Here is Timothy Taylor commenting on a study of airport security:

K. Jack Riley considers “Flight of Fancy? Air Passenger Security Since 9/11.” He has been thinking over the time and cost tradeoffs of airline passenger security. “There is very little reason to be concerned about suicide bombers being present on flights originating in the United States. The security improvements noted above””passenger vigilance, cockpit security, and visa screening””go a long way toward preventing radical jihadists from entering the country or, having entered, from being able to commandeer a plane to conduct a spectacular attack. . . . Recognizing the security of flights originating in the United States and thus returning all passengers to the domestic procedures that existed before the recent additions would save, at minimum, about $1.2 billion annually. . . . It would also reduce the deadweight losses that domestic travelers incur from arriving at airports early, waiting in lines, and undergoing intensive scrutiny.” “The current security regime applies the same procedures to all 700 million passengers who board planes each year in the United States. That we have not developed a reasonable way to reduce that inspection workload is perhaps the biggest missed opportunity of the past decade. A trusted traveler program could be configured in a variety of ways.” “Researchers have estimated that the 9/11 attacks generated nearly 2,200 additional road traffic deaths in the United States through mid-2003 from a relative increase in driving and reduction in flying resulting from fear of additional terrorist attacks and associated reductions in the convenience of flying. If the new security measures are generating similar, or even smaller, substitutions and the driving risk has grown as hypothesized, the new methods could be contributing to more deaths annually on U.S. roads than have been experienced cumulatively since 9/11 from terrorism against air transportation targets around the world.”

There are about 22 months between 9/11 and mid-2003, hence our airport security is killing about 100 people per month—roughly the typical passenger load on a Boeing 737.  Robin Hanson would point out that the government is showing that they care.

Here’s a case where security and freedom are aligned.

BTW, even if the actual number is zero, I don’t think the lives saved are worth the hassle at airport security.

I first became radicalized about 3 years ago when I realized that my fellow economists did not see the seemingly obvious need for greater monetary stimulus.  Here are a few facts:

1.  The number one monetary textbook tells us that monetary policy is still highly effective at boosting nominal spending at the zero bound.

2.  There are many prestigious academic papers discussing how the Fed can boost nominal spending at the zero bound.

3.  American economists were highly critical of Japan’s refusal to boost NGDP growth in the 1990s and 2000s.

4.  I’ve never met a right-of-center economist who worried about “liquidity traps.”

5.  Lots of progressives (Romer/Krugman/DeLong/Yglesias, etc) favor more Fed stimulus.

6.  Ben Bernanke keeps insisting that the Fed is not out of ammunition, a view he’s held from the beginning.

OK, there are some economists who worry about the Fed running out of ammunition.  But rates weren’t even at zero in the fall of 2008, and there was still no pressure on the Fed to ease.  None at all.  And nothing’s changed in the subsequent 3 years.

Clare Zempel sent me a new survey from the National Association of Business Economists:

Given a budget of 10 points, what are the major factors holding back the recovery?  You may allocate all 10 points to one factor or divide the points among them.

16.9% Uncertainty about future economic policies
13.7% Low consumer and business confidence
13.5% Financial headwinds caused by tight credit conditions and balance sheet restructuring
11.0% A tepid housing market
7.4% State and local government spending cutbacks and tax increases
7.3% Uncertainty about economic prospects in the rest of the world.
6.5% The burden of new regulations
6.3% Structural imbalances requiring the reallocation of labor and capital across sectors
6.1% Lack of progress in reducing long-term fiscal imbalances
4.9% The removal of near-term fiscal stimulus
3.1% High and rising commodity prices
1.6% Inadequate monetary stimulus.
1.2% Nothing is holding back the recovery. The economy is poised for a strong rebound.
0.4% Ongoing supply disruptions associated with the earthquake and tsunami in Japan

Just three of the 49 respondents selected “inadequate monetary stimulus” — and just one considered it to be quite important (by allotting 5/10 points to it).

