I’m so depressed I just want to give up on this pointless crusade, but I suppose I’d better say something about Bernanke’s “pep talk” today in front of Congress.  In the Q&A he argued that “no one” can dispute the aggressive nature of monetary policy today:

“Senator I think it’s important to preface the answer by saying that monetary policy is currently very stimulative as I’m sure you are aware.  We have brought interest rates down close to zero, we have had a number of programs to stabilize financial markets, we have language which says we plan to keep rates low for an extended period. And we have purchased more than a trillion dollars in securities.

“So certainly no one can accuse the Fed of not having been aggressive in trying to support the recovery. That being said, if the recovery seems to be faltering then we will at least need to review our options.

I guess that makes me “no one.”  In the 1930s everyone seemed to think Fed policy was expansionary.  They cut rates close to zero, they dramatically increased the monetary base, they encouraged banks to hold on to more reserves.  Hoover set up a fund to help the banking system.  I’m not disputing that the Fed has done more this time.  But Bernanke himself admitted that we now know Fed policy was actually contractionary during the 1930s.  By what benchmark can the economics profession say it was contractionary then, but is highly expansionary now?  I’ve asked the question 100 times of my fellow economists and still haven’t received an answer.

The broader aggregates? OK, I admit they fell in the 1930s.  But I thought the monetary aggregates were discredited as policy indicators in the 1980s?  Now you have economists who had dismissed monetarism as a washed up doctrine suddenly clinging to the aggregates as the one piece of evidence that money was easier this time than in the 1930s.  This crisis makes economists look like a bunch of atheists who suddenly accept the Lord on their deathbed.  Well it’s too late for that, even M3 is falling now.

Here’s the problem.  The Fed’s “effort” only matters if one policy stance is more costly than another.  That may be true for fiscal policy, but it isn’t true of monetary policy, at least for any plausible policy stance.  Krugman talks about how massive QE could expose the Fed to some price risk.  But there are three things the Fed could do with minimal price risk; lower the interest rate on reserves, set a price level target, and do several trillion in QE with T-bills and short term T-notes.  In practice, the Fed would never go beyond those three steps, so it makes no sense to talk about the Fed having “given it the old college try.”  The correct metaphor is a steering wheel.  Is the steering wheel set at a position where they expect to reach their goal?  That’s the only sense in which one can talk about “easy” or “tight” money.

Here’s what Bernanke says about the prospects for reaching their goals:

The unemployment rate is expected to decline to between 7 and 7-1/2 percent by the end of 2012. Most participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw the risks to growth as weighted to the downside. Most participants projected that inflation will average only about 1 percent in 2010 and that it will remain low during 2011 and 2012, with the risks to the inflation outlook roughly balanced.

Bernanke’s lucky that Congress doesn’t have a clue as to how to interpret Fed-speak, because he is basically saying the following:

1.  The Fed has reduced its implicit inflation target below 2%, indeed below even 1.5%.

2.  The Fed sees more downside risk on jobs, but puts a zero weight on jobs in its policy deliberations.

Bernanke has frequently suggested that the dangers of missing the inflation target are not symmetrical, with deflation being a far more serious problem than modestly higher inflation.  If the Fed is forecasting 1.25% inflation in 2012, and if they also think the inflation risks are balanced, then we know the hawks have won.  Especially given the downside job risks.  Last year Janet Yellen said “we should want to do more.”  Today Bernanke basically said the Fed has options, but doesn’t want to do more.  As I noted earlier, I suspect his actual views are slightly more dovish, but he may feel obligated to paper over differences at the Fed when testifying to Congress.

Oh, and one other thing.  Bernanke told Obama that he better plan on running for re-election in 2012 with the same unemployment rate George Bush faced in 1992.  You remember, the Bush that presided over a big foreign policy success in the Gulf War, and then got 38% of the vote two years later.

Bernanke also noted that the Greek crisis had increased the demand for dollars, causing NGDP growth forecasts to fall below levels expected in April:

One factor underlying the Committee’s somewhat weaker outlook is that financial conditions–though much improved since the depth of the financial crisis–have become less supportive of economic growth in recent months. Notably, concerns about the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal from risk-taking in global financial markets in the spring, resulting in lower stock prices and wider risk spreads in the United States.

