Archive for July 2013


Skidelsky on monetary stimulus

For the past 4 1/2 years I’ve had a running battle with commenters who insist that progressives favor monetary stimulus, even if they almost never talk about it.

Obviously some do (Krugman, DeLong, Yglesias, etc.)  But overall I’m just not buying.  Academic economists vote Democratic by a 3 to 1 ratio, and yet I doubt even 10% would say that Bernanke’s policy is too tight.

Here’s Robert Skidelsky:

This new enthusiasm for unconventional monetary policy is the more remarkable in that no one is quite sure how it works. There are several possible transmission mechanisms from money to prices (or nominal income) – notably the bank lending channel and the portfolio rebalancing channel. They have been extensively tested, with inconclusive results.

All of this led John Kay to wonder why so much attention was given to unconventional monetary policies ‘with no clear explanation of how they might be expected to work and little evidence of effectiveness?’ His answer: they are helpful to the financial services and those who work in them.

Here is another answer, given by the Chicago University economist Robert Lucas in the Wall Street Journal. Quantitative Easing, he wrote,  “entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls in the operation of individual businesses, and no government role in the allocation of capital…These seem to me important virtues”.

In short, a happy mix of self-interest and ideology. It has always been thus; which has not stopped economists discussing questions of policy as though the only thing to get right was the theory of the matter!

I think the Summers/Skidelsky/Stiglitz scepticism about QE is much more representative of the left than Krugman.

Speaking of Summers, TravisV sent me the following:

“If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal,” said Mr Summers. “We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates.”

Great.  We are going to base Fed policy on the growth rate of RGDP.  Just like in the 1960s and 1970s.

Wall Street economists favor Yellen over Summers by a ratio of 20 to 1:

David Gulley sent me this survey:

Participants, who include economists, traders and strategists, say monetary policy expertise is the most important quality for a new Fed chairman.

Of the 40 economists surveyed, 20 favored Yellen and one favored Summers.

Does Bob Rubin still work on Wall Street?


My new nominal GDP futures paper

Lots of people ask me for a paper explaining NGDP futures targeting.  Here it is (published by the Mercatus Center.)

BTW, I now think it might have been better to call it a “prediction market,” as that would have avoided a lot of misunderstanding.  You’ll see why if you read the paper.


Yes, a brilliant economist really can be that bad at monetary economics

Last weekend I argued that Larry Summers was unqualified to be Fed chair.  Lots of people pushed back, pointing to his obvious brilliance.  But that’s not enough.  In my post I pointed to this column by Summers:

However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.

.  .  .

It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero. Consider a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate. Depending on where it was undertaken, this project would yield at least an extra 1 cent a year in government revenue for each dollar spent. At any real interest rate below 1 percent, the project pays for itself even before taking into account any Keynesian effects.

Now Matt O’Brien and Matt Yglesias are criticizing the same column.  Here’s Yglesias:

Unlike Summers’ monetary policy analysis, I think this [fiscal view] is correct. But the conjunction of the views is remarkable. He’s saying that in a low interest rate environment we dare not leave investment decisions up to the private sector, which is going to just blow the money on boondoggles and white elephants””the state needs to step in and plan the economy. Socialism, in other words. But does Summers really think that? It sure doesn’t sound like something he thinks.

If the choice were up to me and this was what I had to go on, I’d consider this viewpoint to be nearly disqualifying.

Matt O’Brien is also appalled:

In other words, he thinks the Fed pushing down real interest rates might only push companies to make bad investments they otherwise wouldn’t make. It’s a very Austrian view of things — the idea that pushing interest rates “artificially” low makes businesses make mistakes.

No wonder our neo-Austrian president loves Larry.  Two peas in a pod.

Bob Murphy must be rubbing his hands together with mischievous joy.  An Austrian cabal has taken secret control of the Democratic Party at the highest levels of the US government.

But seriously, I hope people are beginning to understand why I’m horrified by the thought of a Summers Fed.

Let’s hope this backlash is in time.

I don’t hate Obama, but . . .

I’m not one of those right-wing haters, who thinks Obama’s a horrible president.  He has good points and bad points.  But from the very beginning I’ve been pointing out that he really doesn’t understand economics at all.  Conservative economists are often 70% to 90% supply-side.  Liberal economists are often 10% to 30% supply-side.  I’d put Clinton in there somewhere.  Obama is 0% supply side.  He just doesn’t get it.  He also doesn’t understand monetary policy, or the AS/AD model, or macroeconomics in general.  He just doesn’t.

Once he stunned Summers and Romer by indicating that high unemployment was due to things like ATM machines.

Now even Brad DeLong is disgusted.  Here’s the first few words of DeLong’s new post:

Obama turns neo-Austrian:

Read it and weep.

PS.  Yeah, he’s entitled to be neo-Austrian if he wants to.  But then why the fiscal stimulus?

HT:  Patrick Sullivan