We need a commission on stabilization policy

I know, you are gagging on the title of the post.  I hate commissions too.  But there’s already a lot of discussion about a commission to re-evaluate the Fed’s goals and tactics.  And the current proposals are both too much and too little.  Too much because there are some tactical questions that the Fed itself can resolve better than any commission.  But there are also some questions that the Fed currently cannot answer, and where a commission could be very useful to the Fed. I believe the biggest issue now is what to do about stabilization policy in a world that frequently hits the zero bound during recessions. That’s not the world of the past 50 years, but I believe it’s quite likely to be the world of the next 50 years.

Although I don’t recall doing so, it’s quite possible that at some point in the past 6 years I insinuated that Paul Krugman favors fiscal policy because he likes big government.  Perhaps there’s even a grain of truth in that statement.  But there’s also one really big problem with that claim.  Consider:

1.  Paul Krugman strongly supports raising the inflation target to 4%

2.  There is only one justification for raising the inflation target to 4%; it makes it possible for the Fed to handle 100% of the responsibility for stabilization policy.

And it’s not just Krugman; lots of other liberal economists have also favored raising the inflation target to 4%.  Why do I bring this up now?  Because I can just hear commenters saying how naive I am; “liberals will never agree to a plan that eliminates the need for fiscal policy.”  Then why do so many favor 4% inflation target?  And why does Paul Krugman say fiscal policy is pointless when nominal interest rates are positive?

Now I don’t happen to favor a 4% inflation target, and I doubt that this would be the outcome of the commission.  But I do believe the commission’s output would be very useful, even if I don’t “get my way” on fiscal policy.

Both liberal and conservative economists agree on these basic facts:

1.  When trend NGDP growth rates are lower, the economy will hit the zero bound more often.  One option is to raise the inflation target.  The Paul Krugman solution.

2.  Another option is to do something like NGDPLT.  My preferred solution.

3.  Another option is to keep the Fed’s current policy framework, 2% PCE inflation, growth rate targeting, and unemployment near the natural rate.

Economists also agree that option three may require some hard choices.  These include:

a.  Pursuing QE to the limit in a liquidity trap.  Allowing the Fed to buy whatever it takes, even if they have to move beyond Treasury debt.  Telling the Fed not to worry about capital risk, the Treasury has them covered.  My second preference.

b.  Constraining the Fed to buy securities of no more than a specific amount, say 50% of GDP, to avoid excessive risk.  Other options are also possible here, such as more aggressive cuts in IOR, perhaps to negative levels.  Then just live with a slow recovery.  Similar to current policy.

c.  Same as option b, but have an implicit agreement that once the Fed hits its QE limit, fiscal stimulus will take over.  The Larry Summers solution, Krugman’s second preference.

Policy is currently hindered by the fact that the Fed doesn’t know exactly how aggressive it should be, partly because Congress is not even aware of these “hard choices.”  So we don’t have any sort of clear policy regime, rather we drift in a sort of limbo, where the Fed doesn’t really know how much others want it to do.  Or whether it would be scolded for large capital losses on its balance sheet if rates rose sharply.  Or whether Congress would support the Fed if it shifted its target higher in order to keep interest rates above zero.  The Fed knows that politicians are concerned that rates are low for savers, but doesn’t know if that concern implies they’d favor higher interest rates that are caused by higher inflation.

I don’t think this commission is politically feasible until January 2017, but at that time it just might work. I’m assuming the Dems will again win the presidency and the GOP will retain the House.  Gridlock will make fiscal policy impossible unless an agreement can be reached.  If you put sensible conservatives like Taylor, Mankiw and Hubbard on the committee, with sensible Keynesians, they are all going to understand the trade-offs I discussed above.  The GOP economists can explain to GOP politicians “look, it’s inflation or socialism, take your choice.  If we don’t have a bit more inflation then interest rates will fall to zero, and the Fed will keep expanding its balance sheet, bigger and bigger.”  Or we’d get fiscal stimulus, another option the GOP doesn’t like.  The liberal members of the commission can explain to Democrats “look, it’s better if the Fed handles stabilization policy, and fiscal resources are utilized for pressing social needs, not economic stabilization. And in any case, the GOP will never let us do the amount of fiscal stimulus we need, or they’ll insist on tax cuts that ‘starve the beast’.”

Krugman and I may not get our way.  Maybe the commission will compromise on a monetary/fiscal mix, where the Fed takes the lead, but the fiscal authorities act if the Fed ‘s balance sheet hits X% of GDP.  If I lose the battle I’ll stop objecting to fiscal stimulus.  I’ll stop claiming the multiplier is zero.  I’ll stop claiming there is monetary offset.  If that’s clearly the regime, and it’s all spelled out, then so be it. At that point I’ll argue that payroll tax changes are the best form of stimulus.

But right now there is great uncertainty about who is in charge, and what is expected of the Fed.  This stuff really needs to be clarified for the zero bound environment.  Or at least discussed.  I’ll bet the Fed would be thrilled if Congress told them exactly what their responsibilities were in terms of capital losses, instead of leaving it quite vague.

What would Congress decide in the end?  One possibility is keeping the 2% inflation target, and a continual role for fiscal policy.  That’s very possible.  Or Congress might ask the Fed to study options for preventing the zero rate bound from hamstringing monetary policy, and they might buy into a technical fix like level targeting and/or NGDP targeting. I don’t know.  But politics goes in cycles.  After so many years of gridlock, 2017 might be a good time for a compromise.  To make this happen we all have to starting talking up the idea right now—assuming anyone agrees with me.