Oddly, he did not indicate any Fed plans to respond to the increase in demand for dollars.  Instead, the Fed is content to see the Greek crisis further depress the already pathetically weak NGDP growth forecasts.  But they do plan to keep an eye on the situation:

We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.

And what might those further actions be?  Returning to the Q&A link above:

“We have not fully done that review and we need to think about possibilities. But broadly speaking, there are a number of things we could consider and look at; one would be further changes or modifications of our language or our framework describing how we intend to change interest rates over time “” giving more information about that, that’s certainly one approach. We could lower the interest rate we pay on reserves, which is currently one-fourth of 1%. The third class of things has to do with changes in our balance sheet and that would involve either not letting securities run off “” as they are currently running off “” or even making additional purchases.

Here’s how to tell if the Fed is serious, if and when it moves.  If they take one of those three steps, it will merely be a desultory action aimed at mollifying the markets.  If they are serious, and really want to turn around market sentiment, then they will use the multi-pronged approach I recommended last year; eliminate interest on reserves, major QE, and some sort of quasi-inflation targeting language.  As Bernanke indicated, the best we could probably hope for regarding inflation targeting is a vague mention that rates would be left low until some collection of macro indicators rise much more substantially—i.e. no early exit.  Those three steps might not be enough for a fast recovery, but it would almost certainly get things moving again.

At a personal level I do get some satisfaction from seeing Bernanke finally mention reducing the IOR as a possible expansionary policy option.  My very first blog post (after the intro) was on this issue.  Even earlier I mentioned it in a short paper in The Economists’ Voice.  Even before I set up my blog, people like Jim Hamilton were warning of the contractionary nature of IOR.  But I do think I pushed the idea a bit further, especially with my suggestion of negative rates on ERs.  (An idea later adopted in Sweden, but with lots of loopholes.)  In the early days I took a lot of grief for focusing on this issue, although I always thought other steps like inflation/NGDP targeting were more important.  But with Bernanke mentioning it as a policy option, I think the Hall/Hamilton/Sumner view that IOR was contractionary has been vindicated.  Bernanke would not mention reducing IOR as one of three possible expansionary steps, if the program itself was not contractionary.

Despite this minor personal vindication, today fills me with gloom.  It will be interesting to hear what you commenters think.  How about it JimP?  Did Bernanke exhibit the sort of “Rooseveltian Resolve” that (in 1998) he insisted the Japanese needed in order to get out of their Great Recession?  Did he show the “yes we can” spirit?  The Rooseveltian/Kennedyesque/Reaganesque determination that we won’t put up with high unemployment for as far as the eye can see?  Or did he blink?

PS.  Yes, there might be some “recalculation” problems out there.  But how can we know that without first boosting NGDP growth, which is currently only one half the pace of the recovery from the 1982 recession?

Update:  Torgeir Hoien has a nice piece on monetary policy at the zero rate bound.

I recently came across a very interesting essay written by Paul McCulley (of PIMCO) in 2001.  At one point he discusses a bizarre idea that got a foothold at the Fed in 1989:

For the last decade, the Fed has played something called “opportunistic disinflation,” and it, too, has worked.

The term actually entered the public arena on July 10, 1996, when the Wall Street Journal leaked an internal Fed report by staff economists Orphandies and Wilcox, detailing the Fed’s “new” approach to inflation-fighting: the Fed should not take deliberate action to reduce inflation, but rather “wait for external circumstances – e.g., favorable supply shocks and unforeseen recessions – to deliver the desired additional reduction in inflation.”

Simply put, the theory said, the Fed should not deliberately induce recessions to reduce inflation, but rather “opportunistically” welcome recessions when they inevitably happen, bringing cyclical disinflationary dividends. A corollary of this thesis was that the Fed should pre-emptively tighten in recoveries, on leading indicators of rising inflation, rather than rising inflation itself, so as to “lock-in” the cyclical disinflationary gains wrought by recession. While the label “opportunistic disinflation” was a clever one, the Fed had actually been practicing the policy for a long time. Indeed, former Philadelphia Fed President Edward Boehne elegantly described the approach at a FOMC meeting in late 1989:

“Now, sooner or later, we will have a recession. I don’t think anybody around the table wants a recession or is seeking one, but sooner or later we will have one. If in that recession we took advantage of the anti-inflation (impetus) and we got inflation down from 41/2 percent to 3 percent, and then in the next expansion we were able to keep inflation from accelerating, sooner or later there will be another recession out there. And so, if we could bring inflation down from cycle to cycle just as we let it build up from cycle to cycle, that would be considerable progress over what we’ve done in other periods in history.”

