American liberalism, circa 2007
Marcus Nunes directed me to a very interesting piece by Jonathan Chait in the American Prospect, from 2001. It begins by pointing out that by the early 1990s American liberals had turned against the deficit spending policy of Ronald Reagan. Then it moves on to the Clinton Administration:
All of these developments were known at the time, but they had not fully cohered when Clinton began to construct his first economic plan. The key decision was not whether to reduce the deficit——given its size, the White House had no other realistic option——but rather what effect this would have upon the economy. Everyone present assumed that raising taxes or cutting spending would, at least in the short run, dampen economic growth. White House economists gave serious consideration to the possibility that their plan would throw the economy into recession. The only way to avoid this dismal fate was if the Federal Reserve or the bond market would lower interest rates to spur economic activity and make up for the depressing effects of deficit reduction. According to Bob Woodward’s account in The Agenda, Clinton replied to this news in a half whisper: “You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?”
The question that so bedeviled the White House in 1993——can the Fed and the bond market overcome the effects of tight budgets?——is no longer in doubt, and therein lies the great transformation of liberal economics. Previously, even liberals who favored deficit reduction considered it a painful trade-off: Reducing government borrowing would free up more savings for private investment and, in the long run, improve productivity, but in the short run, it would slow or even halt economic growth and throw millions out of work. The White House accepted this bargain in 1993 and hoped it would work out for the best. Now fiscal restraint is seen not even as a trade-off but, rather, as a way of getting the best of both worlds. This does not mean that forbearance is the one true answer, now and forever. It merely suggests that, under the present economic and political circumstances, the interests of current and future prosperity both argue for reducing deficits or expanding surpluses.
That intellectual breakthrough forms the bedrock of progressive fiscal conservatism. The principles of this economic synthesis are eminently clear. It begins with a recognition that the Federal Reserve and the bond market wield an effective control over the economy and that these instruments, rather than deficit spending, have become the most effective levers available to government for promoting economic growth. At the same time, there is an understanding among liberals that the burdens of fiscal restraint should fall primarily upon those most able to bear it and that the government should make a special effort to ensure that the benefits of economic growth also flow to those at the bottom.
Clinton’s 1993 budget bore out these tenets in their purest practical form. Its overall framework was deficit reduction, with the purpose of reducing interest rates and promoting economic health. It also had a strongly progressive tilt, raising the tax rate on the highest earners while expanding low-income subsidies such as the Earned Income Tax Credit (EITC) and Head Start. Six years later, Clinton and his advisers—and even like-minded economists outside the administration—continue to hold up the 1993 budget as their pinnacle achievement. [The article seems to have typos, so I added dashes in the first two paragraphs.]
Recall that unemployment was pretty high when Clinton took office, much higher than today. Of course today’s liberals would point to one key difference, interest rates were not stuck as zero. (But that’s also true of the eurozone, circa 2008-12.)
As recently as 2007, the conventional wisdom of American liberals (on fiscal policy) was essentially market monetarist—they believed in monetary offset. The fiscal multiplier is close to zero. Deficits are bad. And yet I get many Keynesian commenters who don’t know this. They act like I’m propounding some sort of weird theory. They tell me that:
GDP = C + I + G
So “obviously” more G will boost GDP. In fact, it is post-2007 liberals who are the “weirdos,” who have rejected the successful policies of Clinton and replaced them with the failed policies of Obama. (Remember, this is the president who 5 years into the recovery was arguing that unemployment was still so bad that we needed to enact an “emergency” unemployment program.)
First the Keynesians argued that monetary stimulus was ineffective at the zero bound. That’s what got me into blogging. But it soon became obvious that monetary policy was still effective. For instance, the dollar dropped 6 cents against the euro on the day QE1 was announced, in March 2009. Then after 2011 we had a controlled experiment, both the US and eurozone did roughly equal amounts of fiscal austerity. But the US did monetary stimulus and the eurozone did not. Both regions had similar unemployment rates as recently at 2010, in the 9% to 10% range. By 2014 the eurozone unemployment rate was twice that of the US (roughly 12% vs. 6%). Monetary policy made the difference.
Then Keynesians claimed that even the Fed didn’t believe in monetary offset. That theory lost a bit of force when (in late 2012) Fed officials said they were doing aggressive stimulus (QE3 and forward guidance) partly to keep the recovery going as Congress moved to austerity in 2013. By early 2013 it was clear that if this new form of liberalism, this rejection of Clintonomics, was going to have any plausibility they needed to be able to show that the Fed could not or would not offset fiscal austerity. And calendar 2013 was the perfect test, as all sorts of austerity came together at the same time. The budget deficit fell by $400 billion in fiscal 2013, but that year begins on October 1st. The tax increases didn’t start until January 1st, 2013, and the deficit fell by an astounding $500 billion during that calendar year. A near perfect test.
Some of my critics point out that GDP data is noisy, and that the speed up in growth in 2013 wasn’t particularly significant. Agreed. But the Keynesians didn’t just need a single, they needed a home run. They needed a sharp slowdown. The evidence in favor of monetary offset was becoming increasing persuasive. The Fed doesn’t stop doing monetary policy at the zero bound. If you are going to reject the previous liberal conventional wisdom, reject views held as recently as 2007, ask the public to spend a trillion dollars, you better damn well have a good reason. They desperately needed a slowdown in 2013, and got a speed up in growth instead. That’s why 2013 was so devastating. Not because it was definitive, but because fiscal stimulus was already on its last legs, increasingly rejected even by liberals such as Jeffrey Sachs. Once 2013 went against them, it was game over.
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27. January 2015 at 06:47
You have GOT to be kidding me Dr. Sumner? Please tell me this is a joke? Do you really think monetary policy is leading, not coincident? Have you not read the works by Fischer Black that argues–and he successfully traded on this theory at Goldman Sachs–that the Fed bows to market forces? Don’t fight the Fed is a myth. George Soros fought the UK Fed on 16 September 1992, Black Weds, and won. His contemporaries fought the central banks of Asia during the 1997 Asian crisis–and won. Why do you think the Fed determines output? Because of the IS-LM curve? That’s theory, where is the experimental data? Just eyeball a curve, and see how the Fed always is coincident with market forces. And in the few cases they are not–such as in the USA in 1994 with Greenspan’s tightening, the effects were dramatic but ultimately only causes local losses, see: http://www.businessinsider.com/1994-federal-reserve-tightening-story-2013-1?op=1 (see Orange County, LA region)
Again, the Fed has the ability to screw things up, but ultimately no real power to move the economy.
If you disagree, where is your *empirical* data to the contrary?
27. January 2015 at 07:06
According to the local genius (with and IQ of 120, to boot), the cause of rain is puddles on the ground.
Where is your *empirical* data to the contrary?
27. January 2015 at 07:12
GDP = C + I + G
is of course the same as
C + I = GDP – C
so, boosting C will decrease consumption and investment.
27. January 2015 at 07:36
Those were good days.
Chait spent the Bush years arguing that liberals were “reality-based” empiricists because they learned during the Clinton years that (1) balanced budgets and even surpluses lead to economic prosperity and (2) welfare reform was a net good, and asking people to work for their benefits was good for them.
Then Obama won, and it turned out that most liberals preferred arguing that any Democratic policy choice was the best of all possible choices, regardless of that that choice actually was.
27. January 2015 at 07:39
“Monetary policy made the difference.”…between U.S. and Eurozone unemployment rates. Perhaps, but the data are noisy, and other factors are at play.
From 2010 to 2013, U.S. Federal spending fell significantly, from 23.1% of GDP to 20.6%, and the unemployment rate fell from about 9.6% to 6.5%. Over the same period, Euro area government spending barely moved, falling from 50.4% to 49.4% of GDP, and the unemployment rate rose, from about 10% to about 11.6%.
Those changes could be caused by monetary policy; as the post notes, the U.S. and the Euro area had different monetary policies from 2010-2013.
What about within the Euro area itself? Germany’s general government expenditure fell from 47.2% to 44.3% of GDP, and German unemployment fell from 7.1% to 5.3%. Conversely, France’s general government expenditure increased from 56.4% to 57.1% of GDP, while France’s unemployment rate rose from 9.3% to 10.4%. The opposite changes in unemployment rate don’t seem to be explained by a monetary policy shared by both countries.
A plausible remaining explanation is that government spending hinders, rather than helps, economic growth.
Poor monetary policy can be a noose that chokes both sound and unsound microeconomic environments. Good monetary policy accommodates sound microeconomic regimes, but cannot create growth in countries with unsound microeconomic conditions.
Possibly I’m missing something important here; I welcome comments to point me in the right direction.
27. January 2015 at 07:48
“In fact, it is post-2007 liberals who are the “weirdos,” who have rejected the successful policies of Clinton and replaced them with the failed policies of Obama”
How have Obama’s policies failed? The failure was a fall in demand. The failed policies are owned by the Fed and those on the right calling for more tightening.
