Brad and I

Last weekend I was in Denver for the AEA meetings.  Nothing earthshaking to report, but I thought frequent readers might be interested in knowing I was on a panel with Brad DeLong.  First time I met him, and he wasn’t quite the ogre I expected.  Indeed he was quit nice—let me use his laptop for my PowerPoint slides.  DeLong went first and talked about how shocked he was to find out that the Fed was willing to let NGDP fall 8% below trend.  Then I spoke, and talked about how shocked I was to find out that the Fed was willing to let NGDP fall 8% below trend. 

I had expected to be the lone right-winger on the panel, and in a way I was.  But it turns out that there really isn’t much difference on monetary policy between a center-left neoliberal like DeLong and a pragmatic quasi-monetarist like me.  The other two panelists (James Galbraith and John Quiggen), were a bit further left–and provided a sort of progressive critique of mainstream macro.  Mark Skousen did a spur of the moment defense of the Austrian/libertarian view.

If there were any differences between DeLong and I, it’s that his critique was aimed more solidly against those on the right who see no need for stimulus, whereas I tended to split my criticism into two—against those (often on the right) who see no need for stimulus, and those (often on the left) who didn’t see how important it was to adopt unconventional monetary stimulus in 2008-09.  Bottom line is the left/right distinction is increasingly murky, as my commenters keep reminding me when I try to make overly broad generalizations.

I have to say that I was impressed with DeLong’s presentation.  My favorite line was when he mused there might be a shortage of housing in America, as lots of families are doubling up in the recession.  Perhaps a bit of hyperbole, but a good way to drive home the need for more demand, more NGDP.  I’ve always thought of Krugman and DeLong in Batman and Robin terms.  But now I think DeLong’s just as smart as Krugman, but in a different way.  Krugman has more ability to handle abstract macro, and come up with clever little parables for macro concepts.  But DeLong has a wider range of knowledge, and a better sense of the real world.  Of course they’re both bat-s*** crazy when it comes to politics. 

Regrets?  I should have gotten in at least one jab in revenge for the comment of mine he once deleted.  Maybe when I talked about how I felt like I was going crazy in late 2008 (when all macroeconomists were ignoring the tight money policy), I could have flashed the DeLong post where he said “Scott Sumner is losing his mind” onto the screen.  But perhaps I did get a sort of revenge, as just days after I inserted my memory stick into his nice Mac laptop; it mysteriously developed a serious bug.  How’d that happen?

Here’s a good DeLong post on real wages—an argument Krugman would be unlikely to make.  And here’s a bad DeLong post, where he makes the common mistake of assuming a bubble prediction was correct, that was in fact wrong.   I was going to talk about this problem in my AEA presentation, but ran out of time.

If people are interested, I could try to put the AEA presentation on my blog.  I am thinking of videotaping it for use at a conference in Britain.  After the presentation I met Scott Wentland (mentioned in the previous post) and a young blogger named Steve Waldman.  I immediately recalled the name, but as my memory is bad I forgot he was associated with Interfluidity.  Steve, Scott and I all had lunch afterward, and I was amazed that Steve knew so much economics and finance, given he was merely a grad student at Kentucky.  He kept up with any monetary concept I discussed, and was ahead of me in knowledge of finance.  He knows more than most econ professors.  Another blog I need to start checking out.

After discussing my wacky defense of finance with him, I realized that I need to back off until I know more finance.  On the way home I decided to shift the focus a bit, and argue that the tendency of firms to increasingly outsource might also help explain some of the growth in finance, indeed others have argued that it explains some of the shift from manufacturing to services.  The commenter 123 had the same idea, and beat me to it.  I’d rather let more knowledgeable people pick up the ball and run with my finance ideas.  If no one does, then I have to assume my idea wasn’t very fruitful.

Downtown Denver seemed nicer that downtown Atlanta (my previous conference), but I didn’t have time to see much as I interviewed lots of job seekers.  The Brown Palace Hotel was great.  For the fourth time I almost died in a taxi to or from the airport.  This time we passed a similar airport van that had rolled down an embankment off the expressway.  But no matter how often this happens, I still feel much safer in a taxi than an airplane.

For some odd reason I always seem to visit places later hit by disasters.  In 1991 I was in Toowoomba, Queensland, where this week’s floods are.  In 1999 I was in Phuket, Thailand, where the 2004 tidal wave was.  In 2006 I was in the town 60 miles west of Chengdu where the 2008 earthquake was centered.  Two weeks ago I drove by the store in Tucson where the recent shooting was, then ten minutes later drove right by the suspects house. 

BTW, I’ll be visiting LA in March.


Tags:

 
 
 

65 Responses to “Brad and I”

  1. Gravatar of marcus nunes marcus nunes
    12. January 2011 at 18:30

    Scott has morphed into a “leading indicator” of catasthrophies. Before travelling check his past schedule!

  2. Gravatar of Otto Maddox Otto Maddox
    12. January 2011 at 18:39

    All California needs now is an 8.0 to finish it off.

  3. Gravatar of Dustin Dustin
    12. January 2011 at 18:56

    You might be on to something, marcus. Can anybody decipher a pattern? Any hints about what will happen in December 2012? There has to be some sort of mathematical pattern. Are Scott’s traveling patterns causing the poles to shift? The mysterious animal deaths?

  4. Gravatar of happyjuggler0 happyjuggler0
    12. January 2011 at 19:12

    It won’t be too difficult for a disaster to happen in LA during some unspecified period in the future after you leave. It would be more surprising if it never had a disaster again.