So my fellow economists don’t think we need more monetary stimulus.  And I have no doubt that this is why the Fed isn’t doing more.  If the monetary stimulus choice was 98.4% rather than 1.6%, you can be sure the Fed would be doing all sorts of aggressive stimulus right now.

Here’s the big puzzle; do my fellow economists oppose more monetary stimulus because they don’t think it will work, or because they fear it will work?  In other words, do they want more AD or not?

When I look at all the responses, I see at least a half dozen that implicitly point to AD being a problem.  But in that case why wouldn’t they favor more monetary stimulus?  Is it really possible that 46 out of 49 economists think the Fed is out of ammo?  Or is there some sort of third possibility, which I miss because the model is completely off my radar screen?  I.e. do they think monetary stimulus creates inflation and fiscal stimulus creates real growth?  God only knows.  All I can say is that I am part of a profession that I know nothing about.  I can’t even fathom what is going on in the minds of my fellow economists.

Of course it’s very possible that this whole blog is wrong, and that we don’t have a demand shortfall.  Or that we do, but a more expansionary monetary policy can’t boost nominal spending.  But if I am right then there can be no doubt as to who is to blame for the current crisis (in both America and Europe.)  It’s not politicians.  It’s not bankers.  It’s not voters.  It’s macroeconomists.

PS.  In my view the top 4 choices are mostly a consequence of tight money, of low NGDP.

PPS.  Maybe I should look at the bright side.  Four times as many point to monetary policy being the problem, as compared to the tsunami in Japan.

When I was young, we would be assigned to read books like 1984 in high school.  These were viewed as dystopian novels, as cautionary tales.  We would have the usual earnest class discussions.  Some feared the outcome, some thought it unlikely.  But everyone agreed that it would be a really bad thing.

Robin Hanson points out that 1984 has arrived, albeit 27 years late.  And what’s interesting is that no one seems to care:

Soon the police will always be watching every public move you make:

“A vast system that tracks the comings and goings of anyone driving around the District. … More than 250 cameras in the District and its suburbs scan license plates in real time. ..

With virtually no public debate, police agencies have begun storing the information from the cameras, building databases that document the travels of millions of vehicles. … The District [of Columbia] … has more than one plate-reader per square mile, the highest concentration in the nation. Police in the Washington suburbs have dozens of them as well … creating a comprehensive dragnet that will include all the approaches into the District. … The data are kept for three years in the District. … Police can also plug any license plate number into the database and, as long as it passed a camera, determine where that vehicle has been and when. …”

As prices rapidly fall, this will be widely deployed. Unless there is a public outcry, which seems unlikely at the moment, within twenty years most traffic intersections will probably have tag readers, neighboring jurisdictions will share databases, and so police will basically track all cars all the time. With this precedent, cameras that track pedestrians and people in cars via their faces and gaits will follow within another decade or two.

If firms tried to set up camera networks to collect and sell similar info, I would expect an outcry and regulations to stop them. But police will be not only be allowed to continue, they’ll probably also succeed in intimidating citizens away from recording police interactions with citizens, no matter what the official rules say.

I’m not really sure what to say, so I’ll provide two endings to this post and you can choose the one you prefer.

Ending #1:   My fellow Americans have become a bunch of pathetic sheep.  We’ve been cowed by authorities with their phony wars on terror, drugs, and crime.  We meekly submit to all sorts of indignities.  We’ve lost the spirit of 1776.  We now prize security above liberty.  Soon it will be impossible to teach 1984 in classrooms, as students will wonder; “what’s the big deal?”