Before discussing the Boehne quotation, think for a moment about just how strange this “opportunistic disinflation” idea really is.  Suppose you are trying to lose weight.  You notice that extremely ill people often lose weight.  Voila!  A cancer diagnosis is a perfect “opportunity” to lose some weight.  Of course you don’t want to go on a diet when suffering from cancer, (that would be going too far), but on the other hand don’t go out of your way to eat food either.   Just enjoy the weight loss.

There are basically two types of macroeconomists in academia.  Those (mostly right-wing) who favor a strict inflation target.  In that case inflation would be the same whether we are in a recession or boom.  Others favor some sort of flexible inflation target.  NGDP targeting is a good example.  When real growth falls, you allow inflation to rise a bit.  This reduces the severity of the business cycle during supply shocks.

But within the halls of the Fed a third and very dangerous idea took hold during the 1980s and 1990s, opportunistic disinflation.  This ideas suggests that the fall in inflation rates often observed in recessions is not a failure of demand management, not a highly procyclical monetary policy, but something to be welcomed.

Now at this point I know my more sensible readers are starting to roll their eyes.  “Yes, a few oddballs at the Fed put forth this theory, but you don’t mean to seriously suggest that such a wacky idea, with almost no support in academia, would be embraced by the Fed itself?”

Go back and read the Boehne quotation.  As of 1989, inflation had average about 4.5% over the previous 7 years.  The bond markets clearly indicated that inflation was likely to stay high, indeed go even higher.  But Boehne had inside information, he worked at the Fed and understood that in the next recession the Fed was determined to reduce inflation to 3% and keep it there until the following recession.  And in the following recession they would reduce it a bit further, and so on.  And that is what happened.  Inflation fell to 3% percent in the 1990s.  The next cycle didn’t see much further reduction, but only because of the huge 2006-08 oil shock.  If not for Asian oil demand, the Fed would have delivered a further reduction in inflation.  Now that oil prices are down, we have inflation falling to about 1% in this cycle.

Boehne was very accurately predicting a Fed policy that would almost inevitably drive the economy off the cliff, only he didn’t realize it.  Opportunistic disinflation means that inflation falls at the same time that RGDP is falling.  If you start from a position of already minimal inflation, and have a steep recession, and the Fed does nothing to offset the fall in inflation typically associated with steep recessions, then you can get a fall in NGDP.  As I keep pointing out, NGDP in 2009 fell at the sharpest rate since 1938.  And both 1938 and 2009 saw near-zero interest rates.  Boehne did not recognize that this sort of policy could drive the economy into a liquidity trap.  But he can be forgiven for that oversight, after all, with Treasury-bill rates up around 8% in 1989, few people even considered the possibility of 1930s-style liquidity traps returning.

Bernanke and Greenspan saw what happened in Japan in the 1990s, however, and that ‘s why the Fed seemed to ease aggressively in 2002.  In fact, monetary policy was not very expansionary, but at least they understood the problem.  Unfortunately, they didn’t recognize just how dangerous the Fed’s opportunistic disinflation policy had become.

The following graph shows that the jobless recovery of 2010 is nothing new, the previous two cycles had the same problem, it’s just that they were much milder, so fewer people noticed.

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I found this graph in Erik Brynjolfsson’s blog, which also contained this provocative post:

As growth resumes, millions of people will find that their old jobs are gone forever. The jobless recovery is one symptom.

Two points.  There are no jobless recoveries.  If you don’t generate jobs, you have no recovery—regardless of whether RGDP is growing.  And second, people normally don’t get their old jobs back, in this recession or in any other recession.  How many people return to their old jobs after being laid off?  I read somewhere that during a typical year there are about 32 million jobs lost and about 33 million jobs created.  I’d wager that very few of those jobs created are people getting their old jobs back.

The post was entitled “The Great Recalculation.”  But if the Fed is doing its job then recalculation should produce stagflation.  Lower output should mean higher inflation.  But that’s not what we are seeing.  It is possible that there is an unusually large amount of recalculation going on, although in my view that mostly occurred before the severe phase of the recession began in August 2008, but in any case it is observationally indistinguishable from opportunistic disinflation.

