, I now see how you entirely missed the current context of this exchange.

    In case you have not noticed, Congress is now wrestling with whether it should extend UI to 99 weeks. This was the subject of Barro’s article and Krugman’s attempted rebuttal.

  36. Gravatar of John Becker John Becker
    21. January 2014 at 07:27

    c8to,

    That’s a great idea if you want unemployed to stay unemployed forever. Also, a great idea if you want a lot more people to decide to become unemployed. Don’t forget about the inflation that would cause. Remember what the “misery index” is? Your proposal should be called boosting the misery index.

  37. Gravatar of ssumner ssumner
    21. January 2014 at 07:33

    Brian, Those numbers are exactly as you’d expect from the AS/AD model. As the economy approaches the natural rate, growth slows.

    Market Fiscalist. Fiscal policy has no necessary link to monetary policy. Indeed expansionary fiscal often causes tighter money, and vice versa.

    Erik, I agree.

    Vivian, Here’s the link:

    http://online.wsj.com/news/articles/SB10001424053111903596904576516412073445854

    It’s August 24, 2011

    In my view the Krugman post was basically about AD, and he was simply using UI as an illustration.

  38. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 07:41

    Scott,

    Do I have this right?

    1. Barro rights an Op-Ed piece in the WSJ dated December 11, 2013;

    2. Krugman attacks that Op-Ed in a blog post of his own dated January 12, 2014.

    3. You read the Krugman piece that was written specifically in response to that December 11, 2013 Op-Ed and weigh in on that debate with your own blog post without ever reading Barro’s piece but rather something he wrote in 2011 that you now claim (how, I don’t know) is a “version” of the current piece?

    I think that if you were in Barro’s place you would be rightfully upset.

    Is there someway that I can chip in to buy you a subscription to the WSJ? Or, perhaps a friendly party will agree the next time to e-mail you a copy of the literature that is the genesis of any future debate?

  39. Gravatar of J Mann J Mann
    21. January 2014 at 07:45

    1) Krugman has a bad habit of responding to very old pieces and not reading them carefully. I think it’s a little sloppy for Krugman to write a response in 2014 to a 2011 op ed by Barro without at least calling it out.

    2) Anyway, if you want to read the Barro piece without the paywall, google “Keynsian Economics vs Regular Economics,” and you can read the unsigned WSJ editorial by googling “How to Keep Workers Unemployed.” The WSJ will allow you to see paywalled articles when you come in via google search.

    3) Barro took a pretty strong stand several years ago, he argued that there was “no meaningful theoretical or empirical support for the Keynesian position” that $1 in food stamp benefits produced more than $1 increase in GDP, and specifically for the Obama admin estimate in the day that each additional dollar in food stamps at that time boosted GDP by $1.84.

    4) Barro then moved on to empirical support for the Keynsian multiplier, said that it was hard to get and that there was none, and said that the increase in unemployment following the stimulus was an inperfect data point against the Keynsian model.

    5) The WSJ article expressed scepticism about the Keynsian multiplier in general, then argued specifically that the current increases in unemployment taxes on hired workers is discouraging unemployment, and that extended UI benefits discourages employment by raising the cost of it.

    6) In response, Krugman accused the WSJ and Barro of being anti-scientific by refusing to accept the “sort of standard model” that increased government spending increases GDP by a multiplier of more than 1.

    IMHO, Krugman doesn’t fairly characterize either the Barro piece or the WSJ piece, so his article isn’t really helpful. If he was more clear about where they disagree and why, but as far as I can tell, Krugman’s main point is that only idiots think that the muliplier is 1 or less, but unless you take his word for it, the whole thing stops there.

  40. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 07:47

    There are too many rights in the above paragraph, but not enough to correct your initial wrong. Barrow “writes”.

  41. Gravatar of The Market Fiscalist The Market Fiscalist
    21. January 2014 at 07:49

    “Market Fiscalist. Fiscal policy has no necessary link to monetary policy. Indeed expansionary fiscal often causes tighter money, and vice versa.”

    Take 2 (ZLB) scenarios:-

    1. Monetary policy alone (QE): CB buys assets for new money. This has no direct effect on income. Assets will rise in value due the CB purchases and eventually people (feeling richer) will spend some of their new wealth and this may increase NGDP.

    2. Combined fiscal/monetary policy: Govt runs a deficit (to fund a negative sales tax) by selling bonds. The CB buys some of these bonds for new money. The deficit directly increases income which leads directly to increased NGDP. The CB uses monetary policy to fine tune the effects on the economy and hit the NGDP target.

    Scenario 2 seems foolproof to me while scenario 1 seems risky because it operates mainly by manipulating asset prices

  42. Gravatar of TravisV TravisV
    21. January 2014 at 08:19

    Martin Wolf on Ben Bernanke:

    “The very model of a modern central banker”

    “Outgoing chairman Ben Bernanke deserves great credit for the Fed’s handling of the crisis”

    http://www.ft.com/cms/s/0/e8fa8154-7f82-11e3-94d2-00144feabdc0.html#ixzz2r3E1cb4D

  43. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. January 2014 at 08:19

    Wow, this is all about mistaken identity (pace Vivian)?