Ending #2:  Sumner, you’re just an old reactionary.  Time moves along, and the world doesn’t cater to your preferences, it reflects the desires of the next generation.  They grew up with computers, social media, cell phones, etc.  They are quite comfortable with the fact that there is no privacy in a technocracy.  Your childhood was just a brief interlude between millenia of village life, with no privacy about what you purchased or where you traveled, and the coming millenia of technocracy, where big brother will know everything.  You just happened to have been born in a time when big cities granted anonymity, but technology hadn’t yet advanced enough for bureaucracies to know everything about us.  You should just hole up in a hotel penthouse in Vegas and watch reruns of your precious 1940s film noirs.  Nobody else cares; indeed in a few more decades no one will even be able to understand those films.  Hire a detective to find someone?  What would be the purpose when everyone knows where everyone else is?

Marcus Nunes sent me a new Christina Romer paper, which claims that fiscal stimulus is effective.  I’ll argue that she has some good evidence, but also that there are weaknesses in her argument.

Her best evidence is a study that she did with David Romer, which examined two types of tax cuts; those done to boost the economy, and those done for other reasons, which can be viewed as “exogenous.”

What David and I did was to bring in information on the motivation for tax changes. For every legislative tax change, up or down, there is a huge narrative record about why it was passed. This narrative record is contained in Congressional reports, presidential speeches, the Economic Report of the President put out by the Council of Economic Advisers each year, and other documents.

We read all of those documents and classified tax changes into those taken in response to other factors affecting output and those taken for more independent reasons. We identified a number of tax cuts taken because the economy was slipping into a recession. We also found a number of tax increases taken because government spending was rising; for example, policymakers raised taxes dramatically during the Korean War. This is important because spending increases will tend to increase output, while tax increases will tend to reduce it. So in cases where the tax increase is caused by the spending increase, there are systematically factors going in opposite directions.

At the same time, we also found a number of tax changes taken not in response to current or forecasted economic conditions, but for more ideological or long-term reasons. For example, Ronald Reagan cut taxes in the early 1980s because he believed lower tax rates were good for long-term growth. Bill Clinton raised taxes in 1993 because he thought dealing with the deficit would be good for the long-term health of the economy.

We argued that to estimate the impact of tax changes, we should look at the behavior of output following these tax changes made for more ideological reasons. In other words, we dealt with some of the omitted variable bias problem by excluding from the empirical analysis the tax changes taken in response to economic conditions.

They found that the endogenous tax changes had a modest (but positive) effect on output, while the exogenous changes had a large impact on output.

I favor a pragmatic approach to research, so I applaud the Romers for using the narrative approach.  However what’s being tested here isn’t really “stimulus,” it’s tax cuts.  The traditional Keynesian model says fiscal stimulus will boost NGDP, and will also boost RGDP if there is slack in the economy.  Otherwise you get higher prices.  So there are actually two interesting questions worth testing; does Keynesian stimulus boost NGDP (i.e. spending) and does the higher spending lead to more real output.

To make things even more complicated, supply-siders have suggested an alternative channel through which tax cuts might boost RGDP; increasing the incentive to work, save and invest.  The basic supply-side model doesn’t predict claim any impact of tax cuts on NGDP, indeed it was sold in the late 1970s as a tool for boosting output without boosting inflation.  Even so, if the central bank is targeting interest rates, then supply-side effects could easily lead to more NGDP as well.

So let’s accept Romer’s argument that tax cuts boost RGDP.  Is it a problem that we don’t know exactly how or why?  It could be, because if it is due to supply-side effects then lump sum tax rebates and government spending increases wouldn’t necessarily work.

Romer discusses one such event that occurred in the spring of 2008, when the Bush administration issued tax rebates to boost consumption.  John Taylor later pointed out that consumption did not seem to respond to these tax rebates, despite the temporary spike in disposable income.  Romer replied:

The trouble with this analysis is, Professor Taylor wasn’t thinking about what else was going on at the time. Democrats and Republicans didn’t come together to pass the tax rebate for no reason. This was the heart of the subprime mortgage crisis. House prices were tumbling. Mortgage lenders like Countrywide Financial were in deep trouble.

Economists were worried that consumption was about to plummet. For most families, their home is their main asset. When house prices fall, people are poorer, and so tend to cut back on their spending.

