Ben Bernanke does not have a secret plan to stymie stimulus

The post title is in response to a Matt Yglesias post entitled:

Does Ben Bernanke have a secret plan to stymie stimulus?

Matt begins his post as follows:

Scott Sumner wants an answer from Keynesians about how fiscal stimulus is supposed to help a depressed economy if the central bank is determined to offset any impact on total nominal spending.

The answer is that it can’t. The central bank can act faster and prevent fiscal reflation. But my question for Sumner is what makes him think that the central bank we have is doing this.

I believe Bernanke sincerely favors short term fiscal stimulus, and hopes it succeeds.

Now let’s stop talking about what Ben Bernanke believes, and start talking about how the Fed actually behaves.  Here’s Matt again:

It appears to be the case that the real world Federal Reserve operates primarily by targeting interest rates, and in a world like that fiscal policy makes a big difference. I also hesitate to rely on anonymous sources for my arguments, but I sometimes hear from people on the Fed staff and the complaints always point in the direction of saying I should complain less about Fed inaction and more about fiscal policy.

I’m not quite sure what Matt is claiming here.  If the Fed adjusts the fed funds target in such a way as to implement inflation targeting, NGDP targeting, or the Taylor Rule, then fiscal policy has no impact on demand.  Perhaps Yglesias means that since 2008 they have been pegging short term rates near zero.  But it’s also true that since 2008 the Fed doesn’t operate primarily by targeting interest rates, it operates primarily by using various unconventional monetary tools, including QE1, QE2, promises of low rates for varying periods of time, and Operation Twist.  They seem to alternate between periods of aggressiveness and passivity.  And although it’s hard to tell exactly, they still seem to be engaged in targeting some sort of proxy for demand (such as inflation.)

Now in fairness to Yglesias, their implicit target does seem lower than in normal times.  I agree with those who say that if the Fed could cut nominal rates right now, it would do so.  So the move toward unconventional policies has effectively created a more hawkish Fed.  And I even agree with those who say Bernanke would like a bit more demand, especially if delivered by fiscal stimulus.  So it’s possible that fiscal stimulus would work.

But when I look at what the Fed has actually been doing over the past three years, I have a really hard time writing down a set of implicit policy targets that allow for fiscal stimulus to play much of a role.  I see them engage programs like QE2, when core inflation is too low, then see core inflation rising significantly, and then see the Fed disengage (i.e. tighten) as soon as they begin worrying that inflation is too high.  And then when I see growth falter, I see the Fed promise two years of low rates, Operation Twist, and put out strong hints of more to come.

Unfortunately, the Fed seems to also respond to inflation that has no bearing on optimal monetary policy (such as oil prices increases produced by Libya and China.)  I think Keynesians are failing to embed their vision of fiscal stimulus into the Fed reaction function that we actually observe, for levels of political stimulus that are politically plausible.

I don’t doubt that a WWII-style military build-up would more than offset Fed policy conservatism.  But what about politically plausible stimulus, say another $400 billion?  I see the most likely outcome as a modest boost to the economy, which pushes up oil prices and headline inflation, which frightens the Fed, which leads the Fed to refrain from additional unconventional stimulus that they would otherwise do.

How do I know that the Fed would otherwise do more monetary stimulus?  I don’t, but that’s certainly been their pattern over recent years, whenever the economy faltered.  And there are already rumblings of the possibility of additional stimulus.  And the number of hawks on the FOMC drops from 3 to 1 in January.

None of this means I’m right–as I’m no mind-reader.  But if you look at how the Fed actually behaves, rather than what Bernanke says or “really” believes, then you are forced to conclude that the 2009 stimulus was sabotaged.  That stimulus was not enough to create a robust recovery, even with unconventional Fed moves.  If they hadn’t done that stimulus, it looks like the Fed would have done a more aggressive stimulus, as they seem determined to keep core inflation in the 0.6% to 2.0% range.  And thus if we’d never done the 2009 fiscal stimulus, we’d probably be about where we are now–9.1% unemployment and 2% core inflation.  But with a much smaller national debt.

Why do people have trouble accepting my view?  Because at first glance it doesn’t seem to make sense.  Bernanke seems like a good guy, doing his best.  And he probably is.  He keeps assuring us not to worry, that the Fed has plenty of ammunition.  He keeps assuring us that the Fed will act forcefully to prevent deflation.  This means that he is basically assuring us (whether he knows it or not) that if we have fiscal austerity the Fed will act much more aggressively, and use its unlimited ammunition to prevent deflation.  You might ask; “what’s wrong with that?”  Isn’t it the Fed’s duty to act aggressively if we are in danger of deflation?  Yes, but the problem isn’t so much that he would take these aggressive steps if the fiscal authorities fail us, but rather that he won’t take these aggressive steps if the fiscal authorities don’t fail us.  When you put these two statements together, you are led inexorably to the conclusion that the Fed will have tighter policy without with fiscal stimulus than with without it.  And as a matter of pure logic, that means the Fed is at least partially sabotaging fiscal policy–even though I have little doubt that they don’t think of it that way.