  5. Gravatar of OneEyedMan OneEyedMan
    12. January 2011 at 20:05

    I didn’t like that Brad was playing with his smart phone through your whole presentation.

  6. Gravatar of Full Employment Hawk Full Employment Hawk
    12. January 2011 at 20:17

    ” I could try to put the AEA presentation on my blog”

    By all means do so. And will a transcript of the discussion between the participants in the session be made available?

    On another issue, I have a stupid question. Is the Fed only paying interest on the part of the reserves that consist of deposits with the Fed, or is it also paying interest on vault cash?

  7. Gravatar of cassander cassander
    12. January 2011 at 20:18

    Just don’t give a talk at the same time as Al Gore. A natural disaster AND a snowstorm might be too much for any one city to handle.

  8. Gravatar of Liberal Roman Liberal Roman
    12. January 2011 at 20:31

    I am still amazed that after the events of the past few months (which vindicated Scott in my eyes once and for all and made me a tidy investment profit) that no one and I mean NO ONE!!! is making the connection between QE and the improved economic performance the past few months.

    Be they right or left, the pundits still throw out the SAME lines when it comes to monetary policy (Pushing on a string, banks not lending despite Fed printing, etc., etc., etc.).

    I blame Krugman and DeLong almost as much as I do the right wingers. They are STILL apathetic towards monetary policy. Still, pining for fiscal stimulus. UNREAL!

  9. Gravatar of Brian Brian
    12. January 2011 at 20:36

    “I was amazed that Steve knew so much economics and finance, given he was merely a grad student at Kentucky.”

    Is this a jab at grad students or Kentucky?

    Will you be speaking at UCLA or USC when you visit LA?

  10. Gravatar of Morgan Warstler Morgan Warstler
    12. January 2011 at 21:12

    I don’t know Roman, I get the sense that everyone assumes the current economy is growing in part because of QE2, but they also have their eye on inflation – which is everywhere we spend out money save housing.

    I thought it was notable that the Fed had to indicate/explain why they weren’t ending QE2 early.

    That concern had to come from somewhere… What’s UK inflation look like now? Oil’s at what? People are obviously aware QE2 is happening while they see some kind of effects making them nervous.

    And when that stuff runs up, and NGDP rises over 5% – and unemployment is still up above 7.5%, it’ll be time for tightening up, and that’s when the real Sumner vs. DeKrugman debate will begin.

  11. Gravatar of Dustin Dustin
    12. January 2011 at 21:25

    Morgan, it’s level targeting, right? If I recall right, we need something like 8% for a couple years to get back to the targeted level.

    Should we speak in $$’s instead of %%’s ?

  12. Gravatar of Scott Wentland Scott Wentland
    12. January 2011 at 22:03

    The level of agreement with Brad DeLong was quite surprising. There wasn’t nearly as much of divide between Sumner macro and Delong macro as I had thought (though there were certainly some key sources of disagreement).

    On a number of the questions from the audience, there seemed to be an even bigger divide between the audience and Sumner/DeLong macro.

  13. Gravatar of Eric Morey Eric Morey
    12. January 2011 at 23:12

    “After discussing my wacky defense of finance with him, I realized that I need to back off until I know more finance.”

    What did Waldman say that convinced you to “back off”?

  14. Gravatar of Dirk Dirk
    13. January 2011 at 01:48

    Slightly off-topic, but I’m still wondering a lot about that link JimP posted a few days back showing how much the Treasury seems to be hoovering up the cash the Fed is trying to put into the market.

    You have said before that the Fed bats last. The impression from that data is that right now the Treasury is batting last. Could you please clarify for those of us who don’t quite understand such things? Is the Treasury undermining quantitative easing — or am I misinterpreting the data?

  15. Gravatar of Ashwin Ashwin
    13. January 2011 at 02:29

    Btw Scott – you may find this FT article interesting http://www.ft.com/cms/s/0/0d46d3a4-1e7f-11e0-87d2-00144feab49a.html . It claims that the BoE is now following a closet NGDP target of 5%. Also highlights the problems with this approach – masses not happy with 4% inflation. And also crucially highlights the asymmetry in BoE policy which cuts rates when import prices fall due to “idiosyncratic” factors but doesn’t raise rates when import prices rise as they are doing right now. Sort of an NGDP target when RGDP growth is low and an inflation target when RGDP growth is high.

  16. Gravatar of JL JL
    13. January 2011 at 05:52

    Steve Waldman has some very important and insightful points on his blog, and he obviously understands the relationship between finance and macro very well.

    IMHO, Steve Waldman in a nutshell:

    The past 40 years policy has been geared towards reducing the stickiness of wages (in practice that means lower wages) at the expense of capital. So Greek workers are expected to take a haircut, so that Greece’s creditors get paid.

    We have not tackled the issue of debt stickiness. Bankruptcy is the only way to erase debt and its a crude instrument with lots of negative consequences for debtors who use it. Policies are needed to reduce the stickiness of debt.

    The past 40 years have favoured capital at the expense of labor and the huge profits in finance should be seen in this light.

    Also he has a marvelous idea for direct cash transfers (helicopter drops) as a policy tool for the Fed to fight recessions. You should read it:
    http://www.interfluidity.com/v2/918.html

    Monetary policiy for the 21st century.

    Basically: Let the fed give people money during recessions, but in order to not make people dependent on these checks and thereby reduce work incentives (and to prevent massive protests when these checks are reduced during boom times) give people free lottery tickets. the Fed then sets the size of the jackpot according to what is necessary to achieve growth.