    Okay, then, here’s what Barro said in the WSJ just last month (to which Krugman is referring)

    ———-quote———-
    Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving “aggregate demand.” Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

    Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment.
    ———-endquote———-

    Which is a fair representation of what the Obama Administration is arguing, and apparently, so is Krugman. Barro responds;

    ——–quote——–
    If valid, this result would be truly miraculous. The recipients of food stamps get, say, $1 billion but they are not the only ones who benefit. Another $1 billion appears that can make the rest of society better off. Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch.

    How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people? Keynes, in his “General Theory” (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.
    ———–endquote———

    If Milton Friedman were alive, he’d tell us the same thing–and, in fact, when he was alive he did make just that point. Then Barro asks, what does the evidence tell us;

    ————-quote————-
    Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.

    The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack’s claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.
    ———–endquote————

    He also could have used Herbert Hoover’s ‘experiment’ in the early 30s with raising Federal spending by something like 50%. To no noticeable effect (unless, as Barro says, that spending retarded the economy’s recovery). Then comes Barro’s finish;

    ‘There are two ways to view Keynesian stimulus through transfer programs. It’s either a divine miracle—where one gets back more than one puts in—or else it’s the macroeconomic equivalent of bloodletting. Obviously, I lean toward the latter position, but I am still hoping for more empirical evidence.’

  44. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. January 2014 at 08:22

    In the above, note;

    ‘Keynesian stimulus through transfer programs’.

    That’s what the dispute is about.

  45. Gravatar of Steven Kopits Steven Kopits
    21. January 2014 at 08:27

    Viv, I don’t think you have it right.

    Krugman links two articles, the Dec. 11 WSJ Op-Ed, not attributed to Barro; and a Barro WSJ op-ed from Aug. 24, 2011.

  46. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 08:40

    Steve, you are correct that the WSJ article is not signed by Barro. I take responsibility and apologize (to Scott) for suggesting that it was and calling Scott on it. Nevertheless, Krugman’s blog post was in response to the WSJ Op-Ed and the current proposal to extend UI benefits. This is the context of the current debate, not a general theoretical debate on the effects of AD versus disincentives of UI.

    Thanks for setting me straight on the first point.

    When there is a specific legislative choice immediately in front of us and is the focus of a current debate about what to do, I submit that the discussion should be on the table that is set in front of us, not on the table that was set two years ago. Again, specifically, that means in the context of this discussion: Will extending UI benefits *now* to 99 weeks result in increased AD (or, as Scott puts it, (avoid) “a big drop in NGDP” and thereby reduce unemployment? It strikes me that Krugman has cleverly tried to move the discussion to a general theoretical one rather than focus on the specific conditions we face today even though there is absolutely no question he (and the WSJ) are attempting to influence a decision to be made tomorrow.

  47. Gravatar of Ralph Musgrave Ralph Musgrave
    21. January 2014 at 08:40

    Scott,

    Thanks for directing me to your Mercatus article. Your explanation there of what you mean by “offset” is precisely and exactly what I took your defintion of the term to be before reading the paper.

    Thus my three “monster problems” still stand. I suggest you have no grasp of what the problems are to which I refer.

  48. Gravatar of Mike Sax Mike Sax
    21. January 2014 at 09:25

    “But it’s a really important issue, as in my view the evidence for the claim of monetary offset (fiscal stimulus doesn’t boost NGDP) is 100 times more powerful than the view that AD doesn’t matter (i.e. more NGDP fails to boost RGDP.)”

    I agree that the Monetarist case has always been-politically-much more powerful than most conservatives who simply ignore AD altogether.

  49. Gravatar of J Mann J Mann
    21. January 2014 at 10:18

    Scott, here’s how you summarized Barro back in 09, if it helps:

    “So they are both basically saying; ‘Of course if the problem is nominal, then monetary policy can fix it much more easily. But I don’t think it’s nominal. And if we hold nominal spending constant, fiscal policy can’t fix it.’ And that’s true, even within the Keynesian model. Fiscal stimulus can do nothing if the Fed has got NGDP where it wants it.”

    http://www.themoneyillusion.com/?p=10124

    For what it’s worth, Barro seems relatively consistent. In 09, he wrote “economists have not come up with explanations, such as incomplete information, for multipliers above one.” In the 11 article Krugman criticizes, Barr argues that he can’t see any theoretical or empirical basis for assuming a multiplier above 1 for social transfers.

    Krugman argues that’s witch doctor stuff, and that since it’s allegedly the “sort of standard view” that Krugman is right, Barro should agree.

    My neutral-ish take is that Krugman is still not engaging with Barro, so there’s nothing to judge.

    IMHO, Barro doesn’t say that it’s obvious that the multiplier from UI is negative, which is what Krugman seems to imply Barro says, only that he doesn’t see any reason to believe that the multiplier from social spending is greater than 1.

  50. Gravatar of Tom M. Tom M.
    21. January 2014 at 10:39

    Wow…all these replies and nobody has debunked the ridiculous notion that the bill before the Senate extends UI to 99 weeks?

    http://www.cbpp.org/cms/?fa=view&id=3164

    Oh and by the way, to show how freaking stupid these debates really are here is a litte factoid:

    When Wal-Mart opened a store in D.C. 23,000 people applied for 600 positions.

    http://www.businessinsider.com/wal-mart-receives-23000-applications-2013-11

  51. Gravatar of Don Geddis Don Geddis
    21. January 2014 at 10:41

    Ralph Musgrave: you think you understand monetary offset, and you still think you have three “monster” problems? Fine, I’ll take a crack at them:

    1. “Central banks negate fiscal policy.” I would say “have the ability to”, but close enough. “chucking dirt on a car that someone is trying to clean”. That’s a terrible, counterproductive analogy. A car can’t be “too clean”. But NGDP growth, if too high, causes high inflation (which is a harm). If too low, it causes high unemployment (which is a harm). So, unlike your clean car analogy, the trick in NGDP growth is finding the right balance. So, yes, if the Fed believes the car is at the “right level” of clean, then it SHOULD “chuck dirt” when someone is trying to clean it “too much”. It’s not that “cleaning cars is pointless”. It’s the that Fed ALSO cleans, by itself. If the car is the wrong level of clean, then complain about the Fed’s choices. Don’t try to take new cleaning actions, when the Fed has the easy ability to set the clean level of the car where ever it wants.