[the previous version confused with and without]

A few final comments:

1.  I’ve never denied that fiscal stimulus might work.  One can always construct “God of the gaps” arguments.

2.  Matt Yglesias also said:

I know that before the crisis, Sumner reached the conclusion that this was how fiscal and monetary policy would interplay.

It would be more accurate to say that a zero fiscal multiplier was the standard view of mainstream new Keynesian economists before this crisis.

3.  Some types of fiscal stimulus can work with an inflation targeting central bank–for instance an employer-side payroll tax cut.  I’ve advocated that sort of fiscal stimulus.

4.  If a Fed official ever said to me what he apparently told Matt in a face to face conversation, I’d . . . well, I probably shouldn’t say what I’d do.  I don’t want to sound like Rick Perry.



38 Responses to “Ben Bernanke does not have a secret plan to stymie stimulus”

  1. Gravatar of Nick Rowe Nick Rowe
    14. October 2011 at 08:34

    Typo “….which frightens the Fed, which leads the Fed to refrain from addition conventional stimulus that they would otherwise do.

    Should be addition*al* *un*conventional stimulus.

  2. Gravatar of Morgan Warstler Morgan Warstler
    14. October 2011 at 08:39

    Uhm, watch this:

    This is Ben:

    “”putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term”

    This is me as Ben:

    “You people should cut public employee compensation by $200B per year at Federal, State and Local levels (cuts in Federal transfers) THIS YEAR, and not grow it past inflation for the next 20 years.

    “And use that money this year to pay 2OM unemployed $10K a year as Guarantee Income, under that whip smart funloving guy Morgan’s plan… and auction their labor to America in $40 per week opening bid auctions….. AND funnel ALL The bid money back into increasing the base pay of the GI workers.”

    That’s a stimulus that doesn’t cost anything, but increases economic activity.

    The point here is the Fed ONLY asks for stimulus with long terms cuts.

    When we talk long term cuts, there are TWO POSSIBLE big changes to make to future spending:

    1. public employees
    2. entitlements

    Since 2 is much harder, and will lead to discussion of higher taxes, which is also a non-starter, the ONLY OBVIOUS EASY POLICY CHANGE that gets Ben what he is asking for is:

    Cuts to public employees.


  3. Gravatar of JimP JimP
    14. October 2011 at 09:00

    Noonan says we need something BIG. Or the protests will go on and on – and get bigger, because, as she says,

    “Because at some point in the past year or six months, people started to realize: The economy really isn’t going to get better for a long time. Everyone seems to know in their gut that unemployment is going to stay bad or get worse. Everyone knows the jobless rate is higher than the government says, because they look around and see that more than 9% of their friends and family are un- or underemployed. People put on the news and hear about Europe and bankruptcy, and worry that it’s going to spread here.”

    Her idea of a big thing is Cain and his 9 9 9 plan. We sure do need something like that. Because our tax system now is a corrupt mess, put in place by one corrupt Congress after the next. Along with long-term spending control. Something that will persuade us that our long term financing is under control.

    And – monetary easing. A Fed that actually DOES SOMETHING. We need something big – we sure do. tax and budget reform and an aggressive Fed. Will we get them? If we don’t those protests will get bigger and bigger – as more and more people realize that they will never become employed again.

  4. Gravatar of Ryan Sanchez Ryan Sanchez
    14. October 2011 at 09:22

    Seems like a never ending cycle with the fed since the recession started: Lack of AD leads to monetary stimulus, pushing NGDP towards trend, raises inflation and inflation expectations, which causes the fed to passively end the stimulus and we end up back where we started with a lack of AD.

  5. Gravatar of John Thacker John Thacker
    14. October 2011 at 09:34

    I don’t want to sound like Rick Perry.

    Indeed. But it is worth understanding the reasons why Rick Perry (and John Taylor, for that matter) say what they do.

    1) There is a widespread belief among conservatives that inflation is a “short term good, long term pain” and that furthermore inflation is very difficult to eliminate once it starts (the “crack theory of inflation” as Arnold Kling put it, describing Taylor’s position while still wanting to give your plan a try.) Under this interpretation, Perry’s comments about “political manipulation” make sense. He is accusing Obama of trying something that will seem good just until after the election, but then we’ll have a massive hangover that will be worse than the temporary gain. While some politicians may want things to get worse so that they can win, voters still want a story about how their policy is actually preferable in the long term.

