Charles Calomiris explains why QE2 is needed

A few months back a great deal was made of a letter signed by 24 mostly conservative intellectuals.  Some people drew the conclusion that conservative economists were opposed to QE2.  Undoubtedly many are, including some that did not sign the letter.  But the letter itself shows almost nothing.  Many of the signers were not economists.  A grand total of 5 had jobs at American universities.  One more taught at a college.  Four were at Stanford, meaning a total of one American economist teaching at a university not named Stanford signed the letter.  Let’s take a look at that one, the distinguished monetary economist Charles Calomiris, who teaches at Columbia University.

Noah Kristula-Green emailed Calomiris to ask him why he opposed QE2:

Charles W. Calomiris of the Columbia University Graduate School of Business told FrumForum in an email that he favored keeping interest rates were they currently were:

“There are many reasonable alternative views on how to target monetary policy. I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II, at least for the moment, I would neither be raising or lowering interest rates.”

Though he also stated that he would be in favor of a looser monetary policy if the evidence could convince him the circumstances warranted it:

“If there were evidence of a need for further loosening to raise the growth of nominal GDP to that target rate, then some quantitative easing might be a reasonable proposal.”

This puzzled me on several levels.  First, I also support 5% NGDP growth targeting, and I thought QE2 was far too weak.  The easiest way to explain this discrepancy is that I favor level targeting, which requires us to make up for at least some of the previous NGDP shortfall, whereas Calomiris may support a sort of “memory-less” growth rate targeting.  Let bygones be bygones.  I feel pretty strongly that level targeting is better after a serious slump, and also when monetary policy is up against the zero bound, but let’s put that issue aside.

What I find most perplexing about Calomiris’s statement is that even if you accept growth rate targeting, and even if you buy his argument that QE2 should only be adopted if there were signs that NGDP growth was likely to be inadequate, there is no logical reason why Charles Calomiris should have opposed QE2.

A few weeks ago I suggested that the early indications are that QE2 had raised NGDP growth expectations up from about 3.5% to 4.0% in late summer, to around 5.0% to 5.5% today.  Isn’t that what Calomiris wants?  But those were just my hunches, from reading various news stories.  So I looked for a table that averages the various forecasts.  The Economist  magazine provides monthly estimates of the consensus forecasts for RGDP and inflation.  They don’t provide separate NGDP forecasts, but NGDP growth is usually similar to the sum of RGDP growth plus CPI inflation, if not slightly lower (as the GDP accounts use a more conservative technique for estimating inflation.)

Here are the numbers for the last 8 months of The Economist:

Issue date     RGDP growth        CPI inflation    Sum of growth plus inflation

June 3                   3.0%                   1.8%                              4.8%

July 8                    2.9%                   1.5%                              4.4%

Aug. 5                   2.8%                    1.5%                             4.3%

Sept. 9                  2.4%                    1.5%                             3.9%

Oct.  7                  2.4%                     1.5%                             3.9%

Nov.  4                 2.3%                     1.5%                             3.8%

Dec.  9                  2.6%                     1.5%                             4.1%

Jan. 6                   3.0%                     1.5%                             4.5%

A few comments on the numbers.  The date refers to the issue of the Economist magazine.  Because these changes lag a couple months behind changes in many market indicators, my hunch is that the actual forecasts were made somewhat earlier.  The Economist may have surveyed forecasts that had already been published elsewhere by professional forecasters.  But either way, whether you think NGDP growth forecast hit bottom at the time QE2 was announced, or whether you believe (as I d0) that they hit bottom right before the intense flurry of QE2 rumors in September and October, it is clear that NGDP growth expectations were falling well below 5%, and QE2 seems to have raised them back up closer to Calomiris’s target.

I don’t know about you, but even if these numbers are slightly off, I don’t see any reason for someone who favors 5% NGDP targeting to write a highly public letter complaining about Fed policy on the basis of this sort of pattern.  Perhaps Calomiris looked at actual NGDP growth.  But NGDP growth had only averaged about 4% during the recovery, and if anything was slowing slightly in the summer of 2010.

Now it may be that actual NGDP growth in 2011 will come in at a tad more than 5%.  Perhaps we’ll get 4% RGDP growth and 1.8% inflation.  And Calomiris can claim that vindicates his opposition.  But even in that case I don’t think I’d write a letter complaining about Fed policy being too easy, particularly if I had not signed any letters complaining it was too tight from mid-2008 to mid-2009, when growth was 8% below trend, or mid-2009 to mid-2010 when it was 1% below trend.  Indeed I don’t recall any letters from conservatives complaining about tight money, unless you count us quasi-monetarists as “conservatives.”