    This is in line with my wishes. Current Fed tools are basically gifts to capital, big finance especially. I would much rather have the Fed boost the economy by gifting the poor during hard times.

  17. Gravatar of John Papola John Papola
    13. January 2011 at 06:03

    Has NGDP actually risen since QEII was announced? How does the NGDP data track against the tax deal and the winds moving toward likely extension current rates? What other global events could be impacting things?

    Macro seems especially prone to confirmation bias.

  18. Gravatar of scott sumner scott sumner
    13. January 2011 at 06:08

    Marcus, Dustin, Otto, happyjuggler0, I knew I could safely pretend to make that prediction, in full knowledge that some sort of disaster will strike LA. That is, of course, the trick used by fortune tellers–predict something likely to come true.

    OneEyedMan, I didn’t know that, now I have one more reason to seek revenge.

    Full Employment Hawk, Not at all a stupid question. I think it is just the part at the Fed, but I’ve argued they could do both if they wanted to, preferably by first exempting the a certain share of vault cash, which is more than banks would customarily hold. That would reduce paperwork.

    I will probably get the talk up eventually, but it may be 2 or 3 weeks.

    cassander, Good point.

    Thanks Liberal Roman. In an earlier post I argued my blog has created $5 billion in wealth. 🙂

    Brian, No, I just meant he wasn’t a professor, or a student at a top 5 program. Come to think of it I suppose it was a jab at Kentucky. Sorry.

    Unfortunately I am fully scheduled in LA. But don’t assume I would be welcome at those schools. I am in Boston, home of lots of econ programs and a regional Fed. Not once in the past two years has anyone in Boston asked me to do a seminar. I’m still a nobody in Boston.

    Dustin, Yes, it’s level targeting, something Morgan forgets. But at this point I don’t think we should try to get all the way back to trend–too much water under the bridge. Maybe half way back, which would still require much more than 5% for a few years.

    Scott, Thanks for mentioning that. I had intended to, but forgot to when I actually wrote up the post. The audience was not what I would have wished. There were mostly older style Keynesians, whereas my talk is actually addressed at new Keynesians (Mishkin, Mankiw, Woodford, Bernanke, etc.) I wish I had had an audience of elite new Keynesians, I wonder how they’d respond. (BTW, no disrespect to the audience, just that my talk was really a critique of the behavior on new Keynesians.)

    Eric, I don’t recall, I just recall that I didn’t know enough about the modern financial industry to effectively respond to his arguments. To some extent I had the same problem with commenter Ashwin. I’ve never taken a finance course, and have only a very fuzzy idea what all the terms mean. I.e. “credit default swaps” etc. I have a very simple vision of finance in my head; stocks, bonds, banks, options, cash, futures, deposit insurance, etc. I don’t know many of the recent innovations. Ditto for recent finance theory.

    Dirk, I wish I knew the answer. I figured I’d just wait and see what happened. It seems to me that Bernanke would lose credibility if the base doesn’t increase next year, but I don’t know how others look at the picture. My main interest was the market reaction, which has already occurred. The mechanical effects of QE2 are probably small.

    Ashwin, Thanks, that’s a very helpful link–I’ll do a post. I am pretty sure that the UK has averaged about 5% NGDP growth in recent years, just like the US. If that’s true, that would suggest the asymmetric argument is false, as an asymmetric policy would push NGDP growth above target.

    I do think the UK experience is slightly in conflict with my model, because they have higher inflation than I would expect. I really don’t know why, although some articles mention VAT increases. That’s not an issue that I have studied. But I don’t see them as far off course, as the implicit inflation target is probably more like 2.5% (as the UK averages 2.5% real growth, and I think actual inflation has been closer to 2.5%.) Does anyone know the 5 or 10 year TIPS forecasts of inflation in the UK, and how they compare to TIPS forecast in normal times (say 2000 or 2005?)

  19. Gravatar of scott sumner scott sumner
    13. January 2011 at 06:21

    JL, I don’t agree that current monetary policy is a gift to finance. Bonds are bought at fair market value.

    We just did a $800 billion helicopter drop–it didn’t work.

    (fiscal stimulus plus base expansion.)

    John, I am pretty sure it increased based on the data coming in–but it won’t be until late January when we have the first indication.

  20. Gravatar of Ashwin Ashwin
    13. January 2011 at 06:45

    Scott – Inflation in the UK has been above the 2% target for most of the last 10 years, hence the charge of asymmetric policy. A rise in inflation above the target is tolerated for a lot longer than a fall in inflation below the target.

    The primary reason for inflation is probably the depreciation in the GBP. VAT increase has just kicked in which won’t help matters. And the rise in food prices and oil doesn’t help either especially given again that the UK imports most of these things.
    .

  21. Gravatar of Full Employment Hawk Full Employment Hawk
    13. January 2011 at 07:30

    “We just did a $800 billion helicopter drop-it didn’t work.”

    When Obama took over the Presidency, the bottom was falling out of the economy. Output was decreasing at 6%. By the Summer, output was growing again and the recession was over. It is very difficult to maintain that it did not work in light of that. Yes, it was not the only factor that can be credited for it. The actions of the Fed, and the TARP also were major contributing factors. As far as the unemployment rate not coming down, the unemployment rate is a well-known lagging indicator, and the experience in the previous two recessions indicates that the lag has gotten a lot longer than it had been. Expansionary economic policy, whether fiscal or monetary, directly affects output and the effect on unemployment is indirect. Therefore the effectiveness of the stimulus has to be judged on how it affects output, not unemployment. Also, in order for the unemploymnet to come down at a brisk rate, the economy not only has to grow, it has to grow briskly. And, in light of Christina Romer’s estimate that a 1.2 Trillion stimulus was needed a strong case can be made that Krugman’s argument, made before the stimulus went into effect, that the stimulus was too weak has to be taken seriously.