    2) The argument that the Fed is conservative actually bolsters this argument. The 1950s-1970s Fed was *not* conservative by this measure. What this means is that Fed culture is resistant to change in goals and acceptable results, even if it is not resistant to change in tactics. The Fed could be “conservative” in being willing to try anything to hold down unemployment but not caring about inflation, which wouldn’t be politically conservative, but it would be conservative in the sense of being unwilling to change its views about, say, the Phillips Curve.

    3) The distinction between John Taylor’s remarks about Japan and the US is that he, like others, has been focusing on things like M2. People who focus on M2 can easily come to the conclusion that Japan was suffering from not enough money, and they loosened, and it helped– but argue that the US has already tried loosening, and it’s done all it can.

    The widespread conservative (and many independents’) view of monetary expansion right now is: “Of course it’s possible, even at the zero bound, to print money. And we’ve been doing it– just look at M2! Whether it helped or not, it’s done all it can that’s worth it in the long run. If we do any more, we’ll have huge inflation that will take us a generation to get rid of! Don’t you remember the Misery Index?”

    You can’t convince people without understanding them.

  6. Gravatar of Dan Kervick Dan Kervick
    14. October 2011 at 09:37

    I tend to doubt inflation is where it is because the Fed has a target rate that it has successfully hit. The Fed is primarily just the apex of a subset of the banking system, and its channels for influencing the economy all work through that system. It is not some kind of all-purpose money supply machine for feeding money into the economy.

    If you guys want the Fed to have the kind of role you imagine it has already, you really should be advocating some fairly far-reaching reforms so that the Fed can create money in accounts all over the economy, not just exchange money for existing assets in financial sector accounts.

  7. Gravatar of JimP JimP
    14. October 2011 at 09:56

    Personally I think the kind of inflation (rational) conservatives are worried about is this kind:

    begin quotes

    “For several years, a heated debate has raged among economists
    and policymakers about whether we face a serious risk of inflation.
    That debate has focused largely on the Federal Reserve””especially on
    whether the Fed has been too aggressive in increasing the money supply,
    whether it has kept interest rates too low, and whether it can be relied on
    to reverse course if signs of inflation emerge.
    But these questions miss a grave danger. As a result of the federal
    government’s enormous debt and deficits, substantial inflation could
    break out in America in the next few years. If people become convinced
    that our government will end up printing money to cover intractable
    deficits, they will see inflation in the future and so will try to get rid of
    dollars today””driving up the prices of goods, services, and eventually
    wages across the entire economy. This would amount to a “run” on the
    dollar. As with a bank run, we would not be able to tell ahead of time
    when such an event would occur. But our economy will be primed for
    it as long as our fiscal trajectory is unsustainable.”

    “Needless to say, such a run would unleash financial chaos and renewed recession. It would yield stagflation, not the inflation-fueled
    boomlet that some economists hope for. And there would be essentially
    nothing the Federal Reserve could do to stop it.”

    “Over the broad sweep of history, serious inflation is most often the
    fourth horseman of an economic apocalypse, accompanying stagnation, unemployment, and financial chaos. Think of Zimbabwe in 2008,
    Argentina in 1990, or Germany after the world wars.
    The key reason serious inflation often accompanies serious economic
    difficulties is straightforward: Inflation is a form of sovereign default.
    Paying off bonds with currency that is worth half as much as it used to be
    is like defaulting on half of the debt. And sovereign default happens not in
    boom times but when economies and governments are in trouble.”

    end quotes

  8. Gravatar of Jeff Jeff
    14. October 2011 at 10:04

    I thought I was following your arguments until I got to:

    “When you put these two statements together, you are led inexorably to the conclusion that the Fed will have tighter policy without fiscal stimulus than with it.”

    Should this read “tighter policy with fiscal stimulus than without it”?

  9. Gravatar of Morgan Warstler Morgan Warstler
    14. October 2011 at 10:17

    This is Matty puking on himself:

    “There’s no way to go from 9.1 percent unemployment to 7 percent unemployment without many more people driving their cars to work, increasing demand for gasoline and pushing oil prices up.”

    1. Kill the EPA and drill baby drill.
    2. Public employees pay for my Guaranteed income plan.

    Gas prices are much less scary and everybody has a job.

    Matty just hasn’t mentally come to terms with what the future holds…. and there’s no place for the Matty of today tomorrow.

    Neo-liberals ARE GOING to become neo-progressives. They will be who care so much about the good cause of government (helping the have nots), they will agree to deliver those services with the same ruthless efficiency Wal-Mart uses to deliver to the have-nots.