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59 Responses to “We need a commission on stabilization policy”

  1. Gravatar of TallDave TallDave
    22. June 2015 at 07:08

    A commission’s not a bad idea if handled properly, but I worry it’s going to end up being a foodfight between rightwing goldbugs who want to abolish fiat currency and leftwing socialists who want the Fed to finance deficits for fiscal expansion.

    Then why do so many favor 4% inflation target? And why does Paul Krugman say fiscal policy is pointless when nominal interest rates are positive?

    As soon as the Fed adopts a 4% inflation target or NGDPLT, they’ll immediately pivot to other arguments for increasing government spending. But that doesn’t mean they’re wrong about inflation being too low.

  2. Gravatar of TallDave TallDave
    22. June 2015 at 07:14

    Also, GOP politicians are more worried about their seats than their ideology, as evidenced by the way they dodged responsibility for both the Iran and trade treaties — the right argument to sway them is to point to what happened to the Republican majority in 1932. Too tight monetary policy is not the GOP’s friend, whatever the right wing base says about it.

  3. Gravatar of benjamin cole benjamin cole
    22. June 2015 at 07:27

    Well, maybe a commission on Fed policy will work.
    There is some sort of theo-monetarism afoot that places a pseudo-religious significance upon either zero inflation or minor deflation – – – there is great risk that the gold-genuflectors will end up in charge of the commission.

    And central bankers appear to worship inflation targets. Perhaps that is because they know they can hit an inflation target, while promoting growth is a much more difficult endeavor.

    Tough call…btw I see GOP White House in 2016 (though every candidate seems weak).

  4. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. June 2015 at 08:11

    “Although I don’t recall doing so, it’s quite possible that at some point in the past 6 years I insinuated that Paul Krugman favors fiscal policy because he likes big government. Perhaps there’s even a grain of truth in that statement. But there’s also one really big problem with that claim. Consider:

    1. Paul Krugman strongly supports raising the inflation target to 4%

    2. There is only one justification for raising the inflation target to 4%; it makes it possible for the Fed to handle 100% of the responsibility for stabilization policy.”

    I don’t see why favoring big government and supporting increasing the inflation target to 4 percent are inconsistent. In fact, the latter seems highly consistent with “big government” and “big spending”. Doesn’t a 4 percent target help monetize the existing debt? And, when all the existing debt is rolled over to the new “4 percent normal”, wouldn’t those same folks advocate a 6 percent inflation target?

  5. Gravatar of Jeff Jeff
    22. June 2015 at 08:31

    If the Republicans win the presidency, which seems very likely to me, how would that change your view?

    On a different note altogether, I’ve been thinking recently that appointing academics to policy decision making roles is a bad idea. Often they have staked out strong positions on controversial issues, but issues are usually only controversial when the evidence for both sides is pretty weak. If one side was clearly right on the evidence, there wouldn’t be a controversy to begin with.

    So there’s something close to a 50 percent probability that, on any given controversial issue, a policy maker’s initial views are actually wrong. Not because he’s stupid, but just because that’s the nature of controversy. So maybe we want policy makers to be people who don’t have a lot invested in one side or the other. It’s fine, and probably even desirable, that they are advised by experts who take strong stands. But the decision makers themselves should be people who feel free to change their minds as new evidence comes in.

    I could try to relate this to monetary policy, but I probably better leave that to you.

  6. Gravatar of Tom Brown Tom Brown
    22. June 2015 at 08:38

    Scott, this is a very intriguing idea.

  7. Gravatar of collin collin
    22. June 2015 at 08:45

    My big question is the post-Great Recession era did the Fed really do such a poor job the last 8 years? In all reality, in terms of stable prices, haven’t the US prices since 2010 been the most in our history? Isn’t the unemployment lower during Obama’s Seven Year than under Reagan’s Seventh Year of Presidency? (Yes, I know labor supply is a bigger portion here but it is worth thinking about.)

    By 2015, I am wondering if MacroEconomics is hitting a new threshold of a different global economy than the old models of the past. I still find the most extraordinary story of our time is the huge rise and slow decline of Japan the last 45 years.

  8. Gravatar of Ray Lopez Ray Lopez
    22. June 2015 at 09:24

    Step zero, before start designing a camel: prove that the Fed has some influence in the economy. Show it with statistics (econometrics). I cited the Christiano et al paper* to show it does not (60% confidence used not 95%).

    Ball back in your court. Whatcha gonna do, cite Friedman’s Thermometer?

    C’mon Sumner, quit trolling us readers. We demand evidence that the Fed moves the economy. You and your followers have hid behind a wall of rhetoric long enough. Mr. Sumner, tear down this wall!

    * * Lawrence Christiano, Martin Eichenbaum, Charles Evan, “The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds”, Review of Economics and Statistics, February 1996, 78-1, cited in Olivier Blanchard “Macroeconomics”, 2nd edition., p. 96, 5-6, ‘Does the IS-LM Model Actually Capture What Happens in the Economy?’ Shows that for data 1960 to 1990, that a 1% increase in Fed funds rate shows, over 4-8 quarters, a decrease in sales, decrease in output, decrease in employment, increase in unemployment rate up to 6 quarters (then a decrease after 8 to the original level). However, the “confidence band” is only 60% probability, not the usual 95% confidence interval.

  9. Gravatar of Steve Steve
    22. June 2015 at 09:28

    I think the GOP will win 2016. Do you think a Bush, Walker, or Rubio WH will benefit monetary reform more than Clinton?

