Commenters, butterflies, etc.

A few weeks ago the mainstream progressive view was that Yellen and Summers were two peas in a pod in regards to monetary policy (although many progressives saw differences in other areas.)

Here’s Paul Krugman on July 19:

First of all, what do we need in a Fed chair? Above all, a committed dove “” someone who will not succumb to the pressure to tighten policy too soon, and almost equally important, someone who will be seen by investors as resistant to this temptation. We’ve just seen how much damage even a hint of Fed hawkishness can do; it’s really critical to not follow the far worse step of making an appointment that gives the wrong signal.

As it happens, both Janet and Larry have good credentials on those grounds, at least in terms of what they’ve said in recent years.

And here’s Matt Yglesias on July 23:

Rumors are flying in DC that apparent front-runner as Federal Reserve Chairman Janet Yellen has been left in the dust by Lawrence Summers. My view continues to be that passing over Yellen for Summers makes no real sense, but it’s worth emphasizing that as far as we know there’s no real daylight between Yellen and Summers and monetary policy.

I’ve been highly critical of Summers over the past 4 years, but based on very weak evidence.  Recently commenters like TravisV and Mark Sadowski started sending me a flood of information on Summers, which in my view made him look too hawkish, too worried about Fed-created bubbles, too attached to fiscal policy, and too pessimistic about the potency of monetary policy at the zero bound.

Without naming Summers, Krugman seems increasingly concerned about the White House’s views on monetary policy:

So, here we are with inflation at a long-term low, many economists arguing that we need higher inflation expectations, and unemployment the overwhelming problem we face. Yet Obama appears if anything to give more emphasis to inflation-fighting than to unemployment reduction, and throws in stuff about bubbles; basically, he has a definite tight-money lean. I don’t know who it’s coming from.

I think we know which candidate has been talking about the danger that QE could lead to bubbles.

Yglesias has done an even more forceful turnaround, with posts like:

The Incredible Shrinking Case For Summers

And this one:

Unlike Summers’ monetary policy analysis, I think this is correct. But the conjunction of the views is remarkable. He’s saying that in a low interest rate environment we dare not leave investment decisions up to the private sector, which is going to just blow the money on boondoggles and white elephants””the state needs to step in and plan the economy. Socialism, in other words. But does Summers really think that? It sure doesn’t sound like something he thinks.

If the choice were up to me and this was what I had to go on, I’d consider this viewpoint to be nearly disqualifying.

Although Krugman cited Carola Binder, at least one of the Yglesias posts was motivated by one of my recent posts.  The White House does not pay attention to what I say, but they do pay attention to Krugman and Yglesias.  And that means that the views of my commenters do get heard in the White House.  Keep it up!

BTW, this isn’t a criticism of these two bloggers, indeed it speaks well of them that they update their views with new information.  I was originally quite negative on Yellen, but it was based on one misleading statement.  I’ve changed my views on her.




30 Responses to “Commenters, butterflies, etc.”

  1. Gravatar of Justin Irving Justin Irving
    29. July 2013 at 06:04

    I think James Hamilton makes a good case for Yellen here:

  2. Gravatar of Brian Donohue Brian Donohue
    29. July 2013 at 06:16

    Great stuff TravisV and Mark Sadowski!

    Hey Scott, still trying to get my brain around your whole world view.

    Between July 2003 and July 2008, the CPI increased at an average annual rate of 3.8%, the fastest clip over five years since Nov 1988 – Nov 1993. As far as I can tell, you think the Fed should have stepped on the accelerator here. Correct? Or is it mostly about what the Fed said rather than what they did?

    Over the past 3 years, CPI has averaged increases of 2.5% per year in an environment of 0% nominal rates.

    I remain skeptical that the last recession could or should have avoided a serious reckoning. We rang up trillions and trillions of debt in the years just before the recession.

