Two years too late

In early March 2008 I wrote an open letter to the President:

President Obama: You need to talk to Christy

I pointed out that Christine Romer understood the importance of monetary stimulus in the Great Depression, and predicted that she would recommend aggressive monetary stimulus in this crisis as well.  I doubt he ever talked with her, as he didn’t even bother filling empty Fed seats.  At the time most progressives were ignoring monetary stimulus, and focusing almost entirely on fiscal stimulus.

Now we know I was right, Christine Romer does think that monetary stimulus is crucial:

“We need to realize that there is still a lot of devastation out there,” Romer said, calling the 8.9% unemployment rate “an absolute crisis.”

“If I have a complaint about policy these days, it’s that we’re not doing enough,” she said. “That goes all the way up to the Federal Reserve, [which] could be taking more aggressive action. It goes to the Congress and the Administration – there are fiscal policy actions they could be taking.”

“And don’t tell me you can’t [take those actions] because of the deficit because I think there are fiscally responsible ways,” she said.

Romer suggested that extending the payroll tax break to the employer side of the payroll tax could spur the economy;

The employer-side payroll tax cut is a good way of offsetting wage stickiness, and is an idea I have often advocated.  Monetary stimulus combined with an employer payroll tax cut would be a powerful one-two punch.

Why didn’t he talk to Romer?  I suspect that Larry Summers blocked access.

HT:  Matt Yglesias

PS.  Replies to comments may be delayed.

Update 3/25/11:  Alex Tabarrok sent me an even better quotation from Romer:

One thing I had the class read was Ben Bernanke’s 2002 paper on self-induced paralysis in Japan and all the things they should’ve been doing. My reaction to it was, ‘I wish Ben would read this again.’ It was a shame to do a round of quantitative easing and put a number on it. Why not just do it until it helped the economy? That’s how you get the real expectations effect. So I would’ve made the quantitative easing bigger. If you look at the Fed futures market, people are expecting them to raise interest rates sooner than I think the Fed is likely to raise them. So I think something is going wrong with their communications policy. They could say we’re not going to raise the rate until X date. Those would be two concrete things that wouldn’t be difficult for them to do. More radically, they could go to a price-level target, which would allow inflation to be higher than the target for a few years in order to compensate for the past few years, when it’s been lower than the target.


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34 Responses to “Two years too late”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. March 2011 at 18:10

    Scott wrote:
    “Why didn’t he talk to Romer? I suspect that Larry Summers blocked access.”

    I have to dig into my memory banks but I suspect this is absolutely true. As I recall things, Sumner has been a bulldog about depriving access to the President. And consequently, one of the brightest minds concerning how things should have been done, could not get close to his ear. (Sigh.)

  2. Gravatar of Dustin Dustin
    24. March 2011 at 18:34

    March 2009

  3. Gravatar of Greg Ransom Greg Ransom
    24. March 2011 at 23:35

    Another Rube when it comes to Obama.

  4. Gravatar of Mike Sandifer Mike Sandifer
    25. March 2011 at 02:06

    Scott,

    I think I read somewhere that Summers wouldn’t share Romer’s estimate for a sufficient fiscal stimulus with Obama. Why have someone like Romer around if you’re gonna ignore her? And to make things worse, she was sometimes the spokesperson for Obama’s economic policies. She was terrible in that role.

    And what about Summers? The guy is a celebrated researcher, seems to say the right things, and this might be what we get?

  5. Gravatar of Cliff Cliff
    25. March 2011 at 02:56

    Scott, now that we are two plus years into the Fed’s aggressive monetary policy, could you comment on whether the results are what you expected? If so, can you point to data that supports that conclusion?

    Thanks, Cliff

  6. Gravatar of marcus nunes marcus nunes
    25. March 2011 at 04:40

    Scott
    One year on and Angry Bear is “angry” at you again!
    You “cherry pick”!!!
    http://www.angrybearblog.com/2011/03/is-scott-sumner-reality-based.html

  7. Gravatar of Richard Allan Richard Allan
    25. March 2011 at 04:41

    I only just realised Larry Summers was the douchebag President of Harvard in The Social Network movie.

    Well, he didn’t play himself, obviously.

  8. Gravatar of marcus nunes marcus nunes
    25. March 2011 at 04:43

    Plus: “You are crazy and delusional”!

