Beyond hawks and doves

After the recent series of posts on Bernanke I asked readers to send me some information on the FOMC.  I was all set to look for “villains.”  But after looking at the information, I was reminded of something I’ve known all along—the FOMC isn’t the problem, rather the state of macroeconomics circa 2010 is the problem (assuming my critique is correct.)  Given that I am one of only a handful of economists who thought money was too tight in late 2008 and throughout 2009, on what basis would I expect the Fed to follow my preferred policy?

But since I asked for the information, let me give you a few reactions.  They are based on this FT article (supplied by Marcus), which discusses the perceived hawkishness or dovishness of each potential FOMC member, and also this Fed report (supplied by Statsguy) which provides brief biographies if you click on the person’s name.  Some initial reactions:

1.  Many of the Fed presidents and Board of Governor members have banking backgrounds, and seem to be in way over their heads.  Woodford has argued that when in a liquidity trap it is essential to engage in price level targeting, not inflation targeting.  Without disrespect to any single member of the FOMC, how many of those members seem qualified to judge his arguments, merely on the basis of their background?  Just so that this doesn’t sound too arrogant, I would be completely unqualified to serve on a board that oversaw banking regulation.  Having a banking expert serve on the FOMC is essentially no different from having an accountant, economist, or engineer serve on the Supreme Court.  Except the FOMC is much more important.  Do we need banking experts at the Fed?  Sure, if they are going to regulate banks.  But they have no business being on the FOMC.  The FOMC does not determine whether credit is easy or tight, it determines whether monetary policy is easy or tight.

2.  If I sat down and chatted with each individual FOMC member, I would probably have much more in common with the hawks than the doves.  The hawks talk about controlling inflation expectations while the doves discuss “output gaps.”  Like the hawks I want to target only a nominal variable, and ignore the output gap.  Where I differ is that the nominal variable I favor targeting is NGDP, not P, and I want to target levels, not rates of change.  In my view the doves are currently right for the wrong reasons.

3.  The other main problem is that the doves tend to be excessively “Keynesian” in their approach to monetary economics.  Thus Janet Yellen, one of the most dovish Fed presidents, was quoted last year saying that the Fed could not ease monetary policy further once rates hit zero.  At the time I argued that that sort of statement should instantly disqualify someone from serving on the FOMC.  (During late 2008 James Hamilton said something to the effect of “if the Fed doesn’t know how to inflate, let me try my hand at the printing press.”  Can someone find me the exact quotation?)

Many of my natural allies (the doves) failed to push hard for further easing, thinking it futile, while the people who do understand how powerful monetary policy can be at zero rates tended to be hawkish on inflation.  And Mr. Bernanke?  If you read the 1999 paper I keep talking about you will have no trouble understanding why he was my first choice to replace Greenspan.  I’ll look at his memoirs before drawing any final conclusions.

Update 1/10/10:  Statsguy sent me the exact Hamilton quotation:

But if inflation is what you want, put me in charge of the Federal Reserve and believe me, I can give you some inflation.

Notwithstanding, I think Greg [Mankiw] is raising a very valid point. Allowing the overall deflation in the U.S. in the 1930s and Japan in the 1990s was one quite fixable policy error. But perhaps modern macroeconomists have deluded ourselves into thinking that if this policy error had not been made, the whole episodes could have been avoided. How bad would the Great Depression have been if the price level had not fallen? Not as bad as it was, I’m convinced, but maybe still pretty bad.

I love the first sentence but absolutely hate the next paragraph.  Count me as “deluded.”  If there is one thing I have learned from 20 years of studying the Great Depression is that THERE WOULD HAVE BEEN NO DEPRESSION AT ALL HAD PRICES NOT FALLEN.  The interwar economy was very different from ours, much more commodity-based.  And commodities were not only a large share of GDP, they were by far the most flexible and cyclical prices.  A sharp drop in aggregate output during the interwar years could not occur without a sharp drop in commodity prices.  And if the overall price level was stable, there is no way commodity prices could have fallen sharply.  They were a huge share of the WPI, (which was the only price index that policymakers paid attention to.)  Furthermore, without the deflation the banking crises of the 1930s would never have occurred.  Without deflation the 1929 stock market crash would have been exactly like the equally large 1987 crash in terms of its effect on the economy—i.e. it would have had no effect.