My hunch is that Calomiris was asked to sign the letter, had recalled reading someone forecast roughly 3% growth, added on an assumption of 2% inflation, and thought “things are fine, we don’t need that.”  I think if he had looked closely at the data, and noticed that the recent increases in forecasts for 2011 occurred precisely when QE2 rumors began swirling around, and precisely because of QE2 rumors, he might not have signed the letter.  I hope he provides more clarifying remarks.

PS.  I notice Ben McCallum did not sign the letter.



20 Responses to “Charles Calomiris explains why QE2 is needed”

  1. Gravatar of Dustin Dustin
    17. January 2011 at 12:52

    Clarification requested.

    I recall reading Thoma’s blog on NGDP targeting, and there seemed to be agreement in the comments section that targeting the NGDP growth rate (which I assume is like the ‘memory-less’ growth rate targeting) is worse than targeting inflation, but LEVEL targeting of NGDP is better than any inflation targeting.

    Did I understand that right?

  2. Gravatar of Cardinal Cardinal
    17. January 2011 at 13:52

    While correct that Calomiris was the one non-current Stanford economist in the group, you might should have thrown him into the Stanford group as his Ph.D. was from Stanford.

  3. Gravatar of scott sumner scott sumner
    17. January 2011 at 14:02

    Dustin, I don’t recall reading that, but it may well be right. It sounds plausible to me, as right now it would take more monetary stimulus to get us to 2% inflation, then it would to get us to 5% NGDP growth.

  4. Gravatar of scott sumner scott sumner
    17. January 2011 at 14:07

    Cardinal, Interesting, what is it about Stanford?

  5. Gravatar of Dirk Dirk
    17. January 2011 at 17:26

    I’m curious what data you think these professional forecasters might be using to make their forecasts. Obviously the stock market must be a large factor, but what are the others? Do we know what the record of these forecasters is compared to say, just using the stock market as our forecaster? Or maybe just using the stock + real-estate markets as our forecaster?

  6. Gravatar of scott sumner scott sumner
    17. January 2011 at 19:06

    Dirk, Good question, I do not know. Perhaps someone else can answer the question.

  7. Gravatar of Full Employment Hawk Full Employment Hawk
    17. January 2011 at 20:18

    “what is it about Stanford?”

    How about the Hoover institution?

  8. Gravatar of Tom Grey Tom Grey
    18. January 2011 at 00:13

    How much food & gas price increases higher than “CPI” would you need before you think the CPI number is not the right metric?

    I think calculating real inflation, including real housing prices, food prices, gas & fuel prices, and other issues, is not well captured now in the CPI number.

    The food & gas prices consumers pay in 2011 is likely to be more than 5% higher than was paid in 2010. This is a significant part of actual inflation as experienced in “what happens to the paycheck” for the median voter.

    Some of this is a true cost shift, from buyers to sellers, especially of gas. But it looks and feels and, in many ways, acts likes monetary inflation.

    In fact, I think the USA needs quite a lot more inflation now, with wage stickiness upwards (real wage decreases), so I support QE2. But critics of Palin’s opposition to QE2, which led those conservatives, are likely to be called out as supporting the higher prices.

    It’s all too convenient for academic economists to complain that the real world is too complicated to fit the nice models … but that’s sort of like ignoring the increase in money available for mortgages due to the AAA ratings on MBS used as Tier 1 capital, isn’t it?

    I think the CPI metric is diverging too much from real world price increases, and the opposition to QE2 is more oriented at real prices, including food and gas.

  9. Gravatar of Tom Grey Tom Grey
    18. January 2011 at 00:14

    Yes, big-gov’t Leftists have been hating Stanford’s Hoover Institute for many years.
    But I like it.

  10. Gravatar of Tom Grey Tom Grey
    18. January 2011 at 00:49

    Finally, I’ve finished catching up and won’t comment on the old threads where Scott says (vs Kling);
    But I still think it is mostly demand-side,

    If it’s mostly demand side, what happens when the number of not quite counted illegals goes down from 15 million to 10 million? Or some other combination of minus 5 million?

    I believe, without strong data, that the outbound-emigration of illegals, after the housing bust in 2006, is a huge reason the numbers are so “weird”, and housing, especially, is way overbuilt. (I’d support a LOT more legal immigration, like auctioning Green cards for $20k throughout Europe, India, and China.)