I recall reading about opportunistic disinflation in the 1990s, and making a mental note that it was a silly idea, obviously procyclical, and that surely the Fed would not take the idea seriously.  Shame on me.  The Fed warned us what they planned to do as far back as 1989.  We ignored them.  Then they went ahead and did it.  And they are still doing it.  This expansion will have even lower inflation that the last one.

PS.  Paul Krugman deserves some credit for anticipating this problem.

Before starting today’s post, a few quick comments:

1.  I am quoted in CNNMoney.com.  Considering that it is necessary to water things down a bit for the general audience, I thought it was actually pretty good.  I said in the interview that 3% inflation for 2 years followed by 2% inflation was about right.  But what he wrote is close enough.  And he got the tricky negative interest on reserve thing exactly right–so I can’t complain.

2.  Those readers thinking “I wish someone would take that arrogant Sumner down a peg or two” should be reading the comment sections of recent posts.  Andy Harless, who is a distinguished monetary blogger, has been giving me some very tough questions.  He has skillfully exposed some of the soft underbelly of my arguments, especially in the “Power Seduces” comment section.  I will add him to my blogroll.  He is very smart.

Here are 4 very different views of Germany:

Paul Krugman:  Germany is an anti-Keynesian villain.

Tyler Cowen:  Germany is an anti-Keynesian success story.

Der Spiegel (from Mark Thoma):  Germany is a Keynesian success story.

Me:   Germany?  Successful?

I do understand that Germany has done very well on the jobs front, and deserves credit for that.  But I don’t see that as a Keynesian success.  Keynesian stimulus is supposed to create jobs by boosting NGDP, and NGDP has done much worse in Germany than the US (as has RGDP.)  Their jobs success comes from reduced hours, not more output.  Output is still well below 2008 levels, and is expected to remain lower for years.

Germany’s strength, in my view, is its manufactured goods export sector.  I don’t know why they are so good at building BMWs and turbines, but my hunch is that it isn’t fiscal stimulus.  It probably has more to do with an educational system that has a technical skills track, and which doesn’t bore normal boys out of their minds in a futile attempt to use schools to create an egalitarian society.

This reminds me of a point made by Tyler Cowen last month:

I’m a fan of the northern European social democracies, but in part they succeed because those countries don’t follow all of the prescriptions you might hear coming from their boosters in the United States.

PS.  This New York Times article suggests that German technical education was already superior to ours by 1902.

In the previous post I provided evidence that extended UI benefits tend to reduce aggregate supply and increase unemployment.  (BTW, the most recent three posts are best read in reverse order, this one last.)  Now I will argue that extended benefits probably trigger a more contractionary monetary policy.

Let’s assume a sort of “Bernanke put” on the price level.  More specifically, assume that if inflation threatens to fall below the 0% to 1/2% range, the Fed will pull out all the stops with some sort of unconventional easing, say QE or lower interest rates on excess reserves.  I’ll call this a “zero lower inflation bound” assumption.

The standard Keynesian argument against cutting extended UI benefits is that it would reduce inflation expectations, and hence AD would fall.  Any job-creating effects from lower wages would be swamped by the deflationary impact of falling prices.  But if the economy is at the zero lower inflation bound, then cutting UI benefits does not reduce inflation.  To better understand this counter-intuitive result, imagine an AS/AD diagram (some day I need to learn how to make graphs on a computer.)  Lower UI benefits will tend to shift the SRAS curve to the right.  Normally this would lower inflation.  But if we are already at the zero inflation bound, then the Fed will react to this policy shift by moving the AD curve to the right, in order to prevent prices from falling.  In that case we are in a classical world, where less UI and lower minimum wage rates will lower both nominal and real wage rates, and also boost employment.

You may have noticed an amusing irony in this argument.  Keynesians like Paul Krugman argue that all the laws of classical economics go out the window when nominal interest rates are at the zero lower bound.  Cutting UI doesn’t create jobs.  There is a paradox of thrift.  But if we assume that inflation is at the zero lower bound (due to the Fed’s reaction function) then much of (old) Keynesian economics goes out the window.  In one sense there is nothing new here.  The new Keynesians have long recognized that the old Keynesian model is invalid when the central bank has a symmetrical policy of inflation targeting.  Fiscal policy can’t affect inflation, and, ipso facto, it can’t affect AD.

