Something a Fed chairman should never say
A Fed chairman should never suggest that Congress spend lots of money on utterly wasteful military boondoggles because not doing so would result in an undesirably slow rate of increase in AD.
If that were true, then the current stance of monetary policy would not just be too tight, it would be way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way, way too tight.
And then there’s President Obama, telling us that if we don’t spend tens of billions of dollars on wasteful military boondoggles it will “hurt the economy.” And he’s regarded as a progressive. And the progressives seem to think he’s doing a pretty good job.
Maybe he is. But what’s the plan? Can we cut the military in 2014, when unemployment is 7.4% instead of 7.9%? Is the plan to preside over 8 years of recession? Is that a good plan? I know, it’s all the fault of the evil Republicans. Well the Republicans are evil, but I fail to see how this is all their fault:
1. Obama proposed an inadequate stimulus when he had control of Congress. Paid no attention to the Fed in 2009.
2. Later when he realized it was too little, the GOP blocked additional stimulus. Except they didn’t—they OK’ed a payroll tax cut and extended UI benefits.
3. Then Obama decided that higher payroll taxes were a good idea. So he cut fiscal stimulus.
4. Then Obama decided to raises taxes on people making over $150,000 (no not $400,000-that’s another lie.)
5. So withdrawing stimulus with tax hikes is a great idea because the rich might invest the money in new enterprises, but we can’t cut military spending even though the Cold War ended 20 years ago because it would “hurt the economy.” Apparently the Obama plan is to preside over a permanent recession, so that we need a permanent war economy to make sure we have enough jobs. Or did I miss something?
The GOP will cave, and we’ll get more military spending. And the libertarians will be partly to blame. They keep insisting Fed policy is “inflationary,” and they keep intimidating the Fed. So we get a slow recovery, and the Dems and the GOP will decide we need more military spending to create jobs.
The Fed, Obama, the GOP, and the libertarians. Did I leave anyone out?
Oh yes I did, I forgot the Europeans. Here’s the Financial Times, which until yesterday was one of the world’s few media outlets that had not gone certifiably insane:
Eurostat, the EU’s statistical office, said on Friday that inflation fell to 1.8 per cent in February from 2 per cent in January, closer to the ECB’s target of keeping the consumer prices index “below, but close to” 2 per cent in the “medium-term”.
However, the encouraging news of a drop in consumer prices was offset by rising unemployment, as the rate of joblessness hit a fresh high in January at 11.9 per cent after it had stabilised at 11.8 per cent towards the end of 2012.
An extra 1.9m people found themselves out of work in the first month of 2013 across the 17-country bloc, raising the number of unemployed to 19m. The latest figures highlight the human cost of the eurozone’s sovereign debt crisis and the austerity measures that followed it.
Emphasis added. Et tu Financial Times?
End of rant.
HT: Nicolas Goetzmann
Tags:
1. March 2013 at 15:14
Scott,
The stock market rapidly dropped yesterday on news that the sequester was more or less a sure thing. Do you view that as evidence that fiscal policy is somewhat effective in this environment?
1. March 2013 at 15:21
Scott,
Are you suggesting that the Obama administration should have wasted even MORE resources on cronies with an even larger “fiscal stimulus”? Yikes. It shockingly sounds like you are in this otherwise terrific rant. Fiscal stimulus makes us poorer right when what we need most is discovering ways to create new value. The “stimulus”, particularly the parts which amount to paying people not to work, has slowed real growth even more than had we had less government spending and stable monetary policy.
1. March 2013 at 15:28
Dan, Perhaps a tiny bit, but overall I see no evidence in either the markets or the broader economy that it makes much difference. The Keynesians are predicting RGDP growth will slow by 1.5%. Maybe, we’ll see. My hunch is that the slowdown will be merely a few tenths of a percent, if that.
BTW, the markets have known for many days that no deal was going to be reached this week.
John. I think everyone knows I favor monetary stimulus, not fiscal stimulus.
1. March 2013 at 15:40
Scott,
Exactly. Which makes this post surprising.
1. March 2013 at 15:44
I’m no expert, but it seems that you aren’t looking deeply at where political decisions come from. For example, would Obama have raised taxes on people with incomes over $150,000 if Republicans hadn’t been screaming about the out-of-control deficit that they didn’t care about when Bush was in office? You are the first person to point out how uninformed the public is on issues economic. Well, until recently, Obama had to be elected by that uninformed public. I won’t deny that he deserves blame, but just because he proposes raising taxes or not cutting the payroll tax enough, doesn’t mean that he prefers those things to nothing, but rather that he prefers those things to the alternatives presented to him. Considering that he had to propose a Grand Deficit Reducing Bargain to get reelected, a tax increase on incomes above $150,000 as part of that bargain doesn’t seem like such a terrible idea.
1. March 2013 at 15:47
If we assume, not that monetary policy is useless, but that it won’t be used effectively, is there then room for fiscal policy to have a more-than-tiny impact?
1. March 2013 at 15:47
John, It would have been surprising if I’d said I favored fiscal stimulus.
J, Sorry, but the “Grand Bargain” occurred after he was elected.
1. March 2013 at 15:49
J, Possibly, but you’d need to assume much more than “it won’t be used effectively.” And I see almost no evidence to support the claim that fiscal stimulus would be effective right now.
One exception would be cuts in MTRs, which of course also have supply-side effects. But Obama opposes those.