  9. Gravatar of Policy Wank Policy Wank
    25. March 2011 at 05:40

    Presumably Obama was meeting with Bernanke fairly regularly at least during the time when QE1 was enacted. If Bernanke wanted to do more but was being held back by the hard money stooges wouldn’t he himself have told Obama to fill the vacancies with more like-minded people? I bet Bernanke was satisfied with the wait and see approach for far too long.

  10. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 06:48

    Add this to two years too late:

    http://www.bloomberg.com/news/2011-03-25/fed-s-kocherlakota-says-stimulus-could-avert-unemployment-rise.html

    (Do you know where we can get a copy of that paper, btw?)

  11. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 07:00

    “At the time most progressives were ignoring monetary stimulus, and focusing almost entirely on fiscal stimulus.”

    Those progressive villains!!!! It’s THEIR fault!

    Herr Professor, thank you for defending us against the evil villainy of progressive thought, and their national socialist leaders.

    Like, oh, Martin Feldstein

    http://www.nytimes.com/2009/01/07/business/economy/07spend.html

    Or, you know Gregory Mankiw…

    http://delong.typepad.com/sdj/2009/02/seven-out-of-seven-economists-favor-a-fiscal-stimulus-right-now.html

    (Mankiw went so far as to email DeLong that he does, in fact, favor fiscal stimulus…)

    It’s nice to know this blog is becoming more Fair and Balanced (TM) every day.

  12. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 07:00

    “At the time most progressives were ignoring monetary stimulus, and focusing almost entirely on fiscal stimulus.”

    Those progressive villains!!!! It’s THEIR fault!

    Herr Professor, thank you for defending us against the evil villainy of progressive thought, and their national socialist leaders.

    Like, oh, Martin Feldstein

    http://www.nytimes.com/2009/01/07/business/economy/07spend.html

  13. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 07:00

    Or, you know Gregory Mankiw…

    http://delong.typepad.com/sdj/2009/02/seven-out-of-seven-economists-favor-a-fiscal-stimulus-right-now.html

    (Mankiw went so far as to email DeLong that he does, in fact, favor fiscal stimulus…)

    It’s nice to know this blog is becoming more Fair and Balanced (TM) every day.

  14. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 07:05

    [hmm, that's a bit more snarky than intended - sorry]

  15. Gravatar of Morgan Warstler Morgan Warstler
    25. March 2011 at 07:34

    Stats,

    You just violated the “Fiscal Stimulus does not equal tax cuts,” rule.

    I guess you might get away with extended unemployment. Did Mankiw go that far?

  16. Gravatar of thruth thruth
    25. March 2011 at 08:41

    Statguy: This one? http://www.minneapolisfed.org/news_events/pres/kocherlakota_paper_March25_2011.pdf

  17. Gravatar of Einhorn Einhorn
    25. March 2011 at 09:14

    marcus,

    But did you see this comment in response to “Angry Bear”. It may be the best comment I have read in all of 2011:

    “”To me this means that he claims that US real interest rates have been high “in recent years”. Of course he also says “in late 2008″ but suggests that the real interest rates then were a policy choice and that the policy continues.”

    His explanation isn’t great, but he makes no such suggestion. More on this below.

    “I’d say he is crazy and delusional. Basically, I’m convinced that his methodolical a priori is that everything is determined by monetary policy. Since unemployment is high, he claims US monetary policy is tight.”

    This is a complete fabrication. It is no bearing on Sumner’s argument in the slightest. His definition of monetary “tightness” is NGDP, only NGDP, and nothing but NGDP.

    He repeats this mantra of NGDP tightness every two days on his blog. He tells his pets that they should target NGDP, should they ever have an opportunity to sit on the Fed board. His iPod is nothing but the term NGDP repeating for hours. (One of the tracks is PDGN, just for the sake of some variety.) He mumbles NGDP to himself when he falls asleep at night. He asked his wife to get NGDP tattooed on her chest, but she refused. (Sometimes she’s willing to use temporary tattoos when they’re feeling feisty.)

    To claim that his definition of money tightness is related to unemployment, without the filter of NGDP, is simply wrong. Utterly wrong. He has a simple mantra. It is easily testable. He would be proven wrong, and quasi-monetarism would die a horrible death, if unemployment spiked while NGDP growth maintained steady. Sumnerism is NGDP and only NGDP.

    If you’re going to criticize Sumner, NGDP is where you do it.