    In any case, whether expansionary fiscal policy works or not, under the current political environment, it’s not going to happen and expansionary monetary policy is the only game in town.

  22. Gravatar of John Thacker John Thacker
    13. January 2011 at 09:58

    “And, in light of Christina Romer’s estimate that a 1.2 Trillion stimulus was needed a strong case can be made that Krugman’s argument, made before the stimulus went into effect, that the stimulus was too weak has to be taken seriously.”

    As does the case, made at the time, that far too much of the stimulus was for long-term spending. The vast majority of the high speed rail money, for example, hasn’t been obligated yet, even though the winning projects have been announced. “Shovel-ready” is a myth, especially with the EIS requirements under NEPA and so forth– the only projects you can do quickly are projects that were previously rejected.

    It’s really easy to maintain that the stimulus did not work if we accept your claim that “output was growing again and the recession was over” by the summer, since most of the fiscal stimulus wasn’t spent by then. The tax breaks, yes, and the direct payments to states to keep them from cutting existing programs (much faster than funding new things), were mostly in effect.

  23. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. January 2011 at 10:20

    ‘I didn’t like that Brad was playing with his smart phone through your whole presentation.’

    Usually he plays with his laptop during others’ presentations (I’ve been told by someone who has observed him at seminars), but Scott had borrowed that. Ha ha.

    Btw, for all you Palin-phobes, I’ve just heard a report that death threats toward her have drastically increased since her little speech. Vindicating her ‘blood libel’ metaphor.

  24. Gravatar of ISLM ISLM
    13. January 2011 at 11:08

    Btw, for all you Palin-phobes, I’ve just heard a report that death threats toward her have drastically increased since her little speech. Vindicating her ‘blood libel’ metaphor.

    Obviously, they come from the neo-monetarists who didn’t appreciate her vacuous criticisms of Benanke’s monetary policy.

  25. Gravatar of Morgan Warstler Morgan Warstler
    13. January 2011 at 12:24

    Scott, I don’t forget level targeting but I’m counting recent the period we ran over 5%, you are too right?

    Didn’t we agree money was too loose 2004-2006?

    So yes Dustin, the real question is: when the “recovery” is running along at 5% for 4,6,8 quarters and unemployment is STILL 7.5% – liberals are cooked.

    There’s plenty of good reason to assume the job environment during both recent booms was aberrational. And what we have is structural unemployment brought about by poor government policy.

  26. Gravatar of JL JL
    13. January 2011 at 13:03

    Around the world labor is getting a haircut one way or another: lower real wages, layoffs and government austerity.

    Meanwhile banks are getting capital injections and bailouts. Bond holders are not getting haircuts, inflation or defaults.
    Some banks even get a 0.25% IOR, while 1 month bonds are yielding a mere 0.15%.

    And as Krugman and others have pointed out: there was no fiscal stimulus.
    Whatever washington gave, it was nullified through spending cuts by state and local governments.

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. January 2011 at 13:36

    Btw, I’m not at all surprised that DeLong was collegial at the AEA meeting. That reflects what Mickey Kaus said in the Bloggingheads TV clip I linked to; that face to face confrontations have moderating influences that ‘tribal’ blogging doesn’t. That said, here’s the latest in the Kaus-DeLong dispute (and, I’m entirely on DeLong’s side of the economics at issue):

    http://www.newsweek.com/blogs/kausfiles/2011/01/11/google-and-cocooning-you-ain-t-seen-nothin-yet.html

    —————quote—————-
    I’m told Berkeley economist Brad DeLong sent out the following to at least one reader who asked why DeLong didn’t post a comment about immigration I submitted to his website. ….:

    =============quote===========
    When Mickey stops trying to destroy the careers of twenty-something journalists, I’ll talk to him…

    Until then, I won’t””and you shouldn’t carry water for him either. He’s not a good person.

    Yours,

    Brad DeLong
    =============endquote==============

    P.S.: If I’m trying to destroy the careers of 20-something journalists like Ezra Klein, I don’t seem to have been very effective. By the time I’m through destroying Klein he’ll be host of Meet the Press … [Note: I emailed DeLong for comment, just in case the above email is a hoax. I haven’t heard back. I see no indicia of inauthenticity.] 1:14 p.m.
    —————-endquote———————

  28. Gravatar of Dustin Dustin
    13. January 2011 at 14:28

    Morgan, if the ‘recovery’ is running at 5%, then you’ll never get back to a 5% trend.

  29. Gravatar of scott sumner scott sumner
    13. January 2011 at 17:22

    Ashwin, I agree, but I was commenting on the assertion that the real target was 5% NGDP. If so, they’ve been very close. Of course if they really have a 2% inflation target, they should have a 4% to 4.5% NGDP target, not 5%.

    Inflation has also been above the US target. The Fed cut rates in 2007 and early 2008 when inflation was way above target, as were TIPS spreads. I don’t believe the Fed targets inflation, and I don’t believe the BOE targets inflation.

    Full Employment Hawk, You said;

    “As far as the unemployment rate not coming down, the unemployment rate is a well-known lagging indicator, and the experience in the previous two recessions indicates that the lag has gotten a lot longer than it had been.”