27. January 2015 at 08:04
Okay, I think that Ray Lopez has jumped the shark by using Soros/BOE as an argument against “don’t fight the Fed”. If we assume that he/she knows the logic of the aphorism, and the events of ’92, then he/she is clearly trolling, and thus forcing comment section readers to parse even more troll text than usual.
27. January 2015 at 08:15
@Todd Ramsey:
> A plausible remaining explanation is that government spending hinders, rather than helps, economic growth.
What do those figures look like in raw (inflation-adjusted) Euros?
Another plausible explanation is that government spending in real-terms remained roughly constant in France and Germany, but Germany had exogenous growth and France had an exogenous (continued) recession. The denominator of goverment-by-GDP changed, but not the numerator, meaning that the actual extent of austerity or stimulus would be questionable.
Is this reality? I’m not sure, I don’t have these figures handy.
27. January 2015 at 08:23
‘How have Obama’s policies failed? The failure was a fall in demand.’
Obama reputedly told Christie Romer, the first time they met, that, ‘I guess monetary policy has shot its wad.’ As opposed to, ‘Let’s get together with Ben Bernanke and chart a recovery for the American people.’
That’s how.
27. January 2015 at 08:29
My favorite part of the Jonathan Chait piece;
‘That intellectual breakthrough forms the bedrock of progressive fiscal conservatism.’
I.e., an oxymoron.
Btw, I once heard Alice Rivlin–Clinton’s OMB head–admit that the Budget Reform Act of 1990 (that Clinton inherited from GHW Bush) was a big part of the Clinton success. That was because it had actual spending constraints built in to it (thanks to Phil Gramm).
27. January 2015 at 08:38
“Obama reputedly told Christie Romer, the first time they met, that, ‘I guess monetary policy has shot its wad.’ As opposed to, ‘Let’s get together with Ben Bernanke and chart a recovery for the American people.’
That’s how.”
Really? The whole point of Market Monetarism is that, on a first order, fiscal policy does not matter, not that the fiscal side should be moved one way or the other. It certainly isn’t based on the fiscal side trying to convince the Fed to “please do the right thing”. Its based on the assumption that the Fed is getting exactly what it wants at all times.
The only reason Clinton years compare favorably to Obama years is that the Fed did the right thing that time but not this time. Opinion about Obama policies is just politics and I get tired of people mixing the two all the time.
27. January 2015 at 09:07
@Daniel, @A – please explain? You waste so many words insulting me but none in explaining. I’ve laid out my arguments, let’s hear yours? If you are convincing I will retract my statement.
See below for more information. Also Google Real Bills Doctrine. The irony is that Sumner knows exactly what I am talking about, but like the Catholic priests of old who forbade reading of the Bible and kept the inconsistencies of the Bible secret from their parishioners, for fear of upsetting them, he will not tell you all why I am right. Instead he will probably respond with a one-liner and you lemmings will applaud. Is that any way to go through life?
http://economics.barnard.edu/sites/default/files/inline/understanding_fischer_black.pdf (Perry Mehrling, Economics Department, Barnard College, Columbia University, yr 2000, “First, money. In his 1911 The Purchasing Power of Money, Irving Fisher had revived the quantity theory of money, in part to provide the theory of the price level that was missing from his version of general equilibrium. Post war American economics, both monetarist and Keynesian, followed Fisher’s lead, but Fischer Black did not, on the grounds that the quantity theory was inconsistent with equilibrium as he understood it. Ruling out exogenous money left the price level hanging, but there was really no choice since exogenous money was inconsistent with CAPM. Black made the argument repeatedly and in different forms (1970, 1972c, 1974a, 1978b, 1987) but to little effect, at least among the economists who were his target audience.”)
27. January 2015 at 09:12
So where did I say anything about moving fiscal policy, Elwaily?
Do you suppose that Clinton’s getting Alan Greenspan onboard in 1993–he was the official guest at the SOTU–had anything to do with The Fed doing ‘the right thing’?
27. January 2015 at 09:18
Speaking of bond markets;
http://www.voxeu.org/article/syriza-and-debt-talks-estimates-rubinstein-bargain-approach
Paolo Manasse has a reality check for Greeks bearing socialists into office;
‘Greece has needs financing of about €28 billion over the next two years and has no access to capital markets. A disorderly default on official debt would cut off Greek banks from collateralized lending from the ECB, and would likely result in a dangerous banking and currency crisis. ‘
But, since Greece has made some progress in recent years, Manasse thinks they’ll be able to get a little relief;
‘It is more likely that negotiations will concern giving more time for fiscal adjustment. Although the new guidelines for the Stability and Growth pact, similarly to Draghi’s QE, do not apply to Greece, some leeway could be made invoking the ‘cyclical clause’ that reduces fiscal adjustment when the (negative) output gap is very large. Considering that Greece has made an unprecedented fiscal adjustment in recent years…with a primary structural balance moving from -13.6% of GDP in 2011 to +5.4 % today, such concessions may be easier to justify.’
Which could mean reducing the surplus to about 3.75% annually, further slowing down Greece’s repayment of its debts.
27. January 2015 at 09:22
Elwailly,
“How have Obama’s policies failed?”
Perhaps “ineffective” or “superfluous” would be a better descriptor? One Obama policy that certainly hindered any recovery though was extended unemployment insurance compensation. The stimulus was ineffective economically. The payroll tax cut helped but it would have been more effective if it had been given to employers instead of employees (ref. Scott Sumner).
“The failed policies are owned by the Fed and those on the right calling for more tightening.” I disagree about the Fed but agree about the right. The Fed could have done better/more, but relative to the fiscal side it has been much more effective. The Right’s weird conspiracy theories about the Fed, bankers, looming monetary disasters, gold haording…..shameful and embarrassing.
27. January 2015 at 09:25
Elwailly,
“The whole point of Market Monetarism is that, on a first order, fiscal policy does not matter, not that the fiscal side should be moved one way or the other.”
I don’t think that’s an accurate description of MM. The fiscal side is very important on the Agg Supply side. I think it’s on the Agg Demand side where the Fed and monetary offset make the fiscal policies less relevant.
27. January 2015 at 09:41
Patrick R. Sullivan,
“Do you suppose that Clinton’s getting Alan Greenspan onboard in 1993-he was the official guest at the SOTU-had anything to do with The Fed doing ‘the right thing’?”
I agree with this. Obama was quite oblivious of the importance of the Fed to his administration.
Anthony McNease,
“I don’t think that’s an accurate description of MM. The fiscal side is very important on the Agg Supply side. I think it’s on the Agg Demand side where the Fed and monetary offset make the fiscal policies less relevant.”
Yes but Obama’s tenure has us at a lower tax and lower outlay relative to GDP than Clinton’s tenure gave us. Why does he compare unfavorably on the Agg Supply side?
MM is a theory of aggregate demand management. It doesn’t mix in arguments about aggregate supply. It does state that aggregate supply shocks are better managed with level targeting NGDP not inflation targeting.
27. January 2015 at 09:52
Ray, You said:
“Do you really think monetary policy is leading, not coincident?”
Coincident.
You said:
“Again, the Fed has the ability to screw things up, but ultimately no real power to move the economy.”
Now you sound like an internet Austrian. So when the economy is “screwed up”, it doesn’t move? What will you be tomorrow?
Luis, Good point.
J Mann, Good point.
Todd, There’s some truth in what you say, but maybe not in the sense you assume. The specific data you cite may reflect reverse causality. Germany sees unemployment fall for some other reason, and that causes less spending on welfare programs. So in that sense I don’t agree. But in another sense I do. Because France spends more as a share of GDP, French people have less incentive to work (not just due to taxes, also benefits). So in the long run France should have a higher natural rate of unemployment than Germany, and Germany’s natural rate should have fallen after the labor market reforms. It seems to have done so.
Elwailly, And who appointed the Board at the Fed? Even Obama’s supporters (i.e. Yglesias) criticize him for that. But yes, the original recession occurred under Bush, I was talking about the slow recovery.
Patrick, Good points. Speaking of oxymorons, how about Ray’s claim that the Fed can screw up the economy, but not move it?
27. January 2015 at 09:56
Patrick, I can’t imagine a reduction in the surplus that small will satisfy the fans of the new Greek government, but we shall see. I wouldn’t want to be in their shoes.
27. January 2015 at 10:02
Scott,
It’s true that tax increases began in 2013Q1, so that’s perhaps why you look at calendar-year growth in real GDP. But sequestration-related spending cuts began in 2012Q4. On a fiscal year basis, real GDP growth went from 2.3% in 2012 to 1.8% in 2013 even with QE3. How does this square with monetary offset? thanks.
27. January 2015 at 10:08
Elwailly,
Ok, I must have misunderstood. I thought initially that you were arguing that MM disregarded fiscal policy as entirely ineffective and/or that monetary policy could cover any bad fiscal policy. It sounds like that’s not what you meant.
