In the previous post, an excellent comment from “Ram” included this gem:

Krugman is the oddest of the skeptics (though he’s only a quasi-skeptic), because he has said that the way out of the liquidity trap is to raise inflation expectations, and then when the Fed succeeded in doing just that, his response was that the market was overreacting. Overreacting to what? Wasn’t getting precisely that reaction the point?

I wish I wasn’t so long-winded; that’s the sort of short post I’d like to do.  But the rest of his comment is also excellent:

Of course, QE works in Bernanke’s model, otherwise he wouldn’t keep proposing it (first for the BOJ, now for the Fed). Bernanke is hardly a heterodox macroeconomist, which makes me wonder why so many reputable economists have expressed skepticism about QE. Do they work with fundamentally different models from Bernanke, or do they merely disagree about parameter values? Or is there no there there? I thought that Bernanke & Woodford were the foremost representatives of contemporary business cycle theory, prior to Bernanke’s appointment. Why so much dissent now, when there appeared to be so much consensus then?

.   .   .  [the paragraph quoted above]

I understand that economists disagree about a lot of things, but the sense one gets from the pre-crisis literature is that there was a lot more agreement than we’re now seeing. For whatever reason, it seems like the crisis caused everyone to throw everything they believed out the window and revert to their own pet models. Now that the Woodford-style models have turned out to have been the best of the lot, I think what we’re seeing is denial, because it is easier to explain away these apparent successes than to admit that one’s very public deviation from the conventional wisdom proved unnecessary.

My only comment is that I believe the Svensson approach (targeting the forecast) has gained even more credibility than the Woodford approach, although both are far superior to most of the half-baked macro models currently being tossed around.

There’s something about inflation targeting that causes otherwise sensible people to become slightly deranged.  On one side you have Bloomberg.com warning that no amount of money can cure Japanese-style deflation:

Yes, Hooters Inc. has made its way to Tokyo. Normally when hundreds of Japanese men huddle in line it’s for a new iPhone or video game. These days, it’s to be served beer and chicken wings by waitresses in white tank tops and orange short-shorts. The American chain is gaining popularity in Japan.

It’s also an unlikely sign that deflation will be with Japan for a long, long time.

Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

Japan used to be an automated-teller machine for brands like Prada, Gucci and Louis Vuitton. Women thought little of plopping down $2,000 for the latest fashions from Milan and Paris. Men didn’t blink at paying $200 for a tie. That’s all fashion-industry history now. Sliding wages and rising job insecurity brought budget-shopping into vogue.

No matter how much yen the Bank of Japan pumps into the economy, deflation deepens. It’s all about confidence, of which there is virtually none.

The hard core Keynesians say QE can’t work, because their models tell us it can’t work.  It’s just exchanging one zero rate asset for another.  Unfortunately their models are flawed, and we are seeing inflation expectations rise in response to QE, something that’s not supposed to happen.

At the other extreme you have Sarah Palin comparing Bernanke unfavorably to Ronald Reagan:

I’m deeply concerned about the Federal Reserve’s plans to buy up anywhere from $600 billion to as much as $1 trillion of government securities. The technical term for it is “quantitative easing.” It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air.

.   .   .

We shouldn’t be playing around with inflation. It’s not for nothing Reagan called it “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”

First of all, I think Reagan did a pretty good job on inflation.  Contrary to what some Democrats argue, it was Reagan, not Jimmy Carter that is responsible for the drop in inflation from about 10% in 1981 to about 4% in 1982.  He supported Volcker’s second attempt at tight money, whereas the first attempt was abandoned during the run-up to the 1980 presidential elections.  But let’s not overdo things.  After inflation was reduced to 4% in 1982, Reagan administration officials and conservative newspapers like the Wall Street Journal pressured the Fed to ease its monetary policy, and no further reductions in inflation were achieved.  Indeed inflation was closer to 5% by 1989 when Reagan left office.  In contrast, Bernanke has reduced core inflation to little more than 1%, and the TIPS market suggest inflation is likely to remain well under 2% over the next 5 years.  If low inflation is Sarah Palin’s goal, then Bernanke should be her hero, not Reagan.

Palin is echoing the views of many freshwater economists.  Their models tell them that Bernanke’s policies will produce high inflation.  Of course they also claim to believe in efficient markets, except when those markets tell them that their models are wrong.