  3. Gravatar of TravisV TravisV
    29. July 2013 at 06:37

    I didn’t realize that the White House actually pays attention to Yglesias. Now THAT is impressive! Yglesias is a personal hero / idol of mine.

    I was always a much bigger fan of Yglesias than Ezra Klein over the years…..

  4. Gravatar of Steve Steve
    29. July 2013 at 06:54

    You did a brief post on the Fed CNBC survey, but I believe the full results haven’t been released.

    They did a teaser on air and found that Yellen was better than Summers on: “Monetary Policy” “Respect from Markets” “Concern about Unemployment” and “Communication”.

    Summers, however, was better than Yellen on “Fighting Inflation”.

    Hopefully they release the full results this week and you can do another post.

  5. Gravatar of Peter K. Peter K.
    29. July 2013 at 07:22

    “The White House does not pay attention to what I say, but they do pay attention to Krugman and Yglesias.”

    It doesn’t seem to me like the White House pays attention to what they say, but I could be wrong.

    “BTW, this isn’t a criticism of these two bloggers, indeed it speaks well of them that they update their views with new information.”

    Yes I have found they are fair-minded and will update their views based on new information. Also, like a lot of people if they are wrong about something, they’ll stop talking about it and change the subject, but hey they’re human just like the rest of us!

    This time around you have a number of Democratic Senators (Durban, Cantwell, etc.) and Nancy Pelosi mobilizing behind Yellen. Meanwhile Bob Corker of Tennessee says he doesn’t want a dove. I wonder if Republican Senators told the White House that they don’t want Yellen. Binder might have had the catch, that Obama believes monetary policy has “shot its wad” even though Christina Romer tried to explain to him back in his first term that it hadn’t.

  6. Gravatar of TravisV TravisV
    29. July 2013 at 07:22

    Prof. Sumner,

    Here is a good question I just thought of:

    Which Fed policy is more damaging and should be eliminated first: the fact that the Fed uses the Fed funds rate (an instrument that becomes “mute” at the zero bound) or the fact that the Fed focuses on the rate of inflation rather than NGDP?

  7. Gravatar of TravisV TravisV
    29. July 2013 at 07:25

    Obama himself a couple days ago:

    “let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

  8. Gravatar of Jon Jon
    29. July 2013 at 07:41

    Alright Scott, how about pulling together some quotes that show how Yellen understands monetary policy, how she describes the relationship between monetary and fiscal policy, and how she views claims such as. “The financial crisis caused the economy to tank” or “the repeal of glass-steagall contributed to the crisis”

  9. Gravatar of Steve Steve
    29. July 2013 at 08:17


    Yellen: “Optimal Control Path”

  10. Gravatar of ssumner ssumner
    29. July 2013 at 08:59

    Thanks Justin.

    Brian, As you probably know I think inflation data is meaningless and should be ignored. But if you insist, yes I think money was too tight in mid-2008. Inflation has averaged 1.34% over the past 5 years. (Actually even less as I ignored compounding.) Unemployment has averaged around 8%.

    BTW, I drive my car by looking forward down the road, not in the rear view mirror.

    You said;

    “I remain skeptical that the last recession could or should have avoided a serious reckoning. We rang up trillions and trillions of debt in the years just before the recession.”

    Here’s where you and I differ. You think the reckoning for trillions in dollars of debt should be a nice long vacation(high unemployment), whereas I think Americans should have buckled down and worked harder (low unemployment). They ran up the debt, let them suffer with hard work.

    Thanks Steve.

    Peter, You are wrong—they are read in the WH.

    Travis, The gains from shifting to NGDPLT would exceed the gains from dropping the fed funds target.

    Jon, She’s far from perfect, but who isn’t. See Steve’s comment right after yours.