1. March 2013 at 16:00
@Scott,
You write: “And the libertarians will be partly to blame. They keep insisting Fed policy is “inflationary,” and they keep intimidating the Fed.”
THE libertarians? Really, Scott? I’m a libertarian and I haven’t said that in the last few years. (I said it in the 1970s but so would you have.) In fact, you might recall that I won a bet with Bob Murphy on just this issue.
1. March 2013 at 16:14
David:
Do you think that your views are typical of libertarians?
1. March 2013 at 16:36
New book by Fed reporter Neil Irwin!
http://neilirwin.com/2013/03/01/heres-what-four-top-authors-have-to-say-about-neil-irwins-the-alchemists
1. March 2013 at 17:29
“A Fed chairman should never suggest that Congress spend lots of money on utterly wasteful military boondoggles because not doing so would result in an undesirably slow rate of increase in AD.”
Wasteful? According to MM, if the Fed’s inflation of the money supply results in an increase in military spending, which is a component of NGDP, and we observe NGDP going up as MMs desire, then MMs can’t complain, or else they must admit that not all NGDPs are created equal.
The last time I checked, NGDPLT isn’t “NGDPLT…but low military spending.” One 5% NGDPLT is supposed to be just as stimulative as any other 5% NGDPLT.
What if in 2008 the Fed and Treasury agreed for the Fed to monetize so much additional Treasury debt that the resulting government spending on “military boondoggles” succeeded in preventing the collapse in NGDP growth?
According to MM theory, that would have been better than what actually occurred. Imagine that. I see seeming complaints about military spending on this blog, but if inflation and military spending grew so much in 2008 that NGDP growth kept chugging along, then those complaints would turn into WOOHOOs!
“And the libertarians will be partly to blame. They keep insisting Fed policy is “inflationary,” and they keep intimidating the Fed.”
Except Fed policy IS inflationary. The Fed is creating new money virtually every day. NGDP has been growing at 4% per year since 2010. Inflationary. Stock prices have continued to go up. Inflationary. Commodities have continued to go up. Inflationary. Consumer prices have continued to go up. Inflationary.
What world are MMs living in that they would complain about true statements regarding Fed activity?
Speaking of intimidation, I see lots of intimidation of cash holders, money market fund investors, and those on relatively fixed incomes, from those who want more zeros added to paper notes.
“However, the encouraging news of a drop in consumer prices”
“Emphasis added. Et tu Financial Times?”
For the love of everything we learned in econ 101. STOP CONFLATING FALLING PRICES WITH MONETARY DEFLATION.
Higher productivity in a context of fixed aggregate spending can also reduce consumer prices. Falling consumer prices is in fact a good thing for those whose incomes do not fall.
Gee whiz, isn’t this basic economics?
1. March 2013 at 18:34
@Bill Woolsey,
I really don’t know. Most of the libertarian economists I talk to don’t worry much about inflation in the short term. About libertarians, I’m not sure. But, as you probably noticed, my objection was and is to the word “the.”
1. March 2013 at 18:36
Geoff:
You are mistaken.
Market Monetarists don’t think that monetary policy should (or really can) impact the composition of spending on output.
Should there be more or less spending on cars? Should there be more or less spending on ice cream cones? Market Monetarists believe that consumer preference should drive this. Should there be more or less spending on drill press machines? Should there be more or less spending on bulldozers. Market Monetarists believe this should be driven by entrepreneur’s expectaions.
Should there be more or less spending on the military? That depends on the need for security. If there is no such need, the spending on other goods or services, things that people can use more of, should expand.
1. March 2013 at 18:37
David, Most libertarians–surely you’d agree with that.
TravisV, Trichet is the “hero?” I think I’ll pass on that one.
Geoff, Start at the beginning of my blog, February 2009, and start reading. I don’t have time to explain S&D here.
1. March 2013 at 18:40
David, I call myself a “libertarian” and lots of the other market monetarists are also libertarian. So I assumed people would take my comment as reflecting the views of the vast majority, not all.
1. March 2013 at 20:10
Paul Krugman – Ben Bernanke, Hippie: http://www.nytimes.com/2013/03/01/opinion/krugman-ben-bernanke-hippie.html?src=me&ref=general
Paul Krugman is still TEH LONE WARRIOR FOR TRUTH.
Scott, are we now revising our opinion on the great Bernanke’s wisdom, or are we still running the line where he is simply saying what he has to say (thus excusing almost anything he could be reported to say in future)?
1. March 2013 at 20:21
@Scott,
“David, Most libertarians-surely you’d agree with that.”
I think that’s right. I’m just not sure and I haven’t seen any polling data on it. I guess I take your language too literally.
1. March 2013 at 20:30
” Later when he realized it was too little, the GOP blocked additional stimulus. Except they didn’t””they OK’ed a payroll tax cut and extended UI benefits.”
I think this is fairly disingenuous. Correct me if I am wrong, but were UI benefits shortened? And what about the AJA?
“Then Obama decided to raises taxes on people making over $150,000 (no not $400,000-that’s another lie.)”
What’s the lie?
“So withdrawing stimulus with tax hikes is a great idea because the rich might invest the money in new enterprises, but we can’t cut military spending even though the Cold War ended 20 years ago because it would “hurt the economy.” Apparently the Obama plan is to preside over a permanent recession, so that we need a permanent war economy to make sure we have enough jobs. Or did I miss something?”