So which is it, deflation or high inflation?  The smart money says neither:

Goldman Sachs Group Inc., which warned a month ago that the U.S. economic outlook was “fairly bad” at best, said the Federal Reserve’s decision to increase bond purchases will spur growth.

“Downside risks to the economic outlook have declined significantly,” Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “As we move through 2011, the lagged effects of the renewed monetary easing combined with a gradual slowdown in the pace of private deleveraging should result in a substantial pickup in GDP growth.”

The Fed’s decision will lower the risk of deflation, Hatzius wrote. The Institute for Supply Management manufacturing index and the government’s employment report last week also show the economy is moving in the right direction, according to the report.

Hatzius defended Fed Chairman Ben S. Bernanke when others including E. Gerald Corrigan, former president of the New York Fed, have voiced concern that the central bank actions will lead to a surge in costs for goods and services. Bernanke on Nov. 6 dismissed the idea the central bank will increase prices to higher levels than it prefers.

There’s a reason GS makes more money that other banks, they use reality-based models, not faith-based models.  I am not sure why so many economists are predicting either no effect from QE, or high inflation.  This isn’t rocket science.  The Fed’s had an implicit inflation target of about 2% for decades.  When it’s too high they nudge it down, when it’s too low (as in 2002) they try to nudge it up.  I happen to support a NGDP target, but I’m not running the show.  Given their target, it’s no surprise they are trying to nudge inflation a little bit higher.  Markets currently expect only 1.7% inflation over the next 5 years, even given the recently announced QE.  Before rumors of QE started circulating, the expected inflation rate was only about 1.2% over 5 years.  Given how much we’ve undershot the Fed’s target over recent years; I’d like to see higher than 2% inflation.  But even I don’t think we’d need to go above 3% to get a robust recovery.  The markets and GS are telling us the same thing.  Trust the smart money, not the left and right wing ideologues.

QE has a modest positive impact, contrary to Keynesian models.  But it won’t produce high inflation, contrary to monetarist models.  Targeting the forecast—call it the Goldilocks model.

PS.  A year ago I talked to Bob Murphy about advertising.  He said he’d know I’d started taking ads when I put Sarah Palin in the title.  So I’m counting on a lot of hits—what could be better than combining Sarah Palin and Hooters!  I’ve only earned about $300 so far in Google Ads.  About $100 of that will go to pay down our national debt.  So if you want to help promote economic recovery and address our nation’s intractable fiscal problems, please tune in more often.

Last year I made a rather wacky argument:

I don’t propose to abolish the phenomenon of inflation, but rather the concept of inflation.  And to be more precise, price inflation, which is what almost everyone means by the term.  I want it stripped from our macroeconomic theories, removed from our textbooks, banished into the dustbin of discarded mental constructs.

I thought no one would agree with me.  I was wrong.  Here’s Niklas Blanchard:

Inflation is confusing. The concept makes crazy people crazier. And even worse, it makes otherwise sober people disagree with each other. Reading through the accounts of QE2 on the internet the past few days have solidified my view that inflation is a thorny enough concept that we should rid it from popular vernacular. Is inflation important? Sure…but what measure of inflation is correct? CPI-U? GDP Deflator? Your crazy uncle’s index? Does inflation help or hurt savers in the current landscape?

.   .   .

In order to square this circle, I propose we forget about inflation. And not just forget about talking about it, but forget about its use in the setting of monetary policy. Instead, we should target nominal expenditure at a steady growth rate (3% a la Woolsey, or 5% a la Sumner, Beckworth, etc.) with level targeting.

I love being a contrarian.  What do I do if the whole world ends up agreeing with me?  Life would become unbearable.

I need to start reading Josh’s posts more often.  He is a good blogger and much less long-winded than me.  Here Josh discusses how the new British government is following a quasi-monetarist policy:

The reason that one should be interested in the Bank of England is because they are following a policy roughly consistent with those advocated by folks like me, David Beckworth, Scott Sumner, Bill Woolsey, and others: anchor expectations with an explicit goal “” preferably for nominal income “” and use quantitative easing when interest rates fall near zero.