Part 2.  My hometown

I grew up in Madison, Wisconsin, which superficially seems a fairly ordinary city.  But if you look closely enough no place is really average, is it?  Life Magazine once named Madison the best place to live in America.  Playboy once named the UW “best party school.”  It is the second most educated city in America (I believe above 100,000 or 150,000 people.)  It produced America’s greatest visual artist (Frank Lloyd Wright.)  And its greatest claim to fame?  The Onion:

Available Labor Rate Increases to 10.2%

WASHINGTON””In what is being touted by the Labor Department as extremely positive news, the nation’s available labor rate has reached double digits for the first time in 26 years, bringing the total number of potentially employable Americans to an impressive 15.7 million.

Hilda Solis briefs the press corps on the unprecedented level of untapped manpower.

“This is such an exciting time to be an employer in America,” said Labor Secretary Hilda Solis, adding that every single day 6,500 more citizens join America’s growing possible workforce. “There’s such a massive and diverse pool of job-ready Americans to choose from. And each month the number only gets higher.”

“While our current available labor rate of 10.2 percent isn’t quite as robust as it was in 1982 or 1933, we’re happy to say that reaching that benchmark is no longer out of the realm of possibility,” Solis continued.

According to the Department of Labor’s report, nearly 200,000 more Americans suddenly became fully hirable in October alone. And November saw unprecedented gains in the number of high-quality auto workers, teachers, lawyers, part-time retailers, and even doctors who could be employed.

The report also explained that, because of the booming would-be-employee market, college graduates are having an easier time than ever joining the ranks of those ready and able to receive monetary compensation for work performed at some point.

Moreover, it found that, while all Americans were benefiting in some way from the new trend, the nation’s African Americans appeared to be in the best position to take advantage of the upward swing in potential employment, with 15.7 percent of all black citizens now situated to have a chance of becoming wage-earners someday.

“We are very lucky to be living in a time when so many people can just go out whenever they feel like it and get a job application,” Deputy Labor Secretary Seth Harris announced. “Compare that to the late ’60s or late ’90s, when the available labor rate plummeted to 4 percent and employers didn’t have their pick of millions upon millions of Americans dying to put on a hard hat or suit jacket for practically peanuts.”

Added Harris, “Those were scary times in America.”

PS.  Yes, I know The Onion moved to NYC, but it started in Madison.

PPS.  Several commenters including Malavel sent me this WSJ piece on the new FOMC members.

HT:  Michael Belongia

Tags: ,


18 Responses to “Beyond hawks and doves”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. January 2010 at 20:19

    I think I agree with your assessment of the FOMC. Most of the biggest hawks (Plosser, Hoenig and Lacker) know full well what monetary policy can accomplish right now. Plosser, in my opinion, is brilliant. They just don’t give a damn.

    The exceptions are Fisher and Warsh. Warsh in particular knows less about monetary economics than my cat (who’s nevertheless a quick study for a feline).

    As for the doves (Yellen, Kohn, Dudley and Rosengren), they generally seem to be somewhat weaker economists than the ultra-Hawks.

    I’m a little disappointed with Yellen’s statements given her husband is Akerlof. However, monetary economics is not Akerlof’s speciality and perhaps they don’t engage in a lot of economics pillow talk.

  2. Gravatar of StatsGuy StatsGuy
    9. January 2010 at 20:36

    “if inflation is what you want, put me in charge of the Federal Reserve and believe me, I can give you some inflation.”

    Back in October 08. I loved that post. Especially the part about buying up equities in the Japanese stock market with printed dollars and fixing two problems at once…

    BTW, in case you haven’t read it, I highly recommend Bill W.’s history of the structure of the Fed.