    2. CBs augmenting fiscal stimulus: you’re again missing that this is all about setting a level. The “offset” was that, if the fiscal authorities had NOT done fiscal stimulus a few years ago, then the Fed WOULD HAVE done MORE monetary stimulus. The “offset” was the lack of even more additional monetary stimulus. The “dog that didn’t bark” effect.

    3. “National debt disappears”. This is a highly unlikely scenario, but it isn’t a problem even if it were to happen. As you say, the CB can simply buy other assets. What happens when it buys every asset in the world, for fiat paper? Still not a problem. It would never happen, but even if you’re worried about your reductio, people can create new intellectual assets at essentially zero cost. (E.g. Picasso doodling on a napkin.) There is no breakdown in the model, even if your highly unlikely scenario were ever to come to pass.

    Your three “monster” problems have long since already been considered, and easily disposed of. None of them are problems for Market Monetarism.

  52. Gravatar of Don Geddis Don Geddis
    21. January 2014 at 10:55

    Vivian: “Krugman’s blog post was in response to the WSJ Op-Ed and the current proposal to extend UI benefits.

    Perhaps, but Krugman ALSO linked directly to the 2011 Barro piece, and immediately responded to specific aspects of that old article (“If you read Barro’s piece…”). Krugman presumably thinks that the Barro article provides the intellectual heft to support the more recent WSJ op-ed.

    Will extending UI benefits *now* to 99 weeks result in increased AD

    Sumner’s post here, was defending Krugman’s piece from criticism that Krugman was unfair to Barro. You’re asking for a different subject to be discussed, which is whether US economic policy would be improved by extending the UI benefits. The three perspectives seem to be:

    1. Barro: more UI benefits are a disincentive to work, so extending them will only make unemployment worse. “Aggregate demand” isn’t an important topic to think about, in this context. (Conclusion: do NOT extend benefits.)

    2. Krugman: Barro is wrong. It’s counterintuitive, but aggregate demand is critical here. While extended UI benefits have some effect on encouraging unemployment, the more important effect under current economic conditions is that they are a form of fiscal stimulus, which would boost NGDP, and thus easily pay for themselves and have a net effect of lowering unemployment. (Conclusion: DO extend benefits.)

    3. Sumner: Krugman is right that aggregate demand is critical. Barro deserves to be criticized for not addressing that topic, when discussing extended UI benefits. However, Krugman, as usual, believes that fiscal stimulus can increase AD; whereas the Sumner Critique on monetary offset suggests that NGDP is set by the Fed, and fiscal stimulus is irrelevant. Yes, the Fed should increase AD. But no, extended UI will not increase AD. (Conclusion: do NOT extend benefits.)

    So, Sumner thinks that Barro’s conclusion is right, but Barro has the wrong reasons. And Sumner thinks that Krugman’s conclusion is wrong, but Krugman’s criticism of Barro is warranted.

  53. Gravatar of John Becker John Becker
    21. January 2014 at 11:54

    Degenerate gamblers probably have the highest MPC. Would giving them money be the quickest way to boost GDP?

    To me Keynes was to economics what Sigmund Freud was to psychology/psychiatry. There was very interesting research going on in the fields that had to be completed rediscovered and rebuilt upon because of one guy coming alone and taking the entire endeavor in the wrong direction. In the 1880s, psychologists were looking at the physical brain for the source of mental disorders while 40 years later, economists were correctly looking at money as the cause of the business cycle. Freud and Keynes took the fields down a long, long detour. Economics has been slower to recovery unfortunately-probably due to how much the government liked what Keynes has to say.

    I think people who support Keynes do not realize just how far away from economic reasoning they are going and how deep into the realm of fantasy land they live. Keynesianism is a direct rejection of the economic way of thinking and a return to the mercantilist idea that all that matters is the volume of spending.

    People forget how many tin-foil hat ideas the man published. Here are some arguments that Keynes made: investment should be socialized, the Egyptian commoners were better off because the Pharoahs built the pyramids, the economy could be modeled as a simple circle of spending, you should pay people to dig holes and fill them back in, saving money creates a vicious cycle, one person spending less money can cascade the whole economy into depression through a positive feedback loop (the paradox of thrift), the Jews are the greediest race of people, and mercantilist theory was correct this whole time.

    The Keynesian case for UI and food stamps is based on giving money to people with a higher marginal propensity to consume. They have never been able to answer their detractors who say that they fundamentally misunderstand what saving money is about. Do a thought experiment. If everyone just spent all the money they had, then all of our capital goods-tractors, computers, tools, factories-would degrade and become useless. Living standards would plummet as production processes became simpler and simpler due to a lack of savings and capital goods. Eventually, our economy would become primitive and pre-industrial. Our current standard of living is due to the fact that some people were able to accumulate savings and the wealth redistributors didn’t always have their way.