    The other thing missing from US models is the globalized ability of other countries to compete with white collar office workers. All university students are learning English (almost). Why pay $60k in the US for $20k in Poland or Slovakia, or $10k in India?

    Office work jobs of multi-nationals are not going to be growing strongly in the USA, no matter what monetary policy.

  11. Gravatar of Danny Bachman Danny Bachman
    18. January 2011 at 08:10

    @Dirk and Scott: I work for large forecasting company, and I know the industry pretty well. All of those inflation forecasts are based on something like an expectations-augmented Phillips curve, and everybody is addfactoring them becasue nobody wants to forecast signficant deflation (which is what a pure model forecast will give you with a +9% unemployment rate for a couple of years).

    The short-run real GDP forecasts come from adding up the C+I+G+X-M identity (so you might say they have a Keynesian flavor).

    It’s hard to use the stock market for forecasting—it’s too volatile. It would not be hard to test to see if the stock market added value to the forecasts, however. Anybody looking for a paper topic?

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. January 2011 at 09:19

    Scott, why not e-mail a copy of this post to Calomiris and see what he has to say. I’m told by someone who knows him that he’s a nice guy.

  13. Gravatar of Benjamin Cole Benjamin Cole
    18. January 2011 at 10:06

    This is a fascinating post by Scott Sumner. I especially enjoyed the insight that of the 24 signers of the infamous public anti-QE letter, only five were academic economists, and four of those from Stanford.

    So, really, is this a John Taylor letter?

    Taylor, a smart and nice guy, is extremely partisan, and right-wing. I contend Taylor is so partisan it clouds his commentary as a pure economist.

    Examples? He did a book review of Allan Meltzer’s new book on the Fed. In the review, he lambasted the Carter Administration for trying to get Volcker to loosen up (Volcker was appointed by Carter, btw). Taylor literally does not mention that much bigger efforts by Reaganites to get rid of Volcker, and to get him to ease up.

    Going back to the LBJ years, Taylor lambasts efforts to LBJ’ers to loosen up the Fed to accomodate social welfare spending. Again, completely unmentioned is the Vietnam War–of we spent some money there too, remember?

    Taylor has also written high praise about US military personnel.

    All of this is fine, we are a free country, and Taylor is a valuable intellect with a point of view–a POV that once very much touted QE in Japan btw (he wrote a paper in 2006 that just gushed about QE in Japan).

    So now, we get a Stanford letter bashing QE–while Obama is president, and trying to work his way of out recession. A Taylor letter?

    This is a great story.

  14. Gravatar of Benjamin Cole Benjamin Cole
    18. January 2011 at 11:23

    Stanford is, of course, home to the activist, right-wing Hoover Institution. In case you are wondering, they named the institution not after J Edgar, nor the Hoover vacuum.

  15. Gravatar of Dirk Dirk
    18. January 2011 at 11:40

    @Danny, thanks for that info.

  16. Gravatar of scott sumner scott sumner
    18. January 2011 at 15:20

    Full Employment Hawk, Yes, maybe that’s it.

    Tom Grey, You said;

    “How much food & gas price increases higher than “CPI” would you need before you think the CPI number is not the right metric?”

    CPI inflation is low even with food and gas. But I don’t believe inflation numbers are reliable at all, and have done posts saying so. I focus on NGDP.

    I’ve also done posts arguing that the emigration of illegals hurt the housing market, so we are on the same page there.

    Danny, Thanks, I guess that doesn’t surprise me.

    Patrick, That’s a good idea.

    Benjamin, There certainly does seem to be some sort of Stanford angle–that might be it.

  17. Gravatar of Tom Grey Tom Grey
    18. January 2011 at 16:58

    Thanks, Scott. The “name” of the reason that Stanford is big is probably Keith Hennessey:

  18. Gravatar of Rob Rob
    18. January 2011 at 21:40

    Speaking of Calomiris, I was wondering if you had thoughts on this paper re ’37-’38.

  19. Gravatar of Hugh Hugh
    20. January 2011 at 01:21

    The QE2 discussion is not really about whether 5% NGDP would be nice – of course it would be nicer than 4%.

    The real questions arise when it’s time to unwind the Fed’s balance sheet.

    Answers please…..

  20. Gravatar of scott sumner scott sumner
    20. January 2011 at 14:27

    Tom, How is he associated with Stanford?

    Rob, That’s a good paper. I have a different take on the cause of the 1937 recession (high wages and gold hoarding) but I don’t have any problem with that study.

    Hugh, When it’s time to unwind the balance sheet, they should sell bonds. I don’t see any problems, and I am told Bernanke doesn’t either.

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