27. January 2015 at 10:15
Paul, are you sure about that timing? The Wiki page for the BCA (sequester) says that originally the cuts were to start on Jan 1, 2013 but were delayed until March 1, 2013.
http://en.wikipedia.org/wiki/Budget_sequestration_in_2013#Timeline
27. January 2015 at 10:23
OT: Have any one followed the path of Yanis Varoufakis, Greece’s new Finance Minister. His path from obscurity to power & influence seems to exceed even Scott’s.
Here is his blog: http://yanisvaroufakis.eu/
Like I said, he went from an obscure academic, to blogger, to advising Valve Software on administering the economies of the online gaming worlds they have created, to being Greece’s new finance minister. Pretty cool.
Sadly, he is a Marxist. Even more sad, Syriza, at least publicly, has stated it has no plans to exit the Euro which is probably the only thing that will save them.
27. January 2015 at 10:26
Hi Scott,
No Keynesian models predicted a sharp slowdown (CBO, Fed):
http://angrybearblog.com/2015/01/2013-and-all-that-ii.html
So why is it Keynesians “needed a sharp slowdown”?
27. January 2015 at 10:42
2013 wasn’t devastating for Keynesians. The fiscal cliff the Republicans had been using in their brinkmanship over raising the debt ceiling – along with shutting down the government – never happened in full. The CBO predicted a mild recession if it did.
I agree it was foolish for Konczal to challenge market monetarism over austerity in 2013. That’s what started this.
DeLong agrees with Chait’s account and he was there in Clinton’s Treasury. They traded deficit spending for more growth. Many people on the left don’t agree.
The way I remember it is that Rubin and Greenspan told Clinton to drop his middle class spending bill/campaign pledge or else the “bond market would raise rates.” Clinton’s adviser James Carville famously said he wanted to be reincarnated at the bond market. You can scare anybody.
But it wasn’t the bond market, it was Greenspan.
He was blackmailing Clinton and Clinton made the deal. Reduce government social spending and Greenspan said he’d compensate with investment spending and keep up the NGDP path level.
DeLong says it was a good thing. The Clinton economy was good.
But what happened? The 2000 tech stock bubble where a lot of paper wealth was lost. Greenspan handled it, but it shortly morphed into the housing bubble, the popping of which left the Fed at the ZLB.
And the Fed didn’t have the political will do to the necessary unconventional policies to bring about a speedy recovery. That’s why I favor NGDP path level targetting as a thoughtful liberal.
Also ever since (and before) Clinton’s deal with Greenspan, wages have been stagnant (except for a brief period in the late 90s). Labor has not shared in productivity gains as those have all flowed to capital and hence to the top.
So usually I agree with DeLong but not here.
27. January 2015 at 10:47
I firmly believe that Republicans and Democrats have no consistant economic philosophy.
Reagan talked about cutting the deficit and increased it several fold.
Cliton was supposed to be the liberal, who brought the government back into ballance.
Cheney the Neo-Con said deficits don’t matter.
Bush immediately pulled the trigger on fiscal stimulus to counteract the “dot com” implosion. And he did it again with the Lehman failure.
And Obama piled stimulus on top of stimulus and fought any deficit reduction.
Left to right….
Obama – Bush – Reagan – Clinton
27. January 2015 at 11:13
I agree with you, Doug M. Whatever the cause, it seems that there is a sort of pendulum swinging over generations that swamps the differences in party affiliation. Even looking at long term stock market returns there is a sort of sine curve:
Harding-Coolidge…swing…Hoover-FDR…swing…Truman-Eisenhower-Kennedy…swing…Johnson-Nixon-Ford-Carter…Carter-Reagan-Bush-Clinton…swing…Bush-Obama.
Obviously, this is painting with a broad stroke, but for instance, the Nixon era has much more in common with the Obama era and the Clinton era much more with the Reagan era, than any of them have with party affiliates who governed when the pendulum was on the other end.
27. January 2015 at 11:14
“that the Fed bows to market forces?”
Ray, I commented on that recently. It was more along the lines of Fed “follows” as opposed to “bows-to”. Today, all bow before the Fed!!! But Yes, That was the predominant sentiment throughout the 90’s. Whereas Black was a giant, I find Taylor to be a bit of a clown with his Taylor Rule. Seems like slapping your name on a natural occurrence of the marketplace once you remind yourself that the market will naturally correct itself to maintain rates higher than expected inflation, and that taxes makes (inflation, nominal rate) (0,0)=(4,6) therefore the movement should, naturally, follow *close to* the 1 to 1.5 ratio.
Ah, a simpler time, and now I wait and watch as the world of CB’s wishing to experiment with negative interest rates. Always something new and entertaining to see.
27. January 2015 at 11:50
Agree with Doug.
It’s hard to say what Obama’s ‘economic philosophy’ is. Deep down he’s probably a socialist, but had to keep it hidden to win elections. If he had the votes, the stimulus would have been much larger and would have been permanent.
He’s never seemed to be very engaged with economics or history.
Republicans want to balance the budget in theory, but in practice would vote for tax cuts even if it raises the deficit.
Both Clinton and Bush (in the early years) benefitted from a huge increase in private lending/money creation. But when the bills came due, it was discovered that over time that money creation had a smaller multiplier when it comes to economic growth.
27. January 2015 at 13:02
Scott,
“Reducing government borrowing would free up more savings for private investment”
didn’t the Clinton surplus result in less private saving?
http://research.stlouisfed.org/fred2/series/W202RC1Q027SBEA
27. January 2015 at 13:10
The reason why Clinton said “You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?” was because he was informed by Greenspan that if he enacted the expansionary fiscal policies he preferred, interest rates would shoot up, and that would cripple the economy (due to actions by both the Fed and bond traders). If you think about it, it makes much more sense that Clinton would be angered by this than by what is stated in the article you quote.
27. January 2015 at 15:33
Excellent blogging. The libs need to forget their deficit totem, just as conservatives need to stop genuflecting to the tight money shrine.
Print a lot of money and let the good times roll, I say. Fat City.
Inflation? Worry about that if and when we ever see it above 4% (PCE) again.
27. January 2015 at 16:58
Liberal Roman, interesting points about Yanis Varoufakis. Gabe Newell is a co-founder of Valve and is of course quite familiar with MM, so I wonder if we can assume the same about Yanis. At the very least, he’s far from a dogmatic Marxist – more like a mathematical economist/game theorist with eclectic ideas and positions.
27. January 2015 at 17:10
Luis:
Think you erred in your symbol manipulation.
If C + I + G = GDP,
Then GDP – C = I + G
not GDP – C = I + C
27. January 2015 at 17:14
Sumner:
“Luis, Good point.”
This is evidence for why I personally don’t put too much weight into moneyillusion blogposts.
27. January 2015 at 18:04
Ray said:
“Again, the Fed has the ability to screw things up, but ultimately no real power to move the economy.”
Sumner replied:
“So when the economy is “screwed up”, it doesn’t move?”
Obviously Ray meant “move in the right direction”, i.e. forward. That is why “move” was juxtaposed with “screw things up”.
More “output” and more “employment” are not necessarily indicative of an improving, or sustainable, or efficient economy.
If a housing project is started, and the builder believes he has more bricks than he actually has or will have, then “output” can rise and “employment” can rise even though the project will inevitably fail.
More paper bills cannot complete the project.
Tricking the builder into continuing on as if the project makes sense, cannot complete the project.
What is superficially needed are more bricks that do not and will not exist in that particular quantity, quality, and location.
What is therefore actually needed is a trial by ordeal, a medicine tastes bad, a churn em and burn em, liquidate everything solution. Let the bad mistakes be recognized as such, and do not assume the builder is necessarily “efficient” and thus pin the fault on the paper bill issuer for not printing enough bills to trick the builder into believing his unsustainable project should continue on as per normal.
The above calculation errors can and do occur for large populations of project managers. More managers is not sufficient in preventing such calculation errors, when the errors are caused not by an absence in competition in housing construction, but by an absence of competition in money, and thus an absence of market prices, spending, and interest rates.
What is occasionally needed are changes in relative spending that ONLY a change in NGDP will bring about. This is because NGDP changes ARE relative spending changes, and if a central bank affected NGDP prior, then it necessarily and without exception affected relative spending. The central bank cannot increase NGDdP without affecting relative spending. Thus, if calculation errors are caused by non-market driven changes in relative spending, then only a reversal of those non-market relative spending changes can solve the errors and prevent more such errors.
NGDPLT is not only a policy of NGDP. It is also a policy of relative spending. We know this because under NGDPLT, a central counterfeiter is constrained to “trading” with government debt dealers. Government debt dealers are not everyone. Total spending increases in this inflation mechanism by way of government debt dealers increasing their spending, which then “trickles down”. Before anyone else has increased their spending, the initial expenditures that first affect the gooods prices that make up NGDP, have already increased NGDP. This is a relative spending change.