    I don’t agree with this, it’s a common misconception because people assume recessions end when RGDP starts growing. But in fact unemployment falls when RGDP starts growing faster than trend. So I see little evidence that unemployment significantly lags the business cycle.

    Regarding the bottom dropping out of the economy–it is pretty much a random walk, like the stock market, with a slight bit of momentum. Just because output has fallen, doesn’t mean one should expect it to continue falling. The $800 billion helicopter drop is something virtually every macro model would predict would create explosive NGDP growth (it doubled the base), except the Sumner/Krugman/Woodford approach that says expected future policy is far more important than current policy.

    John, Good points. Even I knew that the idea of high speed rail as a stimulus was sheer lunacy. I’d be surprised if construction starts before 2015.

    Patrick, I still have trouble taking her seriously for all sorts of reasons. She seems to enjoy being a lightning rod for critics. But I suppose I have trouble taking most politicians seriously, so perhaps I should cut her some slack.

    Morgan, How can I forget when YOU REMIND ME EVERY SINGLE BLOG POST.

    JL, You said;

    “Around the world labor is getting a haircut one way or another: lower real wages, layoffs and government austerity.
    Meanwhile banks are getting capital injections and bailouts.”

    Sounds good, but is it true? Banks are paying back their bailouts to the government. The unemployed are not paying back their UI benefits.

    When GDP grew fast in the 4th quarter of 2009, Krugman said something like “see, stimulus is working.” I still don’t believe those who claim S&L spending fell by anywhere near $800 billion.

    Patrick, Thanks, I did see the Kaus bloggingheads where he complained, but not that debate. DeLong also deleted my post. Did I try to destroy Ezra Klein’s career? And what did Kaus do to Klein?

  30. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. January 2011 at 17:38

    ‘She seems to enjoy being a lightning rod for critics.’

    You don’t? But, I take her at her word; she’s a ‘mama grizzly’ who will attack when she or her family is threatened. Fairly common trait among Alaskans.

  31. Gravatar of Full Employment Hawk Full Employment Hawk
    13. January 2011 at 19:51

    “because people assume recessions end when RGDP starts growing.”

    That is not simply what people assume. It is essentially the way the Business Cycle Dating Committee of the National Bureau of National Research look at it. Yes, they do look at some other factors, but what happens to real GDP is their most important factor. The Business Cycle Dating Committee definitely does not set the end of a recession when RGDP grows faster than trend. And their dating is generally accepted as official.

    However, a strong case can be made that they should actually be defining it your way. When most economists say the recession is over because RGDP is growing again, non-economists are puzzled at how they can say the recession is over when there is still so much unemployment. Their intuitive concept of when a recession is over is in many ways superior to the NBER’s.

  32. Gravatar of Full Employment Hawk Full Employment Hawk
    13. January 2011 at 20:01

    “it is pretty much a random walk”

    Once the recession started REAL GDP fell every quarter until the Summer of 2009. And through the first quarter of 2009, the rate of the decrease in real GDP kept increasing. There appears to be a strong degree of downward momentum in that pattern.

    “except the Sumner/Krugman/Woodford approach that says expected future policy is far more important than current policy.”

    But Krugman has argued that the maximum effect of the stimulus on the RATE OF GROWTH of RGDP, rather than the level, was in the first half of 2009.

    Another mistake in my previous post. That should, of course be the National Bureau of ECONOMIC Reserch. I AM going to have to proofread my messages more closely.

  33. Gravatar of Full Employment Hawk Full Employment Hawk
    13. January 2011 at 20:36

    “When GDP grew fast in the 4th quarter of 2009, Krugman said something like “see, stimulus is working.”

    In the fourth quarter Kruman argued that the high growth that quarter was to a large degree caused by inventory adjustment and would not last. He has consistently held to the position that the stimulus was too small to restore the economy to full employment, both before and after the stimulus was passed.

  34. Gravatar of Nathanael Nathanael
    13. January 2011 at 21:27

    “My favorite line was when he mused there might be a shortage of housing in America, as lots of families are doubling up in the recession. Perhaps a bit of hyperbole, but a good way to drive home the need for more demand, more NGDP. ”

    Um. It is a great line, but you need to think about it harder.

    This is more a way to drive home the need for *more money going to the poorer families in America*, or in other words a way to drive home the need for either *redistribution-of-income policies* or for *jobs policies*. Your choice.

    There is no way to say that it calls for “more demand” generically — the “more demand” of the superich buying sixth and seventh houses would do absolutely nothing to address the problem.

    Please take off your right-wing blinders for a moment….

  35. Gravatar of Nathanael Nathanael
    13. January 2011 at 21:29

    To put the above comment in a way which might be clearer, we need *more demand for labor*, not *more demand for land or capital*. There is a fundamental asymmetry between demand for labor and demand for capital or land in that the latter can be satisfied with no multiplier effect whatsoever, if there is excess capital or land lying around.

  36. Gravatar of Ryan Ryan
    14. January 2011 at 04:22

    Not to be the crazy Austrian School guy again, but we’ve been saying since the days of Mises that there wasn’t any difference between right and left monetary policy.

  37. Gravatar of Adam Adam
    14. January 2011 at 07:27

    Good to see the two of you finding common ground. I’m a bit surprised that it took an in person meeting, though, because when I first stumbled here (I think following a link from Tyler), one reason I was so interested was because you seemed to be saying some things that were very similar to DeLong, but coming from a different perspective.

  38. Gravatar of Benjamin Cole Benjamin Cole
    14. January 2011 at 09:48

    Please cancel your trip to Los Angeles. Thank you.