    “This was not a shift in monetary policy (just as no Keynesians would call it a shift in monetary policy). It was also very brief.”

    This is some weird phrasing from him, but he just wants people who claim to care about real interest rates to admit that money was tight for a time in 2008. Sumner uses NGDP for tightness, but if others want to use real interest rates for tightness then they have to admit (according to him) that policy makers allowed real rates to spike into extremely tight levels.

    There’s no “shift” in policy necessary here. Negligence is sufficient explanation.

    Allowing a spike in something that shouldn’t spike is a bad thing. If tightness is defined by real rates, then allowing a spike is allowing tight money. Allowing something to happen which can be prevented is a policy. It’s a choice to allow tight money instead of fighting it, and that idleness in the face of a spike is a policy.

    Of course, for this argument to follow, you have to believe (as Sumner does) that the Fed had the power to fight this spike in real rates. He’s so convinced of the Fed’s power in this respect, that he considers allowing the real rate spike to happen as a choice, a “policy”. He doesn’t seem to consider the view that the Fed would not have had that power, that the Fed didn’t act to stop the spike not out of negligence, but because there was nothing that they could do about it.

    But if the Fed did in fact have the power to stop real rates from spiking in 2008 (as Sumner fully believes), then allowing that spike to happen anyway can absolutely be called a policy. If you have the power to stop a bad thing and don’t do it, then that’s a choice.

    “Late 2008 is not years recent or otherwise. It is part of one year. Sumner’s absurd claim is based on describing a few months over two years ago as “recent years”. Basically he claims that because real interest rates were briefly high years ago (during a panic) they are high now”

    Same thing here. If they thought high real rates are bad, a sign of tight money, and then allowed high rates to happen anyway, then that’s a policy. Deliberately allowing something bad to happen is a policy. It’s a choice.

    And as far as parsing “in recent years”, it doesn’t have to mean what you think it has to mean. There was a major hurricane in Louisiana in recent years. (2006 is relatively recent.) There was a tight money policy at the Fed in recent years. Brief? Sure. But it happened.

    Maybe you can disagree with his phrasing (I don’t much like it myself), and you can certainly disagree with how powerful you think the Fed is. But if you come at this question from Sumner’s perspective, it was absolutely a choice, a policy, to allow high rates to happen, precisely because they had the power to stop it.

    Why does Sumner think the Fed have so much power? Because he cites evidence which he believes strongly indicates that markets respond forcefully and immediately to changes in… can you guess? Why, future expected NGDP. He thinks the Fed has these powers, because the markets seem to react as if the Fed has these powers.

    And to say it again: This can be proven wrong. Quasi-monetarism can be proven wrong. Sumner can be proven wrong. But that hasn’t happened. Not yet, anyway.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. March 2011 at 10:42

    I left a comment at the Angry Bear (not the one above).

    I think it’s quite clear Waldman can’t read. Scott was (and is) quite clear that he thinks interest rates are a very unreliable indicator of monetary policy stance.

  19. Gravatar of Jason O Jason O
    25. March 2011 at 11:39

    Scott,

    Thoughts about Plossner’s recent comments about the Fed needing to raise the Fed funds rait to 2.5%? Might this actually happen?

    http://www.foxbusiness.com/2011/03/25/feds-plosser-funds-rate-hit-25-year/

    –Jason

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. March 2011 at 14:48

    StatsGuy: I though Scott was relying on the elementary logic that President Obama was more likely to listen to/be networked with progressives than conservatives. I mean, I am just a poor Ozstraylan and all, but I got the impression that American politics were a touch ideologically tribal. Some palavar about a lack of civility and all.

    Especially as Scott seems to spend at least as much time lambasting conservatives for their failings on matters monetary.

  21. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. March 2011 at 14:53

    Scott, you know you have really made it when a prominent econblogger can make a joke, it is very funny, people get it, it is your central thesis and your name is not even mentioned.

  22. Gravatar of Scott Sumner Scott Sumner
    25. March 2011 at 17:07

    Mark, I’m afraid so.

    Mike, Summers’ competence isn’t really the issue, it’s his lack of knowledge of monetary economics, and his tendency to want to dominate the policy-making process. But I tend to agree with you about “this is what we get.” I don’t think anyone else would have made much difference. Policy is driven by the zeitgeist. Almost no one was talking monetary stimulus in late 2008, which means it wasn’t going to happen. That’s why I started my blog.