    Barro’s article was exceptionally balanced compared to what I am used to reading from Krugman or Delong. Any empirical evidence in favor of either argument is going to be useless because there is so much stuff going on during an economic cycle that it is going to be impossible to separate the cyclical factors from the effect of the transfers. It would also be impossible to know the non-transfer payment counterfactual.

    This is a type of case where you just have to rely on reasoning. The Keynesian reasoning about marginal propensities to consume and multiplier effects does not stand up to logical scrutiny while the disincentive to work arguments actually make sense.

  54. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 12:16

    “So, Sumner thinks that Barro’s conclusion is right, but Barro has the wrong reasons.”

    So, the disincentive effects of extended UI is “the wrong reason(s)” for his conclusion?

    Thanks otherwise for your comment, which makes a certain amount of sense.

    But, once again, if the focus is on the effect of additional UI on AD (and allegedly additional employment as a secondary effect) and the issue is the policy decision before us today, shouldn’t economists address that issue in the context of the current economic environment? Isn’t that the value economists seek to provide? In this very current context particularly, do these abstract debates assuming conditions that are not present today serve policy decision-making well? Clearly, Krugman’s effort here is an attempt to influence a policy decision we now face (the WSJ Op-ed the same) and I think Krugman (intentionally) and indirectly Scott (perhaps unintentionally) have avoided a discussion of the very relevant current conditions. Those conditions are that we have higher unemployment than desirable, but we certainly are not in a depression or even a recession. The economy is also gaining some speed. I contend that you should not address the debate with abstract and generic argument and that the relevant current economic conditions should be directly addressed. Krugman obliquely referenced an old Barro article with an attempt, I think, to focus our eyes on a ball that’s in a different court than the one we are now on.

  55. Gravatar of Tom M. Tom M.
    21. January 2014 at 12:34

    “Those conditions are that we have higher unemployment than desirable, but we certainly are not in a depression or even a recession. The economy is also gaining some speed.”

    When Wal-Mart opened a store in D.C. 23,000 people applied for 600 positions.

    Have you no shame?

  56. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. January 2014 at 13:38

    Ralph Musgrave,
    Frankly, your “monster problem” number 3 is total nonsense.

    Section 14 of the Federal Reserve Act (FRA) sets out the rules governing Fed asset purchases. According to Section 14.1 the Fed may purchase gold, Treasury debt, Agency debt and Agency guaranteed debt. The open market stipulation prevents the Fed from purchasing Treasury or Agency debt directly (that would be “monetizing the debt”) so it must buy Federal government debt (interestingly, this does not apply to any other asset the Fed may puchase) in the secondary markets. This of course has not proved to be much of an impediment.

    The Fed is also permitted to purchase bankers acceptances and bills of exchange in the open market. These are privately issued assets but few American institutions use much of them anymore.

    The Fed is also allowed to purchase state and municipal debt
    and foreign government issued and guaranteed assets, as well as those of their agencies with a term not exceeding six months. The term constraint is important since about 99% of state and municipal bonds, and something like 88% of foreign bonds are of longer term.

    So what’s eligible for purchase? Roughly…

    Federal government Treasuries – $12.0 trillion
    Agency bonds – $2.0 trillion
    Agency guaranteed securities – $5.8 trillion
    Bankers acceptances – zilch
    Gold – $6.9 trillion
    State and municipal bonds – zilch
    Foreign bonds – $5 trillion

    This comes to about $31.7 trillion dollars. Now, the Federal Reserve currently holds about $3.8 trillion in such assets so that leaves about $27.9 trillion in assets that they still haven’t bought.

    (And I suppose they can buy up all the world’s foreign currency and overnight deposits which ought to be worth at least a few trillion dollars but let’s not get crazy!)

    And I still haven’t touched on section 13.3 of the FRA yet.

    Section 13.3 allows the Fed to lend to any individual, partnership, or corporation upon any collateral the Fed deems satisfactory. That’s the Section that allowed the Fed to create Maiden Lane I, II, and III, the Commercial Paper Funding Facility (CPFF), and the Term Auction Lending Facility (TALF) during the financial crisis. Approximately $2 billion is still currently lent out under Section 13.3 (through Maiden Lane and TALF).

    In theory under Section 13.3 private label MBS, CDOs, stocks or corporate bonds are all eligible collateral so the sky is the limit. In practice section 13.3 only allows loans under “unusual and exigent circumstances.” But guess who gets to decide what consitutes “unusual and exigent circumstances?”

    So yes, the Fed is legally prohibited from depositing money into the bank accounts of individuals with no strings attached, or, indeed, from buying up the global supply of cheese. But this accounting suggests there’s still ample room to “print” more money if the Fed so chooses.

  57. Gravatar of John Becker John Becker
    21. January 2014 at 14:12

    Market Fiscalist,

    Are you basically an MMTer?

  58. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. January 2014 at 14:18

    “Have you no shame?”

    I assume that here you are making a humanitarian argument for extending unemployment benefits to 99 weeks. Is that correct? If so, fine because that would be an honest and straight-forward position and one that I would be more inclined to accept than one made on the basis of a phony or even misguided economic one; however, it has little to do with whether the better policy to reduce overall unemployment is to extend UI to 99 weeks (thereby increasing AD and presumably employment) or whether that policy will increase unemployment.

