Bad grammar or bad thinking?

Here’s a typical AP story:

The boldest move left would be a third round of large-scale purchases of Treasurys. But critics say this would raise the risk of future inflation. And many doubt it would help much, because Treasury yields are already near historic lows.

Let’s play around with this story.  How else could we convey the information:

The boldest move left would be a third round of large-scale purchases of Treasurys.  But critics say this would raise aggregate demand.  And many doubt it would raise aggregate demand, because Treasury yields are already near historic lows.

But then the conjunction “and” would be bad grammar.  You’d want to say “on the other hand.”  How about this:

The boldest move left would be a third round of large-scale purchases of Treasurys. Supporters say this would raise expectations of future inflation, and lower real interest rates.  And many doubt it would help much, because Treasury yields are already near historic lows.

Again the “and” is wrong, because if it does raise inflation expectations then the liquidity trap argument is bogus.  And how about fiscal policy:

The boldest move left for Congress would be a payroll tax cut.  But critics say this would raise the risk of future inflation.  And many doubt it would help much, because workers would simply save the tax cuts.

Of course one never sees reporters talk this way.  Never.  Not once.   One never sees reporters discuss both monetary and fiscal policy from the perspective of the standard AS/AD model, where monetary and fiscal stimulus are just two ways of boosting AD.  No, they seem to have some other model in their minds.  What is that model?  Your guess is as good as mine.  It’s not new or old Keynesian.  It’s not new classical or RBC.  It’s not Austrian or monetarist or MMT.  But it has become the standard model for talking about stimulus.

Am I being picky here?  Surely a bit of confused reasoning in the press would not actually impact important policy decisions involving $100s of billions of dollars.  OK, so some reporters don’t understand that fiscal stimulus is just as inflationary as monetary stimulus.  It’s not like you see the GOP leadership bashing the Fed for even thinking about providing additional monetary stimulus at zero cost to the budget, and then weeks later turning around and signalling an intention to massively cut payroll taxes.

Oh wait .  .  .


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22 Responses to “Bad grammar or bad thinking?”

  1. Gravatar of johnleemk johnleemk
    12. December 2011 at 08:12

    “It’s not like you see the GOP leadership bashing the Fed for even thinking about providing additional monetary stimulus at zero cost to the budget, and then weeks later turning around and signalling an intention to massively cut payroll taxes.”

    Haven’t the GOP presidential contenders been falling over themselves to condemn Obama’s plan to continue the payroll tax cut? I’ve only cursorily glanced at their criticisms, but it doesn’t look like any of them honed in on the real reason Obama’s payroll tax cut hasn’t been working so well — it falls on the employee side and offers little for the employer.

  2. Gravatar of Benjamin Cole Benjamin Cole
    12. December 2011 at 08:21

    I’ll say it again: Market Monetarists have to proffer a concrete program, and we have to frame the discussion—otherwise it is the weenies who will frame the discussion, and they are.

    We have to have a program we can close ranks around, even if some of us have to hold our noses a bit.

    I suggest $100 billion a month in QE until NGDP targets are hit, and reduced IOR, and this plan clearly announced by the Fed.
    Yes, we also speak to less taxes and regs on businesses. We cite Friedman, we point out that monetary stimulus is not more federal deficits—indeed, it is the opposite, as outlays may be reduced while revenues rise (without tax hikes). We emphasize growth, and indicate that moderate inflation is not a trade-off, but a medium-term side-effect, largely muted by global trade and a de-unionized US workforce.

    I suggest Scott Sumner draft the Market Monetarism proposal, and the rest of us fall in line behind, for the duration. I am sure what Sumner drafts will be miles better than current Fed policy, and it is better to be roughly right than exactly wrong. In many regards, Sumner’s effort will be a political document, crafted to win support, so some of the fine academic points might get smudged. Too bad.

    Please go for it. The Market Monetarism movement needs the next leg. Right now, we are begin in to look like a flash-in-the-pan.

