Brad DeLong is a quick learner
When I read Brad DeLong’s blog I am in awe of how much he knows. But despite all his brilliance, I still think I know more about monetary policy than he does. Here’s what he said last week, in criticizing my market monetarist views:
Well, I would say that not just “modern Keynesians” but a lot of people believed that monetary policy was expansionary in 2008.
They believed so not just because (safe) nominal (and real) interest rates were falling, but because the money supply was expanding.
Brad had lots of fun calling me the “self-blinded man.” Let’s see who gets the last laugh. Here’s Brad today:
Right now record-low interest rates are not a tool for improving the economy. They are a consequence of the fact that the British economy is 100% scr—d and about to become 150% scr—d. The risk that other investments in Britain will go south as the double-dip hits is sufficiently large that investors are terrified and willing to buy British Treasury debt at absurd and outlandish prices.
. . .
Higher market interest rates right now would be a very positive sign.
That’s right. And another positive sign would be if their monetary base fell sharply because people weren’t hoarding money. I wonder if Brad DeLong would regard those two signs as “tight money.”
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13. October 2011 at 10:41
Scott,
I believe one of the main criticisms that Krugman pushes for here is that Central Bankers are inherently incapable of raising expectations, and he believes they just don’t WANT to. I believe Krugman may agree with you that the Fed could return NGDP back to trend, but he is saying that they never will because of political constraints (such as hard money members). Hence Krugman believes that only fiscal policy can return nominal spending. At least that is the way I have been reading him.
I personally don’t think that it is easier for the government politically, at least right now, to push fiscal policy, but I still think Krugman has a point about the timidity of central banks at the zero lower bound. That being said, I still think that every writer out there with any econ credentials should be pushing the fed towards an NGDP target, but if they refuse to act I dont see why additional fiscal policy would not help.
13. October 2011 at 10:41
I don’t know if you have seen this yet from Narayana Kocherlakota.
http://www.marketwatch.com/story/kocherlakota-twist-no-due-to-credibility-fears-2011-10-13
13. October 2011 at 10:42
Oops, Left this comment on the post.
13. October 2011 at 10:53
Being the smartest guy in the room doesn’t mean that you have all the answers. Sometimes, or maybe more correctly most of the times, you have no clue about how real life, real economy works. They get upset when their fancy models predict certain outcomes and the FED and politicians doesn’t act according their models.
Just look at John Maynard Keynes and his latter day followers Paul Krugman and Brad DeLong, completely clueless on how real people react and how the real economy reacts. (Sargent and Sims got their Nobel Prize for explaining just that)
In real life politicians, the FED and bureaucrats make decisions based not on perfect models but based on their personal bias. Also they have to cater to a less than perfect voter base that is even more biased. This leads to short term policy decisions that make voters vote for them in the short run but make awful policy in the medium and long term.
Therefore the less the FED and politicians meddle the better.
13. October 2011 at 11:16
Old Whig,
Agreed. As time passes, the Gold Standard looks better and better to me. One of the virtues of market monetarism is the elimination of central banker discretionary power.
My ideal would be a system of free banking, with no central bank (excluding voluntary conglomerations of private banks & such) at all.
BTW, you have a very good blog.
13. October 2011 at 11:55
How about we propose a slightly safer option? Long term ngdp level targeting combined with short term inflation targeting?
http://blog.ngdp.info/2011/10/less-scary-leap-for-central-banks.html
13. October 2011 at 12:05
Whig,
I agree with all of it, but I think your skipping over how predictable things really are.
There is a hegemony. Call them the 53%, call them Tea Party – there is a huge swath of folks who own stuff and vote.
And we can make solid predictions about what they want, and as such it behooves guys like Sumner to actually FACTOR IN the dominance of the haves.
13. October 2011 at 12:45
I’m still extremely confused by his claim that you believe in the quantity theory of money when one of the dominant themes of your blog is how misleading traditional nominal anchors are. That was a really weird one.
13. October 2011 at 17:15
Marcelo, You said;
“I believe one of the main criticisms that Krugman pushes for here is that Central Bankers are inherently incapable of raising expectations, and he believes they just don’t WANT to. I believe Krugman may agree with you that the Fed could return NGDP back to trend, but he is saying that they never will because of political constraints (such as hard money members). Hence Krugman believes that only fiscal policy can return nominal spending. At least that is the way I have been reading him.”
That argument makes no sense to me. The hawks are only three out of 10 on the FOMC. Soon to be 1 out of 10. Meanwhile the GOP controls the House. Which is more political plausible, fiscal or monetary stimulus?