    Again, if this is a humanitarian argument, it’s better to acknowledge the downside of the policy and argue that despite those unavoidable budgetary and disincentive costs humanitarian concerns should outweigh them.

    If your argument is different, you’ve yet to state it. The fact that there are 38 persons applying each opening at Wallmart in DC may tell us quite a few other things. It may tell us, for example, that there are a lot of folks unemployed who don’t have the skills to qualify them for other types of jobs, that the problem is in part automation, the minimum wage, etc. I don’t think the lack of AD is automatically the cause of the phenomenon of your example, much less and more to the point that expanding UI benefits would be the answer to that unemployment problem, but if you want to make that case, I guess this is one place where you might try to do that.

  59. Gravatar of Tom Brown Tom Brown
    21. January 2014 at 14:27

    Mark Sadowski, quick OT: if a rule/algorithm (like Taylor’s) had been used since late 2008 to implement NGDPLT (removing all human judgement at the Fed, beyond the initial set up), would you expect the Fed BS to be bigger or smaller than it is today?

  60. Gravatar of Don Don
    21. January 2014 at 14:30

    Thorough post Sadowski!

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. January 2014 at 15:06

    Tom Brown,
    It doesn’t matter how NGDPLT were implemented, the monetary base would be much smaller today. Having the right target would have made open market operations (OMOs) much more potent.

    Doing ad hoc amounts of QE while essentially keeping a 1.6% core PCEPI target in place was a recipe for making OMOs very weak tea. The Evans Rule was a small improvement.

  62. Gravatar of TravisV TravisV
    21. January 2014 at 15:54

    Christopher Mahoney:

    “Look Out! The Fed Is Doing Something Strange”

    “money growth has declined sharply during 4Q13, and is now running below 5%–the slowest rate of money growth since the crash itself.

    What is going on? Why has the Fed been tightening for two years, and why has the it allowed inflation to undershoot the target by such a wide margin?

    Here is what the FOMC says on the subject: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Minutes, 18 Dec. 2014)

    In other words, the Fed denies that it has been tightening. Someone should buy the Fed a subscription to its own database: it could be quite eye-opening. In seriousness, the Fed must be aware of what I have just observed. But why won’t the FOMC publicly address the issue? Shouldn’t the “most transparent Fed in history” explain to Congress and the people why it is tightening when it says it is not?

    Investment Conclusion:

    Whether the Fed knows it or not, money growth is dangerously low and falling. No one is minding the store at the Eccles Building. This means that we are in for a negative growth surprise for 4Q13, and for the stock market. In this case, bad news is bad news.”

    http://capitalismandfredom.blogspot.com/2014/01/look-out-fed-is-doing-something-strange.html

  63. Gravatar of ssumner ssumner
    21. January 2014 at 16:21

    Ralph, You said;

    “By the same token, chucking dirt on a car that someone is trying to clean, negates the cleaning efforts, ergo cleaning cars is pointless.”

    If every time I walked outside with the hose a mob of dozens of people started trowing mud at my car, then yes, it would be kind of pointless to clean it, wouldn’t it.?

    It’s getting increasing hard to take you seriously. Please come up with better analogies.

    Vivian, Many commenters make the mistake of assuming that when I post on some other pieces, I am doing some sort of overall appraisal of what they wrote. Not so, often I have a very narrow objective. I felt that Krugman was being wrongly accused of being dishonest here, whereas the real problem is simply that Krugman’s macro views are wrong (in my view.) But given that he thinks fiscal stimulus boosts demand, I don’t blame him for sharply criticizing a Barro piece that seemed to ridicule the idea that demand shocks don’t matter. Now maybe Barro didn’t imply that, I can’t be certain. But I got that impression. Of course lots of things could be said against the Krugman post, but that wasn’t my objective in this case. I have plenty of other posts that criticize him.

  64. Gravatar of ssumner ssumner
    21. January 2014 at 16:31

    Market Fiscalist, I don’t agree that fiscal policy operates primarily though asset prices. In any case it’s not risky at all, much less risky that fiscal stimulus.

    J. Mann, Thanks for that earlier quotation by me. That seems to support my current argument that Barro doesn’t think nominal shocks are the problem.

    I believe Barro is now arguing the multiplier for taxes and transfers is zero (excluding supply-side effects.)

    Don Geddis, You’ve restored my faith in humanity, or at least that I’m not a totally horrible writer.

  65. Gravatar of Ralph Musgrave Ralph Musgrave
    22. January 2014 at 01:24

    Don Geddis,

    Re No.1, I quite agree that “…if the Fed believes the car is at the “right level” of clean, then it SHOULD “chuck dirt” when someone is trying to clean it too much”. I also agree with your claim that “…the that Fed ALSO cleans, by itself.”

    But what I don’t accept is Scott’s deduction, namely that the fiscal multiplier is zero or that fiscal policy is pointless. It’s like having two people cleaning the same car: the fact that one person is quite capable of doing the job doesn’t prove that the second is pointless or that the first is better than the second (or vice-versa).

    Re No.2, I fully agree that “if the fiscal authorities had NOT done fiscal stimulus a few years ago, then the Fed WOULD HAVE done MORE monetary stimulus.” In that instance, stimulus came from a COMBINATION of fiscal and monetary policies. So you seem to agree with me that fiscal is not totally useless or pointless, as Scott is always trying to suggest.