Why is this significant? The prevailing prices that result from the purely monetary caused change in relative spending, thwarts investors from being able to coordinate real resources in a sustainable manner. The resources that get redirected as a result of the change in relative spending are redirected as if here is an “external to the economy” saver of real resources. Yet there is no such saver, and it is impossible for investors to know precisely which saving signals are internal and which are internal, since there is only one set of observable data.
———-
Regarding monetary offset and Keynesianism: Keynesians believe in the principle of monetary offset and always have. But not always between the CB and the Treasury. They have always believed it the case between the Treasury and the civilian population.
If you want to really convince the Keynesians that for money and spending the CBs are not constrained by interest rates or by the Treasury, you have to the heart of where the theory of the lower bound originated. You have to study and quote from Keynes’ General Theory. Specifically, you have to get behind the fundamental assumptions in Keynes’ work concerning liquidity preference, marginal propensity to consume, cash hoarding, and the fact that Keynes wrote the General Theory when the world’s central banks were somewhat tied to gold and where unlimited money printing was viewed as either impossible, or leading to Weimar hyperinflation.
Then once you do that, and Keynesians join with MMs into the “new” monetary socialism ideology, it will be easy for Austrians to again refute the fundamental (and flawed) assumptions you would be necessarily relying on.
27. January 2015 at 19:15
the crisis happened because of a lack of bricks. It’s hard to be more stupid than that, but I’m sure mf will try.
27. January 2015 at 19:41
Majromax, here are the France and Germany figures in raw Euros. Government spending grew 9.6% in France from 2009-2013, 6.8% in Germany.
Dr. Sumner, unemployment could be the cause of the spending growth rather than the effect; but that’s not necessarily the explanation. If it were, one would expect German spending to fall from 2009 to 2010, but it rose; likewise one would expect a large increase in French spending in 2013 when the unemployment rate grew, but France had a modest (for France) 1.8% increase in government spending that year.
GDP 2010 2011 2012 2013
France 1998 2059 2091 2114
Germany 2576 2679 2750 2809
GDP Growth 2010 2011 2012 2013
France 3.0% 3.1% 1.6% 1.1%
Germany 4.8% 4.0% 2.7% 2.1%
Govt Spending 2010 2011 2012 2013
France 1127 1151 1186 1207
Germany 1216 1195 1216 1244
Govt Spending 2010 2011 2012 2013
France 2.3% 2.1% 3.0% 1.8%
Germany 4.4% -1.7% 1.7% 2.4%
Unemployment 2010 2011 2012 2013
France 9.4 9.1 9.4 10.3
Germany 7.6 6.5 5.6 5.3
Data are from Eurostat and Trading Economics.
27. January 2015 at 19:56
@Sumner–thanks for the reply. I am curious to see (and a blog on this would be helpful) how you believe Fed policy is coincident with the direction of the economy (which I agree with) and not leading, yet you advocate monetary policy as a sort of cure-all, which implies the latter. My conception of the Fed is that it can “lean into the wind” to try and influence policy, but ultimately market forces decide how the economy will perform, not the Fed. You seem to agree? But this is inconsistent with Targeting NGDP as meaning the Fed can steer the economy any way it sees fit (or maybe that’s not your claim about Targeting NGDP?)
MF has it right: the Fed can screw up the economy by steering it with easy money that will cause malinvestment, but sooner rather than later the chickens come home to roost. Much better if the Fed was neutral rather than trying to “steer” the economy.
The big question is whether the Great Depression, like the Great Recession, was preventable even with the best or different Fed monetary (or fiscal) policy. Arguably, the Great Depression was necessary from a ‘real business cycle’ viewpoint as the US economy transitioned from a horse-and-buggy / steam engine era to a mechanized transport (auto/airplane), electrical motor era. Recall Total Factor Productivity was high in the 1930s. Likewise, today, arguably the US, like Japan, needs to figure out how to make old people productive and change the economy from a consumerism oriented economy to one that is more fundamentally driven towards curing the Great Stagnation that R. Gordon and T. Cowen talk about.
Over to you…I really want to know how you get out of the ‘coincident’ / ‘leading’ conundrum. Sumner is like Houdini, once you figure you got him trapped, he manages to slip out!
27. January 2015 at 20:15
It’s more than that . Phillipe. It’s also a willfull blindness to suggest that this was some sort of supply side problem , when there is little to no evidence (aside from spurious correlation) of that being the the case.
Also are you sympathetic to MMT . They also talk about the Clinton surplus and how it reduced private saving.
27. January 2015 at 20:17
OT- Yanis Varoufakis, the chief economist of video game company Valve, a Sumner supporter, is now finance minister for Greece, with their radical left SYRIZA party in charge. Scott Sumner should feel proud. Maybe he will put Scott’s framework into practice? Stranger things have happened and historically Greece “enjoys” inflation…
He is an economist, taught last year at UT Austin, and is now the new finance minister of Greece. … Previously he was working as an economist for Valve, a video game company. Here is Yanis on EconTalk with Russ Roberts. The discussion of Greece and the eurozone starts at about 48:22. – See more at: http://marginalrevolution.com/#sthash.YNFRrxDg.dpuf
27. January 2015 at 20:17
Ray
Lopez, you’ve wandered into cloud cuckoo land when you use real business cycle theory to explain both the greater and lesser depression
27. January 2015 at 20:24
@Edward – ad hominem … pls explain or shut your pie hole.
27. January 2015 at 21:04
Philippe:
It was an analogy, specifically designed for people like you who currently lack the fundamentals required in order to understand more complex scenarios such as economic calculation errors in capital allocations in a division of labor for whole economies.
The story of the home builder and bricks is not meant to be taken as an exhaustive explanation of whole economies. That should have been obvious to you. There is not enough time and resources in my own life to list every resource used in every production process in the world. Such a list would be extremely lengthy and inappropriate. If you want a full list to play show and tell, I’ll leave that up to you to collect.
The intention is to understand the problem in the home building story, and then consider not just bricks, but bricks plus. The same class of errors can take place with more than just one specific resource such as bricks.
You know, you’re only hurting yourself by not even trying to understand the ideas which you criticize. You’re not hurting me, because I understand them already. This is for your benefit if you so choose.
27. January 2015 at 21:34
Edward:
“It’s more than that . Phillipe. It’s also a willfull blindness to suggest that this was some sort of supply side problem , when there is little to no evidence (aside from spurious correlation) of that being the the case.”
And what, the charts shown on this blog of employment and NGDP are something other than a spurious correlation and willful blindness?
Little evidence of real side problems? There is mountains of such evidence, just as there is mountains of evidence of nominal problems. You just can’t see the real side problems because your theory is blind to it. It is like wearing rose colored glasses and claiming there is little evidence that the world has green colors and mountains of evidence that the world is rose colored.
If your theory improved, then you will be able to understand that the fall in NGDP 2008-2009 was strong evidence of real problems, and that there is strong evidence that those real problems were themselves caused by prior money problems.
You and I are looking at the exact same data. The data of history. We agree that NGDP fell and that employment fell 2008-2009. We agree that the central banking system inflated the money supply mostly through credit expansion by such and such quantity before 2007. We can agree on the entirety of the data, and yet have vastly different understandings of the same data because of what we each respectively bring with ourselves to the data. The fact that your economic theory appears to be consistent with history does not imply lack of evidence of all other theories. Yet that is what you are assuming.
You bring a theory that you want to believe is derived from the data, and is exclusive to it, but in reality, there are always multiple economic theories consistent with the same history. Without exception. If there were not, there would be only a single economics school of thought the world over. There would be no need to observe economic data for the purposes of establishing theory.
A major problem with your theory is that it has only a fleeting consistency with history. It can be consistent for some time, but is always short lived. It is always short lived because it is designed to be absorbed into history and divorced from acting man. Every such theory when implemented, is soon transcended by the reality of acting man rendering the theory a past “truth”. See price stabilization policies as an example. Consistent with history for a time, but eventually becomes known as inconsistent after being implemented once learning, adapting (acting) transcends it.
Economic truths must be grounded in action if they are to remain relevant. NGDPLT is its own demise. So is every other “plan” divorced from action. It is only a matter of when. Driving around recklessly and yet not hitting anything for a time does not mean you have unlocked the secrets of proper driving.
27. January 2015 at 21:37
Ray:
Ad hominem? From those Sumner encourages and flatters? Naw!
27. January 2015 at 22:40
I used to mock Major Freedom for spending countless hours here commenting as a proponent of anarcho-capitalism and Austrian business cycle theory, and failing to convince even a single person that his explanation had value.
I now concede that Major Freedom has managed to convince one person of his viewpoint after 5 years of commenting on this blog.
That person is Ray Lopez. Congratulations Major, if you keep this up, in another 5 years you’ll have your second disciple.
27. January 2015 at 23:52
Scott,
what about the fact that US growth accelerated even more in 2014 when fiscal tightening ended –> Keynesiasm wins?
I think that we shouldn’t draw very firm conclusions based on one year GDP growth, 2013 nor 2014.