Here I am proposing something more modest–an asymmetrical lower bound on inflation, but a central bank that is still willing to tolerate slightly higher inflation rates.  In that case fiscal stimulus can still boost NGDP, but fiscal austerity no longer contracts NGDP.  This is roughly analogous to the zero interest rate bound, where conventional monetary policy can lower NGDP, but is powerless to increase NGDP.

I still believe the symmetrical inflation target is the better policy assumption, but I think this one is also fairly plausible for small changes.  It also loosely relates to a point that Andy Harless recently made in the comment section to one of my posts.  Harless argued that the Fed may be reluctant to engage in unconventional easing out of fear that they might overshoot into high inflation.  If I’m not mistaken, implicit in that view is the idea that there is some inflation rate (perhaps 0%?) where the Fed hits the panic button and engages in more QE or lower interest on reserves.  Maybe even an explicit inflation target.  If I have interpreted Harless correctly, this would allow for a bit of the sort of asymmetry that I have assumed in this post.

PS.  I am frequently amused by how often Paul Krugman suggests that any discussion of fiscal stimulus is completely out of bounds if it doesn’t implicitly acknowledge that monetary policy is ineffective at zero nominal rates:

If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.

Notice how Krugman sort of rolls his eyes in disgust at us fools who refuse to “listen” when Keynesians claim that central banks are unable to debase fiat currencies.  OK, I will try to listen more in the future.  But I don’t think Krugman is being fair when he implies that people who believe the following are ignorant of the basic tenets of macroeconomics:

But even given the Fed’s own projections, it’s not doing its job, it’s missing its targets. Yet it apparently sees no need to act.

The preceding quotation was made just a few days ago by a distinguished economist.  I don’t think it is very polite to suggest that this economist doesn’t “listen” and somehow never learned that the Fed is “constrained” once rates hit zero.  And then consider this quotation from a few days earlier:

But how, exactly, does it serve the Fed’s credibility when it fails to confront high unemployment, while consistently missing its own inflation targets? How credible is the Bank of Japan after presiding over 15 years of deflation?

Whatever is going on, the Fed needs to rethink its priorities, fast. Mr. Bernanke’s “it” isn’t a hypothetical possibility, it’s on the verge of happening. And the Fed should be doing all it can to stop it.

There is nothing objectionable about these two quotations.  At worst, you could accuse the economist who made them of being a tad inconsistent.

Seriously, I do understand how Krugman reconciles all this in his own mind.  The Fed could do a lot more, but it’s risky and they probably won’t.  Ergo, we need fiscal stimulus.  (Of course Congress won’t either, as some of us warned last year.)  But not all of us buy into his assumptions about how the Fed operates, and hence not all of us believe the rules of classical economics fly out the window once rates hit zero.  That was the point of this post—to show that you could make an equally plausible claim that the laws of Keynesian economics fly out the window when inflation falls to its lower bound.

Update, 7/20/10:  Rob Fightmaster was kind enough to send me the following graph:

I am always a bit amazed by the way anti-supply-siders interpret certain stylized facts.  They seem to start with the premise that supply-side tax effects are not important.  If you raise taxes on the rich, you get lots more revenue.  And if you lower taxes on the rich, you get lots less revenue.  I try to imagine their thought process:

Yes, the huge increase in the top MTR under Hoover and Roosevelt didn’t raise much revenue, but that was because it “just so happened” that America’s income distribution got much more equal after 1930.  No supply-side effects there.  And yes, the Reagan tax cuts on the rich were actually associated with more revenue, but that’s because it “just so happened” that the income distribution got much less equal after 1980.  And yes the Europeans don’t actually raise much more revenue than we do, despite higher tax rates, but that’s because it “just so happens” that Europeans work less.  You say they work less for tax reasons?  Don’t be silly—it “just so happens” the Germans and French have lazy, happy-go-lucky cultures.  You say the French worked as hard as Americans in the 1960s?  It “just so happens” this distinctive French culture developed only in the past few decades, when their tax rates rose far above American levels.