Brian, See my next post.
Old Whig, Define “meddle.” Is stable 5% NGDP growth meddling?
Peter, First of all it’s good to see a NGDP blog. But I’m afraid I’m going to ask you to reverse the order of your targets. I want NGDP in the short run, and inflation in the long run. Let’s evaluate every ten years where we are in terms of trend RGDP growth, and then adjust the NGDP target according, if people want stable inflation. To me, however, stable NGDP growth is better than stable inflation, so I’d keep it constant.
Brendan, I like the QT way of thinking about issues, but I use a more sophisticated version where expectations matter, and V can change. But I like the excess cash balance transmission mechanism more than the interest rate approach, (which is the Keynesian approach.)
13. October 2011 at 22:58
Scott, I know it’s not exactly what you want. It was just meant as a small step in the right direction that might be easier for a central bank to adopt. It wouldn’t change so much. They would still be doing inflation targeting. This could be phrased as a way of communicating to the public how long they will have ‘easy’ money. So hopefully easier to adopt than a strict ngdp level target and better than what we have today.
14. October 2011 at 09:37
Scott,
I think Paul Krugman believes that Central Bankers, in general, are far too timid (except Swedes and Brits I suppose) to engage in the kind of signalling and monetary expansion to achieve the NGDP growth you talk about. In fact, you yourself are very pessimistic about the ability of the fed to fully re-inflate the economy (you have argued that premature tightening will lead to another decade or so of high unemployment!). Perhaps Krugman believes that only politically elected officials are capable of the ‘radical options’ (radical to the non-Market Monetarists), and thus only the government can affect NGDP at the ZLB. In fact, you have people in the fed (like Bernanke) saying that fiscal policy should do the heavy lifting. I think Krugman is pining for the FDR of the 21st century.
I think that the Fed absolutely can affect NGDP expectations at the ZLB if it wanted to. Also, I see that it was successful in Sweden, and may end up working in the UK. But besides a handful of policy wonk blogs that support this kind policy, I am very skeptical it would happen at the fed.I also think that it is pretty unlikely that the US see a Keynesian revival anytime soon. I just wonder which one is more likely…
14. October 2011 at 09:50
Your newest post pretty much answers my question about where you stand. Maybe if the fed were to inflate the economy to 1.8%, decide to pull back, then we had a huge fiscal stimulus immediately after that the fed does nothing to stop! That might work! Ha.
After having read your new post, I do understand your point about fiscal policy sort of doing what the fed may have done anyway. I just wonder if more economists and more people are more comfortable with keynesian style stimulus over unconventional monetary policy, thus making it more likely…
15. October 2011 at 08:17
Peter, Yes, it might be better than current policy.
marcelo, Your post shows the absolute failure of our press corp (and I’m including Krugman.) Nobody is forcing Bernanke to explain his bizarre idea that we need more fiscal stimulus but not more monetary stimulus. They aren’t even asking him the question.
If Krugman thinks there’s any possibility of significant fiscal stimulus then he’s clueless about the modern GOP. And I don’t think he’s clueless–he must know that significant fiscal stimulus isn’t coming.
Regarding your second point, many conservatives seem more comfortable with fiscal stimulus than monetary stimulus–God knows why.
15. October 2011 at 14:25
Scott,
I think the answer is that in any econ class, everyone hears Keynes (I learned in High School), no one reads about how monetary policy affects NGDP at the zero lower bound. I think many politicians know precious little about how monetary policy works, and thus only can think in terms of stable prices or hyperinflation. Meanwhile, increasing government deficits to ‘put people to work’ makes sense to most average people.
Additionally, people on the other end (i.e. crazy hard money types like Ron Paul) are heard very often, while I have yet to hear ANYONE talk about monetary policy on TV (let alone in a presidential debate). This also alters people’s perception of what is going on.
I just don’t think politicians know why monetary policy would work, and the ones that do are too scared to do anything about it.
I wouldn’t call it a failure of the press corp, but more a failure of our economic education system and polarization (and less wonkish) nature of American politics as of late. No one wants to ask Bernanke tough questions, they want to decry him for debasing the dollar and gain partisan points for scolding the hyper inflationary rascal.
15. October 2011 at 14:29
Any republican candidate signalling that he is for additional easing would almost certainly not win the nomination. Best hope is that they secretly know what must be done (though I doubt it). Obama, nor his advisers it would seem, do not believe in monetary easing (or any additional stimulus either).
16. October 2011 at 06:28
Marcelo, I agree, but am not willing to let the press corps off the hook.