I think it’s best characterized as a bet (that something more comprehensive and lasting would go into effect) which went horribly wrong.
1. March 2013 at 20:46
“The Fed is inflationary indeed!”
http://thefaintofheart.wordpress.com/2013/03/02/where-is-the-love-i-mean-inflation/
1. March 2013 at 21:16
Oh, P.U., military spending.
So, after railing against federal waste and asserting that federal deficit spending does not increase employment, the GOP says that cutting military spending would wipe out jobs? And Obama concurs?
Does anyone know we spend $1 trillion a year on defense, VA and Homeland Security—and we have no military enemies to speak of?
We used to “face” the Soviet Union. They had a blue water navy, and air force with supersonic bombers, ICBMs, a KGB, a huge tank corps, and three million men in uniform.
We spend more now since the SU collapsed, and we face…a few dozen guys armed with homemade bombs? The panty-bomber?
And yes, I also detest HUD, Labor, Commerce and the USDA.
And top of all of that, it is Fed policy that will shape this recession (and has been) not federal spending.
I think I will take up bartending. At least people know what is a drink.
1. March 2013 at 21:27
Prof. Sumner is getting better and better at discussing his ideas with journalists. I highly recommend the podcast he did with James Pethokoukis this past August:
http://www.aei-ideas.org/2012/08/pethokoukis-podcast-an-interview-with-economist-scott-sumner-on-market-monetarism
In particular, I love Prof. Sumner’s comment at 24:50 that if the Fed increased its inflation target, it would actually have to print LESS money.
I also love his comments beginning at 33:45 linking tight money and foolish big government policies (which happened with FDR and Argentina, for example).
1. March 2013 at 21:28
Scott,
What do you think of this chart from Bernanke’s speech on long term rates, that attributes almost all of the interest rate fluctuations around each round of QE to changes in the term premium?
http://www.federalreserve.gov/newsevents/speech/bernanke-exhibit-20130301a2.png
1. March 2013 at 21:29
– Bernanke
http://economix.blogs.nytimes.com/2013/03/02/different-time-zone-same-defense-for-bernanke/
1. March 2013 at 21:32
Prof. Sumner also has excellent comments at 30:25 where he points out that if monetary policy is tight, then the public demand for base money is very high and vice versa.
1. March 2013 at 21:52
“Later when he realized it was too little, the GOP blocked additional stimulus. Except they didn’t””they OK’ed a payroll tax cut and extended UI benefits.”
This is just a little disingenuous, considering UI benefits were cut back and the Republicans voted against the American Jobs Act and have yet to propose anything similar.
“Then Obama decided to raises taxes on people making over $150,000 (no not $400,000-that’s another lie.)”
What’s the lie?
“So withdrawing stimulus with tax hikes is a great idea because the rich might invest the money in new enterprises, but we can’t cut military spending even though the Cold War ended 20 years ago because it would “hurt the economy.” Apparently the Obama plan is to preside over a permanent recession, so that we need a permanent war economy to make sure we have enough jobs. Or did I miss something?”
This is best characterized as an attempt to force people into doing something responsible that went badly awry.
1. March 2013 at 22:46
Scott,
Can you explain how Ben Bernanke openly begging Congress for more expansionary fiscal policy (as he has consistently done for several years now) is consistent with the Sumner Critique?
2. March 2013 at 00:23
About unemployment in the Eurozone:
the december rate was increased with 0,1%, too. Total unemployment is therewith by now 0,2% higher than we thought it was, one month ago. Italy witnessed a 0,4% increase in one month. Wow, amazing that the Italians did not vote for Monti. Unemployment in Portugal, Spain and Greece is now over 15%, in Spain and Greece over 25%. Anybody still of the opinion that the Euro is a success? It isn’t. By the way, if you want real structural changes in Italy – back Grillo.
2. March 2013 at 03:14
Obama and the Dems are trying to prevent the domestic, discretionary cuts, not the military cuts per se.
Most Dems-including me-would prefer to cut the military, although, the abrupt and indiscriminate way these military cuts are laid out is a mistake. I’m all for military cuts but there should be some discretion in how they’re done-not just across the board.
I don’t know that Obama wanted the payroll tax cut to end or just didn’t think he could get it as part of the fiscal cliff deal.
2. March 2013 at 04:37
Isn’t Bernanke doing the case against fiscal stimulus a huge disservice by consistently asking for it? It suggests that he is unwilling or unable to fully offset the impact of fiscal policy.
Throughout the crisis, Bernanke has mainted that the Fed is not out of ammo, but he has never acted to restore demand to pre-crisis trend (or even close). He’s like a fireman who says “We have plenty more water, but we’re not going to pump any faster even though the house is burning down. We are already pumping at historic levels. I suggest that Congress help us by starting a bucket brigade.”
2. March 2013 at 07:59
[…] See full story on themoneyillusion.com […]
2. March 2013 at 08:56
Looks like sequester is going forward.
Never seen so much whining over 2.6% cuts that still result in spending increasing every year. The GOP should have demanded 10% cuts across the board.
2. March 2013 at 10:33
Michael,
He has consistently said that the Fed is not “out of ammo,” but I don’t think I’ve ever heard him say that monetary policy alone is capable of restoring demand to its pre-crisis trend. Just the opposite, in fact.
I see him more as a fireman who says “We’re dumping as much water as we can in here, can you assholes stop throwing lit matches in and help me?”