  3. Gravatar of Gabe Gabe
    12. December 2011 at 09:13

    Very good and important points IMO.

    It seems to me that the reporters standard working model comes from the Hegelian Dialectic. Frame the issue so that sheeple will be forced to choose between establishment republicans and democrats…that way the elite who control both parties have nothing to fear.

  4. Gravatar of W. Peden W. Peden
    12. December 2011 at 10:32

    Johnleemk,

    It depends on the candidate. Bachmann, for instance is opposed; Romney is in favour.

  5. Gravatar of Mattias Mattias
    12. December 2011 at 11:17

    I think the problem is that most people think monetary easing only can work through lower interest rates leading to higher spending. So when interest rates are low there can not be any effect on the economy. Except inflation of course!

  6. Gravatar of Neal Neal
    12. December 2011 at 13:20

    If people say that, we just have to remind them: DON’T REASON FROM PRICE ALONE!

  7. Gravatar of Foster Boondoggle Foster Boondoggle
    12. December 2011 at 13:43

    C’mon y’all! You’re assuming a level of economic knowledge WAY BEYOND that of your average random college graduate.

    Here’s what the AP reporter did. He called three economists. He asked the first one what the Fed was going to do about the continuing slow growth situation. Economist #1 said “more QE”. Then he called a second one to ask whether more QE would be a good idea. Econ #2 said “it risks future inflation”. Finally, he called a third one and asked the same question. Econ #3 said “it won’t make any difference because yields are so low”. Then he wrote his story as excerpted. There was no independent input of journalistic economic thinking and probably no effort to get economists 2 & 3 to reconcile their views, since only 0.001% of readers could possibly understand the details of the debate.

  8. Gravatar of flow5 flow5
    12. December 2011 at 14:27

    A clear distinction should be made between the temporary and the longer term effects of open market operations on the level of interest rates. To hold down the Fed Funds rate (and other rates through this key rate), the Manager of the Open Market Account puts through buy orders for T-Bills or other eligible securities sufficient to yield a net increase in free-gratis, commercial bank legal reserves and excess reserves. The Fed acquires these earning assets by creating, new inter-bank demand deposits in the Federal Reserve Banks””that is by creating legal reserves at the disposal of the commercial banks (IBDDs).

    Assume the buy order is for T-Bills. The effect is to bid up their prices, reduce their discounts (interest rates) and add to free-gratis commercial bank legal and excess reserves. The expansion of costless excess reserves increases the quantity of loanable “federal” funds thereby pegging or retarding the increase in the Fed Funds rate – but the longer term effects of these operations are to fuel the fires of inflation.

    An understanding of these temporary and longer term effects reveals why initiating a tight money policy temporarily brings about a continued upsurge in interest rates…But it has the longer term effect of bringing inflation, and interest rates, down.

    With interest rates at or near record lows it should be obvious to everyone that the FED is conducting a restrictive monetary policy.

  9. Gravatar of Becky Hargrove Becky Hargrove
    12. December 2011 at 16:13

    When two people (who speak different languages) need to communicate with one another, sometimes a translator is brought in. In the case of economic ideas and the general public, the reporter most often provides the role of translator. So what happens when the translator can no longer translate?

  10. Gravatar of marcus nunes marcus nunes
    12. December 2011 at 16:53

    There´s always Bob Hetzel to correct the grammar and the thinking:
    http://www.cato-unbound.org/2011/12/12/robert-hetzel/tim-congdon-on-liquidity-traps-vs-portfolio-rebalancing/

  11. Gravatar of John John
    12. December 2011 at 17:38

    Scott,

    Good to see someone else who can’t really make heads or tails of those AP economic stories. It seems like their stories use the most politically correct economics possible; mostly Keynes with a little bit of other stuff scattered around. I actually admire the way they manage to make economics bland and inoffensive.