    Re No.3 and the national debt disappearing, I agree that that wouldn’t be a problem. In fact I pretty much agree with Milton Friedman and Warren Mosler both of who advocate/d that the government / central bank should issue no interest yielding debt: that is, the only liability they should issue should be base money (in that base money can be described as a liability, which is debatable).

    As to central banks buying up all other assets (shares, houses, etc) that strikes me as lunatic. It would be a kind of communist regime where government owned the means of production. Central banks are just not qualified to measure or take stock exchange type risks. That is, we all benefit from individuals playing the part of entrepreneurs: i.e. taking stakes in businesses, etc.

    And that lunatic / communist scenario is easily avoided by a combination of fiscal and monetary policy. That is: 1, government borrows $X and gives $X of bonds to lenders, 2, government spends the money, and 3, the central bank prints money and buys back the bonds. The net effect of all that is simply: “government and central bank combined print and spend money”. And that in turn means the private sector has a stock of base money sufficiently large that it spends at a rate that brings full employment. Indeed, Positive Money and other organisations believe in cutting out the above three stage bond creation and destruction process and replacing it with the latter “government and central bank combined” system.

    But in either case (the 3 stage system or the combined system) fiscal plays a part: it obviates the need for the above communist type regime because the private sector is simply given base money rather than having to sacrifice assets to get hold of that money.

  66. Gravatar of c8to c8to
    22. January 2014 at 01:57

    donahue, what those numbers show is that real gdp equals nominal gdp net of inflation.

    becker, i was being slightly tongue in cheek – it was a krugner unification, hence the cheeky comment.

    i agree it may encourage people to not work, but so what – we’re entering the age of structural unemployment and unless you have a degree in computer science we don’t need you.

    …think of it as a targeted helicopter drop.

    your inflation comment is a furphy…otherwise no-one would ever counterfeit money.

  67. Gravatar of Andrew’ Andrew'
    22. January 2014 at 07:54

    Stocks are not a totally random walk. In the most obvious sense that is crazy. One doesn’t wake up to stocks at a million. They walk randomly around something. But fair enough.

    But you are basically are dodging the question. We don’t have to use the stock market even though it is a fine indicator of when people stopped worrying that banks were going bankrupt. We can just say “what most stopped banks from going bankrupt and when did it happen and was it monetary policy or was it a regulatory policy?” Go ahead and ignore that any interpretation of the stock market including the strong EMH indicates it was suspension of mark-to-market requirements. What indicates it was monetary policy working through some unknown mechanism (and by unknown, I mean noone knows) and not the very clear mechanism of banks not being forced into bankruptcy by government policy?

    I think the question is whether Fed and other actions acted through “standard” monetary channels or through balance sheet mechanisms. Please tell me how to word the question to get a direct answer, THANKS!

  68. Gravatar of Andrew’ Andrew'
    22. January 2014 at 08:23

    The other question: it’s really obvious The Fed caused the crisis. It is somewhat less obvious they helped stem the disaster. And you say it was tight money then and looser money now. But what I’ve never seen you discuss is why the easy money of the early 2000s didn’t force them to cause the crisis- a soft landing notwithstanding. So, does loose money only ever help?

  69. Gravatar of One Last Post on Russ Roberts and Me Commenting on Krugman vs. Barro One Last Post on Russ Roberts and Me Commenting on Krugman vs. Barro
    22. January 2014 at 13:29

    […] The only defender of Krugman of whom I am remotely sympathetic in all of this is Scott Sumner (here and […]

  70. Gravatar of Geoff Geoff
    22. January 2014 at 19:37

    Daniel:

    “What if plunging NGDP causes unemployment not because wages are sticky, but because business costs are sticky?

    “What if Geoff weren’t a moron and, for a change, actually looked at the facts ?”

    The facts support an affirmative answer to that question. But my question was not whether it is historically consistent, but whether it is correct in theory, or at least more correct in theory than the theory of sticky wages.

    “But thank you for a fine example of praxeology in action. “Tell you what, guys. I’ll falsify the sticky wages model by supposing wages aren’t sticky. Yeah, that’ll show ‘em.””"

    I wasn’t trying to falsify the sticky wage theory. I was merely proposing a different theory.

    Daniel, you seem to continue mistaking insults and displays of ignorance, for actual knowledge. You must still be smarting from the last tutoring session you had with me.

  71. Gravatar of Ralph Musgrave Ralph Musgrave
    22. January 2014 at 22:22

    Mark Sadowski,

    Your basic point (21. January 2014 at 13:38) is that there are still a huge number of assets the Fed could buy over and above those bought to date. But that doesn’t dent my No.3 monster problem and for the following reasons.

    First, Scott claims that monetary stimulus should never be reversed. At least he said “that monetary stimulus is only effective when it is expected to be permanent, is something I’ve been arguing since 1993, and Krugman picked up on in 1998.”

    So if the Fed constantly buys up debt and the latter is never replenished, then the debt declines to zero, at which point the Fed presumably starts buying other assets (e.g. the foreign debt and “bills of exchange in the open market” which you mention). But if the Fed buys those other assets, it’s exposing itself (i.e. the US taxpayer) to risks that a central bank just should expose itself to. Greek debt anyone?

    But there’s a very simple solution to the latter problem: mix fiscal stimulus with monetary stimulus. Fiscal stimulus consists essentially of the government / central bank printing and dishing out debt to the private sector (government borrows and spends the relevant money, and the Fed then prints money and buys the relevant govt debt).