2. March 2013 at 11:12
Saturos, I’d like an hour to grill Bernanke on why additional monetary stimulus would be riskier than defense spending. Indeed why it would be risky at all.
I’m very intrigued by the “intuitional framework” comment—what does that mean? Can someone give an example?
kebko, I have no opinion on that graph. The expected inflation figures are obviously very different from the TIPS spreads—I’d need to know why before having an opinion.
Even if QE affected term premiums, it wouldn’t change the fact that they clearly affect forex rates and stock prices. Thus my overall appraisal would not change.
BJSSP, In 2012 UI benefits were extended at 73 weeks rather than 99 weeks, which is still higher than anytime I can recall other than 2009-2011. In 2013 the fiscal cliff deal had the GOP agreeing to a further extension at 73 weeks. That’s surprisingly generous for the GOP—much higher than during previous recessions.
The lie is the claim that income taxes were only raised on those making over $400,000.
Marcus, Yes, where is the inflation?
Ben, I agree.
Aidan, He’s also said other things that are completely consistent with the critique. For instance, he says the Fed must take fiscal policy into account when deciding what to do. The implication is that the Fed needed to do QE3 and additional communication last fall to fight off the effects of the fiscal cliff. I think it’s quite likely they will succeed, and growth will remain steady in 2013. The markets seem to agree. If we had a GDP futures market they’d probably predict RGDP and NGDP growth in 2013 similar to 2012, not the 1.5% drop predicted by Keynesian models.
Now why would he then want Congress to do more? Because he’d prefer to do less–it’s hard to convince the hawks at the Fed to do more. It would make Bernanke’s life easier if Congress did more. BTW, I’ve never argued that Bernanke buys the Sumner critique 100%. Indeed I’m not sure I do.
Thanks TravisV.
Merijn, I thought Grillo wanted higher government spending with no tax increases. How would that work out for Italy?
The Italian people don’t want to leave the euro. That may be a mistake, or it may not. But if they plan to stick around then Monti’s supply side proposals were the right way to go.
Michael, Good analogy.
Aidan, You said:
“He has consistently said that the Fed is not “out of ammo,” but I don’t think I’ve ever heard him say that monetary policy alone is capable of restoring demand to its pre-crisis trend. Just the opposite, in fact.”
I’d be shocked if this were true. Indeed I’m almost certain it is false. Did Bernanke say a 500% annual NGDP growth target would fail to boost NGDP back to the trend line? I doubt it. I’ve heard him say monetary policy is not a panacea, and I agree. There are also structural problems in the economy.
2. March 2013 at 11:50
Fair enough. To me, though, saying that the Fed must take fiscal policy into account doesn’t mean that they are determined to fully offset any fiscal stimulus. To my untrained eyes, Bernanke thinks the current obsession with deficits is counterproductive. I’ve heard you in the past argue that fiscal stimulus boosts AD just as well as monetary stimulus (or something to this effect – I think I’m remembering this from one of your EconTalk interviews), but that fiscal stimulus has unintended consequences that monetary stimulus does not, primarily the monetary offset. But as long as we are running discretionary monetary policy, this would seem to me to depend on the Fed’s willingness to allow fiscal policy to boost AD.
It may be very well that Bernanke wants Congress to do more because he can’t convince the hawks to do any more, but the hawks are not a majority voice at the Fed right now. I understand that there is currently some tension regarding the end date of the Fed’s current stance, but judging by his speech last night, it seems like Bernanke is pretty determined to ignore the scolds. I tend to take him at his word when he argues that a) monetary policy is not too loose right now and b) fiscal policy is currently too tight.
If he had been making the argument that the problems in the economy were entirely structural and we can only solve them via supply-side reforms, I would be inclined to agree with your position. But that’s not what he’s been arguing, and that’s not what Janet Yellen has been arguing, and I assume that they are both more reliable indicators of how the Fed would respond than Richard Fisher or Jeffrey Lacker.
When I see Janet Yellen arguing (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/19/janet-yellen-explains-our-crummy-recovery-in-three-charts/) that discretionary fiscal policy is acting to restrain the recovery, I don’t take that as a sign that the Fed would offset looser fiscal policy. I think your position makes sense on paper, and under normal circumstances, but I would count as an abnormal circumstances *when the leadership structure of the Fed is openly urging Congress to pursue more fiscal stimulus*.
And as a side question – when Alan Greenspan was urging Congress to pass the Bush tax cuts, did he then fully offset them by tightening monetary policy?
2. March 2013 at 11:59
Dr. Sumner:
“John. I think everyone knows I favor monetary stimulus, not fiscal stimulus.”
Impossible. If you advocate for monetary policy, then you advocate for the Fed to buy government bonds. The more monetary policy you want, the more government bonds you want the Fed to buy.
If the Fed is going to buy government bonds, then it ipso facto implies that the Treasury is going to be engaging in fiscal policy (i.e. government spending) to that extent.
The only way one can really favor monetary policy and not fiscal policy when one believes the government ought to add zeroes to paper notes, would be if one advocates for the Fed to buy something other than treasury debt.
2. March 2013 at 12:00
Bill Woolsey:
“Market Monetarists don’t think that monetary policy should (or really can) impact the composition of spending on output.”
I am pretty sure that this is wrong, because market monetarists want the Fed to be buying government debt when it inflates. Hence, market monetarists are calling for more government spending to at least that extent.
The only way out of this would be for MM to explicitly call for the Fed to buy something other than treasury debt.