    The social services side of our government will be run like Wal-Mart.

    Matty should lead his people there.

  10. Gravatar of dwb dwb
    14. October 2011 at 10:32

    However they spend way too much time looking in the rearview mirror. by the time CPI commodities demonstrates that the commodities price pass-through to headline was a blip, the damage is done because they failed to act. By the time they realize a mysterious x-factor is not driving the economy to full employment, the damage from a failure to act is done.

    *not* acting is just as forceful a policy as doing something. In that regard, they have forecfully done nothing much more than talk about what they might do if it really got bad.

  11. Gravatar of Philo Philo
    14. October 2011 at 12:11

    “[T]he Fed will have tighter policy without fiscal stimulus than with it.” I think you meant ‘looser’.

  12. Gravatar of TylerG TylerG
    14. October 2011 at 14:05

    I don’t understand why critics of fiscal stimulus via ricardian equivalence have been smeared and discarded as typical ‘conservative economists.’ Isn’t that an axiomatic proposition given our current deficit and national debt?

  13. Gravatar of edeast edeast
    14. October 2011 at 16:37

    This was an interesting article about, why gas prices in NA follow the Brent not WTI.

  14. Gravatar of Benjamin Cole Benjamin Cole
    14. October 2011 at 16:49

    Yet another deeply thoughtful post by Scott Sumner.

    What is Bernanke up to?

    Does the answer “feeble dithering” ring a bell.

    Listen, there are times when one can become too cautious. What was General McClellan up to? Ultimately, feeble, indecisive bumbling.

    Sad to say, but I think Bernanke is shooting for the title “The General McClellan of Central Bankers.”

    That, or Bernanke is just sabotaging Obama.

  15. Gravatar of marcus nunes marcus nunes
    14. October 2011 at 17:26

    According to Krugman (via John Kay) others do:

  16. Gravatar of William J McKibbin William J McKibbin
    14. October 2011 at 19:22

    The only outcome that really matters to Dr Bernanke and the Fed is holding inflation at near zero levels — growth is a distant second concern — employment is a very distant third concern — anything Dr Bernanke (or past chairs) say is really just propaganda intended to mask the Fed’s maniacal focus on holding inflation as close to zero as possible…

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2011 at 19:53

    Scott wrote:
    “I’ve never denied that fiscal stimulus might work. One can always construct “God of the gaps” arguments.”

    I’m thankful for that clarification. My recollection is that early on I argued with you that fiscal stimulus might work provided that the Fed stood pat and did absolutley nothing and you insisted that the Fed would never do that. Now evidently, we are on the same page.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2011 at 20:02

    “I don’t want to sound like Rick Perry.”

    You mean like:—the-great-right-hope—stumbling-rick-perry—media-judgment

    Remember this was Morgan’s Great White Hope.

    I rememeber referring to Perry’s college transcript and noting a discernible lack of mental agility. (i.e. a notable lack of any envidence of nerve ganglia at all.)

    Has anything I predicted proved wrong?

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2011 at 22:01

    Well you’re my friend….

    But did you ever notice the kind of thoughts I’ve got.

    Well you know you I have love, a love for everyone I know.

    And you know I have a drive, to live a life I won’t let go.

    And then I see…..

  20. Gravatar of Claudia Sahm Claudia Sahm
    14. October 2011 at 23:42

    Scott, thanks for focusing on policy actions and not Fed mind reading. On your Rick Perry comment: Governor Perry is a bit colorful for my tastes, but public critique of the Fed is totally fair game and welcome. The bothersome part of his statement is *who* he wants to be and not *what* he said. Historical experience around the world suggests that central bank are more effective when they are independent of the federal government. So a presidential hopeful bad-mouthing specific Fed policies is worrisome. Of course, the Fed is subject to federal laws (which specify its mandate and its existence) and the Senate has to approve who serves on the Fed’s Board of Governors. Serious discussions about monetary policy, fiscal policy, the economy, etc. seem to me like a better use of time.

    PS I should let it go, but Morgan W. your “translation” of Ben Bernanke bugs me. It’s fine if that’s *your* opinion about policy, but I would not project your opinions on other people.

  21. Gravatar of Peter N Peter N
    15. October 2011 at 01:46

    Let’s not forget the role of debt.

    People say debt doesn’t matter because we owe the money to ourselves, but this is just a failure of the model. What happens, for instance, when you default on your debt to yourself? How can the need to repay yourself affect your spending?

    Next comes that the money used to repay debt recirculates. This is true, but it doesn’t help much for several reasons.

    1) There’s no reason to believe the lender and the borrower have the same propensity to consume.