    It explains, right away, why the Fed is full of bankers. ANd, why the Fed is more concerned about the health of the financial sector than about unemployment.

    But you claim to be have more in common with the hawks than the doves… At first blush, they might agree, but try reading Plosser’s speech from May 09.

    “My view of the economic outlook is also shaped in part by a forecasting model we are developing at the Philadelphia Fed. This model is based on what has become the workhorse model of modern macroeconomics. One of its key features is that expectations of future economic variables are forward-looking.2 Interestingly, this type of model produces a forecast that shows a significant recovery underway by the end of the year.”

    Obviously, his model has some problems:

    “The sharp rise in the unemployment rate in the first few months of 2009 and the steep declines in payroll employment have led me to revise upward my unemployment rate forecasts. I expect the unemployment rate to peak sometime early next year above 9 percent, before falling gradually.”

    Maybe Plosser just figured he’d discount the forward looking indicators like, Oh, the t-bill rates. When facts disagree with beliefs, he simply explained away the facts (interest rates aren’t really low, really, it’s just a liquidity crisis). Um, uh, um… Dang.

    So, I’d ask this Scott – how do we get a guy who sounds so much like you, and yet arrives at completely the opposite conclusions?

    “And I see greater risk of higher inflation over the intermediate to longer term… I have several reasons for this view: First, monetary policy is extremely accommodative. Second, as I just mentioned, my forecast relies more on forward-looking expectations of inflation compared to the forecasts of many economic models, in which backward-looking elements are more heavily weighted.”

    Plosser is a vocal guy, with apparently strong views on sectoral reallocation and inflation (and little care for unemployment, indeed his response is that the equillibrium level just went down 6% in 1.5 years and that’s just how it goes).

    The man is a Klingon, and the other members of the FOMC were pushovers. And when the well-published macroeconomists are making these arguments, what should the Bankers who rose through the rank say? Do they just go against Plosser? Here’s a guy who certainly talks with confidence. And the more reality disagrees, the more confident he becomes.

  3. Gravatar of Doc Merlin Doc Merlin
    9. January 2010 at 20:37

    The fact that we are even having this discussion saddens me. Sigh. Again, a problem of attempting to rely on “experts” to set monetary policy, is how those experts are chosen. Nothing says that the people who know the most about monetary policy would end up setting monetary policy, as politics determines political positions, not knowledge or ability.

    Knowledge isn’t found in political committees, it is found dispersed throughout, while power is found in the political committees. I predict as technology decentralizes knowledge more and more, political committees will begin to make larger and larger blunders.

    Also, I disagree STRONGLY with what you said about banking experts not being needed on the FMOC, as banking regulatory policy can have very large monetary effects. The banking experts will be needed to explain any monetary effects of banking regulation and allow the monetary experts to account for them. For example, a lot of the “tightness” leading up to this catastrophe was directly caused by a change in bank capitalization requirements. Naturally, as macroeconomists people on this blog don’t understand it, so they ignore that effect, even though the effect of it was huge.

  4. Gravatar of Doc Merlin Doc Merlin
    9. January 2010 at 20:43

    Bah, s/effect/affect/ in the last phrase.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. January 2010 at 21:08

    Doc Merlin,
    You wrote:
    “Nothing says that the people who know the most about monetary policy would end up setting monetary policy, as politics determines political positions, not knowledge or ability.”

    I couldn’t agree more. Warsh’s primary qualification, other than having worked for Morgan Stanley, seems to be that he is married to Jane Lauder, a granddaughter and heiress of Estée Lauder. There are several other members of the FOMC with similar “qualifications.”

  6. Gravatar of Doc Merlin Doc Merlin
    10. January 2010 at 01:36

    @Mark A. Sadowski,
    Another reason why there should be either free banking (what I would prefer) or a Friedman-esk computer running monetary policy.

  7. Gravatar of Michael Michael
    10. January 2010 at 02:23

    My initial reaction to the description of a hawk/dove divide amongst members of the FOMC was that it was probably a gross simplification of their views, reflecting WSJ/FT’s editorial priorities rather than the members’ actual views.