  12. Gravatar of ssumner ssumner
    12. December 2011 at 18:18

    johnleemk, I don’t know, but I’m hearing the Congressional leadership is about to sign off on a tax cut.

    Ben, I’m thinking about it, but just to be clear I’ve done this about once a year, in very specific terms. I believe one of the times was in response to your suggestion. So they are out there, but perhaps need to be updated.

    Gabe. “Sheeple” is a good term.

    Mattias, You are probably right.

    Neal, That’s right.

    Foster, I fear you are right.

    flow5, You said;

    “With interest rates at or near record lows it should be obvious to everyone that the FED is conducting a restrictive monetary policy.”

    Obvious to you, me, Milton Friedman, and about 70 of the 7 billion people on planet earth.

    Becky, Yep, this is what you get.

    Thanks Marcus, I have a book review of Congdon’s book coming out soon.

    John, That’s about right.

  13. Gravatar of John Thacker John Thacker
    12. December 2011 at 23:20

    In fairness, the GOP leadership has also repeatedly signaled their intention to pay for the fiscal stimulus by such things as cutting the pay or raises of federal workers, or slimming the federal workforce. The Democratic leadership too has talked about paying for it via tax increases. I think sometimes (but rarely) you do actually see the Keynesian paragraph:

    The boldest move left for Congress would be a payroll tax cut. But critics say this would raise the risk of future deficits, which increase inflation. And many doubt that it would work, since Congress is talking about paying for the cut elsewhere, reducing the net stimulus.

    One can then get into arguments about whether redistribution from rich to poor is stimulative because of higher propensity to consume.

    However, what you *really* want is something like this paragraph, Scott:

    The boldest move left for Congress would be a payroll tax cut. But critics say this would raise the risk of even larger deficits and debt load, which could lead to problems like in Europe. And many doubt that it would work, because the Fed would react to neutralize the fiscal stimulus through monetary actions.

  14. Gravatar of marcus nunes marcus nunes
    13. December 2011 at 04:44

    And then you have people (politicians no less) that know exactly what they are talking about, and long before anyone else!
    http://thefaintofheart.wordpress.com/2011/12/13/it-was-known/

  15. Gravatar of David Pearson David Pearson
    13. December 2011 at 05:53

    Scott,
    OT, but looks like the SNB, despite its managed deval, is not exactly targeting 5% NGDP expectations:

    “Switzerland’s gross domestic product growth is forecast to be 0.5% next year, compared with its previous forecast of 0.9%, before rebounding to 1.9% in 2013, the government agency Seco said.”

    “…in addition to weaker growth, Swiss inflation rate is forecast at -0.3% next year, compared with its earlier projection of 0.3%…”

  16. Gravatar of Alleged Wisdom Alleged Wisdom
    13. December 2011 at 05:56

    Let me play at the ‘Ideological Turing Test’ and construct a model that explains this thinking:

    We draw the Short Run Aggregate Supply curve as a line in our AS/AD models, but in reality it is a volatile fuzzy mess. Higher AD boosting output is an empirical fact, but is hard to explain theoretically why this happens. If people were rational and well-informed as we typically assume, money would be neutral in the short term as well as the long term and SRAS would be vertical. To explain a flat or upward-sloping curve, you have to resort to things like limited rationality, search frictions, and imperfect information that are not a feature of standard economic models.

    We know that SRAS becomes more vertical as people become more aware that the money supply is changing. In economies ravaged by hyperinflation, money is indeed neutral in the short and long term. If there are a lot of long term nominal contracts and people do not know that the money supply is changing, then the curve is much flatter.

    Therefore it is perfectly reasonable to assume two different SRAS curves, one that models the response to a well-publicized change in the money supply and one that models the response to a hard-to-measure change in the velocity of money. The former will of course be much more vertical.