And then there is the debate over extended benefits for the unemployed, which at 99 weeks is far longer than under any previous recession (that I can recall–does anyone have data?)  Unemployment benefits are of course an implicit tax on labor.  If the benefits are 77% as big as the wages in the best job you can find, then they are a 77% implicit tax rate.  That makes a big difference, particularly for workers in dead-end jobs.  Matt Yglesias recently challenged right-wing economists:

That’s because Congress is unwilling to extent UI eligibility beyond 99 weeks. Which means that soon enough we should see . . . something. But what? My guess is not much. My guess is that basically nobody wants to hire the vast majority of the current long-term unemployed. So my guess is that the labor market prospects of people who’ve been unemployed for 98 weeks will look an awful lot like people who’ve been unemployed for “only” 70 weeks. I wonder what people with a more right-of-center approach would predict? Are we going to see a surge in employment among people around the 99 week mark? Will they uncover hidden secret jobs that are stashed away somewhere?

Then a commenter named “wonks anonymous” provided me with a link where Casey Mulligan discusses just such a study by Stepan Jurajda and Frederick Tannery.  They looked at the number of weeks before unemployed Pittsburghers found jobs during the period from 1980 through 1985.  They choose this period because Pittsburgh had a horrible job market, with unemployment frequently over 10% and peaking at 16%.  They found that a few weeks before unemployment benefits were about to run out, roughly 3% of unemployed workers found a job each week.  Then the number of job finders jumped to 30% during the week their unemployment benefits ran out, and stayed somewhat above normal for another 9 weeks.  That’s pretty definitive evidence that incentives matter.

Why are liberals so often wrong about the supply-side effect of taxes?  Partly because these effects go against comment sense, and partly because they seem morally distasteful.  Unemployed people really are suffering (liberals are right about that), and claims that they could get jobs if they wanted to appear to be “blaming the victim.”  I think this is wrong, and that we need to avoid letting normative considerations distort our positive analysis of cause and effect, but it isn’t easy to do.

Another problem is that people visualize a period of high unemployment as one with very few new jobs being created.  This is not true; millions of jobs are being created all the time, even during recessions.  The problem during recessions is that many more people are looking for those jobs, and hence it is much more difficult for any given individual to find a job.  But it is certainly not impossible, as we know from the jobs created and jobs lost data.  My guess is that most of those suddenly finding jobs are less skilled workers who are accepting a lower-paying job out of desperation.  The low wage job market is widely known to have lots of turnover.

To summarize, common sense suggests that Matt Yglesias and Paul Krugman are right.  And those of us with empathy for the unemployed would like them to be right.  But it “just so happens” they are wrong.  Does this mean UI is a bad idea?  As you know, I favor the Singapore approach of self-funded UI accounts.  Given that we don’t have them, and given that millions have lost their jobs due to the incompetence of America’s macroeconomists (who keep insisting that monetary policy is out of ammunition, or that there is no problem of inadequate AD), then I think you can make a good argument for providing some additional help for the unemployed.

[Update:  A commenter named “Defennder” pointed out that my statement about Singapore was completely inaccurate.  I apologize for this error, which probably appears in a few other posts.  I had recalled that the Singapore (CPF) forced savings plan could be used for health, retirement and unemployment insurance.  According to this link it can only be used for health, retirement, and buying a home.  From now on I’ll call it the UI system that Singapore should have.  The link also indicates that 96% workers in big companies (more than 25 workers) get some sort of severance package, but of course big companies can go bankrupt, and lots of workers are in smaller firms.  Severance packages are better in terms of incentives, but the coverage may be inadequate.  Singapore typically has very low unemployment rates.]

In the next post I will discuss why the extended UI benefits are worsening the recession.  Is there a way to help the unemployed without making the recession worse?  Perhaps the government might want to consider a large, one-time, lump sum payment to the unemployed, which is not in any way tied to the duration of unemployment.  I don’t know whether such an idea is feasible, but it seems better on both efficiency and humanitarian grounds than building dubious public works projects.

PS.  The preceding is not an endorsement of actual, real world, supply-side politicians.  They often do make far-fetched assertions, such as the claim that the Bush tax cuts boosted revenue.  Tax cuts usually do not boost revenue, and that isn’t even the question we should be asking.

PPS.  I don’t mean to suggest that Yglesias and I are far apart on taxes.  We both think a progressive consumption tax is optimal.