  39. Gravatar of Ottovbvs Ottovbvs
    14. January 2011 at 11:22

    The $800 billion helicopter drop “didn’t work?” Sure it was only part of the package but to say “the package” didn’t work is simply not borne out by the data. Krugman who seems to be something of a bete noir of yours has consistently said the stimulus should and could have been larger. He’s right about the former but not the latter.

  40. Gravatar of scott sumner scott sumner
    14. January 2011 at 17:37

    Patrick, I don’t have a big problem with her as a person, but the thought of her as a presidential candidate does not appeal to me at all.

    Full Employment Hawk, I think we agree on recession dating, but just to be clear, if a recession ends and output rises at 2%, and unemployment keeps rising, it would not be correct to say unemployment is responding with a lag to the end of the recession, as 2% RGDP growth SHOULD produce higher unemployment, lags or not.

    Full Employment Hawk and Ottovbvs. Here’s my position on the fiscal/monetary stimulus. If you’d asked macroeconomists in 2005 what would have happened if the Fed doubled the monetary base in a few months, not through OMOs but by dropping the money from a helicopter, most would have expected a huge rise in NGDP. In fact, over the first nine months of Obama’s adminstration policy unemployment rose from 7.8% to 10.1%. (in the first 4 months of FDR, who took office under worse circumstances, industrial output rose 57%) Even another nine months later in August 2010 unemployment was still in the mid nines, and growth was below trend. Sorry, but no reasonable version of the Keynesian model predicts that little NGDP growth from an $800 billion helicopter drop. Nor does the monetarist model. But if you add interest on reserves, and assume fiscal policy is weak, it all makes sense.

    If Krugman had gotten his way on the fiscal stimulus, the Fed would have done less, and we’d be almost exactly where we are now.

    Nathanael, Monetary stimulus can’t be targeted to specific groups. It raises NGDP. But since the fall in NGDP hurt workers especially hard, the increase would presumably help them relative to capital. My goal is to raise employment, not raise profits.

    Ryan, The right pays more attention to money.

    Adam, You said;

    “Good to see the two of you finding common ground. I’m a bit surprised that it took an in person meeting, though, because when I first stumbled here (I think following a link from Tyler), one reason I was so interested was because you seemed to be saying some things that were very similar to DeLong, but coming from a different perspective.”

    I hope this doesn’t sound impolite, but DeLong and I sounded very different when I started blogging. If we sound similar today, it’s because he’s adopted my views.

    Benjamin, Do you know something I don’t? 🙂

  41. Gravatar of Full Employment Hawk Full Employment Hawk
    15. January 2011 at 08:07

    “If we sound similar today, it’s because he’s adopted my views.”

    Keynesians have to a large degree accepted the political reality that another fiscal stimulus is not going to happen and that monetary policy is the only game in town.

  42. Gravatar of ssumner ssumner
    15. January 2011 at 15:02

    Full Employment Hawk, I am referring to the fact that in 2008 and 2009 he claimed monetary policy was ineffective at the zero bound. He published a paper making that claim, and I published a rebuttal (in the same journal) a few months later. Our views were obviously different, or my paper wouldn’t have been published. And it was a substantive difference, not merely a difference in views about what was politically plausible,

  43. Gravatar of Greg Greg
    16. January 2011 at 15:09

    We most certainly did NOT do an 800 billion helicopter drop.

    Swapping long term assets for shorter term assets does not add ANY money to the economy it simply shifts portfolio preferences. It didnt stimulate lending because lending is not limited by the amount of reserves but by the number of credit worthy customers.

    The current monetary policy most certainly WAS a gift to finance. Thats all QE1 and 2 were. First get the bad assets off their books (QE1) then swap Treasury bonds for cash (QE2), hoping the cash will bid up some asset prices. Absolutely NO affect on main street, just more “trustafarian” actvity, keeping the brokers busy.

  44. Gravatar of ssumner ssumner
    16. January 2011 at 18:54

    Greg, We did what the Keynesian call a helicopter drop. I agree that the IOR made it ineffective. But they ignore that problem. My argument was aimed at Keynesians. Of course I believe a true helicopter drop of federal reserve notes would have had a big effect.

  45. Gravatar of Greg Greg
    17. January 2011 at 11:48

    Actually Scott, I think most Keynesians wanted a stronger fiscal response, actual spending of dollars into a consumers hands, either as new hirings for projects or transfers to those who will spend it (preferably without offsetting debt issuance). Since the only option in the current Tea Bagged political climate is monetary policy then yes QE was the only monetary option even as ineffective as it is at actually providing Main St with anything useful.

  46. Gravatar of ssumner ssumner
    18. January 2011 at 15:42

    Greg, QE is not the only monetary option, there are many far better monetary options.

    1. Cut rates to zero in September/October 2008
    2. Negative IOR
    3. Best of all, NGDP forecast targeting.

    Even a bigger fiscal stimulus would not have worked. “Projects” take a long time to get going in a modern economy.

  47. Gravatar of mattmc mattmc
    19. January 2011 at 11:15

    “My favorite line was when he mused there might be a shortage of housing in America, as lots of families are doubling up in the recession. Perhaps a bit of hyperbole, but a good way to drive home the need for more demand, more NGDP.”

    Apologies if this is an ignorant response, or missing an ironic statement, but what it indicates to me is that housing is still overvalued and there are policies in place that are making it difficult for the market to function effectively in reducing prices.