  10. Gravatar of Matt Waters Matt Waters
    22. June 2015 at 10:30

    Krugman would first say a 4% inflation process over the long-run, outside of what they believe is a liquidity trap, marginally reduces unemployment versus a 2% inflation target. I agree with that. It depends on the variance between sectors and jobs of the rate of change in market-clearing real wage.

    Krugman would also say, even if monetary policy outside of interest rates is ineffective, a 4% inflation rate prevents the central bank from tightening too soon. Under the assumption of an “expectation-less environment,” I agree. Such an environment without expectations:

    1. Has monetary policy effective only in interest rates, either in the short-run or long-run versus QE.
    2. Then only fiscal stimulus and long-run replacement of basic necessities ultimately increase AD.
    3. But once AD IS increased, it’s up to the central bank for when they start raising interest rates. In the long-run, the central bank will target a rate of inflation which will also determine a long-run rate of unemployment.

    It’s a consistent worldview, but under a wrong assumption: the world without expectations. The math and evidence though just doesn’t bear that out. The NGDP growth would have been much less and the recession FAR more painful if the simple Keynesian math held up.

  11. Gravatar of ssumner ssumner
    22. June 2015 at 11:27

    Talldave, You said:

    “As soon as the Fed adopts a 4% inflation target or NGDPLT, they’ll immediately pivot to other arguments for increasing government spending.”

    Increased government spending is not the sort of fiscal policy I was referring to. I meant fiscal policy as stabilization policy. For instance, countercyclical government spending is fiscal policy.

    And I very much doubt whether any goldbugs would be put on the commission. You’d have to have at least some sort of credentials.

    Ben, Jeff and Steve, I’m 59 years old and I’ve yet to see a party win the presidency that I didn’t expect to win. Could happen, but don’t bet on it. (I’ve won money on the last two races.)

    Vivian, You said:

    “I don’t see why favoring big government and supporting increasing the inflation target to 4 percent are inconsistent.”

    I never said they were. Read my post again. No wonder you like to claim I’m being intentionally dishonest.

    You said:

    “And, when all the existing debt is rolled over to the new “4 percent normal”, wouldn’t those same folks advocate a 6 percent inflation target?”

    I doubt it, but of course I don’t favor the 4% target either. The 4% target is certainly not being advocated as a way to “monetize the debt.”

    Jeff, I don’t see how appointing incompetent people is better that competent people, even if the latter group is often wrong on controversial issues.

    Thanks Tom.

    Collin, The natural rate of unemployment was much higher back then, and Reagan inherited 13% inflation. So the answer is “yes, they did a poor job.”

    Ray, It’s cute to see a child use terms like “econometrics.”

    Steve, I don’t think it makes much difference who’s in the White House. Or at least I see very little evidence that it matters.

    Matt, You lost me there somewhere.

  12. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. June 2015 at 11:56

    Scott,

    I read it again. You don’t think that when you write:

    “I insinuated that Paul Krugman favors fiscal policy because he likes big government. Perhaps there’s even a grain of truth in that statement. *But there’s also one really big problem with that claim. Consider:*” (my emphasis)

    followed by:

    “1. Paul Krugman strongly supports raising the inflation target to 4%”

    doesn’t mean that the former claim (that Krugman favours fiscal policy because he likes big government) is contradicted by the latter (that he strongly supports raising the inflation target to 4%”?

    If not, what’s the big problem?

  13. Gravatar of collin collin
    22. June 2015 at 12:22

    Why was the natural rate of unemployment higher under Reagan 1980s than today 2010s? Wasn’t the crash of 2008 of the Reagan-Bush boom of couples overworking for higher home payments just as big as the crash of 1980 when the high wage blue collar factory era crashed? 1982 Recession was the last Fed induced recession and layoffs meant workers were hired back to jobs after the recession. Considering how productive the US economy is today, isn’t it harder for people to find replacement jobs so wouldn’t the natural rate be higher or relatively the same? Considering the size of the Great Recession compared to S&L or Dotcom bust, didn’t the private job come back the quickest under the Great Recession?

  14. Gravatar of Blue Eyes Blue Eyes
    22. June 2015 at 12:25

    Obviously as a Brit, I am relunctant to suggest how our cousins might like to do politics, but… Why doesn’t a set of politicians stand for election, campaigning for a set of policies and then if it wins, it has a mandate for putting those policies into effect?

    We just had an election where parties stood on a variety of fiscal platforms, but everyone seems to have accepted a monetary consensus of medium-term inflation-targeting.

  15. Gravatar of Kenneth Duda Kenneth Duda
    22. June 2015 at 14:12

    Hi Scott, thanks for the note.

    I like this post. I like the idea of a commission on stabilization policy. I like your framing of the fiscal stimulus issue, which I’d express as: fiscal stimulus makes sense when the monetary and fiscal authorities agree that (1) AD needs boosting, and that (2) the monetary authority won’t/can’t/shouldn’t boost AD through monetary loosening.

    Some non-MM (not yet MM?) folks in the blogosphere seem to believe that the idea of full monetary offset is somehow core to MM, that one cannot support MM without also insisting that fiscal stimulus is always useless. I don’t see how that’s true. The core MM message I have received is:

    1. NGDPLT: the central bank should set a level-path of desired NGDP, and then set policy instruments to target the forecast of the future NGDP level, adjusting policy instruments until the forecast says the Fed will hit its level-path target.