Moreover, what you said isn’t something I am saying is your position or your thoughts on this matter. My point is that MMs don’t distinguish between various forms of “spending” when they say the Fed should target NGDP growth.
It is an issue of omission, not inclusion. But be advised that MMs ignoring this does not justify MMs in saying that their theory is independent from spending direction influence. That somehow MM theory is not taking any stand on spending compositions. This is because while MMs omit what form the spending is supposed to take, it doesn’t prevent MM from taking a stand whenever it makes a statement as to what the Fed should buy.
MMs aren’t calling for the Fed to target a rate of spending in growth in the private sector only. No, it’s spending that includes government spending, and the money supply is supposed to grow by way of the Fed buying primarily government debt. You can’t call for the Fed to buy government debt, and then at the same time claim that MM isn’t taking a stand on what form money spending is supposed to take when it comes to government versus private sector spending.
MM is telling the world that if NGDP rises by 5% this or every year, then there is equal “stimulus effect” between 5% growth composed of war spending and 5% spending growth caused by private capital spending. There is no explicit argument that separates one 5% NGDPLT from any other, in terms of composition of spending.
MMs claim that the Fed cannot control where the money goes or what the money is spent on, but that is clearly false, because the Fed has the discretion in what it buys. If it buys government debt, then that requires the government to borrow, and that implies government spending to that extent. So the Fed, if it buys government debt rather than private debt, is indeed influencing what form the aggregate spending takes.
What if the treasury stops borrowing? The Fed would have to start buying something else, and whatever MMs say it should buy, would require specific people who own specific institutions who issue specific securities. If MMs called for the Fed to buy private AAA debt from banks, then that would imply MM is a theory that calls for certain institutional spending and not others. The only way out of this would be if MMs called for the Fed to buy some of everything available to be bought. That would be a theory that doesn’t discriminate between various forms of spending, through omission.
“Should there be more or less spending on cars? Should there be more or less spending on ice cream cones? Market Monetarists believe that consumer preference should drive this.”
I don’t think this is true. If you did, then you wouldn’t be calling for the Fed to be buying the government’s debt, and you wouldn’t be supporting an institution that is based on governmental initiations of force against property owners (sovereign consumers), which is necessary for the Fed to even exist.
It would be like me saying “I am in favor of the consumer deciding who earns profits….in everything except my monopoly money creation operation. And defense. And security. And…”
If you really wanted consumer preferences to determine where spending goes, then you would be a laissez-faire “monetary anarchist” so to speak. You’d be calling for a free market in money, just like you call for a free market in cars and ice cream cones.
It is literally impossible for there to be consumer preferences determining where money spending goes, and a central bank with governmental monopoly privilege in money production that overrules consumer preferences, both at the same time. You can only have one or the other.
“Should there be more or less spending on drill press machines? Should there be more or less spending on bulldozers. Market Monetarists believe this should be driven by entrepreneur’s expectaions.”
The same problem alluded to above, applies here too. If you really wanted entrepreneur expectations to guide where money is invested, then again you wouldn’t be calling for the Fed to be buying government debt, which is an implicit call for the government to borrow savings and hence spend, which is a call for people other than entrepreneurs to direct investment spending.
Yes, entrepreneurs would eventually end up spending the money once it circulates from the treasury and banks, but it is necessary for the government to be spending as well.
“Should there be more or less spending on the military? That depends on the need for security. If there is no such need, the spending on other goods or services, things that people can use more of, should expand.”
MM still requires the government to borrow (and hence spend) money. If the government spends the money on more military boondoggles, then MM is intellectually responsible, for MM called for the Fed to buy government debt, and hence government borrowing, and hence government spending.
2. March 2013 at 12:01
Dr. Sumner:
“Geoff, Start at the beginning of my blog, February 2009, and start reading. I don’t have time to explain S&D here.”
I have gone back quite a bit in the blog history, and I can assure you that there is no serious addressing of the points I am raising. I wouldn’t have brought them up if the answers were there.
I don’t think it is a good idea to pretend that these explanations exist, and to make it appear as if I am being lazy in some way, or ignoring the writings of the people whose ideas I find need to be more fleshed out before they make sense.
2. March 2013 at 15:14
Aiden, Multiplier estimates are nothing more than estimates of central bank incompetence, and hence are almost impossible to derive scientifically. Different people will come to different conclusions, as we can’t rerun history to know what Bernanke would have done had Congress not passed stimulus in 2009.
2. March 2013 at 17:09
I think we might have reached the point where permanent recession is the government’s desired end state and economic growth would prove disastrous.
1. Typically elected officials lose their jobs if the economy sucks, but that link seems to be severed.
2. On the other hand, an increasingly redistributionist government makes patronage that much moe effective as a vote-getting mechanism.
3. That is, elected officials have found that fostering economic growth for the whole country is less important and controlling the economy to direct slices of pie toward your voters is more important.
———–
A rapidly growing economy and non-gamed monetary policy would rapidly raise interest rates on government debt. Because debt levels are high and roll over short term, this means the cost of a debt will increase more quickly than increased tax revenues.
That is, we’ve reached the point where economic growth would cause both a legitimate crisis in government spending and in the coalition that wins votes by redistributing goodies to its constituents.
3. March 2013 at 01:28
” Can we cut the military in 2014, when unemployment is 7.4% instead of 7.9%?”
FULL EMPLOYMENT FIRST, DEFICIT REDUTION AFTERWARD!