Against that background, the fact that consumption held steady around the time of the tax rebate may in fact be a sign of just how well it was working. It kept consumption up for a while, despite the strong downdraft of falling house prices.

Romer’s right that without the rebates aggregate spending and output might have been somewhat lower during mid-2008.  But Romer doesn’t consider whether that might have led the Fed to move much more aggressively in September 2008.  As it is the Fed met two days after Lehman failed and did nothing (which effectively tightened policy sharply as the Wicksellian natural rate was plunging rapidly during this period.)

The Fed cited an equal risk of recession and inflation (i.e. economic overheating) when it left interest rates unchanged at 2% in September.  It seems highly unlikely that the Fed would have been so passive if Romer’s counterfactual had come to pass.  If so, then John Taylor might be right, but for the wrong reason.  The real problem is that the Fed sabotaged Bush’s tax rebate.  The real problem is that in new Keynesian models the fiscal multiplier is precisely zero if the central bank targets either inflation or NGDP.

This is the biggest weakness in Romer’s paper.  When discussing Taylor’s critique she rightfully talks about the omitted variable problem.  But then she basically ignores the problem of monetary policy counterfactuals when considering what would have happened without the Obama stimulus.  The basic problem here is that she seems to hold three contradictory views:

1.  She agrees with Bernanke that the Fed is not out of ammunition.

2.  Elsewhere she praises Bernanke for acting aggressively in 2008-09, making the recession less severe.

3.  Her three million “jobs created or saved” estimate for the Obama stimulus implicitly assumes that if Obama’s stimulus had not passed, then the Fed would have responded to the deeper downturn with almost criminal negligence.

Now I’m perfectly willing to concede that it’s unlikely a counterfactual monetary policy would have exactly offset any fiscal stimulus reductions.  But I would also insist that monetary policy counterfactuals must be addressed in any multiplier estimates.  And I see one Keynesian study after another completely ignoring this problem.

She also cites the study by Nakamura and Steinsson that looked at the cross-sectional effects of defense spending in various regions.  But as I’ve pointed out many times, these multiplier estimates are completely consistent with the national multiplier being zero.  In other words, models that assume no aggregate multiplier effect (such as the monetary policy offset model) would nonetheless predict that regional defense expenditures would impact regional GDP.

She also cites a study of how individual reactions to rebate checks depend on the date they were received (Jonathan Parker, et al.)   This approach is somewhat better, but still fails to fully address the monetary offset problem.  Stimulus might boost NGDP in Q2, and the Fed might take it all back in Q3.

On a more positive note let me acknowledge that the Romers’ tax cut study is very important.  It suggests that we do know, at a minimum, that cuts in marginal tax rates boost RGDP.  I’m willing to support that sort of fiscal stimulus.  But at this point I’d have to say that’s all we know.  In a world where central banks are targeting inflation (and by implication AD), then all multiplier estimates for demand-side stimulus will be highly uncertain, little more that estimates of monetary policy incompetence in the specific period being examined.

The ironies are piling up so fast, and becoming so surreal, that I’m almost at a loss for words.  Fortunately Paul Krugman isn’t, and makes some very good points. After quoting Mario Draghi on the importance of keeping inflation expectations well anchored, Krugman points out that they are failing:

Unbelievable. Right now, the ECB has too much credibility on the inflation front; the spread between German nominal and real interest rates, which is an implicit forecast of the inflation rate, is pointing to disastrously low medium-term inflation:

You’d think at a time like this if the ECB was going to err, they’d want to err on the side of a bit too much stimulus.  Instead they’ll miss their inflation target on the low side.

The events of the last few years have caused me to radically revise my views of the Great Depression.  Not in terms of the causal factors, those have been amply confirmed.  Falling NGDP does create domestic and international financial turmoil—no doubt about that.  But I used to think people were stupid back in the 1930s.  Remember Hawtrey’s famous “Crying fire, fire, in Noah’s flood”?  I used to wonder how people could have failed to see the real problem.  I thought that progress in macroeconomic analysis made similar policy errors unlikely today.  I couldn’t have been more wrong.  We’re just as stupid as they are.