    But there seems to be a lack of intellectual rigour in a lot of public statements they make, which makes me concerned that the hawk/dove divide is actually a big deal. Their justifications for their views seem to be excessively general (oh no, inflation! oh no, unemployment!) and not very informative.

    It would be better if they could be a little more specific about the factors and indicators they’d be looking for so that our expectations of their actions wouldn’t depend so much on our belief of where they lie on some simplistic hawk/dove spectrum.

  8. Gravatar of ssumner ssumner
    10. January 2010 at 07:10

    mark, Yes, I think the hawks are probably the stronger monetary economists. I won’t analyze their motives, as my default position is that most intellectuals are idealistic, just deluded.

    Statsguy, Thanks. You and the other readers may want to comment on the paragraph I added at the end of section one, which critiques something else Hamilton said right after the quote.

    On Plosser, those quotations just confirm that he has the same forward-looking view as I do, focused on nominal aggregates. The problem is:

    1. He relies on Fed forecasts, not market forecasts
    2. He favor inflation, not NGDP
    3. He favors inflation rate targeting, not NGDP or P-level targeting.
    4. He thinks money is “easy.”

    Doc Merlin, You said;

    “Also, I disagree STRONGLY with what you said about banking experts not being needed on the FMOC, as banking regulatory policy can have very large monetary effects. The banking experts will be needed to explain any monetary effects of banking regulation and allow the monetary experts to account for them.”

    This seems to go against your distrust of experts. No banking expert would have any idea how banking regulations would impact money demand. It is not their area of expertise. Next time you meet a banking expert ask him or her what would happen to velocity if capital requirements are raised 5%. Watch the look of incomprehension in their face.

    But I agree with your general distrust of experts, as you know.

    Mark#2, When I looked at some of the bios, I wondered how some of them got picked.

    Michael, Yes, I agree. Congress made a huge mistake going with the “look at inflation and unemployment mandate.” It lets the Fed do whatever it wants, but even worse it allows for infighting. Congress should have said “Keep NGDP growing at x%, level targeting. No more hawks and doves, everyone would be pulling together toward the same goal.

  9. Gravatar of StatsGuy StatsGuy
    10. January 2010 at 07:54

    I think Hamilton is being politic – he’s a very middle of the road scholar, and to make the claim that the Great Depression could have been completely avoided would have just invited a whole avalanche of comments challenging him when that wasn’t the central point he wanted to make.

    “…maybe still pretty bad” – he’s just conceding he doesn’t know, but _no one_ is going to argue with his statement that it would have been _less bad_ at the very least.

  10. Gravatar of StatsGuy StatsGuy
    10. January 2010 at 08:02

    OK, I can’t help taking one more dig at Plosser…

    Krugman points to a very nice Mankiw short history of macro. (Yes, I just complimented Mankiw…)

    “Among the leaders of the new classical school, none (as far as I know) has ever left academia to take a significant job in public policy. By contrast, the new Keynesian movement, like the earlier generation of Keynesians, was filled with people who would trade a few years in the ivory tower for a stay in the nation’s capital. Examples include Stanley Fischer, Larry Summers, Joseph Stiglitz, Janet Yellen, John Taylor, Richard Clarida, Ben Bernanke, and myself. The first four of these economists came to Washington during the Clinton years; the last four during the Bush years.”

    Well, this WAS TRUE, but there is ONE name among the neoclassicals who shows up in policy…

    “The third wave of new classical economics was the real business cycle theories of Kydland and Prescott (1982) and Long and Plosser (1983). Like the theories of Friedman and Lucas, these were built on the assumption that prices adjust instantly to clear markets”

    So, we DO have an example of a neo-classical in a position of policy authority. And now, we know the outcome.

    It may be that the other folks (Yellen, etc.) were right because of all the wrong reasons… But at least they were right! Isn’t there something herein about post-modern truth?