Then he quotes this very interesting passage from the WSJ:

Another quarter, another surprisingly strong U.K. growth figure. Growth of 0.8% in the third quarter smashed the consensus estimate, pitched at just half that level, and also demolished any thought that the Bank of England might move towards more quantitative easing at its meeting next week. The U.K. economy is looking resilient.

[…]

The U.K. economy has now expanded 2.8% in the last year, a little above the average for the pre-crisis decade of 2.6%. Encouragingly, growth is broad-based across services, construction and manufacturing; the latter has now racked up annual growth of 5.3%, the strongest year-on-year rise for 16 years, Barclays Capital notes. Despite concerns, service-sector growth held up at 0.6%, the same pace as the second quarter. Indeed, worries that the U.K. is experiencing a particularly bumpy recovery are starting to look overdone. That should help unlock corporate spending and hiring.

Investors hadn’t expected such strong growth: sterling shot up against the dollar and 10-year gilt yields rose more than 10 basis points as markets judged that more BOE bond purchases were a vanishing prospect. Of course, the fiscal tightening set out in last week’s comprehensive spending review may drag on growth in coming months. But there is no case for the BOE to be loosening policy now, with inflation stubbornly above target and nominal growth close to 6%; Citigroup notes this means that policy makers are above the trend growth rate of 5% that the BOE targeted in undertaking round one of quantitative easing.

So here’s my question to Keynesian readers:  What is the Keynesian argument against British austerity?  I thought the New Keynesians accepted the fact that fiscal policy was superfluous if the central bank was targeting inflation or NGDP.  Yes, if monetary policy is impotent then there may be a case for fiscal stimulus.  But one could hardly argue that the BOE is currently powerless, indeed they seem to have nominal growth about where they want it and are refraining from additional steps because they don’t think the economy needs any more stimulus.  So why do so many Keynesian bloggers think the Conservative/LD coalition is making such a tragic error?  I don’t get it.

Gordon Brown’s policies increased government spending and raised the top MTR to 50%.  So I don’t expect Britain to do as well over the next 20 years as it did from the mid-1980s to about 2006.  But if growth is disappointing, it won’t be because of austerity.

Josh also has a new post that elegantly demolishes the argument that because Milton Friedman favored stable money growth, he would have opposed the current round of QE.

PS:  In answer to your question, you can be Pippin.  The guy who wrote Pop Internationalism was Smeagol.

Be careful what you wish for.  Tim Worstall sent me this interesting post about the Nordic countries:

The UK’s centre left just doesn’t seem capable of understanding what it is that makes what they claim to want work: imagine the horror there would be if I suggested that Group 4S took over the majority of fire and ambulance services in the UK? Yet that is what Denmark does (really: it’s actually Group 4S that runs them). We can hear the screams already as Gove tries to bring the Swedish school system with its funding following the pupil, essentially a market, to the UK. Can you imagine the piteous wails if someone suggested importing the Finnish schools system (often ranked as the world number 1)? With its division at 15 into academic sheep and vocational goats?

Compare and contrast the the Swedish health care system with the NHS: taxes are raised in county and spent in county (on average, 400,000 people, it’s as if a PCT raised and spent its own money), there are copayments to see the doctor…no, we couldn’t imagine the British centre left allowing such a system to exist, could we? Nor the localism of Denmark: the national income tax rate is 3.76%: the top national one 15%. The vast bulk of the money is raised by the communes which can be as small as 10,000 people. You and I would think that money so raised will be better spent when any and every taxpayer knows exactly who is spending it and where they have a snifter on a Friday night.

This reminded me of a post I did a while back, which discussed an interesting article in the New Yorker on health care in McAllen, Texas:

In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.

. . .

I was impressed. The place had virtually all the technology that you’d find at Harvard and Stanford and the Mayo Clinic, and, as I walked through that hospital on a dusty road in South Texas, this struck me as a remarkable thing. Rich towns get the new school buildings, fire trucks, and roads, not to mention the better teachers and police officers and civil engineers. Poor towns don’t. But that rule doesn’t hold for health care.

I had this to say about the New Yorker quotation:

Suppose McAllen was an independent country with universal health care.  How much would it cost the government to insure the entire population?  If independent, McAllen would be poor relative to the US, but it certainly wouldn’t be poor in any absolute sense.  My guess is that it would come in somewhere around Portugal or Slovenia.  And I would also guess that it would spend less insuring the entire population than we now spend insuring the relatively small share of the population covered by Medicare.

