One reason I like Matt Yglesias’s blog is because he is much less “tribal” than most other bloggers of the left and the right. Here he takes a shot at liberals who insist it’s obvious that we need more government spending during the current recession, but somehow forgot to call for less government spending during the preceding boom:
Or at the state and local level, anyone who’s thinking seriously about the issue ought to see that the middle of a recession is a terrible time to implement major cutbacks in public spending. But at the same time, people who believe in good faith that state and local spending is above the optimal level will understandably agree with Rahm Emannuel that you don’t want to let a good crisis go to waste. After all, were center-left Keynesian economics bloggers issuing table-thumping condemnations of state and local spending increases in 2004-2007? Bemoaning the fact that we’d entered a new “dark age” of macroeconomic understanding where policymakers didn’t realize that under the circumstances states and municipalities ought to be trimming its workforce and accumulating huge surpluses? I think I missed that.
Like Yglesias, I don’t particularly care whether people on my side are offended by my opinions. So I’ll keep attacking my friends and allies on the right whenever I don’t agree with their views on monetary policy.
Update 12/4/10: When I woke up this morning I realized the preceding paragraph is all wrong. It suggests I’m more courageous than other bloggers, which is both incorrect and kind of insulting. My apologies.]
Here’s a question that puzzles me. We know the right is up in arms over the Fed’s recent move toward monetary stimulus. Yes, inflation is only 1.2% and core inflation is only 0.6%. And yes, unemployment is 9.8% and rising. But despite these dreary numbers it is viewed as an outrage that the Fed is trying to boost the growth rate of aggregate demand to a more normal level.
So this got me wondering about the right’s reaction to the Fed’s policy of easing during 2007. As you may recall, the Fed cut rates several times during 2007. I checked and found that the inflation rate during 2007 was 4.1%, more than double the Fed’s target. Unemployment was below 5%. So if the right was angry about monetary easing when inflation is half the Fed’s target and unemployment is double the natural rate, they must have been absolutely apoplectic about Fed easing when inflation was more than double the Fed’s target, and unemployment was below the natural rate. After all we’re constantly being told that the Fed’s job is to produce price stability. Period. End of story.
Now I can imagine some apologist for the right arguing that the Fed needed to cut interest rates in 2007 because there was a banking crisis. But haven’t we been told over and over again that the Fed should focus on targeting inflation, that it has no business targeting other variables? So clearly that can’t be the explanation.
So what is the explanation? Maybe there were a lot of complaints back in 2007 and I have just forgotten. Were conservatives complaining that monetary stimulus would merely bail out the failed Bush administration fiscal policies, and allow him to put off the tax increases necessary to balance the budget? I don’t recall reading that argument, but perhaps I forgot.
I’m not good at searching out old editorials; perhaps some commenters can help me. But here is the Fed press release from the September 2007 rate cut:
Release Date: September 18, 2007
For immediate release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.
Not one vote against? Thomas Hoenig could have voted against any rate cut. He could have supported a quarter point rate cut and voted against the half point cut. But he decided to vote for the full 50 basis point cut, which was more than markets expected and which set the stock market soaring. And he did this at a time when unemployment was 4.7% and inflation was running at double the Fed’s target. Interesting.
Another possibility is that conservatives think that right now money is really easy because the base has ballooned and rates are near zero. Of course the same was true during the 1930s. Come to think of it, conservatives also thought money was really easy during the 1930s, indeed they thought it was too easy. Later Friedman and Schwartz showed conservatives how tragically mistaken they had been. But perhaps they forgot.