Sometimes I get commenters saying that the Germans are inflation-phobic because of their experience with hyperinflation.  I doubt that’s the reason; when countries make mistakes they tend to repeat them again and again.  I don’t see much fear of inflation in Argentina.  And the Swiss are just as inflation-phobic as Germans, but they never had a hyperinflation.  The lesson that should be taught to German children is that the deflation of 1929-32 caused much more harm than the hyperinflation.  Here’s Krugman:

Dylan Grice of SocGen points out that it was the deflationary policies of 1930-32, not the inflation of 1923, that brought you-know-who to power.

Indeed. When we hear assertions that Germans are deeply hostile to loose money because of their historical memories, I always wonder why those memories are so selective. Why is 1923 seared into collective memory, while the Brüning disaster has apparently gone down the memory hole?

This is important “” and there’s not much time to get the record straight.

That’s right; it was deflation, not hyperinflation, which brought the Nazis to power.  As late as mid-1929 (six years after the hyperinflation) the Nazis had only a trivial share of seats in the Reichstag.  By early 1933 they were in power.

Here’s Krugman’s policy analysis:

There are strong self-fulfilling aspects to this crisis of confidence “” which is why Europe desperately needs the ECB to act as lender of last resort, and short-circuit the vicious circles.

But no, the ECB will defend its credibility. And it will end up as the highly credible defender of the value of a currency that no longer exists.

I’m not sure if the lender of last resort is needed.  It’s possible that a dramatic shift toward monetary stimulus could rescue the euro.  But we’ll never know for sure, as the ECH will definitely not undertake my moderate proposal.  Instead it’s all or nothing.  They will either do nothing, or they’ll start buying up lots of bad debt.  But there’ll be no conventional stimulus.

This reminds me of the US during the Great Depression.  Richard Timberlake pointed out that one of the most damning facts of the interwar period is that when the US left the gold standard in April 1933 it had the largest gold reserves in the world.  Just think about what that means.  Those reserves are there for a reason, and it’s not to prevent the NY Fed building from blowing away in a hurricane.  They are held in case of an emergency.  Why weren’t they used in 1929-33 to massively boost the money supply?  Because they were there for emergencies.  Are you stupid!  I’m sure Fed officials were quite proud of the fact that they maintained those reserves all through the financial hurricane of 1931-33.

Similarly, as Trichet left office he proudly stated that under his leadership the ECB had driven inflation to even lower levels than achieved by the Bundesbank.  The irony of 1933 is that the refusal to do more aggressive monetary stimulus prior to 1933, led to the eventually collapse of the international gold standard, a much more radical move.  And the irony of the ECB circa 2011 is that they’d prefer the collapse of the euro system, or the monetization of potentially worthless debt, to a more moderate program of targeting modestly higher NGDP growth.

Again, I’m not saying my proposal would definitely work, but surely there’s no excuse for undershooting your inflation target at a time like this.  The ECB seems determined to hold on to its credibility just as tightly as the Fed held on to its gold reserves.  And by doing so it may end up losing everything.

PS.  My unusual policy views puts me in the odd position of agreeing with both Krugman and Tyler Cowen.  Too much debt or too much disinflation?  Maybe both guys are right.

PPS.  I’m very grateful for the nice compliment from Tyler, but in all honesty I think both he and Krugman are much better at euro-analysis.  I’m like the hedgehog who knows one big thing—falling NGDP is very dangerous during a debt crisis.  Yes, it’s a rather important thing, but the euro crisis is very complex, and when I read others I am constantly reminded how much of it is beyond my comprehension.  That’s why I’m sticking to the “more NGDP” mantra, it’s the only advice I feel confident about offering.