Soon after I started blogging, I suggested that the importance of monetary policy would be clearly exposed by the way the recovery from the Great Recession played out. That was true in the Great Depression, where the role of money was not noticed during the first couple years of the 1930s, but became clearer as each country started to recover after they left gold. I don’t think anyone can deny that this prediction has been confirmed in this recovery. Just look at the varying paths of the US, Japan, Britain and the eurozone. One side effect is that we are now seeing much more interest on Fed policy from the left:
JACKSON HOLE Wyo. (Reuters) – Reginald Rounds was among those present at the Federal Reserve’s high-flying monetary conference here, enjoying the chance to button hole two top officials of the U.S. central bank.
The St. Louis resident is neither an economist nor a central banker. He’s a 57-year-old unemployed worker, who said he is trained in the green technology field and can’t find a job.
He was among a group of activists who gathered on the sidelines of the Fed’s annual symposium wearing green t-shirts with “What Recovery?” on the front and a chart depicting sluggish U.S. wage growth on the back.
“From the world where I reside, there is no recovery. We need a boost. We need a jump start,” said Rounds. “The key is jobs creation.”
The ten activists, most of whom were unemployed and seeking jobs, were sent as emissaries for a coalition of advocacy groups that has launched an unusual campaign from the left to press the U.S. central bank to keep monetary policy easy.
Of course these advocacy groups ignored the Fed back in 2009, when monetary stimulus really could have done a lot of good. (Now it can do just a little good.) A few years ago Matt Yglesias said overlooking the importance of monetary policy was “a major intellectual weakness of the progressive movement.” Brad DeLong expressed similar a frustration with the Obama administration.
Why did MMs get there first? Because we have the best model—NGDP growth expectations falling below the implied target is excessively tight money. Even if it looks like money is “extraordinarily accommodative.” And we understand that fiat money central banks rarely run out of paper and green ink.
Here’s Peter Diamond back in 2011, pouring cold water on the recommendations of people like Blanchard and Krugman
Nobel laureate Peter Diamond, whom the Obama administration nominated to fill a vacant seat on the Fed’s board, puts it this way: “If the Fed says we are determined to keep going till we have, say, 4 percent inflation, would that really turn around expectations in a way that would stimulate the economy and create higher inflation? I doubt it.”
And here’s Peter Diamond a few days ago:
“Historians are going to tar and feather Europe’s central bankers,” Peter Diamond, the world’s leading expert on unemployment told UK newspaper the Telegraph at the sidelines of the meeting. “Young people in Spain and Italy who hit the job market in this recession are going to be affected for decades. It is a terrible outcome, and it is surprising how little uproar there has been over policies that are so stunningly destructive,” he claimed.”
It seems awfully cruel to tar and feather people who can’t do anything at the zero interest rate bound. Even MMs merely recommend tar, no feathers.
Seriously, I’m glad the left is coming around to the view that monetary policy is of great importance. I hope they’ll take a look at the school of thought that reached this conclusion in late 2008.
PS. I also have a post on money at Econlog.