    2) There’s every reason to believe they consume different goods. If 10,000 people can’t afford a new car, a commensurately enriched Warren Buffet won’t buy 10,000 cars to compensate. As Krugman observed, you can’t say that an economy that produces goods only for the rich is impossible. He’s probably right. It is not, however the economy we have, nor, I hope, the one we want.

    Large cutbacks by the bottom four quintiles will not be magically balanced with replacement consumption by the top quintile, unless your model only has only one good. Even then you have to assume the propensity to consume is the same.

    3) Default is a loss to the system. The forgiveness of debt is technically income, but the borrower has already spent the money. Default will result in loss of equity and damaged credit. A foreclosure is particularly damaging, because servicers aren’t set up to manage property and do it poorly. Many foreclosed properties end up uninhabitable, and foreclosure decreases the value of all the neighboring properties. (Still default is probably better than zombie property. Of course, debt relief would be more effective, but the politics seem to be toxic.)

    4) Through the magic of money, current goods and services are exchanged for claims to future goods and services. If the claims come to greatly exceed the quantity of goods and services that are likely to be available (say from asset inflation in a bubble), then either:

    a) The claims will be revalued to match what’s available (asset deflation)

    b) What’s available will be revalued to match the nominal value of the claims (inflation)

    c) The claims will be repudiated (default or confiscation)
    This is the uncertainty which is paralyzing the economy. Will there be enough goods to honor all the current and expected future claims? The lower quintiles are losing confidence that there will.

    I think Dan Kervick may be right. The Fed needs tools that work more directly. It’s not a bank, and the pretence that it is has outlived its usefulness.

  22. Gravatar of Bill Woolsey Bill Woolsey
    15. October 2011 at 05:01

    I believe that “fiscal policy” can work. If government spending is funded by new money creation, of course it can raise total spending in the economy. With an interest rate targeting central bank, government spending is funded by money creation by default.

    If inflation and inflation expecations were at 2%, and the Fed were really worried that excessive nominal (or real) growth were pushing it up, then I would agree that ‘fiscal policy’ would do no good. (Well, I suppose cutting the employers’ share of social security taxes might help for employment.)

    I think Bernanke wants fiscal stimulous in the short run to raise interest rates. Really, to raise the natural interest rate. And then, they can finally get back to manipulating the federal funds rate.

    While it seems crazy, I think that the Fed would lower short term interest rates today if the zero nominal bound wasn’t an issue. (Or, I guess, if traders in the money market could still make money at lower interest rates.) But expanding the monetary base by large amounts or saying things about long term interest rates is costly to them. They will do that to prevent deflation, but not to keep inflation at 2%. So, there is a range for inflation between 0% and 2%. If expansive fiscal policy raises output, employment, and interest rates, pushing inflation up 1/2 percent or 1%, then Bernanke will be happy. The rest of us would be happy with the increase in employment and real output. (Really, market monetarists would be happy with the growth in nominal expenditures.)

    Of course, budget deficits and the national debt will be bigger. I think those are bad things, and that a specific target for the growth path of nominal GDP can do better without increasing the national debt. (In the future, taxpayers will pay interest on the national debt which I think is a bad thing.)

  23. Gravatar of Scott Sumner Scott Sumner
    15. October 2011 at 05:38

    Thanks Nick, I corrected it.

    Morgan, Yes public employees again.

    JimP, I agree we need easier money and supply side reforms.

    Ryan, Yes, and even at their most aggressive, they’ve been way too timid.

    John Thancker, I’m afraid it’s far worse than you think. When a Republican was President (Bush) inflation was much higher than over the past three years. Yet when the Fed eased in 2007 I don’t recall so many conservatives criticizing it.

    In the early 1980s central banks all over the world decided to aim for low and steady inflation. And it happened. It wasn’t just coincidence, and it certainly wasn’t Congress that produced the Great Moderation. Central banks control the trend rate of inflation, although they obviously don’t control every short term blip.

    JimP, Yes, and tight money now makes the deficit bigger, and makes it more likely that we’ll have high inflation later.

    Jeff, That was a typo, I corrected it now. Thanks,

    dwb. I agree.

    Philo, Thanks, I corrected it.

    Tyler G, They shouldn’t be smeared, but almost nothing in economics is axiomatic.

    edeast–Thanks, that was informative.

    Thanks Ben.

    Marcus, Yes, many people don’t understand Ricardian equivalence.

    William, Yes, but that wasn’t true in 2007—so what changed?

    Mark, You probably misunderstood me, as I’ve never argued it couldn’t work–just that it was quite unlikely to work.

    BTW, Standing pat might be sabotage, if in the absence of fiscal stimulus they wouldn’t stand pat.