28. January 2015 at 03:52
http://www.capx.co/monetary-policy-the-great-illusion/
Any commentary?
28. January 2015 at 04:04
I think the idea of GDP=C+I+G predates Clinton-who interestingly enough gave Obama a full throated endorsement at the 2012 Democratic convention-so I guess he didn’t see them as failed. That equation as I’m sure you know is national income accounting that goes back to the late 30s.
Also based on the above equation there was no need for a ‘home run’ in 2013 at least if this is defined as a sharp slowdown. All that had to happen was that we would have had faster growth without the sequester. With that the case is made to not do fiscal austerity.
In any case, austerity wasn’t just in 2013 but started in 2010. As for deficits we’ve surely had enough deficit cutting for the most blood thirsty austerians.
http://www.usatoday.com/story/news/politics/2015/01/26/cbo-report-budget/22353147/
28. January 2015 at 05:01
Mike Sax: “As for deficits we’ve surely had enough deficit cutting for the most blood thirsty austerians.” With the US federal deficit still projected to be about 3% of GDP, that is an odd notion of austerity. A lower level of pump priming is not actually austerity.
Meanwhile, here in Oz, the fight is over if we are heading back to surplus fast enough.
http://www.abc.net.au/news/2014-12-15/budget-deficit-for-2014-15-forecast-to-reach-404-billion/5967956
28. January 2015 at 05:08
Ben J:
I used to believe that the truth was what most people believed, and thus the way to test my own ideas for truth is whether and to what extent I could convince others.
Then I became more learned and educated. I learned such things as argumentative fallacies like ad populum, ad hominem tu quoque, and countless others. It has made me a much better thinker.
Then I see what you write. You are making many of those same errors, which tells me you either never learned what makes an argument good and what makes it bad, or you have, but just don’t care. Either way, I will be crystal clear to you. I am not concerned with whether or not you are “convinced”, or with whether or not anyone else on this blog is “convinced”.
Often when people become “convinced” with what I say, they agree for the wrong reasons. I do not like it when people agree for the wrong reasons. Sumner does not care if people agree with him for the wrong reasons. If someone “influential” merely mentions stablizing NGDP might be a good idea, Sumner will promote them to General regardless of the reasons they made the comment.
If you agreed with me starting today, guaranteed it will be for the wrong reasons. So it is a good thing in my mind that you are not yet convinced. You’re just not ready to do it rationally.
BTW Every time you dump on free market ideology, you are only communicating your anti-free market ideology.
28. January 2015 at 05:20
See the sad thing about how you think Ben J, about truth in money, is the exact same reason why you find the imperialist warfare state an evil. You can’t connect the dots on it.
Truth is not established by majority vote. But because you are convinced of otherwise, and so are many others in the democratic minded locations, all that is necessary to bomb small countries is to convince the majority there are terrorists there wanting to kill everyone. Then it becomes truth. Same method, different morality.
28. January 2015 at 06:14
Paul, I don’t agree, the sharp drop in the deficit occurred at the beginning of 2013, not October 2012. And your growth figures are not quite right. More accurate data would show essentially no change in growth after Oct. 1st, 2012.
Liberal Roman, In that case I wonder if I spoke with him on the phone. I talked to some Valve people who were interested in introducing economic concepts into their games, but don’t recall their names. It was a few years ago.
Jason, That’s even worse. If the Keynesians of 2012 didn’t even know what their models predict, then how can we rely on Keynesians for advice? And sorry, a sudden $500 billion reduction in the deficit is MASSIVE, and is austerity in my book. If someone claims it isn’t, then they aren’t talking about the Keynesian model most of us were taught in school. Not are they talking about the Keynesian model discussed by Krugman, Wren-Lewis, and other prominent pundits.
Peter, There was a $500 billion drop in the deficit in calendar 2013. How is that not massive austerity?
And if you can see a connection between the 1993 debt deal and the housing bubble, then you are a much better economist than I am. In my view housing was caused by moral hazard and stupid banking, not anything the Fed did. Fed policy was pretty stable.
Doug and Kevin, I agree.
Philippe, It may have reduced private saving, but should have increased total saving.
Thanks Todd.
Ray, You said:
“Arguably, the Great Depression was necessary from a ‘real business cycle’ viewpoint as the US economy transitioned from a horse-and-buggy / steam engine era to a mechanized transport (auto/airplane), electrical motor era. Recall Total Factor Productivity was high in the 1930s.”
More weird humor? Faster productivity growth leads to depressions? I wonder why the East Asian tiger economies didn’t have a 50 year long depression?
And no, I never claimed monetary policy is a “cure-all,” just the opposite.
I meant “coincident” in the same sense as used by economists—policy changes and NGDP changes show up in the same quarter. Obviously if policy influences NGDP, than policy changes must occur at least a millisecond before NGDP changes, but a millisecond doesn’t show up in the data. It looks coincident in the data. Commodity prices move within seconds, which means NGDP does as well.
Andy, Actually, RGDP growth for 2014 will probably come in below 2013, when we have Q4 data. But I concede it probably did speed up slightly. Certainly the job market was considerably better. Early in the year I said we’d need to look at the job market to test the hypothesis that ending extended unemployment insurance would create jobs. In April, Krugman said it looked like it failed to do so. Just as in 2013 he spoke too soon, and now it looks like it did create jobs. I have a post at Econlog on this issue.
I also think there is a misunderstanding in your comment. MMs have never claimed that monetary policy is a precise surgical instrument that exactly offsets fiscal policy in each and every twist and turn. For instance, in 2013 I predicted austerity would slow growth in Q2, but not over a more extended period of time. (I was wrong, but the point is that my expectation was never that there would be perfect offset at each moment, but rather over the time frame of concern to Fed policymakers.) So yes, it’s possible that growth sped up slightly due to the end of austerity.
If you are having trouble with the nuances of what I am saying (and I can’t blame anyone for being confused, it’s complicated), always assume the most logical interpretation. It’s not logical that monetary policy would precisely offset each zig zag.
Mike Sax, You said:
“Obama a full throated endorsement at the 2012 Democratic convention-so I guess he didn’t see them as failed.”
It’s rare to see such astute political analysis.
Yes, by all means, 2013 proves nothing. So you are saying that all of Krugman’s earlier claims about “austerity” in the UK and eurozone slowing growth were also BS, or are you going to use a double standard?
28. January 2015 at 06:32
All I’m saying is that not everyone sees 2013 in the US in such categorical terms. I don’t agree that to prove austerity has been harmful you have to see a dramatic slowing in growth.
All you have to show is that growth would have been faster without it.
28. January 2015 at 06:53
@Jason Smith – nice rebuttal of the Sumner strawman; it’s true, Keynesians generally did not predict a recession in the US sequestration of 2013, though the Open Letter by certain economists (but not signed by Krugman) did have one single sentence predicting a double-dip recession. But you’ll be relegated to the Sumner memory hole.
@Derivs – if you have a link to your comment pls provide. Indeed central banks seem to have a tough time with new regimes, as they seem to drive forward looking at the past, like generals always fighting the last war. Monetarism as advocated by Irving Fisher is a phenomena only, at best, around for less than 100 years. Keynesianism has been around even less, yet people think it’s written in stone. Woodford’s monetary model has only been around since the late 1990s. I also model things in C# programming language, would you trust me to design something for a 16T economy? Why then trust Woodford? Is he a superman? If so, why doesn’t he use his model to make money? Same with Sumner. These guys are largely, intentionally or unintentionally, well-meaning or otherwise, charlatans.
28. January 2015 at 07:18
Scott wrote “In my view housing was caused by moral hazard and stupid banking, not anything the Fed did. Fed policy was pretty stable.”
I think this is accurate. Basel II encouraged (unintentionally probably) banks to load up on AAA rated mortgage backed securities (MBS) due to their very light capital requirements for risk weighted assets (RWA). This incented banks to capture these higher ROE instruments. They were backed by Fan and Fred, little capital needed on the books, nice steady returns. The Investment banks loved them for the fees, rating agencies loved them for their fees, this got investors involved along with appraisers….the rest is history. Of course few of these were AAA. About 3/4 of them would eventually be rated junk. This downgrade meant that banks had to either sell them (if they were junk) or add significant amounts of capital in accordance with the Basel II RWA rules. With fire sales of junk assets and emergency capital calls for functionally bankrupt banks we had a full blown bank panic. Banks loaded up on what they thought were virtually risk free assets which were nothing but risk free and failed to do basic due diligence on these investments.
28. January 2015 at 08:25
@Anthony,
It was much worse than that. No doc “liar loans” are but one example of loans that were designed to fail. Just think, you can document your income and assets and get a mortgage, or you can not document them and still get a mortgage but at a higher interest rate. Clearly, the honest borrower is going to take the first option, and the liars will go the no-doc route.
The people who designed these mortgages knew exactly what they were doing. They were sort of hoping that house prices would rise forever, so that if the liar loans went bad, the house could be sold to pay off the loan and nobody got hurt. But if that didn’t work out, they didn’t really care since the mortgages were opaquely securitized and sold off to unsuspecting pension funds or banks who thought they’d be able to unload them before they went bad.