    2. Prediction market: rather than doing its own NGDP forecasting, the Fed should outsource it.

    To me, it seems imaginable that the prediction market might say, “Sorry, folks. No matter what the Fed does with its policy instruments, it will undershoot its NGDP level target.” Now maybe that just can’t happen. But suppose it did. Surely a good MM’er would ask the fiscal authority for fiscal stimulus (tax reductions, spending increases) to help the economy hit the Fed’s NGDP level target?

    So it seems to me that MM, far from excluding fiscal stimulus, in fact sets up a framework within which we can assess when fiscal stimulus is necessary (namely, when the prediction markets tell us that no policy instrument settings will enable the Fed to hit its targets), and possibly even how much we need (if we can somehow operate a prediction market for that too.)

    -Ken

  16. Gravatar of Matt Waters Matt Waters
    22. June 2015 at 14:50

    “Matt, You lost me there somewhere.”

    Sorry. My first paragraph, at least, was worded too densely. I didn’t want to go on too long.

    Let’s say an economy has 100 different types of jobs, each type of job earns the same wage. Unemployment should happen when that wage for job i (out of 100) is higher than the market-clearing wage.

    Keeping the labor/capital ratio constant, if NGDP per working hour goes up by 3%, then the total paid to labor (each of the 100 jobs) per hour goes up by 3%. But technology or changing consumer tastes could have that growth unevenly spread among the 100 categories. If each of the 100 categories has a constant number of working hours available, then the wage increase for that sector equals the NGDP increase per hour for that sector. But if the NGDP decreases for that sector, the wage does not decrease and rather unemployment is created for that sector. Either the unemployed change sectors or that sector stays underutilized.

    A 4% inflation rate translates to a higher NGDP rate, which means less sectors see nominal market-clearing wage go down. Sorry, I was just trying to say basic Phillip’s curve stuff, but got bogged down in trying to be exact in my argument.

    For the second part, Krugman or traditional Keynesian arguments see a simple “lower interest rates = increased loan demand” framework. I see that framework as “expectation-less.” Yeah, I can see how that would lose people.

    I’ll try to put it another way. Krugman sees NGDP or AD as purely mechanical at the zero-bound. Either money gets spent on fiscal stimulus or it remains in a bank account earning zero or 0.25% interest.

    Krugman has said that an alien attack would dramatically increase AD, even without fiscal stimulus. If people really desire cash in a “liquidity trap,” they’re not likely to buy yachts but they will certainly replace their home. Keynes also said AD, over the long run, will eventually increase as basic things depreciate and degrade, again even without fiscal stimulus.

    So in Krugman’s mind, once AD increases for whatever reason, it’s important to let AD keep increasing and not to tighten monetary policy too soon. Krugman basically says it’s not really possible for central banks to do good in a liquidity trap, but it’s very possible for central banks to do evil by raising rates too soon.

    Having a higher inflation target then makes sense even in a framework where monetary policy is ineffective past going to 0% interest rates. An inflation target sets a strict parameter before the central bank raises rates and a higher inflation target allows AD growth to reach a rate with less unemployment than a lower inflation target.

  17. Gravatar of Don Geddis Don Geddis
    22. June 2015 at 14:58

    @Vivian Darkbloom: You do seem to be having a subtle logic problem. In your recent comment, you say: “doesn’t mean that the former claim (that Krugman favours fiscal policy because he likes big government) is contradicted by the latter (that he strongly supports raising the inflation target to 4%”?” Yes, that’s true.

    But in your earlier comment, you said: “I don’t see why favoring big government and supporting increasing the inflation target to 4 percent are inconsistent.” That’s not at all the same thing.

    Krugman’s support of 4% inflation, certainly contradicts something. But what? It contradicts the implication that “Krugman favours fiscal policy because he likes big government”. What we are left with, instead is: (1) Krugman favors fiscal policy [for some unknown reason independent of his love of big government]; and (2) Krugman also favors big government.

    But (1) and (2) are not inconsistent, and nobody ever claimed that they were.

  18. Gravatar of Benny Lava Benny Lava
    22. June 2015 at 16:24

    Not sure why so many comments think the GOP will win 2016. Seems like a real longshot to me. Now if we’re talking 2020 maybe.

  19. Gravatar of benjamin cole benjamin cole
    22. June 2015 at 16:27

    I think the real action is in appointments to the Federal Reserve Board, and also who gets selected as regional Fed presidents. ( I have traded emails with the famous Ken Duda on the score).

    If Market Monetarists could become effective in helping to select appointments to the FOMC, that my top anything a commission does…

  20. Gravatar of Bonnie Bonnie
    22. June 2015 at 17:49

    I’m game for a talking up the idea of a commission. If we left the politicians to decide amongst themselves, we’d get the politically expedient solution that features the ideas Fisher, Plosser, and Taylor like best. And since these choices are profoundly important, they need to be suberly discussed with all due rationality and seriousness. We’d need to not only suggest a commission, but at the same time, also suggest members from ‘team rational’ to help avoid the danger of it being stacked with people who believe there is no possible state of the universe where money can be too tight because prices adjust.

  21. Gravatar of Ray Lopez Ray Lopez
    22. June 2015 at 18:44

    Sumner’s response, let the record show, on my long and detailed post asking for proof the Fed influences the economy, after I cite evidence that fails to prove any relationship: “Ray, It’s cute to see a child use terms like “econometrics.””

    That’s it? That’s all you got? Cite me please ONE econometrics study that shows the Fed influences the economy, even short term, with 95% confidence, and I’ll go away. And you win. If there’s ‘hundreds’ of such studies, as you claim, isn’t it worth it to take a few seconds and cite one such study? Unless you secretly enjoy me bashing you. Your move.