    Yes, you were right about Perry.

    Claudia, Yes, but it’s not fair game to criticize the Fed if you are trying to pressure them into bad policies that will help you get elected.

    Peter, I think you are confusing consumption with expenditure. Money saved is spent on investment goods–that’s also a form of expenditure. The problem is low NGDP caused by tight money, not changes in income distribution.

    Bill, I agree that the Fed would lower rates if it could.

  24. Gravatar of Morgan Warstler Morgan Warstler
    15. October 2011 at 05:42


    I’ll still with the basic logic:

    1. Ben says do short term stimulus BUT ONLY IF if it comes with credible long term debt reduction.

    2. The only politically acceptable long term fix right now is cutting public employees (entitlements and taxes are off the table). Ben KNOWS this.

    So what is Ben saying? When he exhorts, pushes, cajoles, what could he possibly hope would happen with his statement which carries the force of the Fed behind it?

  25. Gravatar of Peter N Peter N
    15. October 2011 at 08:09

    you’re missing my point, I think, and I’d really like to hear what you have to say about the subject.

    Let’s try a simple example. I have $1000. I buy $500 worth of stock. The company goes bankrupt. I got nothing in exchange for my stock. It’s just gone. I need $500 to pay the rent, so I don’t buy the washing machine I was planning to buy with the other $500. This small piece of aggregate demand is gone.
    I contend that asset deflation reduces demand to the extent prices and wages are sticky relative to the deflation. In this recession, they have been. Perhaps we have Bernanke to thank, since general deflation would be even worse.

    Perhaps part of the problem is the ambiguous use of the word money. Let’s just say stores of value. Every month I review my stores of value to determine what I can convert to media of exchange to purchase goods. This is what most people mean by “disposable money”. Little distinction is made between increases in debt (let’s just charge it), disposable income and disposable assets. My consumption, whether of investment goods or consumer goods, depends on my “disposable money”, not my disposable income. If I either lose assets, or lose the ability to borrow, I’ll consume less. Of course, increase in debt only increases consumption if new money is created for the loan, since otherwise there’s crowding out. I think there’s reason to believe that the post 2000 Fed allowed the creation of that money. The consumer debt chart takes of like a rocket starting in 2000

    Most of the time disposable income is probably an adequate proxy for “disposable money”. I don’t believe now is part of most of the time.

    An NGDP target is a great idea, and probably sufficient in a less pathological economy, but while it’s true that, as Lasker said, the threat is stronger than the execution, the threat has to be credible. I don’t think at this point people will believe the Fed can deliver on “whatever it takes”. Maybe they would have 2 years ago, but now?

  26. Gravatar of Donald Pretari Donald Pretari
    15. October 2011 at 10:35

    Morgan, Even G-d doesn’t have the knowledge you claim to have.

  27. Gravatar of Nick Rowe Nick Rowe
    15. October 2011 at 11:06

    Peter N: “Let’s try a simple example. I have $1000. I buy $500 worth of stock. The company goes bankrupt. I got nothing in exchange for my stock. It’s just gone. I need $500 to pay the rent, so I don’t buy the washing machine I was planning to buy with the other $500. This small piece of aggregate demand is gone.”

    That is analysing the effect on one person. You need to step back a bit, to get the bigger macroeconomic picture. What caused the company to go bankrupt?

    Take an (admittedly silly, but simple) example. The factory gets hit by a meteorite, and it didn’t have insurance. Wealth is lower. Yes, aggregate demand will be lower, but so will aggregate supply. Will the result be excess supply and deflation, or excess demand and inflation? Depends what the central bank does. If (say) the central bank holds the money supply constant, there will be less demand for money now that wealth and income are lower, so there’s an excess supply of money, and inflation.

    Take another (again silly) example: the company accountant ran off with all the company’s assets. You are poorer, he is richer. Your demand falls, his rises. Will it be a wash? Not necessarily. It could go either way. But changes in the distribution of wealth are happening all the time. And all sorts of other changes are happening all the time. Normally a market economy can handle these changes.

  28. Gravatar of Morgan Warstler Morgan Warstler
    15. October 2011 at 14:37

    Donald, argue with #1 or #2 to win.

    Ben keeps saying short term stim + long term cuts, so if you think he’s lying, argue that.

    Taxes and Entitlements are off the table. Argue they are likely if you want…

    Meanwhile, in reality, this is the age of gutting public employees which INSTANTLY improves long term outlook. See Wisconsin, over night the school districts had budget surpluses. See New Jersey. See Everywhere.

    You could argue Ben isn’t this smart. You could say he doesn’t recognize that exhorting for long term spending reductions will lead to cuts in public employees, but that’s silly.