    If it is common knowledge that the central bank is expanding the money supply by a certain amount, then we would expect that action to cause almost no increase in output and simply raise the price level. If a change in the velocity of money is what increases AD, then the money illusion is much stronger and output increases more. In such a world, monetary policy can do relatively little to boost output but fiscal policy can.

    This model assumes that most people do not know what the velocity of money is, or assume it to be constant, and that they believe that base money creation simply causes inflation. This assumption seems to match reality.

  17. Gravatar of W. Peden W. Peden
    13. December 2011 at 07:46

    Alleged Wisdom,

    Good work. I think the reductio ad absurdum of that model is not the last assumption, but rather that if money was short-run neutral in the way that the model suggests then there would be a proportionate increase in nominal wages to the increase in base money that would offset any effect on real wages.

    Empirically we can derive the consequence that huge increases in the monetary base result in huge increases in nominal wages under the model. So the period since 2008 should have been a period of wage explosion in the US and UK. It was not, ergo the model is unsound.

    I suspect that the problem within the model is that rationality is limited in its application at the macroeconomic level. That’s why money is neutral in the long run, but not generally in the short-run.

  18. Gravatar of PrometheeFeu PrometheeFeu
    13. December 2011 at 12:03

    My understanding is that republicans (at least people like Perry with his comment about Bernanke) believe money is neutral in the short term and the long term. If that is the case, printing money just raises the inflation rate which means the money that you have in fixed-income investments is now worth less than it used to. Somehow, in their model, investment opportunities do not adjust to the inflation rate at least in the short term, and I’m pretty sure, they also believe that’s the case in the long run. On the other hand, they believe fiscal policy is not neutral. Which is probably right. Now, maybe I’m giving them too much credit and their mental model is probably closer to: printing money = hyperinflation. hyperinflation = bad. printing money = bad.

  19. Gravatar of PrometheeFeu PrometheeFeu
    13. December 2011 at 12:04

    PS: I realize my above comment is way too broad. Not all republicans are like that, and I don’t know whether most are. But their current more vocal leaders appear to think that way.

  20. Gravatar of ssumner ssumner
    13. December 2011 at 14:17

    John, Yes, but the GOP doesn’t currently care about budget deficits, and hasn’t for 30 years.

    Marcus, Good find.

    David, I doubt the Swiss have had 5% NGDP growth for decades. But they’ll surely have faster NGDP growth then they would with parity with the euro.

    Alleged Wisdom. You said;

    “To explain a flat or upward-sloping curve, you have to resort to things like limited rationality, search frictions, and imperfect information that are not a feature of standard economic models.”

    No, you can simply assume sticky wages, which are a part of standard models. You seem to have a model similar to the 1970s Lucas misperceptions model. But as far as I know there is no support for that model any longer, it doesn’t explain why publicly observable monetary shocks would have real effects. And of course fiscal stimulus is equally observable, and thus should also be neutral. In any case, I don’t buy that model, I think wages are sticky.

    Or else they are trying to starve the beast.

  21. Gravatar of PrometheeFeu PrometheeFeu
    13. December 2011 at 16:55

    @ssumner:

    I don’t think publicly observable monetary shocks really mean Lucas misperception is inapplicable.

    Monetary shocks propagate over time and have uneven effects simply because of the way monetary policy is carried out. For instance, financials are most involved in treasuries. So when the Fed does an open market operation, financials will get affected first and most. Because the way the shocks propagate through the economy is constantly changing, it must be difficult to predict the effects of the monetary shock on your company. Even if that was not the case, I doubt my barber or grocer understand the first thing about the effects of monetary policy or even know about Fed actions.

    That’s not to say the Lucas model is right (I’m far from an expert on it) but I don’t see publicly observable monetary shocks as being a strong refutation.

  22. Gravatar of Scott Sumner Scott Sumner
    14. December 2011 at 19:50

    PrometheeFeu, But it’s a problem for Lucas’s model, because he did assume that sort of hyperrationality.

    In any case, my response to alleged wisdom stands, as I was aguing there are other channels.

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