Many on the left say we should adopt the European health care system.  A good place to start would be federalism.  The EU is roughly the size of the US, but has 27 members, each with their own health care system.  If we are to copy Europe, the first thing to do is to delegate health care to the 50 states.  No more Medicare and Medicaid.  Any public health care should be fully funded at the state level, just as in Europe.  My guess is that the good citizens of Houston and Dallas are not going to be enthusiastic about spending $15,000 per enrollee in McAllen, when the prestigious Mayo Clinic spends $6688 per enrollee.  If those on the left aren’t enthused about this idea, then let’s not hear any more talk about copying Europe’s health care system.  (After completing this post I noticed that Robin Hanson had an even better idea.)

Liberals often tell me that Swedish vouchers wouldn’t work here, our population isn’t as homogeneous and civic-minded.  I’d think that’s a much better argument against the more socialist aspects of the Nordic system, like generous unemployment benefits.  Reading this stuff I can’t help but think back to posts by people like Paul Krugman, praising our Medicare system for its low administrative costs.  He’s right; they spend very little preventing the health care industry in places like Texas and Florida from systematically looting the taxpayers.  By all means, let’s let each county run and pay for its own health care system.  If not, then stop talking about how the Swedes are superior to us.

A few weeks back I complained that Obama was trying to force me to divorce my wife.  According to The Economist, the Swedish government doesn’t do that:

In Sweden 88% of women aged between 25 and 54 take part in the labour market. It helps that the country’s extensive day-care facilities for children are largely reserved for workers, and that couples file their tax returns separately so that households do not get hit by higher marginal tax rates on their second incomes.

A larger share of Sweden’s older people, too, remain in the labour force than anywhere else on the continent, not least because they accrue higher retirement benefits for each year they work after the age of 61. If other Europeans aged between 55 and 64 were as industrious as older Swedes, the continent could reduce the gap in hours with America by almost a quarter, according to the MGI.

The rest of Europe could also learn from Denmark’s efforts to beat unemployment and from the Netherlands’ success in getting youngsters into work. To echo an old joke, heaven is where women and older people work like the Swedes, the young work like the Dutch and the unemployed find jobs like the Danes. Hell is where workers get into unemployment like the Americans and out of it like the Italians.

And we are falling behind them in neoliberal reforms.  Again, from The Economist:

Sweden offers a more encouraging lesson. In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.

Sweden’s retailers put in a particularly impressive performance. In 1990, McKinsey found, they were 5% less productive than America’s, mainly because a thicket of regulations ensured that stores were much smaller and competition less intense. Local laws restricted access to land for large stores, existing retailers colluded on prices and incumbent chains pressed suppliers to boycott cheaper competitors. But in 1992 the laws were changed to weaken municipal land-use restrictions, and Swedish entry into the EU and the creation of a new competition authority raised competitive pressures. Large stores and vertically integrated chains rapidly gained market share. By 2005 Sweden’s retail productivity was 14% higher than America’s.

The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone services like https://www.circles.life/au/plans and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels.

.   .   .

Even in America there would be benefits. But, alas, the regulatory pendulum is moving in the opposite direction as the Obama administration pushes through new rules on industries from health care to finance. So far the damage may be limited. Many of Mr Obama’s regulatory changes, from tougher fuel-efficiency requirements to curbs on deep-water drilling, were meant to benefit consumers and the environment, not to curb competition and protect incumbents. Some of the White House’s ideas, such as the overhaul of broadband internet access, would in fact increase competition. The biggest risk lies in finance, where America’s new rules could easily hold back innovation.

I didn’t always agree with President Clinton, but at least he did deregulation, welfare reform, NAFTA and cut the capital gains tax.  I can’t recall a single thing that Obama has done that a classical liberal would approve of.  Even where his private views may be libertarian (free trade with Cuba, gays in the military, ending the abuses of the national security state, medical marijuana, a smaller military, etc) he seems to lack the courage of his convictions.  No wonder he generates so little enthusiasm.

Tea Partiers complain that Obama wants to make us like Sweden.  If only that were true.  I fear we are headed toward Brazilian-style “big government.”  Lots of spending and lots of poverty.