As William Black points out in The Best Way to Rob a Bank is to Own One, once you subvert the audit function, it is easy to make loans that look very profitable for a few years. You make high-interest loans to people who are taking unreasonable risks, and you make sure to loan them more than they need for their project so they will have enough to make the loan payments for the first couple of years. Then, when you’ve shown a big (fake) profit on these loans, you award yourself a big bonus and retire. Then let the FSLIC or FDIC deal with the fallout.
This stuff did not just happen. As Scott says, there was a great deal of moral hazard involved.
28. January 2015 at 08:58
Regarding liberal economic opinion in the mid 2000s, for the record, here’s Krugman in the Asia Times in 2005…
http://www.atimes.com/atimes/Global_Economy/GE19Dj01.html
It’s interesting that he never made these opinions (taxes increased to 28% of GDP) known in the US through his NY Times column in those years, only far away in Asia.
His economic crystal ball wasn’t functioning so well either…
28. January 2015 at 09:51
Two questions for Keynesians in light of this discussion:
1) If the general consensus of the Keynesian camp is that $500 billion of deficit reduction (much of it exogenous and permanent) shouldn’t be expected to put a noticeable dent in the time path of GDP or the unemployment rate, why credit the $800 billion stimulus (which only lasted for 2 years) with any meaningful effect whatsoever on the economy during 2009-2010?
2) Should we not try to generate a budget surplus for FY2016 if cutting the deficit by $500 billion isn’t really austerity and therefore unlikely to produce obviously negative impacts on GDP and unemployment?
28. January 2015 at 10:09
Not fair to leave out political. “A chicken in every pot” became a “Granite kitchen for everyone to put a pot in”.
Complaining about lending standards had a very racist – elitist non-PC flavor at a time when PC was peaking.
“If so, why doesn’t he use his model to make money?”
Probably for the same reason I never used any of mine to explain the economy.
“if you have a link to your comment pls provide.”
I’m sorry, link to what? The Taylor? I was joking when I called him a clown, probably a very nice guy, I just wanted to wind you up. Everything I said after that is correct though. I call it how not to do stupid things and lose money.
28. January 2015 at 10:37
The Keynesian answer might be:
The stimulus was helpful in that government borrowing made up for the decrease in private lending and also for the decrease in local and state taxes.
The reduction in the deficit recently hasn’t mattered because private lending was robust and the states/municipalities are doing better.
You have to define austerity by looking at all types of money creation.
28. January 2015 at 10:50
@Ray Lopez: “yet you advocate monetary policy as a sort of cure-all” Completely false. The fact that you think this, shows that you need to spend much more time listening, as a student, and much less time pontificating from your position of ignorance. You clearly have no idea what Market Monetarism is even about. So why don’t you try learning, first, before speaking so much?
“Targeting NGDP as meaning the Fed can steer the economy any way it sees fit” It’s clear that you haven’t even grasped the very basics of the framework. Let me help you get started in the right direction: the nominal economy is different than the real economy. There are interactions between the two, but they don’t even always move in the same direction, much less in lockstep. So any time you make a claim with a phrase like “steer the economy”, you must distinguish whether you are referring to the nominal economy, or the real economy.
But you aren’t careful (or maybe you don’t even understand the difference), so your statements wind up being essentially meaningless. You are constantly “not even wrong”.
28. January 2015 at 11:36
@Don Geddis –you love rhetoric, but you are a windbag, empty of substance. Nominal GDP is simply real GDP plus an inflation rate, nothing more. You, ignorant and blinded by ideology such as money illusion and sticky prices, try to make it more than that. As for your Wiki cite “not even wrong”, note who the quote author was: eminent physicist Wolfgang Pauli, who was speaking to the preeminent physicist Lev Landau! In other words, two giants in the field were exaggerating the extent of misunderstanding in some confusing topic of theoretical physics. That’s hardly the state of affairs between you and I, little man. If you want to pontificate, tell us your views towards Fischer Black’s repudiation of Fisher’s quantity theory of money and monetarism.
28. January 2015 at 12:33
Brad DeLong attacks monetarism, citing Eichengreen and Martin Wolf:
“What Failed in 2008?”
https://www.project-syndicate.org/commentary/2008-financial-crisis-lessons-by-j–bradford-delong-2015-01
28. January 2015 at 13:32
Don, don’t bother. Ray hadn’t heard of sticky wages before reading this blog, and this is very embarrassing for a super-duper extra high level mega genius IQ>1000 person such as himself. He’s lashing out about it. Anyone who even notices the empirical evidence for sticky wages must be mocked, or we might start (good lord) thinking maybe his IQ is more like 950. Note he has no alternative hypothesis for the empirical data – he just has an angry emotional response.
This isn’t surprising though, he’ll fail just about any pop quiz you give him (of course you’ll probably get a link to Wikipedia and an abstract from the first paper on Google – the research method of a super mega genius). An example:
Ray, what is the difference between the expenditure, income and production measures of GDP? What does this imply for measures of nominal GDP? For extra credit, answer this concisely and clearly (I can hope, can’t I?).
28. January 2015 at 14:57
@Ray Lopez: But I gave you substance. You used the phrase “steer the economy”, without clarifying whether you were referring to the nominal economy, or the real economy. It makes a huge difference. (Can you answer the question, even now? Which did you mean?) You need to use more precision in your thoughts, or you’ll never understand any of this.
“Nominal GDP is simply real GDP plus an inflation rate, nothing more.” Nobody disagrees with this. But the accounting definition doesn’t have the consequence you seem to think it has. In particular, it doesn’t imply that the distinction between NGDP and rGDP is irrelevant. Depending on the context, it matters greatly which one you are referring to. (To put it another way: just because A=B+C, that doesn’t tell you anything at all about the correlations between any two of the variables, when all three can vary.)
@Ben J: Yeah, I know. I’m just amusing myself, by playing with the monkey. I, too, love his silly habit of “argument via Wikipedia link”.
28. January 2015 at 16:42
Great post. Imagine the alternative scenario where Obama in his first address to Congress says –
“We have been here before, under former President Clinton, so we know what works. That’s why, because of the deteriorating fiscal situation I am regretfully dropping my health care plan, and focusing entirely on deficit reduction. I ask the huge Democratic majority to repeal the entire Bush tax cut, and bring back the pay as you go budget rules of 1990. I am appointing Christina Romer to the empty seat on the Federal Reserve to help Bernanke with the recovery.”
And he points to Bernanke in the audience and says “I will veto any stimulus plan passed by this Congress. With these tax increases and strict spending limits, if you allow the economy to recover we’ll have a balanced budget by the end of my first term. I expect you to offset any fiscal drag on the economy.”
Then the economy would have recovered earlier and Obama would have won reelection in a landslide rather than barely beating Mitt Romney. On the downside, Scott Sumner probably would have never gotten into blogging.
28. January 2015 at 20:16
@Ben J- Why should you be the Inquisition? Surprise me, and answer your own question. I’m all ears, and I doubt you’ll do so. There are two main ways to measure GDP, and if you’re smart you can connect the dots… if not, well, that’s you.
@Don Geddis – “Nominal GDP is simply real GDP plus an inflation rate, nothing more.” Nobody disagrees with this. GOTCHA! LOL. If I was Sumner, I would stop here and let you wonder what that cryptic one-liner means. But here’s a hint: Nominal GDP means a lot more than real GDP plus inflation to a monetarist like Sumner. It goes to the heart of how monetarism supposedly works: money illusion. Since this is not an online distance learning portal, I’ll let you do some reading to come up to speed. What was your major again? Humanities right?
28. January 2015 at 21:13
A refresher…..
After the word CHANGE, the second most used word by clinton running for office was INVEST. Govt would invest in…
He met in early Jan ’93 with Greenspan, Alan told him, sorry Reagan spent all the money, so if you deficit spend I’ll have to raise interest rates.
And to get 4 more years in the big bird, Clinton sold all his team down the river, he put Greenspan on the dais next to Hillary for his ’93 SOTU – (from memory) literally tricked him into sitting there, to message to bond guys he was over the invest thing.
To the great surprise of most of his staff and all political observers, Clinton’s FIRST ACT as president was “Don’t ask don’t tell”
Nobody could figure out why.
And the answer was simple, it was the only thing he could do for his team that was FREE. It took no “investment.”
NOW let’s look at word INVEST.
If Clinton BELIEVED any of his bullshit about govt investing, he’d have told Alan to f*ck off, bc when govt invested money, it was BETTER than when Greenspan kept down rates so businesses could invest it instead.
All of this is WHY, George Bush came into office and spent money like a drunken god damn sailor. All the way down the last $750B in stimulus bailout, the man was SMART to assume if he spent it, the next guy wouldn’t get to.
It is simply undeniable that the GOP took off when they stopped worrying about the deficit and began to worry about making sure that all the money got spent on things that didn’t reward democrat voters.