REPEAL THE SEQUESTER. Dont mend it, END IT!
3. March 2013 at 01:36
“Obama proposed an inadequate stimulus when he had control of Congress.”
So you now assert that Paul Krugman was right about this all along?
I remember that not all too long ago you and others on this site were arguing strenuously that the stimulus had no effect on output and income, not that it was too small.
If there had not been a filibuster, there would probably have been a larger stimulus, perhaps Romer’s 1.2 Trillion. But getting even the smaller stimulus past the Republican filibuster was difficult and required Senator Spector to sacrifice his seat in order to get this passed.
3. March 2013 at 01:46
“And the progressives seem to think he’s doing a pretty good job.”
Starting in 2009 Obama gave deficit reduction priority over job creation. Because of this, he accepted and reinforced the Republican’s agenda of reducing the deficit NOW, NOW, NOW, before the economy had returned to full employment. In doing so he played right into the Republicans’ hands.Instead, he should have used his bully pulpit to explain to the American people that when the economy is depressed any reductions in the deficit kills jobs.*
*This argument, of course, assumes that the Fed is not willing to agressively use non-conventional expansionary monetary policy, which it is not.
3. March 2013 at 01:56
“3. Then Obama decided that higher payroll taxes were a good idea. So he cut fiscal stimulus. 4. Then Obama decided to raises taxes on people making over $150,000”
That is because Obama has accepted the Republicans’s false frame that we need to reduce the deficit NOW. The tax increase on the rich is essentially an alternative to steep cuts in expenditures that benefit working people. And keeping the payroll tax holiday in place would have prevented the compromise that postponed the sequester from going through at the beginning of the year.
3. March 2013 at 07:53
Full Unemployment Hawk:
“I remember that not all too long ago you and others on this site were arguing strenuously that the stimulus had no effect on output and income, not that it was too small.”
Maybe the argument of it having no effect was due to it being too small?
3. March 2013 at 08:02
Full Employment Hawk:
“FULL EMPLOYMENT FIRST, DEFICIT REDUTION AFTERWARD!
REPEAL THE SEQUESTER. Dont mend it, END IT!”
If it’s only “employment” you’re worried about, and not the individual ends of consumers of which employment is but a means, then why aren’t you screaming from the hilltops for the Fed to hire every unemployed person to sweep the floors, take out the garbage, and hold Bernanke’s water?
Everyone would have “jobs” then! “Employment” would be 100%.
Heck, why not have the Fed pay everyone to perform tasks, so that we can abolish “unemployment” forever?
Why are you calling for this rather weak and sloppy solution for eliminating unemployment that consists of money dilution from the Fed that coaxes private employers to hire more people?
There are lots of people without “employment”, and you’re just sitting there not calling for the Fed to hire everyone! You’re not really concerned about unemployment now are you? Hehe. Your name is not so much a description, but a self-affirmation therapeutic mantra. Hehe.
3. March 2013 at 09:23
Aiden, Multiplier estimates are nothing more than estimates of central bank incompetence
Well, to be fair, obviously there is a curve here, the first 10-15% of gov’t spending as a % of GDP has a very large multiplier because it supplies basic things like courts, police, roads, sensible regulation, etc. The problem is that a lot of people don’t realize the curve bends.
3. March 2013 at 10:04
“Maybe the argument of it having no effect was due to it being too small?”
Then what were the criticisms of Paul Krugman, who was making this argument, all about?
The argument at that time, that both Scott and other posters were making is that expansionary fiscal policy is ineffective because the Fed would simply offset it with less expansionary monetary policy. In that case an argument that the stimulus was too small is not valid because a larger stimulus would have been offset by an even less expansionary, or more contractionary, monetary policy.
Since the statements by Bernanke indicated that he wanted aggregate demand to grow more rapidly, but was not prepared to use a more expansionary monetary policy to achive the needed faster growth in aggreagate demand, expansionary fiscal policy expanded aggregate demand and the stimulus had an expansionary effect. But, with the economy having been hit by the worst shock since the Great Depression, the stimulus was too small to restore the economy to full employment.
3. March 2013 at 10:07
Keynesians arguing that a more expansionary fiscal policy has an expansionary effect on the economy largely base their argument on the assertion that the economy is in a liquidity trap. While it is correct that if the economy is in a liquidity trap expansionary fiscal policy has an expansionary effect on the economy, a liquidity trap is only a SUFFICIENT condition for the expansionary effect. But it is not a NECCESSARY condition.
An alternate sufficient condition for fiscal policy to have an expansionary effect is that:
1. The economy is depressed.
2. Very short-term interest rates have reached the zero floor, so that conventional monetary policy ceases to work, and
3. The central bank is not willing to agressively use non-traditional monetary policy (like, for example, targeting NGDP growth) to give the economy the needed monetary stimulus.
Perhaps this situation should be called a “semi-liquidity trap.”
This is the condition that has prevailed during the little depression, so that expansionary fiscal policy has an expansionary effect and a contractionary fiscal policy, such as the sequester, has a contractionary effect on the economy.
REPEAL THE SEQUESTER. FULL EMPLOYMENT FIRST, DEFICIT REDUCTION AFTERWARD!
3. March 2013 at 10:14
“why aren’t you screaming from the hilltops for the Fed to hire every unemployed person to sweep the floors, take out the garbage, and hold Bernanke’s water?”