  48. Gravatar of Greg Greg
    19. January 2011 at 18:30

    Scott

    The rates were already cut when QE had started and as I understand negative IOR this assumes that reserves are lent out, that by charging banks for holding reserves, rather than paying a rate on reserves, that banks will lend the reserves out.

    This is faulty in two ways it seems. One, banks dont lend out reserves and two putting the private sector in more debt is not the solution when private sector debt is still over 200% of gdp. Advocating policies to stimulate more private sector debt will not be helpful.

    I dont know enough about NGDP forecast targeting to comment other than to say this sounds like more “expectations” type mumbo jumbo

  49. Gravatar of ssumner ssumner
    20. January 2011 at 14:44

    mattmc, You might be right, but what policies are you thinking of?

    Greg, You said;

    “The rates were already cut when QE had started and as I understand negative IOR this assumes that reserves are lent out, that by charging banks for holding reserves, rather than paying a rate on reserves, that banks will lend the reserves out.”

    I’ve never encouraged banks to make more loans, or policies that encourage more debt. I favor pro savings policies, as I think Americans should save much more.

    The point of negative IOR is to encourage banks to reduce their demand for base money.

  50. Gravatar of Greg Greg
    24. January 2011 at 12:37

    But isnt banks demand for base money simply tied to reserve requirements, which are sought after loans are made? Why do negative IOR why not just say “reserve requirements are zero”?

    And isnt saving “more” simply going to lead to less GDP? Americans are already saving by paying down debt as fast as they can but there is a need for more output. The output should come out of income though and not debt. And of course income comes out of spending. If we want incomes to increase (which we do, or at least I do) then ipso facto, spending must increase first, not saving.

    A macroeconomic first principle is spending=income….. no?

  51. Gravatar of Scott Sumner Scott Sumner
    25. January 2011 at 14:11

    Greg, You asked;

    “But isnt banks demand for base money simply tied to reserve requirements, which are sought after loans are made? Why do negative IOR why not just say “reserve requirements are zero”?”

    Because banks can and do hold excess reserves.

    Your second paragraph confuses spending with consumption. You are right that spending equals GDP in a closed economy, but spending doesn’t equal consumption. Yes, we need more spending, but also more saving. Both can increase at the same time if easier money encourages more investment.

  52. Gravatar of Greg Greg
    30. January 2011 at 04:10

    Scott

    The only way we could get more spending AND more saving is to increase exports. Now to do that we will likely have to reduce incomes which will negate any notions about increasing our spending AND savings.

    As I understand Wynne Godleys sectoral balances model this is how it must work. We cant do what you suggest entirely domestically within the private sector. We need someone outside the domestic private sector to make the additional investment. This comes from two places, the foreign sector and the domestic public sector. The forces are not with us to make the push in exporting we need. With the rest of the world going austerity, they will not wish to start consuming MORE American goods that they arent currently consuming (they want their own export engines revved up you know). So that leaves the domestic public sector

  53. Gravatar of ssumner ssumner
    30. January 2011 at 07:24

    greg, You said;

    “The only way we could get more spending AND more saving is to increase exports. Now to do that we will likely have to reduce incomes which will negate any notions about increasing our spending AND savings.”

    Both statements are false. Even in a closed economy model both spending and saving can go up, as long as investment is rising along with consumption. And getting more exports doesn’t require a reduction in incomes.

  54. Gravatar of Greg Greg
    30. January 2011 at 08:55

    Scott

    In order for savings to increase from the present level (not just increasing the percentage of income that is saved) there must be outside injection of new funds. Correct? Within the private sector, if you dissave and invest those funds in me, my income rises and my savings can increase but only to the same amount that YOU dissaved. Its a zero sum game within the private sector, a horizontal transaction. No new net increase in total savings can occur unless either we get funds from the foreign sector or from the currency issuing sector (govt). Borrowing to invest is also no net increase as the debt offsets the deposit.

    If you saying we CAN make our goods cheaper than our competitors and keep our labor costs from falling closer to the level of our competitors, then I’ll agree, however our companies the last 3 decades have ALWAYS cut labor costs in order to be competitive. They have always taken the easy way out as evidenced by labors share dropping consistently the last few decades. Unless you advocate wage controls, I’m certain that all attempts we make in earnest to make our goods affordable to the rest of the world WILL in fact result in falling wages for the American worker.

  55. Gravatar of ssumner ssumner
    30. January 2011 at 09:29

    Greg, You said;

    “In order for savings to increase from the present level (not just increasing the percentage of income that is saved) there must be outside injection of new funds. Correct? Within the private sector, if you dissave and invest those funds in me, my income rises and my savings can increase but only to the same amount that YOU dissaved. Its a zero sum game within the private sector, a horizontal transaction.”

    Absolutely not. Imagine an economy with no government, jsut a private sector. By your logic saving could never increase in the aggregate in such an economy. Meaning (I guess) that aggregate saving would always be zero.

  56. Gravatar of Greg Greg
    30. January 2011 at 12:54

    In a world with no govt sector to inject/add new financial assets (funds) or an outside sector to add via trade (a very unreal world admittedly), it would be a zero sum game. No? The private sector only issues credit not currency. Where does non credit come from in the private sector? Who creates it?

    I should say that saving can increase but only at the expense of spending decreasing. How can saving and spending increase in the private sector alone? If I decrease my spending in order to save more, someones income is falling and they have less to save.

  57. Gravatar of ssumner ssumner
    31. January 2011 at 13:06

    Greg, Think of GDP like a pie. In a closed economy, saving equals investment. Assume no government. Economic growth makes the pie bigger. Growth comes from saving and investment. If the pie is bigger, both consumption and saving can increase at the same time. You don’t see that at an individual level because you are assuming the pie is fixed.