    What I don’t get is this – How does one get from Friedman’s critique of monetary policy in the GD to Plosser’s real business cycle theory in a period of 15 years, when they both appear to come from the same academic tradition?

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. January 2010 at 09:32

    You wrote:
    “I won’t analyze their motives, as my default position is that most intellectuals are idealistic, just deluded.”

    That’s OK. I’ll analyze their motives for you.

    I read some of the interesting things Statsguy has been saying about Plosser. Yes, Klingonlike is one way of describing Plosser. However, the more I think about it the time I spent arguing pointlessly with Plosser was like an encounter with Darth Vader (“Come to the dark side, Luke”).

    This was in April of 2007 when he came to the University of Delaware to deliver the Hutchinson Lecture on the theme of “Credibility and Committment.” He struck me as very intelligent, confident, determined, stubborn and extremely coldblooded. He truly doesn’t believe in involuntary unemployment and he is totally obsessed with inflation. He has absolutely no concern over the human misery that might result from his strange form of “idealism.” I suppose that’s mainly because he is unable to even conceive of the possibility that he might ever be wrong.

    I left with the hairs on the back of my neck standing up and a deep sense of (prescient?) foreboding. If I had to pick one person responsible for the FOMC’s apparent passivity in the face of over 25 million unemployed and underemployed it would be him.

    Only a fly on the wall could know for sure but I think I can imagine how FOMC meetings really go. Despite his similarly abundant intellect, Bernanke is probably totally intimidated by Plosser. And based on what I know about Warsh, I suspect Plosser treats him like well trained dog. You get the picture.

  12. Gravatar of TGGP TGGP
    10. January 2010 at 11:06

    Scott should challenge Plosser to a debate.

    I think RBC was more of a Minnesota than Chicago thing. My impression is that RBC denies either fiscal or monetary policy having any effect.

  13. Gravatar of StatsGuy StatsGuy
    10. January 2010 at 15:44

    “Scott should challenge Plosser to a debate.”

    I second that.

  14. Gravatar of Doc Merlin Doc Merlin
    10. January 2010 at 16:50

    @Scott re: my response
    Well, if you have a panel of experts that run something its better to have a better panel than a worse panel. However I agree that a panel of experts is a pretty terrible way to “run an economy” (whatever that means).

  15. Gravatar of ssumner ssumner
    10. January 2010 at 19:16

    Statsguy, I am also frustrated with the RBC ideology, but I must disagree with this;

    “It may be that the other folks (Yellen, etc.) were right because of all the wrong reasons… But at least they were right! Isn’t there something herein about post-modern truth?”

    Her views on monetary theory make a big difference, because it explains why she failed to push for monetary stimulus despite her beliefs. The hawks are a minority on the FOMC. The fact that they are winning speaks volumes about the state of Keynesian and new Keynesian economics today.

    Mark, Well those are certainly interesting comments. I wasn’t there so I can’t comment. It will be interesting to someday read the memoirs. As I said, there are enough idealists to carry the day if they showed some competence and/or nerve, but they haven’t. But I also think it is very possible that you have zeroed in on why the FOMC failed.

    TGGP, I already debated Lee Ohanian (at So I have a pretty good idea how it would go. But nobody at the Fed is going to debate me.

    Doc Merlin, I agree, let’s go to a (NGDP futures) market run policy

  16. Gravatar of Doc Merlin Doc Merlin
    11. January 2010 at 07:48

    So, long as those futures are the mechanism of expansion and contraction of the money supply directly instead of just a form of voting that bears repercussions, great! (But still free banking would be better, as it would deal with a lot of the regulatory problems too.)

  17. Gravatar of ssumner ssumner
    12. January 2010 at 13:41

    Doc Merlin, We agree on regulation.

  18. Gravatar of The Politics of Fed(merica) « It Don't Mean Much, These Seats are Cheap. The Politics of Fed(merica) « It Don't Mean Much, These Seats are Cheap.
    2. March 2010 at 01:45

    […] For your reading pleasure: Scott Sumner, Beyond Hawks and Doves[1,2]. […]

Leave a Reply