    Having said that, Scott’s claim that monetary stimulus should never be reversed can actually be broken down into two elements. First there’s the fact that inflation is constantly eating away at the real value of the national debt and monetary base. And if the debt and base are to remain constant relative to GDP (which they actually do in the very long term – a century or more) then the debt and base HAVE TO BE TOPPED UP via fiscal deficits. Plus there is also economic growth: that necessitates even more “topping up” if the latter ratio is to remain about constant.

    Second, let’s assume no inflation and no growth. In that scenario, the debt and base would remain constant in dollar terms, and given a recession, the Fed would buy debt. But if Scott’s “never reverse” idea holds there, then the same problem occurs: the Fed buys assets it should not be buying. In fact I suggest Scott’s “never reverse” idea is invalid there. That is, given no inflation and no growth, a recession would be a temporary aberration, and the logical course of action would be to RETURN debt and base to GDP ratio to their pre-recessionary level at some stage.

    Conclusion: in that monetary policy is as per Scott’s idea never reversed, that’s because of inflation and growth, and that monetary policy ought to be matched dollar for dollar by fiscal “top up”.

  72. Gravatar of Tom Brown Tom Brown
    22. January 2014 at 22:54

    Ralph, forgive me for butting in here, but I’m not getting you on this “never reverse” issue: I thought the important thing was you don’t reverse as long as the NGDP level is under target. You would reverse it if it was coming in over target, right?

  73. Gravatar of Ralph Musgrave Ralph Musgrave
    23. January 2014 at 00:09

    Scott,

    Re cleaning cars and your “21st January 2014 at 16:21” comment, I’m glad you understand that if someone chucks dirt on a car every time the car is cleaned that the cleaning becomes pointless. Now let’s apply that analogy to your “offset” argument.

    If the Fed offsets (chucks dirt on) on fiscal policy, then cleaning a car by employing fiscal policy becomes irrelevant / pointless. But that does not prove (as you argue in your Mercatus article) that therefor cleaning cars by employing fiscal policy is pointless / useless.

    IT MAY BE that fiscal policy is useless for various reasons, like crowding out. But that’s a separate point. I.e. you can’t argue that because there are two ways of achieving X, namely Y and Z and that because X is currently being attained by using Y, that therefor Z is useless.

    AS IT HAPPENS, I’ve got doubts about employing fiscal policy ALONE in a recession precisely because crowding out might be a serious problem. I also think that using monetary policy alone is flawed because it’s distortionary. I therefor favour a mixture of the two, which is what most MMTers, Positive Money and various other groups tend to favour.

  74. Gravatar of Ralph Musgrave Ralph Musgrave
    23. January 2014 at 00:26

    Tom Brown,

    Yes, I’d reverse if NGDP was over target. In fact most people expect QE to be not only tapered, but unwound at some stage. And that would be the correct action if one wants to return to a pre-crisis scenario. However, that rather clashes with Scott’s claim that “that monetary stimulus is only effective when it is expected to be permanent..”.

    But as it happens, I’m far from convinced that returning to a pre-crisis scenario makes sense. That is (as I pointed out in comments above) I agree with the Milton Friedman / Warren Mosler idea that governments / central banks should issue no interest yielding debt or liabilities at all. That is, the only liability they should issue should be base money (and not pay anyone interest on that money). And if we’re going to do that, then QE should continue till all the national debt has been monetised.

    As to the possible inflationary effect of that, that’s easily dealt with by raising taxes (and/or cutting public spending): i.e. to put it bluntly, confiscating the money the people get from the Fed when they sell their Treasuries under the QE program.

  75. Gravatar of Tom Brown Tom Brown
    23. January 2014 at 00:43

    Ralph, I’m glad you agree about reversing (your 1st paragraph). But I don’t think Sumner would disagree. When he’s use the word “permanent” I never had the impression that he meant it couldn’t be revered in order to hit the NGDP level target: just that it shouldn’t be explicitly temporary: w/o any conditions on the state of NGDP. In other words, QE that’s expected to be reversed prior to any movement in NGDP does almost no good. But I guess we’ll find out what Scott really thinks soon enough.

  76. Gravatar of ssumner ssumner
    23. January 2014 at 05:44

    Andrew, Loose money hurts when it leads to excessive NGDP growth, as in the 1960s-1980s.

    Ralph, You said;

    “If the Fed offsets (chucks dirt on) on fiscal policy, then cleaning a car by employing fiscal policy becomes irrelevant / pointless. But that does not prove (as you argue in your Mercatus article) that therefor cleaning cars by employing fiscal policy is pointless / useless.”

    May I remind you that the stupid analogy was yours. Yes, it doesn’t prove my point nor does it advance your point. It has no bearing on monetary offset. So why offer it as an analogy?

  77. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. January 2014 at 08:59

    Ralph Musgrave,
    “So if the Fed constantly buys up debt and the latter is never replenished, then the debt declines to zero, at which point the Fed presumably starts buying other assets (e.g. the foreign debt and “bills of exchange in the open market” which you mention). But if the Fed buys those other assets, it’s exposing itself (i.e. the US taxpayer) to risks that a central bank just should expose itself to. Greek debt anyone?”