  22. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    22. June 2015 at 18:46

    What is nice about NGDP targeting is that it is simple, does not imply difficult “educated guesses” about nice but useless concepts such as NAIRU, potential RGDP, etc. It can be done by a robot. Please don’t make achieving macro stability impossible by creating even another “experts forum” that will inevitably be biased and will screw up big time eventually.

  23. Gravatar of Ray Lopez Ray Lopez
    22. June 2015 at 18:50

    @ (brainwashed) Bonnie- “also suggest members from ‘team rational’ to help avoid the danger of it being stacked with people who believe there is no possible state of the universe where money can be too tight because prices adjust.” – LOL Bonnie! Bonnie does not believe in non-sticky prices; she also thinks the sun revolves around the earth. Let’s recast this sentence of yours for medieval times, since you and Scott’s minions are so forward thinking (ahead of your time, namely, the medieval ages): ‘also suggest members from ‘team irrationonal’ to help avoid the danger of it being stacked with people who believe the earth revolves around the sun in the universe’ – dangerous ideas them!

  24. Gravatar of ThomasH ThomasH
    22. June 2015 at 18:52

    There will always be a role for “fiscal policy” (higher deficits during recessions) because that is what good old fashioned, income maximizing, microelectronic, prudent fiscal management calls for. [I assume that whatever policy instruments the Fed uses to stabilize its target variable will result in real interest rates falling and resources with market prices above their opportunity costs so long as the Fed’s target variable is below it’s optimum level.]

    Keynesian economics has never been about the size of government; that a “conservative” canard. It is true that Keynesian oppose “austerity,” using the deficit as as excuse for reducing the size of government, but that’s because such a policy is inconsistent with the NPV rule

  25. Gravatar of Don Geddis Don Geddis
    22. June 2015 at 19:32

    @ThomasH: “There will always be a role for “fiscal policy” (higher deficits during recessions) … It is true that Keynesian oppose “austerity,” … but that’s because such a policy is inconsistent with the NPV rule

    No, it is you who completely misunderstands Keynesian proposals. Additional projects undertaken because more projects wind up with positive NPV is not the subject matter under discussion. Keynesians propose doing projects with negative NPV (during deep recessions), in order to stabilize aggregate demand.

    It is this proposal, whether countercyclical fiscal policy should be used to control AD, which is under debate. Not your idea about natural deficit expansion due to NPV calculations.

  26. Gravatar of Don Geddis Don Geddis
    22. June 2015 at 19:41

    @Ray Lopez: “Sumner’s response, let the record show, on my long and detailed post asking for proof the Fed influences the economy…: “Ray, It’s cute to see a child use terms like “econometrics.”“

    Liar. You were already referred to A Monetary History of the US, a study so detailed and a book so influential, that professional macroeconomics changed after it was published. Which you immediately dismissed, not based on any of its brilliant content, but instead because it was published in the 1960’s.

    It’s no surprise that the material is over your head. But please, let’s stop with the idea that there is no evidence that Fed actions influence the economy. There are mountains of evidence, for anyone who cares to look. The fact that you personally can’t understand any of it, really isn’t very significant.

  27. Gravatar of Jeff Jeff
    22. June 2015 at 20:32

    @Scott,

    If the Dems nominate Hillary Clinton, they will lose. Their best hope is someone like Mark Warner, but heavyweights like him are not going to get into the race until Sanders or O’Malley show she’s vulnerable. And by then it may be too late. Remember, Hillary was supposed to waltz to the nomination 8 years ago, but got beat by a freshman senator in his first actual contested campaign. She is a poor campaigner, and there are huge numbers of voters who really, really dislike her.

    On my other subject: Are you saying Greenspan and Volcker were incompetent? More so than Arthur Burns and Ben Bernanke?

  28. Gravatar of Postkey Postkey
    23. June 2015 at 00:22

    @collin

    “I still find the most extraordinary story of our time is the huge rise and slow decline of Japan the last 45 years.”

    Professor R. Werner offers an ‘explanation’ for the huge rise and slow decline of Japan in the last 45 years, backed up with corroborative econometric evidence in his book:
    Werner, Richard (2005), New Paradigm in Macroeconomics, Basingstoke: Palgrave Macmillan”
    Or,
    “Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy” 30 Apr 2003
    by Richard Werner
    “These puzzles remain unexplained by orthodox theory. The monetarist prescription to increase high-powered money (or their subset, bank reserves) had been predicted to fail (Werner, 1995a,b,c) and did fail to deliver, when the Bank of Japan adopted it in 2001 (under the mis-appropriated label ‘quantitative easing’; this concept had earlier been proposed and correctly defined by Werner, 1995c). The Keynesian and post-Keynesian prescription of fiscal expansion had been predicted to fail (Werner,1995a,b,c) and did fail to stimulate the economy – each package under performing the ever more modest expectations of government and private-sector economists – and merely left it saddled with record debt.  The so-called ‘credit view’ approach (consisting of the credit rationing argument a la Stiglitz and Weiss, 1981; the bank lending channel, a la Bernanke and Blinder, 1988, and the balance sheet channel – see Bernanke and Gertler, 1995) failed, as interest rate policy failed to have an additional positive impact via the bank lending channel, and as it remained inexplicable why impaired banks should be a problem in an economy with a thriving non-bank sector, healthy and hungry foreign banks and foreign lenders, and capital markets that were more deregulated than ever before. As noted above, the supply-side prescription to deregulate, liberalise and privatise in order to stimulate the economy also failed (as predicted by Werner, 1995a,b,c; 1996a,b; see also Werner, 2004a). Finally, the almost universal prescription to lower interest rates had been predicted to fail (Werner,1995a,b,c) and did fail to stimulate the economy despite a record number of consecutive interest rate reductions and record-low interest rates.”
    https://www.academia.edu/9867605/Financial_Crises_in_Japan_during_the_20th_Century

  29. Gravatar of Postkey Postkey
    23. June 2015 at 00:50

    @ThomasH

    “Keynesian economics has never been about the size of government; that a “conservative” canard.”

