A bad attitude
In high school I had a bad attitude toward society. A feeling that I was surrounded by fools. I suppose that’s normal. As I’ve gotten older I am somewhat more mature, more forgiving of opinions that seem foolish to me. But my sophomoric former self hasn’t entirely gone away, and tends to flare up when I read things like the following:
Inflation is slowing in the U.S. after a surge early in the year, which should give the Fed room in 2012 to take steps to bolster economic growth. A6
That was one of those brief reports in the left column of the WSJ’s front page, which leads to a longer Jon Hilsenrath story on page 6.
Why am I so enraged by this sentence? Not because there’s anything wrong with Hilsenrath’s story; he’s a top notch Fed watcher, and correctly reports the current views of monetary pundits both within and outside the Fed.
So perhaps I’m enraged that the Fed would focus on inflation, which reflected supply shocks during 2011. That they don’t look at NGDP. No, that’s not it either. Although I can be monomaniacal about NGDP, I do understand that the entire universe doesn’t revolve around me. Not everyone thinks NGDP is the proper target.
So why am I so enraged? Because deep down I know that the following sentence has never been uttered in all of recorded history:
Inflation is slowing in the U.S. after a surge early in the year, which should give Congress room in 2012 to cut the payroll tax to bolster economic growth. A6
Never. Not once.
You might say this merely shows that Congressmen are not well informed. I can live with that. If we are a banana republic with a completely dysfunctional policy apparatus, then so be it. But I suspect the problem goes much deeper. I suspect that even many economists were not enraged by reading the first passage I quoted. That they thought the comment was perfectly innocuous. And I suspect that many of those very same economists would be puzzled to see the second quotation that I provided. It would seem somehow “wrong.” And I suspect that is because they don’t see fiscal and monetary stimulus as being two parallel ways of boosting AD, with the P/Y split determined by the slope of the SRAS.
And I suspect that’s why most economists have not adequately thought about how the monetary policy reaction function figures into any serious estimates of the fiscal policy multiplier.
Or maybe I’m just being sophomoric.
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10. January 2012 at 20:03
Good post, although to be fair congress acts on major economic stimulus packages very infrequently and must commit for a longer period, whereas the Fed can change policy every quarter.
11. January 2012 at 01:33
“…you can change but you don’t ’cause your attitude —–”
http://www.youtube.com/watch?v=kxjo9PJPtiE
11. January 2012 at 01:48
I thought you were enraged because the fall in inflation rate is connected to the fall in NGDP which somehow is transformed into the good news that leaves room for raising NGDP again. Maybe the Fed should say something like:
“We’ve got some good news and some bad news. The bad news is that the economy is slowing. The good news is that gives us reason to try and improve it!”
11. January 2012 at 02:38
I suspect that the reason that you thought you were so smart is that you are so hyperactively expressing your opinion that you move to a different subject before you can be cornered and proved wrong – four posts on complex subjects in one day! My view on economic blogging – in response to a post now off the front page because it was written yesterday – is that blogs can have the advantage that they can provide an unrestricted outlet for unfashionable and hard-to-accept ideas, but that, in the absence of editing, the writer should accept some responsibility for self-editing to maintain readability and rigour.
11. January 2012 at 05:24
Honest question- are you mocking Krugman here? I feel like you’ve hit his typical tone spot-on, and the views would seem to be very similar to his. At first I thought you were, but rereading the intro and your second-to-last sentence I’m not so sure.
Assuming you’re not, am I correct in inferring that the main difference between your views and that of the Keynesians is that they’re more skeptical of the idea of an existing practical monetary policy at the zero bound than you are (not that such a policy couldn’t technically exist, but that the actually existing Fed would be willing and able to implement it with the same willingness and ease with which they would send real interest rates negative absent a zero bound), and conversely that you’re more skeptical of timely fiscal policy than they are (or at least, you believe that the Fed is faster-acting and would have been willing and able to provide more easing absent fiscal stimulus)?
11. January 2012 at 06:32
Brito, True, but how does that affect my argument? Should Congress refrain from stimulus because the CPI rose 3% in 2011?
anon/portly, Not bad.
Mattias, Yes, that’s another example of the insanity. It implicitly shows they understand the difference between supply and demand side inflation, but then they ignore that difference when setting policy. Crazy.
Rebeleconomist, I agree about self-editing. Any comments on this post?
BTW, I just put up a new post, just for you.
David K, Definitely not mocking Krugman here at all. He’d probably be just as appalled by all this as I am. Indeed I’m almost certain he’d agree with me.
I think the smarter Keynesians know that fiat money central banks can always inflate. The real dispute is that I believe fiscal stimulus will be offset by tighter money, as the Fed roughly targets inflation. The Keynesians don’t agree.
11. January 2012 at 07:33
Possibly, it’s never been uttered in all of recorded history because everyone actually agrees with you: the Fed controls the nominal path of the economy. They’re tugging your chain with all that liquidity trap stuff just because they’ve noticed it creates a positive supply shock in blog posts on TMI, linking to them, bringing them more readers.
11. January 2012 at 08:11
There is no “monetary policy reaction function” when you analyze ceteris paribus. That’s why the second passage wouldn’t make sense to most economists.
11. January 2012 at 08:24
I’m not sure I get your outrage. The first passage recognizes that inflation concerns are a policy and political check on the Fed’s ability to act. The first is internal and the second external.
Congress is not so constrained, internally or externally, even if it should be.
11. January 2012 at 09:19
Great blogging. I too have been rankled by the constant mish-mash of ill-formed ideas in even financial media, in which no intelligent distinction is made between monetary and fiscal policy, and indeed the two are often conflated.
Worse are pundits who (deliberately?) conflate loose federal deficits and spending with an “easy” Fed monetary policy.
It is tough to win a debate when most commentators don’t understand the argument.
You know, the New York Giants could win the Super Bowl if they just had better relief pitchers, and showed some steel.
11. January 2012 at 21:34
Sure I’ll bite, Scott. I think it’s perfectly straightforward to think:
(a) Printing more money, other things equal, will cause prices to rise, and
(b) Cutting marginal tax rates, other things equal, will boost output and cause prices to fall.
But you’re saying that coming from the monetarist Chicago tradition, you find those propositions absurd?
12. January 2012 at 03:07
I tend not to comment on fiscal stimulus Scott, as I am not satisfied I understand it well enough to have anything worthwhile to say. I lean towards the Cochrane / Fama view, and so am sceptical that fiscal and monetary stimulus are “parallel ways of boosting AD”, but I can also be swayed by some of Krugman’s arguments. I wish we could lock both sides in a room, with some intelligent scientists to ask questions, until they reached a synthesis.
12. January 2012 at 12:45
Cthorm, I don’t follow you.
Adam, That’s only a small part of my outrage. My real outrage is directed at my fellow economists, who seem fine with all this nonsense.
Ben, Are you mixing baseball and football?
Bob, I’m fine with that, but surely SOME fiscal stimulus is structured and justified on demand side grounds, like the 2009 stimulus. No good Austrian economist would claim Obama improved the supply-side of the economy. Yes, the particular example I picked was the current issue over payroll taxes, which could have a supply side aspect, as you say. But I think the problem is more general–I never see a rational discussion of the issue. Still I’ll accept that there was some hyperbole in this post–let’s just move along, nothing to see here.
Rebeleconomist, Nice thought, but will never happen.