    Being from the UK, maybe you’re not aware of this, but Agency bonds and Agency guaranteed securities already come with the implicit backing of the US taxpayer. That’s $7.8 trillion alone, or about 46% of US GDP. The most that the US monetary base ever reached as a percent of GNP was 22.8% in 1946Q1. So even if the US Treasury paid off all of its debt there’s no shortage of US taxpayer backed debt for the Fed to purchase.

    More importantly, central banks are *supposed* to take on risk when necessary. That’s the whole point of being the *lender of last resort*. The idea that a central bank has to be run at a financial profit is quite simply idiotic.

    And in any case how could asset losses possibly affect the Fed? Central banks simply cannot default. The only support the Fed requires is the political support of the US that guarantees the legal medium of payment nature of the dollars it issues. This political support does not require the financial support of the US. It is ridiculous to believe that nations that can, and sometimes do, default are required to provide the financing of an institution that cannot by definition itself default.

  78. Gravatar of Ralph Musgrave Ralph Musgrave
    24. January 2014 at 01:30

    Mark,

    Thanks for your detailed and intelligent responses to my points: more than I’m getting from Scott.

    Re Agency bonds, I’ve just looked up some definitions, and it seems they don’t have any EXPLICIT backing by US taxpayers. As to what IMPLICIT backing they have, only an expert on US politics can answer that, and I don’t have that expertise. But that doesn’t dent my basic point, which to repeat is as follows.

    National debt and monetary base are constantly shrinking relative to GDP, because of inflation and real economic growth. So if the debt and base are to remain about constant in the very long term relative to GDP, then government / central bank just have to top up the base and debt, and that can only be done via fiscal stimulus: to put it simply, by printing and distributing debt and base to the private sector.

    If government / central bank DON’T DO THAT, then the shrinking debt and base constitute a decline in the real value of private sector assets (liquid assets in particular), the effect of which is deflationary. Now if government and central bank counter that by buying sundry assets, then that asset buying will continue till (in the very long run) government and central bank have bought up every available asset: including houses, Exon shares, you name it. And it’s not government’s job to own everyone’s house and all stock exchange shares.

    Alternatively, if there is no growth and no inflation, any monetary stimulus HAS TO BE REVERSED at the end of a recession, else the base would grow constantly relative to GDP (which contravenes Scott and David Beckworth’s “no reversal” idea).

    Re your last two paragraphs (Fed being “lender of last resort” etc) I fully agree that applying traditional ideas about profit and loss to central banks is nonsense. E.g. if the Fed makes a loss if and when it has finally unwound QE, I’m not bothered. But I don’t think you can conclude from that that central banks should be into buying assets that are more efficiently owned and run by the private sector.

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. January 2014 at 06:07

    Ralph Musgrave:
    “Now if government and central bank counter that by buying sundry assets, then that asset buying will continue till (in the very long run) government and central bank have bought up every available asset: including houses, Exon shares, you name it. And it’s not government’s job to own everyone’s house and all stock exchange shares.”

    Over the 94 years from 1919 through 2012 the US monetary base has averaged about 9.4% of GDP:

    http://research.stlouisfed.org/fred2/graph/?graph_id=123169&category_id=0

    The largest the monetary base ever reached was 22.8% of GNP in 1946Q1. The smallest was 4.78% of GDP in 1985Q1.

    The current $31.7 trillion value of assets the Fed is permitted to buy as stipulated the Federal Reserve Act (FRA) is about 188% of GDP.

    There are a total of $219.9 trillion in private assets in the US today, or about 1,300% of GDP:

    http://research.stlouisfed.org/fred2/graph/?graph_id=156668&category_id=0

    Even without Treasuries, which are currently 71% of GDP, I seriously doubt the Fed will ever reach the limits of what it can buy under the FRA, much less own all of the private assets in the US.

    What you are saying right now is bordering on incoherency. Please come down to earth.

  80. Gravatar of Ralph Musgrave Ralph Musgrave
    25. January 2014 at 03:36

    Mark:

    Greetings from planet Earth.

    It doesn’t make any difference how many assets there are out there that the government sector can buy: if monetary stimulus is implemented without fiscal stimulus, then eventually the government sector (i.e. government plus Fed) will swallow up all assets and for reasons I gave above. But long before that, it will be buying assets that the government sector has no business buying, like stock exchange shares.

    A nice illustration of that has been staring us in the face for two years: monetary stimulus has been large relative to fiscal stimulus over the last two years. That process is popularly called “QE”. And that process involves a steady transfer of privately owned assets (i.e. government debt) to the public sector.

    I’ve enlarged on that point in a recent post on my own blog:

    http://ralphanomics.blogspot.co.uk/2014/01/for-every-dollar-of-monetary-stimulus.html

    I wouldn’t have thought thru the points on that blog post had it not been for this exchange of views with you and Scott. So having a good old argument in the comments after a blog post is very constructive.

  81. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. January 2014 at 07:00

    Ralph Musgrave,
    “…if monetary stimulus is implemented without fiscal stimulus, then eventually the government sector (i.e. government plus Fed) will swallow up all assets and for reasons I gave above.”

    But you haven’t given any coherent reasons that I can see. In fact you haven’t even engaged with anything that I have said. Consequently the only person you’ve convinced is yourself. Maybe you should leave yourself a comment on your blog agreeing with yourself. That would complete the loop.

  82. Gravatar of ssumner ssumner
    25. January 2014 at 10:32

    Ralph, When interest rates are positive the base is only 6% of GDP. No danger of running out of assets to buy.

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