    You could argue it may not be his “preferred” solution, but that’s beside the point, it is the most LIKELY one, and he’s a smart guy.

    So Ben is essentially advocating cuts to public employees.

  29. Gravatar of Peter N Peter N
    15. October 2011 at 15:36

    You say “That is analyzing the effect on one person.” That wasn’t my intent. I was thinking about something more like this:

    “Las Vegas had 63.3 percent [under water mortgages], or 269,560, residential properties underwater in the second quarter. An additional 4.9 percent were near negative equity, the report said.

    Arizona was second in the nation with 49 percent underwater, followed by 45 percent in Florida, 36 percent in Michigan and 30 percent in California.”

    You say –

    “Normally a market economy can handle these changes.” and I agree, but is now part of normally?

    The panic of 1837 is probably the clearest case of a depression brought on by the popping of a bubble. So it can happen that an economy can’t handle such changes on it’s own. I think the Albanian Ponzi crash was also a pretty clear example.

    You also seem conflate:

    “The factory gets hit by a meteorite, and it didn’t have insurance. Wealth is lower.”


    “the company accountant ran off with all the company’s assets. You are poorer, he is richer.”

    Of course destruction can stimulate construction, but I can’t see it happening for all capital losses.

    Also, are you treating realized investment goods capital gains and losses as income, but not non-investment or unrealized losses? If so, what’s the difference when there’s no perceived chance to recoup?

  30. Gravatar of dwb dwb
    15. October 2011 at 16:03

    i remain eternally puzzled why the Fed does not adopt an NGDP growth target, at least a “soft” target. If Bernanke really wanted more monetary stimulus, it would be an easy way around the hawks’ complaints that inflation would get out of control -by providing a rule for tightening. I appreciate the measurement error of a lot of economic variables, so I could see the argument for a “soft” target the way they softly target PCE and core inflation. And yeah, i know they want to reserve the right to break the rule if conditions are extreme (9% UE used to be considered extreme). but still… I have always thought an inflation target was absolutely against the law, and i remain puzzled why Bernanke does not embrace it with a big bear hug given that the Fed’s mandate is low inflation, full employment, and moderate interest rates.

  31. Gravatar of John John
    15. October 2011 at 16:08


    I think in your responses to me about inflation you revealed a huge flaw in NGDP targeting. Both are unscientific measurements collected by unaccountable bureaucrats who are perhaps politically motivated.

    I think GDP measurements are actually worse than inflation measurements. By measuring changes in a basket of goods and services you can get a general idea of changes in purchasing power, despite numerous reasons why it’s impossible to precisely measure money’s purchasing power. In the case of GDP, I think there are 3 main issues

    1. It doesn’t account for unpaid labor or black market activities

    2. It misleads people into thinking that the economy is consumer driven when really much of “C” is capital investment. These investments get lumped together with final goods sales in order to avoid double-counting. This is really more of a problem of atrocious Keynesian fallacies rather than something intrinsic to GDP measures.

    3. All government spending counts as output. People don’t voluntarily pay for government goods and services, therefore, there is no way of providing any sort of valuation for government expenditures at all, ever. If the government spends a million bucks on a nail then that counts as a million bucks worth of output. That is absolutely absurd.

    Fortunately, this last concern can be remedied. I humbly suggest that you consider using GPP, or Gross Private Product; GNP minus income originating in government and government expenditures. This measure, developed by Rothbard, gives you a much more realistic picture of economic health. You avoid the problem of counting government expenditures as productive output, and you measure the size of the private sector. Private sector growth is all the really matters in the long run since the private sector pays for all the government’s activities in some form or another.

    In conclusion, I think NGPP targeting would be much better for the economy than NGDP targeting. The government shouldn’t be able to get away with saying that they’ve added value to society by producing guns, planes, or tanks that sit around until they’re obsolete. NGPP paints a picture that is more in tuned with what people can really sense about the economy. For instance, it was far more stagnant during the late 70s and early 80s. That was a time period when people were really suffering in a way that real GDP numbers didn’t catch. In addition, the government depends on the resources of the private sector for funding anyway, so the size of the private sector is what really determines the well-being of society.

    Since you’re a libertarian, I think you should understand the importance of something that measures economic health based on the private sector.

    P.S. When you say that I’m not presenting Austrian arguments, that tells me that you probably haven’t read anything longer than an article or short essay by the most important classic Austrian economists: Mises and Rothbard, or Bob Murphy in the present day. I assure you that I’m representing their arguments on this blog to the best of my (admittedly limited) ability. No one who advocates central bank targeting of anything, or believes that the central bank should try pumping in money to prevent prices from falling deserves the title Austrian. Sorry older F.A. Hayek.