    This is the ‘conservative’ objection?

    “Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; . . . ”
    http://cas.umkc.edu/economics/people/facultypages/kregel/courses/econ645/winter2011/generaltheory.pdf

  30. Gravatar of Mike Sax Mike Sax
    23. June 2015 at 03:11

    I think you’re on the right track here, Scott. At least IMHO.

    You’ve made an assumption here I think is correct. Even if the Fed can do it all on its own, it’s too timid to do it if it thinks it’s getting too far ahead of Congress.

    I admit I personally find you being a little less rigid about fiscal stimulus disarming.

    The truth is I probably would take NGDP targeting without fiscal stimulus if that’s the best the political situation would allow.

    But I took you as being so stubborn on fiscal policy that this made me very stubborn in arguing with you even though in a sense it’s a totally hypothetical discussion anyway.

    AS long as there is a GOP House stimulus is not in the cards.

    So I like the idea of the Commission but I think that conservatives and libetarians have their work cut out for them in the next year and a half getting the GOP House used to the idea of being so cooperative with a Hillary Clinton White House.

  31. Gravatar of Mike Sax Mike Sax
    23. June 2015 at 03:14

    Ie, for this idea to be successful it will help if you share this proposal next time you write at the National Review or chat with Larry Kudlow

  32. Gravatar of Mike Sax Mike Sax
    23. June 2015 at 04:01

    Obviously just my take: Sumner goes constructive

    http://diaryofarepublicanhater.blogspot.com/2015/06/scott-sumner-takes-it-down-notch.html

  33. Gravatar of Ray Lopez Ray Lopez
    23. June 2015 at 07:23

    @Don Geddis – I’m asking for an ECONOMETRICS argument that proves the Fed influences the economy, not a Austrian ‘thought experiment’ nor a revisionist history account like Friedman’s Monetary History. Data, dude, data. Until you show me the econometrics study, you got nothing.

  34. Gravatar of SG SG
    23. June 2015 at 07:29

    Eric Rosengren on monetary offset, from a speech at a central banking conference in May 2013:

    http://www.bostonfed.org/news/speeches/rosengren/2013/051613/index.htm?wt.src=rss

    “As I mentioned a moment ago, fiscal policy is just one of the many factors that the Federal Reserve considers in policymaking, but one can see how the central bank – pursuing its dual mandate – would be likely to adopt a more accommodative monetary policy stance if government spending were contracting in the midst of an economic recovery.”

    “Contrary to the notion that policy has not succeeded, I would actually say that monetary policy has been quite effective in offsetting the contractionary effects of recent fiscal policies.

    “In sum, fiscal restraint during the recovery has been notable and naturally has factored into the recovery’s pace. While the sectors that are sensitive to monetary policy have responded to the Fed’s accommodative policy actions, the results have not fully offset the headwinds, fiscal and otherwise, that we have seen. The overall result has been economic growth around 2 percent, and only a very gradual improvement in labor markets.”

  35. Gravatar of collin collin
    23. June 2015 at 07:45

    Thanx for the Japanese feedback and it still appears Japan has busted every Macroeconomic theory from my 1990 economic textbook.

    1) Is captial especially manufacturing and ditigal getting so productive that there is a limit of need of capital stock and creating a global liquidity trap? (Yes I assuming the negative rates can happen but is not a stable environment.) Who knows where interest rates would be without China investing internally and externally. And sooner or later there will be a bust.

    2) The other modern contradiction is like Japan or Singapore. The richer the society the less we can afford having children which long run limits the (10 – 20 years) AD & (20 – 30 years) AS curves.

  36. Gravatar of Major.Freedom Major.Freedom
    23. June 2015 at 08:35

    On dome on Ray there are lots of econometrics studies.

    I did one just a minute ago. Collected the data, ran a regression, and confirmed my theory, all the span of a minute.

    Did you know that the nominal dollars stolen shows a very strong correlation with the nominal dollars in existence? R is about 0.98 for that regression.

    This confirms the theory that theft boosts inflation.

    Try it!

    For the Fed, all you have to do is show a correlation between what the Fed does, and some “good” statistic out there, and poof, your theory is confirmed that the Fed influences the economy in a “good” way. But don’t say good! Be pragmatic and hedge your statements. Say things like “this is least destructive”, or ” given the Fed exists, this is best”, stuff like that.

    Don’t ever mention the negative effects of the Fed’s “optimal” policy. You will be guaranteed to hear all the good that “on net” swamps those negatives out the window. Free lunches to be had! Praise Jeebuz. Socialism FTW.

  37. Gravatar of We need a commission on stabilization policy « Economics Info We need a commission on stabilization policy « Economics Info
    23. June 2015 at 10:01

    […] Source […]

  38. Gravatar of bmcburney bmcburney
    23. June 2015 at 10:33

    “If I lose the battle I’ll stop objecting to fiscal stimulus. I’ll stop claiming the multiplier is zero. I’ll stop claiming there is monetary offset. If that’s clearly the regime, and it’s all spelled out, then so be it. At that point I’ll argue that payroll tax changes are the best form of stimulus.”