Now YES, scott won his debate with me bc when the economy got so shitty that GOP strategy got flipped over and pinned, we learned a crucial fact:
IF THE ECONOMY GETS TOO UGLY, we can’t Clinton a ll the future Democrat Presidents.
As such the core benefit to a nice level target policy either on GDP, inflation, wages, whatever, is that it takes the possibility of an Obama outlier befalling our nation, and if we use Scott Sumner’s terribly wicked genius plan….
We can ensure that all future Democrats, never have any money to spend unless thye cut something else they like.
Selah.
29. January 2015 at 05:12
Morgan,
Nice comment. I might frame it a little differently. Its not just ‘if the economy gets too bad’ that starve the beast stops working so well as a long term strategy. It’s like anything in a repeat player game, losing to Bush in 2000 and then seeing the deficits pile right back up was too much to ignore. No one likes to lose twice in a row the exact same way. Politically, Dems would have felt the game needed to change even if there had been no ‘crisis’ in 2007-2008. Even if there had just been a slight slowdown, politics would have required a shift on the part of dem leaning economist away from deficit reduction once Obama was in office.
29. January 2015 at 06:49
Mike, You said:
“All you have to show is that growth would have been faster without it.”
Exactly, but good luck doing that.
Jim, That Krugman quote is very amusing. How times change.
Justin, Great. I quoted you at Econlog.
Morgan, You said:
“It is simply undeniable that the GOP took off when they stopped worrying about the deficit and began to worry about making sure that all the money got spent on things that didn’t reward democrat voters.”
Yup, that’s the modern GOP, and it’s exactly what I don’t like about them.
29. January 2015 at 07:15
The thing is that Obama has never implemented any kind of economic policy.
He hasn’t done any budgeting plans, so that process just goes on the way it does — entitlement spending goes up, discretionary spending stays the same or declines.
There hasn’t been any changes in tax policy.
The biggest economic development of his term — oil and gas production — happened despite his efforts.
He kept Bernanke and hasn’t influenced Fed policy.
He hasn’t taken up any reform of shadow banking or federally backed loans (in fact student loans are expanding) or too big to fail.
Whether you support him or not, we’re all going to look back on his eight years as a period of treading water before we start addressing problems again.
29. January 2015 at 10:00
@Ray Lopez: “GOTCHA! LOL. If I was Sumner, I would stop here and let you wonder what that cryptic one-liner means. But here’s a hint: Nominal GDP means a lot more than real GDP plus inflation to a monetarist like Sumner.”
It’s abundantly clear, from the quality of your comments on this blog, that I understand what Sumner means, far, far better than you do. But let’s stop talking about irrelevant personal characteristics, like your IQ, or how rich you are, or who you’re dating, or what I majored in. Why don’t you give a shot at actual economics content. Please explain how “NGDP=RGDP+inflation” is in any way a “gotcha”. You say that NGDP “means a lot more” to Sumner, and that he somehow wouldn’t agree with that simple definition. Please be specific. What is it that you have in mind? (And don’t think that you’re “teaching” me anything, at least about economics. All I’m asking is what you think the answer is. Please assume that I already fully understand all these concepts.)
29. January 2015 at 10:04
@Ray Lopez: And, once again, you wrote (way above) “Targeting NGDP as meaning the Fed can steer the economy any way it sees fit” Please stop ignoring or trying to weasel out of answering the direct question. I’ve asked you multiple times already: when you wrote “steer the economy”, did you mean the nominal economy, or the real economy? A simple question, not even about economics, per se, just about what you thought your own words meant. Why won’t you answer the question?
29. January 2015 at 10:11
Is NGDP targeting a stealth way to deal with the debit crisis?
As in trigger inflation so that that debtors can pay back their creditors more easily.
29. January 2015 at 11:11
@Charlie Jamieson: “Is NGDP targeting a stealth way to deal with the debit crisis?”
You’ve got causality backwards. After three decades of 2-3% inflation, that expectation was baked in to long-term debt and wage contracts. It was the precipitous fall in NGDP in 2008 that created the debt crisis.
29. January 2015 at 11:12
Scott,
They were the PERMANENT MINORITY PARTY until Reagan (Nixon started it).
So I’m ok with whatever they needed to do.
my point was, Chait got it backwards, and you shouldn’t for a second assume that once we take Obama style presidency off the table with level targeting, the GOP strategy of, “do not let Dem buy votes” won’t come back even stronger.
I just think all eyes should be open, it’s like Liberals cheering for gun control, but instead delivering a national database of mentally ill people.
29. January 2015 at 11:16
Nick, I’m with you, but of the opinion that Obama would have bent like Clinton IF he didn’t have the financial crisi to question capitalism. Being a two terms is always worth anything.
29. January 2015 at 11:29
Don: Everything flows from the debt crisis.
It’s really the only issue. You either grow your way out of it (post WW2), suffer through a painful liquidation (Great Depression), carry on like a dead man walking (Japan) or make painful political choices to decide who wins and who loses. … Or maybe NGDP targeting can save the day.
29. January 2015 at 13:31
Charlie
Everything flows from the debt crisis.
Yeah, and rain is caused by puddles on the ground.
29. January 2015 at 18:06
“Exactly, but good luck doing that.”
Well, it cuts both ways. For your position you have to do the same thing: show that it wouldn’t have been more without austerity.
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I think Simon Wren Lewis did a pretty good job of at least strongly suggesting that it would have been more without austerity.
As for all this talk about how Obama should have done austerity like Clinton, we’ve had plenty of austerity.
“Because of that 2011 agreement, we spent less in 2012 than we had in 2011, and less in 2013 than we did in 2012. That was unprecedented “” only once since 1948 did the government spend less than it had the year before (in 1965, and only by a hair).”
http://www.washingtonpost.com/blogs/plum-line/wp/2015/01/29/dont-believe-the-hype-obama-and-republicans-will-reach-a-budget-deal-heres-why/
So we’ve actually had more austerity than the 90s. Only once did we have the govt spent less in one year-and that was barely-yet from 2011 to 2013 it happened two straight years.
29. January 2015 at 18:25
I’m glad you said Scott’s plan s wicked, evil, genius, Morgan not me as I’d be accused of wildly mischaracterized if I said it, though you’re right.
What is the key to the genius? I think it’s the way MM is presented politically speaking. There are two notable aspects of MM:
1. Move from an inflation target to a NGDP target.
2. Monetary offset
The reason so many liberals and centrists have been taken in by MM is 1. That’s for them the carrot as liberals never really liked the inflation target even if ostensibly it’s a ‘New Keyensian’ concoction.
On the other hand liberals don’t like 2 which is basically for them the fine print. Still even though they don’t like 2 they still don’t worry about totally buying into 1-all the big liberals like Krugman, Delong, Christina Romer, and Woodford have accepted it and the ‘small liberals’ like at Angry Bear seem to have positively embraced it.
Conservatives on the other hand prior to seeing 2 are even somewhat distrustful. Again, liberals never really liked IT as it clearly thumbed its nose at the dual mandate making it obvious that the Fed only cares about inflation not employment or at least if it comes to a choice inflation always comes first.
Only when conservatives see 2 do they see the genius. It’s working, conservatives are slowly catching on-not the GOP Congress, yet at least, but places like the National Review and Larry Kudlow, etc.-while liberals probably aren’t as skeptical as they should be.
29. January 2015 at 18:29
In the same vein I will say this. I tend to think Krugman ought to engage Scott more than he does. He continues to skewer Right wing inflationphobes, totally missing that the truly cutting edge conservative idea now-MM-totally repudiates inflationphobia-which appeals too many not so sensible centrists and not so thinking liberals.
29. January 2015 at 19:34
Mike Sax: so austerity means cutting government spending. So if government spending is cut from 20% of GDP to 18% of GDP but taxes fall from 18% of GDP to 14% of GDP, that would be austerity? Conversely, if spending is raised from 18% of GDP to 20% of GDP but taxes rise from 18% of GDP to 24% of GDP, that wouldn’t be austerity?
29. January 2015 at 20:34
Lorenzo there’s no question that tax hikes are austerity like the recent consumption tax hike in Japan which did hurt growth.
Now I think I see what you’re getting at with a spending cut but a even larger tax cut-that certainly could be a net fiscal increase what Keynesians would call stimulus.
What I suspect you may be thinking is that liberals like me like spending hikes more than tax cuts. There can be some truth in that but what I think is that you can’t be too categorical about it.
If we had a very big spending cut with an even bigger tax cut you might be bale to argue that this is not technically ‘austerity’ and be right but yet liberals quite possibly would be apocalyptic.
That’s because besides the question of fiscal stimulus vs fiscal austerity-a business cycle issue-there are distributional issues.
If tomorrow there was the nightmare liberal scenario of a total elimination of Social Security in order to pay for the end of the capital gains and corporate tax rates the fact that you can argue it’s stimulus certainly wouldn’t mollify libs.