  32. Gravatar of John John
    15. October 2011 at 16:13


    I really like your views in general, that’s why I was so shocked to see you advocating a system without interest. If it’s for theological reasons, I understand and I’m not going to argue. But economically, I just want you to hear the case that interest (basically) arises from the fact that people prefer to have things now. As a broad measure of patience, interest rates are important for coordinating investment projects so that they match consumer’s preferences for consuming now vs. in the future. It would be impossible to get rid of this basic aspect of human nature (preferring things now) by changing the monetary system.

  33. Gravatar of John John
    15. October 2011 at 22:24


    About point #4 that you make. I’d pay good PPV money to see you get into the ring against Bernanke. However, if I was a betting man (I’ve got no stats to go on) I’d bet on Bernanke because he’s got a beard and ceteris paribus guys with beards are tougher.

  34. Gravatar of ssumner ssumner
    16. October 2011 at 06:07

    Peter, I don’t follow your example with the $500 investment in stock. Whether you invest $500 in a start up that fails, or a bicycle that gets run over by a truck, you’ve lost your $500. That shows the example has nothing to do with consumption versus investment. It’s about poor choices. So I don’t see your point, or how it relates to saving failing to boost AD.

    Also note that in each case there was $500 of output, the bicycle, and the corporate assets built before the company failed.

    dwb, It’s hard for central banks to change–they are conservative.

    But this central bank has changed a lot (such as IOR) just in the wrong direction.

    John, I don’t agree with the three objections, as it’s the growth rate we care about, and none of those factors greatly distort growth rates as things like the underground economy and government waste don’t vary very much as a share of GDP.

    I don’t see how anyone could confuse C and GDP. Indeed exactly the opposite. Lots of my commenters now think that calling for more expenditure means calling for people to spend more on consumption. This would show that the real issue is GDP, not C.

    I addressed your proposal in another post.

    I like Bob Murphy, but I’d hardly call him the leading modern day Austrian. What about people like Garrison, White, Horwitz, Selgin, etc?

    John, Bernanke is a horrible debater. Pathetic. I’d have no trouble debating him. I saw him in Congressional testimony having trouble with stupid questions that I’d handle easily.

  35. Gravatar of Bob OBrien Bob OBrien
    16. October 2011 at 13:11

    As a long time reader of this blog I find the discussions first rate and very educational, but, I blow hot and cold from day to day on the idea that the low level of NGDP was a cause of our poor economy.

    Recently I read the following quote at Cafe Hayek that reinforces my doubts:

    … is from page 61 of Vol. 9 (Contra Keynes and Cambridge) of Hayek’s Collected Works – and in particular from his 1963 essay entitled “The Economics of the 1930s as Seen from London”:

    To me it seems as if this whole effort [begun in earnest in the mid-20th century to scientistically ‘scientificize’ economics] were due to a mistaken effort to make the statistically observable magnitude the main object of theoretical explanation. But the fact that we can statistically ascertain certain magnitudes does not make them causally significant, and there seems to me no justification whatever in the widely held conviction that there must be discoverable regularities in the relation between those magnitudes on which we have statistical information. Economists seem to have come to believe that since statistics represent the only quantitative data which they can obtain, it is these statistical data which are the real facts with which they deal and that their theories must be given such a form that they explain what is statistically ascertainable. There are of course a few fields, such as the problems of the relation between the quantity of money and the price level, where we can obtain useful approximations to such simple relations – though I am still not quite persuaded that the price level is a very useful concept. But when it comes to the mechanism of change, the chain of cause and effect which we have to trace in order to be able to understand the general character of the changes to be expected, I do not see that the objectively measurable aggregates are of much help.

  36. Gravatar of Ess Ess
    16. October 2011 at 14:08

    Hi, could you clarify your theoretical understanding of the relationship between rates and stimulus?

  37. Gravatar of Scott Sumner Scott Sumner
    17. October 2011 at 06:52

    Bob, I agree with Hayek about money and the price level, and also agree with Hayek that NGDP is a better target for monetary policy than the price level. I also agree that all statistical relationships in economics are uncertain, but all we can do is to try our best. There will be a money supply, because money is necessary. Thus let’s control the supply in the way that does the least harm, and Hayek and I both thought that was done by targeting NGDP.

    Ess, Low rates are usually a sign of a weak economy, not easy money. Truly easy money would raise NGDP growth sharply, which would gradually raise interest rates over time.

  38. Gravatar of Scott Sumner: Monetary Causist | Last Men and OverMen Scott Sumner: Monetary Causist | Last Men and OverMen
    29. March 2017 at 04:19

    […] […]

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