    Do you mean that “losing the battle” will establish the value of fiscal stimulus, the mltiplier will change and that there will no longer be a monetary offset? If not, that rather suggests your opinions (or at least the opinions you offer to the public) are not honestly held.

    And who are you offering to sell your virtue to anyway? Is there really some group out there saying to themselves “if only we could get Sumner to back off on his pro-monetary offset rhetoric I would be willing to support a stablization commission”?

  39. Gravatar of Morgan Warstler Morgan Warstler
    23. June 2015 at 10:42

    Somebody should form a commission!

  40. Gravatar of Anthony McNease Anthony McNease
    23. June 2015 at 11:29

    Scott, I don’t know if you saw it or not, but Lars had a very interesting (to me at least) post about just this subject, you and your role here. His thesis is that you “won” the argument and that the Fed has actually switched to targeting 4% NGDP.

    “So if we have a NGDP target then the central bank basically pegs M*V, which means that if the growth rate in Y drops (the Great Stagnation story) then the growth rate of P (inflation) will increase.

    So we see that under an NGDP targeting regime the causality runs from M*V (and Y) to P. Inflation is so to speak the residual in the economy.”

    Lars admits though that this is his speculation and that we don’t know what the policy regime actually is.

    http://marketmonetarist.com/2015/06/07/does-y-determine-mv-or-is-it-mv-that-determines-p/

  41. Gravatar of Liberal Roman Liberal Roman
    23. June 2015 at 12:12

    Jaw dropping post by Krugman where he finally admits to not getting 2013 right:

    http://krugman.blogs.nytimes.com/2015/06/22/2013-and-all-that/?module=BlogPost-Title&version=Blog Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body&gwh=E5A6B7D5B5EE6B8BCD76F94085CA87D8&gwt=pay&assetType=opinion

    Money line from Krugman to Sumner and his critics: “If gotcha is all you’ve got, then you’ve got nothing.”

    This is from the man who plays gotcha more than anyone else.

  42. Gravatar of o. nate o. nate
    23. June 2015 at 13:07

    Liberal Roman- I think that’s why it’s important when making predictions to sketch out the model that’s driving the prediction as well. When Krugman predicted contraction in 2013, he made it clear his reasoning was based on the Keynesian effect of government spending. So if the contraction didn’t come to pass, but he can go back and say government spending changed less than I thought it would, that’s a reasonable defense, since he was up-front about his model. That’s a bit different from someone who said “inflation is coming” back when QE started, but didn’t spell out their model. In that case, the prediction is all they have, so if it doesn’t come to pass, they don’t have a defense against the gotcha.

  43. Gravatar of flow5 flow5
    23. June 2015 at 14:59

    “the model”

    There’s only 1 model. Everything that’s happened in the last 35 years was predicted in June 1980.

  44. Gravatar of Don Geddis Don Geddis
    23. June 2015 at 15:42

    @o. nate: You’re giving Krugman too easy a pass. The eventual data was not especially different from his estimate at the time. The result was not at all what he predicted. What Krugman is doing now, is using hindsight to find other aspects of the economy that allow him to tell a new story where Keynesianism still works. But the very important part, which you are in danger of letting him get away with, is that, in early 2013, Krugman (and the other 350 signers of the letter) never mentioned the contingent nature of their prediction, never mentioned these “other aspects”, which now, in hindsight, seem to have been so critical to their model.

    It is simply false that “the contraction didn’t come to pass”. The fiscal cliff that everyone was worried about, did indeed come about much as everyone expected. The story now is that it was offset by “other stuff”, or that the (correctly predicted) magnitude was too small a % of GDP to matter. But there is nothing in the original 2013 predictions that did not come to pass. Except the final outcome, of course.

  45. Gravatar of ssumner ssumner
    23. June 2015 at 16:31

    Vivian, You said;

    “I don’t see why favoring big government and supporting increasing the inflation target to 4 percent are inconsistent.”

    I never said they were inconsistent, indeed I strongly believe that Krugman supports big government, and I strongly believe he supports a 4% inflation target, and I see no inconsistency in the two beliefs.

    However I do not think it’s necessarily the case that he supports fiscal stimulus because he supports big government. You obviously must have misread what I wrote.

    I see Don had the same reaction.

    Collin, Many factors go into the natural rate, but as far as I know almost all economists agree that the natural rate was higher back then. The data seems pretty clear. In late 1980 and early 1981 NGDP was growing at over 19% a year and unemployment was over 7%. That’s pretty bad.

    Blue Eyes, Because we don’t have an effective system of governance, like Britain has.

    Ken, I agree. I don’t think monetary offset is necessarily a core MM idea, although I would say it is a MM idea, which helps distinguish at least one strand of MM. I am pretty sure that some of the MMs don’t agree with me on monetary offset, or just partially agree. Even I don’t think it always works.

    Matt, OK, that makes more sense. The two zero rate problems are the argument for higher NGDP growth. Both wages increases and interest rates are hard to cut below zero.

    Benny, I agree.

    Ray, I gave you the most famous one, and you thought it was a “paper” (It’s a book. But I’m still ROFL about your comments that Bermuda was a developing country that had overfishing. You really feel a need to add comments everywhere, don’t you? Even if you know nothing about the subject.

    Thomas, You said:

    “Keynesian economics has never been about the size of government; that a “conservative” canard.”

    Yup, and that’s my next post.

    More to come . . .

  46. Gravatar of ssumner ssumner
    23. June 2015 at 16:39

    Jeff, The Dems are moving left—Warner has no chance.