For me I’m all for tax cuts depending on who gets them. Usually conservatives don’t seem interested in the kinds of tax cuts that could interest me-like cutting the payroll tax or consumption taxes, or lowering state taxes for the little guy.
They usually want to cut the corporate rate, cut the capital gains rate, and cut the top individual rate while looking to raise consumption taxes which is closer to the European model ironically which has less progressive tax rates but a much larger safety net, etc.
29. January 2015 at 20:38
On the other hand Cochrane in a recent WSJ piece claimed that Keynesians are logically inconsistent by being for fiscal stimulus but opposing the Iraq war-this argument is just silly.
No doubt there are some things that would mean an increase in govt spending but liberals would still vehemently oppose-the Nazis were able to get out of the Great Depression fast because they used forced labor-this doesn’t mean that logical consistency dictates that liberals have to support forced labor.
29. January 2015 at 20:52
Mike, You said:
“On the other hand Cochrane in a recent WSJ piece claimed that Keynesians are logically inconsistent by being for fiscal stimulus but opposing the Iraq war-this argument is just silly.”
That’s funny, it uses the same logic you employ over here time and time again. Why do you think the argument is silly?
Still, I guess it’s a welcome break from Ray.
29. January 2015 at 21:23
Mike Sax: what I am actually getting at is that your working definition of austerity seems to make no sense. Spending which is paid for by taxes is not notably stimulatory. But a fiscal deficit is still stimulatory, even if it is shrinking. The issue of monetary offset can make the net effect moot, but but that is by counteracting the stimulatory effect.
Stimulus is stimulus, the question is who moves “last”–to which the answer is the monetary authority.
29. January 2015 at 21:26
As for (federal) spending, the more the US federal government does, the lower the general trust in government and in Congress. Given the diversity of the US, and the costs in coordination across such a large and diverse country, don’t you think the two trends might be connected?
29. January 2015 at 21:28
In fact, an explanation for the “madness” of the GOP might be that they find the contradiction particularly intense–they are the Party to vote for to express anti government angst, but everyone still wants on the gravy train.
29. January 2015 at 21:53
I don’t see how I’ve employed Cochrane’s argument over here. If you can give me an example it’d help me see your point.
29. January 2015 at 22:01
Lorenzo as I mentioned above-I provided a link-2012 and 2013 were just the 2nd and 3rd years since 1948 that the government has spent less than the year before.
I don’t know why you think it makes no sense as it’s common for economists to see a drop in spending or an increase in taxes as a contraction year over year-it’s really definitional, there’s not even anything to misunderstand I wouldn’t think. It’s sort of like arguing against an identity.
Again basic national income accounting shows that a drop in G spending is a drop in growth. Now if there is a drop in G but an overall increase in output this means something else-C or I-were increased.
You’re simply wrong that a reduction in the deficit isn’t austerity. It’s not true that only a balanced budget makes it austerity.
29. January 2015 at 22:33
As for taxes I’d rather they didn’t raise taxes to pay for spending-I agree that’s not stimulative, though the idea is that in a recession you spend the stimulus money now and then only raise taxes in the future after the recession is over-you don’t have to do it all one year but can ‘smooth it out.’
Again, not my preference. In my mind, if there is a deficit during a recession from stimulus spending, then we should wait till after it’s over to even talk about cutting deficits. A lot of the structural deficit will decrease thanks to higher tax revenue which comes from higher growth.
30. January 2015 at 07:01
@Don Geddis – ” Please assume that I already fully understand all these concepts” – then why do you ask me? If you fully understand you don’t need me.
But to give you a clue: targeting NGDP rather than targeting GDP is an attempt to use ‘money illusion’ to your advantage. Simple example: the economy is not growing at all, 0%. If you target GDP (real) you must keep the money supply constant. But, if you target 5% NGDP, you can print money up to 5%. People will ‘feel richer’ due to money illusion, and, if you believe in the ‘sticky wages’ hypothesis, it will make it easier to hire again, since money is depreciated. Now substitute -5% real GDP growth and 10% target NGDP growth for a even more ‘compelling’ example (in the eyes of people like Sumner). GOT IT NOW? Even a poor, dumb English major like you should understand. BTW, I agree you know Sumner better than I: you both drink from the same Kool Aid cup.
30. January 2015 at 07:34
Ray,
Personally, I’m impressed with your summary. You are getting closer on wage rigidity. Still missing the part where ngdp drop causes more unemployment overall in the first place though. It’s not just replacement wage. Then there are a few unfortunate claims about money supply / depreciating money …
But here’s what I really want to know: when you write a comment how do you decide what to put in single quotes?
30. January 2015 at 08:12
‘Charlie
Everything flows from the debt crisis.
Yeah, and rain is caused by puddles on the ground.’
Why the sarcasm?
I don’t see a lot of policy makers directly addressing the issue. There is still mostly kick the can strategies and extend and pretend.
I still suspect that NGDP targeting is a way to solve the debt crisis in an indirect way, while still pretending that we’re doing something else. But debt holders are going to oppose it.
Fwiw, I’m in favor of inflating away the debt; however, inflation is a tricky animal to control and some are hurt more than others, usually the most vulnerable.
30. January 2015 at 08:24
@Ray Lopez: “Simple example: the economy is not growing at all, 0%. If you target GDP (real) you must keep the money supply constant.” Sorry, please explain more about this fascinating idea of yours, to “target real GDP”. Let’s say that I wish to target real GDP growth at 4%. But today, real GDP growth is only 1%. What exactly do you recommend that I do about the money supply, in order to hit my target of 4% real GDP growth?
30. January 2015 at 08:48
Mike, I meant that sort of argument, not that precise one. Like when I write a piece saying extended UI causes more unemployment, and you accuse me of opposing extended UI.
30. January 2015 at 11:00
@Don Geddis (and Nick too) –this thread is getting too long, and this forum is unwieldy, so this is my last post on this thread.
You say: “Sorry, please explain more about this fascinating idea of yours, to “target real GDP”. Let’s say that I wish to target real GDP growth at 4%. But today, real GDP growth is only 1%. What exactly do you recommend that I do about the money supply, in order to hit my target of 4% real GDP growth?”
The exercise was for me to explain to you what *Sumner’s* thinking is in Targeting NGDP, not what *I* think (Nick: note this, and I’m glad you understand how Supply and Demand curves work in Econ 101 textbooks, good on you). I agree with what Charlie Jamieson says upstream, Targeting NGDP is just a fancy way of hurting the debtee (debt instrument holder) and helping the debtor. It’s basically a modern ‘Jubilee’.
To answer what *I* think it takes to increase real GDP? Besides increasing population (through open borders), we need to increase TFP via more basic R&D (government or private), better education (including letting the stupid people drop out instead of kicking them to the next grade), a better patent system (including prizes like Alex Tabarrok favors, and reforming the laws to allow a first to invent defense, two-tier patent term protection, a Japan-style Article 35 law in the USA [inventor gets moral rights to pioneer inventions]), and other such supply side and structural changes. Not by printing money. GOT IT NOW?
30. January 2015 at 14:04
Mike Sax: “You’re simply wrong that a reduction in the deficit isn’t austerity.” If that is what is meant by ‘austerity’ then it is misuse of a perfectly good word.
A rise in taxes with spending kept constant is contractionary. A cut in spending with taxes kept constant in contractionary. You are mistaking use of the ceteribus paribus assumption for something else. A cut in spending with a bigger cut in taxes is stimulatory. Just as a rise in taxes with a bigger rise in spending is stimulatory (on balance).
As for the first cut in actual nominal spending in decades, that is after a massive increase in nominal spending, so a bit more like a return towards the status quo ante than something truly extraordinary.
And, between the continuing deficit and monetary offset, happened while the economy continued to grow. And no, it wouldn’t have grown faster without the cuts because the Fed would have adjusted its policy to compensate if the deficit had been higher.
30. January 2015 at 20:01
@Ray Lopez: “The exercise was for me to explain to you what *Sumner’s* thinking is in Targeting NGDP, not what *I* think”
Nope, not quite. You must have forgotten your own words. Let me repeat them for you: “Simple example: the economy is not growing at all, 0%. If you target GDP (real) you must keep the money supply constant.” Sumner has never once suggested that anyone target real GDP via money supply manipulations. So you can’t be “explaining” Sumner’s reasoning. And you do label this as a “simple example”, so it should be trivial for you to explain.
Again, what did you possibly mean, in your simple example, by a monetary policy of targeting real GDP, via changing the money supply? Please help me out by using a target of 4% real GDP growth, so I can understand your “simple example”. How does your imagined monetary policy work?
What does “If you target GDP (real)” mean? These are your words, not Sumner’s.
P.S. And I almost forgot: you’ve neglected to answer, when you wrote “Targeting NGDP as meaning the Fed can steer the economy any way it sees fit“, whether your phrase “the economy” meant the nominal economy or the real economy. Please clarify! Thanks.