    Cliff, Yes, I said Qe1 wouldn’t get the job done, and it was mostly ineffective, albeit it might have prevent outright depression.

    I said QE2 was inadequate, but would probably help significantly, and it did seem to boost the economy in late 2010. I have no idea where things go next, as we are facing three real shocks (Greece, Libya, Japan.) I still think money is tight, but not as bad as last summer, when a double dip was what people were worrying about. I expect some growth this year, but nothing to write home about.

    If you follow my blog you know I am opposed to the “wait and see” school of policy-making, where you do something and wait a few months to see how it works out. I favor targeting the forecast. So far they have be unwilling to do that, and hence policy remains too tight.

    Marcus, That was silly, as I specifically said real rates were high in July-November 2008. He doesn’t seem very observant. If he read my blog he’d know I closely follow the TIPS market, and hence was well aware that real rates are now negative. His “gotcha” didn’t work.

    Richard, I didn’t think he (the actor) was so bad in the movie, but I imagine in real life he’s a bit more difficult to deal with.

    Policy Wank, You might be right. But of course Obama should be setting his own monetary policy, not taking orders from Bernanke.

    Statsguy, Mankiw and Feldstein are Keynesians. To a right-winger like me that makes then suspect. :)

    BTW, If you want to read some “enlightened” progressive thought, read the comment section of my marshmallow post, full of progressives calling me a racist.

    Also, are there any other U of Chicago-type bloggers who bash conservative monetary economists as much as me?

    Einhorn, I’ve dealt with Angry Bear before, it’s not one of my favorite blogs. They seem to obsess over odd things. I left a comment to explain why his post was a waste of time.

    He thought that just because I believe money is tight now, and because I believe real rates were high in late 2008, ipso facto I believe real rates are high today. But I don’t view real rates as tight money, the Keynesians do. My point was that Keynesians didn’t complain about tight money in late 2008, as they should have if they believed their own theories, which I don’t think they do.

    Jason. They will not do that. What they should do is try to make policy expansionary enough so that we NEED to raise rates to 2.5% as soon as possible. If the hawks get their way we’ll have near zero rates as far as the eye can see, a la Japan.

    Lorenzo, Yes, that’s very funny. Unfortunately I can’t think of any recalculation jokes. Twice Cowen had links with no name, and when you clicked it you just got a picture of me.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. March 2011 at 17:55

    Scott,
    Sorry, but I got to riff on this.

    You wrote:
    “Also, are there any other U of Chicago-type bloggers who bash conservative monetary economists as much as me?”

    Are there other UC dropouts that bash all econbloggers (regardless of political orientation) as much as me?

    Scott wrote:
    “Einhorn, I’ve dealt with Angry Bear before, it’s not one of my favorite blogs. They seem to obsess over odd things. I left a comment to explain why his post was a waste of time.”

    I usually like (agree with) Rebecca Wilder’s posts. And I visit Angry Bear everyday. But then I like to argue.

    P.S. Was I rude (enough) to Robert Waldmann?

  24. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 18:06

    “Also, are there any other U of Chicago-type bloggers who bash conservative monetary economists as much as me?”

    Eh, not really. You do have a penchant for it, admittedly.

    Thruth – OK, that’s a bit heavier than I expected from Kocherlakota. I’m not going to get to that for a few days. I skimmed for a bit of intuition, but I don’t yet see how he deals with Phelps.

  25. Gravatar of StatsGuy StatsGuy
    25. March 2011 at 19:47

    Lorenzo:

    ” I got the impression that American politics were a touch ideologically tribal. Some palavar about a lack of civility and all.”

    I thought that too for a while. Now, I’m beginning to think more that corruption is the rule of the day. The _lack_ of change from 2009-2010 was deafening.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. March 2011 at 20:03

    Statsguy,
    You wrote:
    “I thought that too for a while. Now, I’m beginning to think more that corruption is the rule of the day. The _lack_ of change from 2009-2010 was deafening.”

    Presumably you mean Obama. Obama is a triangulator taken to an extreme level. He’s not corrupt, just stupid.

  27. Gravatar of W. Peden W. Peden
    26. March 2011 at 00:19

    StatsGuy,

    I don’t see how the Democrats being as ineffectual in a position of near-total power as the Republicans were is inconsistent with American politics being ideologically tribal.