Because I am much too CONSERVATIVE to opt for radical measures that would totally disrupt the economy and result is great efficiency. Expansionary monetary and fiscal policy is much more MODERATE and centrist than such radical alternatives.
3. March 2013 at 10:56
Full Employment Hawk:
“Because I am much too CONSERVATIVE to opt for radical measures that would totally disrupt the economy and result is great efficiency. Expansionary monetary and fiscal policy is much more MODERATE and centrist than such radical alternatives.”
Well you’re already in favor of non-conservative, non-moderate, non-centrist central banking (which BTW Marx desired). What you desire only seems moderate and centrist because it’s the status quo.
So if you change the status quo, slowly, and gradually, then there would be no “disruption” of the economy from one moment to the next. You’ll be able to sleep at night knowing that various statistics did not significantly change day to day. You can forget about what was the case 10 years ago, like a frog in in a pot of water that is slowly brought to a boil.
If it’s done incrementally and gradually, if the Fed starts hiring unemployed people over time, say in groups of 1000, then the status quo would eventually become one where the Fed hiring unemployed people is “centrist” and “moderate.”
So now that you have a “moderate” and “centrist” solution, why not shout from the hilltops that the Fed should gradually hire more and more unemployed people until there is not a single unemployed person? Not only will you achieve the goal of no unemployment, but you’ll have done it in a centrist, moderate way!
What say you?
3. March 2013 at 11:17
Full Employment Hawk,
Scott wasn’t arguing that the stimulus package was inadequate because it was too small, he’s arguing that it’s inadequate because fiscal stimulus is always inadequate and he would prefer more monetary stimulus (and he thinks that in the absence of the fiscal stimulus of 2009 the Fed would have pursued more monetary stimulus that would have been more effective).
I’ve seen nothing that convinces me that his position is correct, but it’s different than arguing that Krugman was right.
3. March 2013 at 11:28
“Well the Republicans are evil, but I fail to see how this is all their fault: 1. Obama proposed an inadequate stimulus when he had control of Congress.”
He did not say an INEFFECTIVE stimulus. Calling a stimulus inadequate implies that a larger one would have been adequate.
I strongly agree that much more monetary stimulus would have been badly needed, but in the absence of this the fiscal stimulus was too small.
3. March 2013 at 11:31
Representative John Conyers … released “The Cancel the Sequester Act of 2013 (HR 900).” It is a simple one sentence bill that, if passed, would completely eliminate the sequester.
RIGHT ON!
3. March 2013 at 11:34
“What say you?”
I say you are a very skilled sophist.
3. March 2013 at 16:20
FEH, I still think fiscal stimulus has little effect. I’ve always favored monetary stimulus. There was too little monetary stimulus in 2009.
TallDave, The multiplier refers to demand side effects, those are supply side effects.
3. March 2013 at 20:48
Geoff, how many times does Scott have to tell you that effective monetary policy involves less purchasing and more signalling (less supply and even less demand for money balances)?
Scott, I’d like to know as well.
3. March 2013 at 21:11
Full Employment Hawk:
“I say you are a very skilled sophist.”
Why thank you. But I’m not even in the same league as monetary economists, who want sophistry on national scales where the Fed essentially tricks employers into hiring workers at lower real wage rates and sellers into selling goods at lower real prices. For that is how monetary policy “works” at reducing “unemployment” and increasing “output.” If all employers and all sellers really understood inflation, then inflation would have zero effect on real activity.
What say you about my proposal? It’s centrist, and it will eliminate unemployment. You on board with it? I realize you would rather not answer this, since you responded with calling me a sophist, but just for kicks, I’ll ask again.
Saturos:
“Geoff, how many times does Scott have to tell you that effective monetary policy involves less purchasing and more signalling (less supply and even less demand for money balances)?”
Once?
“Scott, I’d like to know as well.”
Hahaha. After chewing me out for asking an allegedly poor question, you want to know the answer to it as well.
Come on dude, that’s funny.
4. March 2013 at 05:16
“There was too little monetary stimulus in 2009.”
Agreed and too little monetary stimulus since then. I do not see the issue as monetary VERSUS fiscal policy. I see it as monetary AND fiscal policy.
4. March 2013 at 05:28
“where the Fed essentially tricks employers into hiring workers at lower real wage rates and sellers into selling goods at lower real prices. For that is how monetary policy “works” at reducing “unemployment” and increasing “output.” If all employers and all sellers really understood inflation, then inflation would have zero effect on real activity.”
Where is your proof that this is how monetary works at reducing unemployment? There are alternate explanations of how an increase in the money supply affects output in the short run, such as the one given by David Hume, who argued that when the money supply increases, prices only change gradually, and more importantly, sequentually, rather than simultaneously.
4. March 2013 at 06:36
Full Employment Hawk:
“Where is your proof that this is how monetary works at reducing unemployment?”
I am not quite sure what you mean. What I can say is that I know it by a combination of what every monetarist school of thought presumes, and my own economic reasoning. It cannot be observed in a set of historical economic data. So I won’t be able to show you “evidence” in the empirical sense.