  58. Gravatar of Greg Greg
    31. January 2011 at 14:14

    Actually Scott I DONT think the pie is fixed. But it would be in the “no budget deficit, no govt debt” world that many wish for us to inhabit. Your prior conditions that you set up, with a completely private sector money system would behave EXACTLY like a fixed size pie. Yes new goods could be brought into existence and there could be growth of real stuff but without injection of money there would be a point where debts could not be paid off and there would be a collapse. This is EXACTLY how gold standard economies operate and collapse.

    In your previous conditions you set, with only private bank money, all money would be credit based and therefore only ponzi dynamics would operate after some point. All debts could never be paid off. This is why central banks and lender of last resort activities were created in the first place as I undestand it.

    I think of GDP more like cardiac output, but Im in the medical field so that analogy works better. Plus the economy is more circuitous than pie like.

    In your model with no govt where does new money come from (not bank credit)?

  59. Gravatar of ssumner ssumner
    1. February 2011 at 07:44

    Greg, The discussion started with you arguing that more saving would lead to less GDP. Now you are making a completely different arguemtn–talking about money and nominal variables. Saving is a real concept and money is a nominal concept. Don’t mix them up.

    I agree that without more money the level of NGDP is likely to be fairly stable in the long run. But that has nothing to do with saving and RGDP.

  60. Gravatar of Greg Greg
    1. February 2011 at 16:23

    Savings isnt just a real concept, it is ALSO a nominal concept. No? When you have a house or stocks that are priced at $500,000 that is your “savings” (which can be $150,000 the next day, but you still own the stock or the house yippeeee!), when you spend less of your income on going out to eat or buying a car you are decreasing GDP by saving more and spending less. Income is either being saved (not spent) or spent…. going to GDP.

    Yes some of what we call our savings is actually buying a product (a stock a bond or commodity) and can add to GDP but when we forgo going to a restaurant or buying a car we are decreasing GDP and costing jobs. Do you disagree?

  61. Gravatar of ssumner ssumner
    2. February 2011 at 19:46

    Greg, You said;

    “Yes some of what we call our savings is actually buying a product (a stock a bond or commodity) and can add to GDP but when we forgo going to a restaurant or buying a car we are decreasing GDP and costing jobs. Do you disagree?”

    Yes I disagree. Where do you think the money for investment comes from? Saving equals investment. If we save more then we invest more in capital goods.

    You are mixing up some unrelated issues; saving and investment is one issue, and AD is another. You assume that if we save more then AD will fall. But that’s not necessarily true. Often when we save more AD goes up.

  62. Gravatar of Greg Greg
    5. February 2011 at 11:04

    Scott

    How does AD go up when we save more? Absent demand from outside the economy (export) where is the demand?

    Saving by definition is “out of” income, is it not. From where else do you save?

    I have two choices with my income, spend it or save it. Now as I understand it, when I “save” via purchasing a stock on the secondary market (an IPO is different granted) I am actually spending and giving income to a broker and this could technically be called investing in Merrill Lynch. When I save via a bond I am taking my money and putting in the equivalent, sort of, of a savings account at a bank, its not insured but it functions similarly. I can also leave it in a money market as “cash”, where its not really an investment but pure savings.

    I can also take my collection of money market money (my savings) and invest it myself in someones elses income earning venture and my investment becomes income for someone that they can save out of.

    As I understand it the savings=investment is actually the other way around, that investment LEADS to savings. Savings is the residue of prior investment. Without investment somewhere, which is really another form of spending, there can be no income to be saved from.

  63. Gravatar of ssumner ssumner
    5. February 2011 at 17:17

    Greg, You certainly have a strange way of putting things. It would be like someone saying “As I understand it a purchase is actually a sale. And the sale causes the purchase, which is a residue of prior sales.” Isn’t it easier to just say you have transactions, and purchases and sales are opposite sides of the transaction? And they are determined jointly.

    Saving is nothing more than the act of paying for an investment. It’s not complicated. If people save more, that means investment goes up. If people try to save a higher share of their income, investment may fall. That is where you need to study monetary economics, to understand NGDP determination.

  64. Gravatar of Greg Greg
    5. February 2011 at 19:11

    Well I suppose I do have a strange way of putting things but I think getting first causes correct is important. e.g.We have heard endlessly that raising reserves will be inflationary eventually, but once you learn that reserves are not required for banks to actually make a loan but in fact are sought after a loan has been made the policy response of flooding the system with reserves in the hope of stimulating lending becomes obviously wrong. Credit worthy borrowers are the initial step in a loan issuance not the level of reserves in the system.

    Raising your saving level may in fact give you more money to place to another venture, but if all this simply occurs within the private sector its like a simple redistribution of a fixed amount of poker chips. In order to actually increase the total amount of system wide savings, someone needs to inject new funds from outside the system(invest), either the currency issuer or a foreign investor. The private banking system cannot provide that because it only issues credit which comes with an offsetting liability.

    Keynes showed that if EVERYONE saves more the fallacy of composition ends up thwarting the goals of all of us.

  65. Gravatar of ssumner ssumner
    7. February 2011 at 12:33

    Greg, That’s the wrong analogy. You can put more poker chips into saving, or put more into consumption. Even if the number of chips is fixed, the number going into savings can increase.

    The inflationary impact of reserve injections has nothing to do with loans. It depends on the real demand for reserves.

Leave a Reply