    Mike, My views are unchanged, it’s all about the framing effects.

    Thanks SG, good quote.

    Collin, Population growth is a big factor, but it limits AS, not AD. BTW, Singapore’s pop. is rapidly growing.

    bmcburnay, That’s kind of funny, but no, my views are not up for sale. I meant that the reality would be not what I currently believe it to be. Either reality would change, or I’d be proved wrong.

    Anthony, I’ve seen that, but I think it’s a 3% de facto target.

    Liberal and o. nate, I have a post over at Econlog in response.

  47. Gravatar of TravisV TravisV
    23. June 2015 at 16:41

    Good stuff from Noah Smith:

    http://www.bloombergview.com/articles/2015-06-19/civility-breaks-out-among-the-economics-wonks

    http://www.bloombergview.com/articles/2015-06-23/economists-spend-less-time-playing-in-made-up-world

  48. Gravatar of ThomasH ThomasH
    23. June 2015 at 17:15

    @ Postkey

    You cite only one Keynesian and even that quote does not support the idea that the objective of “counter-cyclical” deficits is to expand government. I suspect that “conservatives” project on “Keynesians” a supposed desire to use recessions to expand government because “conservatives” want to use recessions to shrink government without making the case that expenditures x, y, or z flunk the NPV rule.

    @ Don Geddis
    I think you underestimate how elastic an investment schedule could become as the borrowing rate approaches zero. I do agree that, politics being politics, expenditures will not be perfectly matched to the NPV rule during recessions, but neither are they at full employment.

  49. Gravatar of Ray Lopez Ray Lopez
    23. June 2015 at 18:03

    @MF – show your work, what is “dome”? Use this, it’s anonymous: http://www.heypasteit.com/

    Note the Fed follows the market so it’s correlation not causation. To show causation you must ‘lag’ the market from the Fed. And if you do so, the Christiano paper which I cite (and which Sumner agrees with) only shows 60% confidence band not the standard 95%, showing it could be chance the Fed leads the market. I want 95% confidence level.

    @Sumner- you did not understand me if you think I said Bermuda is a developed country. I said there’s overfishing all over the world, that’s all. Take your blinders off man.

  50. Gravatar of Michael Byrnes Michael Byrnes
    24. June 2015 at 02:49

    How much monetization of debt can really be achieved through periodic planned increases in the inflation target? In a nation with a large budget deficit, won’t some of the gains of monetization get offset by higher interest rates on new borrowing?

  51. Gravatar of Major.Freedom Major.Freedom
    24. June 2015 at 02:52

    Meant to write “Oh come on..”

    Autocorrect shenanigans.

  52. Gravatar of Major.Freedom Major.Freedom
    24. June 2015 at 03:00

    Another one:

    Taxes collected is positively correlated with economic booms.

    That confirms the theory that taxation causes economic booms.

    One more:

    Money that people choose to spend out of their balances is positively correlated with economic booms and negatively correlated with economic recessions.

    This confirms the theory that recessions are caused by people choosing to spend less out of their balances.

    I know I know, “MF, correlation does not imply causation.”

    OK, I’ll retract all the above.

  53. Gravatar of Mike Sax Mike Sax
    24. June 2015 at 07:54

    Understood. Some ways of framing the issue might be more efficacious.

  54. Gravatar of Mike Sax Mike Sax
    24. June 2015 at 08:04

    Or put it this way: I find the new framing effects more constructive.

  55. Gravatar of ssumner ssumner
    24. June 2015 at 08:15

    Ray, You said:

    “I said there’s overfishing all over the world, that’s all.”

    In Bermuda?

  56. Gravatar of Ray Lopez Ray Lopez
    24. June 2015 at 08:51

    @sumner – “Ray, You said:

    “I said there’s overfishing all over the world, that’s all.”

    In Bermuda?”

    I’m not an expert on sustainable fishing (and neither are you, though you’re an self-styled expert on the American beaver) but I believe that salt water fishing is unsustainable all over the world, from a podcast of a prominent woman marine biologist I heard a while ago (she’s a vegetarian). Sad but probably true. OT, I might get involved in tilapia fishing, which is popular here in rain-soaked southeast Asia. The biggest problem with tilapia fishing, besides disease, is that all your fish fries must be male, since a single female will cause too many tilapia to be born, and they become stunted and undersized.

  57. Gravatar of bmcburney bmcburney
    24. June 2015 at 09:16

    ssumner,

    That’s what I thought you meant. If that’s the case, however, I think you omitted about a paragraph of transition/explanation from your post.

    As to the main point of the post, for what it’s worth, I guess I sorta think democracy is a better political system than fascsim.

    Although fascism has the benefit of producing “better” policy outcomes (with “better” defined, as it normally is, as whatever academics and economists happen to believe at a given time), history has tended to show that academics and enconomists are not all that good at devising effective (or even non-disastrous) public policy. Most of the human tradgey seen since 1918 has been the result of some guy with tenure (the type of guy that gets put on a commission) getting a brainstorm of some kind.

  58. Gravatar of Student Student
    26. June 2015 at 13:00

    Jesus, how did I miss this? One of your better posts.

  59. Gravatar of ssumner ssumner
    26. June 2015 at 14:07

    Ray, Oh, you once heard a podcast on fishing, well then never mind.

    bmcburney, You said:

    “Although fascism has the benefit of producing “better” policy outcomes (with “better” defined, as it normally is, as whatever academics and economists happen to believe at a given time)”

    I’m not sure many experts favored WWII or the Holocaust.

    Thanks Student.

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