The following is not “proof”, but it does serve as a preliminary that what I said above is not absurd or crazy: Many eminent economists agree. Keynes for example wrote in the GT:
“…For a time at least, rising prices may delude entrepreneurs into increasing employment beyond the level which maximises their individual profits measured in terms of the product. For they are so accustomed to regard rising sale-proceeds in terms of money as a signal for expanding production, that they may continue to do so when this policy has in fact ceased to be to their best advantage; i.e. they may underestimate their marginal user cost in the new price environment…”
“…Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expedience, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures. Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter. Moreover, other things being equal, a method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable…”
“…If important classes are to have their remuneration fixed in terms of money in any case, social justice and social expediency are best served if the remunerations of all factors are somewhat inflexible in terms of money. Having regard to the large groups of incomes which are comparatively inflexible in terms of money, it can only be an unjust person who would prefer a flexible wage policy to a flexible money policy, unless he can point to advantages from the former which are not obtainable from the latter…”
“…The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former…”
Hayek in 1977 said about the GT:
“Lord Keynes .. was operating [in the 1930s] in a very peculiar situation. Now in Great Britain a successful attempt was made after World War I “” which brought a good deal of inflation “” to bring prices down to the pre-war level. Prices came down but wages did not, so you had in the 1920s a position in Great Britain where wages were internationally too high and Britain had become noncompetitive on the world market. The problem in Great Britain was to make Britain competitive again and it was clear that this required a reduction of real wages.”
“Notice these real wages had been artificially increased by increasing the value of the pound. So because the pound was par to its former level, people receiving the same wartime wages, or inflated wages, could buy much more. Wages had not come down.”
“Now his first argument was wages must come down. Then the conclusion was that is politically impossible, so we must find another way, instead of getting money wages down, we must depreciate the pound so that given money wages should correspond to a lower level of real wages.”
“And then by a curious intellectual somersault, I would almost say, he led himself to believe that even bringing down money wages was not any use. It involves a very complex economic argument and all he said, concluded, was that, a, well, we must inflate, in short.”
These are, again, not “proof”.
So what is the proof? It can only be proven by theory, because we can’t observe worker’s or employer’s thoughts. As I alluded to above, we just have to consider all the monetarist theories that make the case that money printing boosts employment and output.
The MM theory states that money printing can boost employment when workers and employers don’t reduce agreed to wage rates. The question is, WHY aren’t they reducing the wage rates? Well, it’s obviously because they believe that they would be worse off by accepting lower wage rates, than holding out for higher wage rates. Without inflation, “unemployment” will remain. That’s where the “trick” of inflation comes in. Inflation can reduce unemployment in a context of workers and employers refusing to cut their too high desired nominal wage rates, by virtue of making workers and employers believe that their desired “hold out” wage rates are justified (beneficial) after all. If workers and employers really understood that inflation is reducing the value of even their desired hold out wage rates, then it stands to reason that they would otherwise raise their desired hold out wage rates, and completely nullify the effects of inflation (on employment).
Otherwise, we would have to believe that all workers and employers are all sitting around on their thumbs, pleading the central bank for more inflation on the basis that they are fully aware that they themselves are incapable of reducing wage rates even if they tried. That of course is absurd.
Like I said above, all monetarist schools of thought also presume that inflation “works” through trickery. I’ll just analyze what you said:
“There are alternate explanations of how an increase in the money supply affects output in the short run, such as the one given by David Hume, who argued that when the money supply increases, prices only change gradually, and more importantly, sequentually, rather than simultaneously.”
See that? Inflation works because the resulting increase in prices is only gradual and sequential. This is fully consistent, and what we would expect, if the theory that inflation “works” through trickery is correct. For workers and employers who don’t raise their prices immediately, they are not raising their prices immediately in part precisely because they don’t fully understand or know how inflation is affecting their business. Prices rise over time as more and more people realize that their previous asking prices are too low. But by that time, there is already “economic activity” going on, and already boosts to “employment” and “output”.
Once people raise their prices again, we’re back at square one. People would hold out for too high prices again, and they would again have to be “tricked” by inflation in order for their prices to clear their respective markets.
Of course it should go without saying that the prices people hold out for is in large part caused by previous inflation, which is why inflation over the long run has a tendency to accelerate. Which brings me to another theory that is consistent with inflation trickery: Rational expectations. If everyone fully understood the effects of inflation, and everyone had the same prediction model of how inflation will affect prices, then inflation would have zero effect on real economic activity (which includes hiring and firing, and output production). For everyone would simply adjust their desired prices and wage rates (which still includes uncertainty on the business side of things). Everyone would add a percentage to their desired prices, and “unemployment” and “output” would not be affected by inflation at all.
Of course, the fact that everyone has different prediction models of how inflation will affect prices, is why rational expectations is not true, and why inflation really does have real effects. All monetarists believe inflation has real effects. Well, these “real effects”, as shown above, MUST be a form of “trickery”, or else everyone would realize what’s going on, raise their desired prices accordingly, and there would still be the problem of “too high prices” given the nominal demand (at least for a time if inflation comes to an end, until people learn how to deal with THAT new context, after their “inflation psychology” is no longer warranted).
The case for inflation as trickery is so strong, so widely accepted, that your blanket denial sounds more like not wanting to believe that there is no such thing as Santa Clause. That the world would be “more just” if inflation was purely mechanical and in no way deceptive.
Ask Joe Sixpack on the street what he thinks of Bernanke’s recent actions, and how he is going to alter his plans due to those actions, and you’ll get a blank stare and glossy eyes. But in order for the inflation as trickery theory to NOT be true, every single individual you ever talk to would have to be fully aware of monetary policy, how inflation will affect the prices of all the goods and services he buys, how it will affect his competitive wage rate, and so on. MADNESS.