    American politics seems to be full of ideological tribalism, but it’s also a big-government plutocracy. So the Democrats are full of people with very strong social democratic principles who’d love a European-style state, while the Republicans are full of conservatives who’d love a flat tax and a general return to some mythical past.

    Neither ever gets what they want, because the US government is such a tasty pie that the trade unions, corporations and special interest groups in general have enough incentive to funnel huge amounts of money into buying it. The result is a government with a great healthcare system- for pharmaceuticals; a great education system- for teachers; a great non-tort law safety regime- for oil companies etc.

    The US government is the biggest regulatory capture in the world. That’s why the US is both the country of Michael Moore & Glen Beck AND the ideologues never get what they want even when they control both the legistlature and the executive.

  28. Gravatar of John Thacker John Thacker
    26. March 2011 at 01:08

    “The result is a government with a great healthcare system- for pharmaceuticals”

    Certainly not when it comes to approving pharmaceuticals as quickly as other countries. What we have is a system that adds a tremendous amount of time and expense to what it takes to bring a drug to the market while only adding dubious utility (according to the scientific consensus on those who have studied the FDA and especially its 1962 changes), and then compensates the drug companies for the regulatory burden through higher prices and the like. I’m not sure that it’s a better system for pharmaceutical companies than the pre-1962 system (their profit margins are not high compared to other industries), but I think that their costs and benefits balance more than patients and consumers, who don’t get anywhere near the promised benefits from the extra regulation.

  29. Gravatar of John Thacker John Thacker
    26. March 2011 at 01:09

    The FDA efficacy requirements are perhaps largely for the benefit of making it easier for insurance companies to decide whether or not to pay for a treatment, and thus a result of third party payment.

  30. Gravatar of Blackadder Blackadder
    26. March 2011 at 05:11

    Reading the updated Romer quote is depressing. When not in office, Romer and Bernanke sound like Scott Sumner. And yet here we are. I’d like to think that if, say, Sumner had been appointed Chair of the CEA (or the Fed), things would have turned out differently. But institutions seem to have a way of predominating over the individuals who make them up.

  31. Gravatar of W. Peden W. Peden
    26. March 2011 at 06:51

    John Thacker,

    It’s true that getting drugs approved takes longer in the US, but as far as I know the FDA does an excellent job of protecting US pharmaceutical firms from foreign competition. There are also trade restrictions on which countries are allowed to export drugs to the US, even if those drugs have been approved for safety.

    I don’t know if it’s better or worse for pharmaceutical companies than the pre-1962 system; however, I do know that it works very differently in practice from the ideal set out by the original reformers.

    The FDA also unavoidably acts as a barrier to entry, which naturally aids existing firms. I have also heard allegations that established firms have (in practice) received preferential treatment under the FDA system, though it’s not something with which I am familiar.

    Then, of course, there is the US insurance system e.g. Americans can buy food from any state in the US, but not medical insurance…

  32. Gravatar of Scott Sumner Scott Sumner
    26. March 2011 at 17:24

    Mark, Great! You said the things I would have liked to have said.

    Blackadder, I’m afraid you are right, even if I had had Romer’s job, things wouldn’t have been any different. I’m not sure they would have been different if I had had Bernanke’s job.

  33. Gravatar of Want to see a dramatic increase in homelessness? Just add rent control « Civitas Want to see a dramatic increase in homelessness? Just add rent control « Civitas
    27. September 2011 at 02:05

    [...] few ideas that seem to command a consensus amongst economists from the left and the (neo-liberal) right. The UK may have done as much as can be done with the money supply (the rest of our problems are [...]

  34. Gravatar of TheMoneyIllusion » The Fed understands the Romer/Sumner tax cut argument (too bad Congress is brain dead.) TheMoneyIllusion » The Fed understands the Romer/Sumner tax cut argument (too bad Congress is brain dead.)
    26. March 2012 at 06:06

    [...] Christina Romer and I have both advocated employer-side payroll tax cuts.  When nominal wages are sticky, that shifts the SRAS to the right, and boosts output if the Fed is targeting inflation.  On the other hand employee-side cuts boost AD, and may be ineffective if the Fed targets inflation.  What does the Fed itself think? The central bank “is performing about as well as it can on both mandates” of price stability and full employment, Kocherlakota said. It needs help from non-monetary policies such as hiring subsidies to offset the uncertainty and adverse credit conditions that are keeping companies from adding jobs, he said. [...]

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