  11. Gravatar of Alexander Hudson Alexander Hudson
    29. July 2013 at 09:02

    TravisV, that’s an incredibly misleading quotation, as it gives the impression that Obama’s emphasis is on fighting inflation. If you include all five sentences of the relevant portion, rather than just HALF of the last one, it’s clear that his emphasis is actually on employment. Here’s the full quote:

    “And what I’m looking for is somebody who understands the Fed has a dual mandate, that that’s not just lip service; that it is very important to keep inflation in check, to keep our dollar sound, and to ensure stability in the markets. But the idea is not just to promote those things in the abstract. The idea is to promote those things in service of the lives of ordinary Americans getting better. And when unemployment is still too high, and long-term unemployment is still too high, and there’s still weak demand in a lot of industries, I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

    Look, there’s a lot to be critical about in Obama’s handling of the Fed, and I sincerely hope he comes to his senses and resists the inexplicable temptation to nominate Summers. But at times there’s almost a desperation on this blog to make him out as worse than he actually is. I think it’s clear he doesn’t have a good understanding of the importance and efficacy of monetary policy (something that you could probably say about 90% of economists, by the way), but it’s clear that his priority is on the employment part of the mandate.

  12. Gravatar of ssumner ssumner
    29. July 2013 at 09:13

    Brian, Sorry if that answer sounded snarky, it’s just that I’ve had that question so many times.

  13. Gravatar of Steve Steve
    29. July 2013 at 09:15

    Janet Yellen Is the Best Fed Choice

    she led the “2% side” in an unusual FOMC debate over whether the Fed should be shooting for 2% inflation or for zero””as measured by our imperfect statistics. Two percent is now the Fed’s official policy.

    Fast forward to her days leading the San Francisco Fed, where she warned, as early as 2005, that the titanic real-estate market was heading for an iceberg. Ms. Yellen was frustrated that the Fed’s Board of Governors would not even issue regulatory guidance to curb disgraceful lending practices like piggyback loans that exceeded 100% of the house’s value, or loans with little or no documentation. When the board finally did so, she was dismayed at how weak the guidance was. She later told the Financial Crisis Inquiry Committee: “You could take it out and rip it up and throw it in the garbage can.” The guidance, she added, “wasn’t of any use” to the San Francisco Fed.

    When the financial crisis started heating up in the summer of 2007, Janet Yellen was one of the first members of the FOMC””probably even ahead of Chairman Bernanke””to realize that the trouble could cause a major recession. I remember reading with dismay the statement the FOMC issued right after its Aug. 7, 2007, meeting. It said, in part, “the economy seems likely to continue to expand at a moderate pace over coming quarters,” and “the Committee’s predominant policy concern remains the risk that inflation will fail to moderate.” Oh my, I wondered at the time. What are they thinking?

  14. Gravatar of TravisV TravisV
    29. July 2013 at 09:17

    Alexander Hudson,

    How can you say that Obama’s priority is on the employment part of the mandate when 6 of the 7 FOMC board members are Obama appointees and they NEVER dissent in favor of a less contractionary policy?

    See here:

  15. Gravatar of Steve Steve
    29. July 2013 at 09:17

    I imagine Blinder holds considerable sway with Krugman…

  16. Gravatar of Alexander Hudson Alexander Hudson
    29. July 2013 at 09:37

    Travis, because he has said so. See, for example, the interview you misleadingly quoted. Obama’s words and actions over the course of his presidency strongly suggest that he favors more stimulus but is clueless about the Fed’s ability to deliver more stimulus.

    I would caution against reading too much into FOMC votes, since the committee largely operates on consensus. It’s only when you get very strong disagreement that you get a dissenting vote one way or the other. In particular, the governors seem especially inclined to defer to the chairman, whatever their own views may be. See, for example, Janet Yellen, who always votes with Bernanke but whose public pronouncements suggest she prefers a more aggressive policy. Now, if Obama’s nominees had dissented in favor of tighter money, that would be different, but the fact they simply follow Bernanke’s lead doesn’t tell you much. At most, it tells you he isn’t strongly in favor of more action. But, again, I think that’s more a function of ignorance.

  17. Gravatar of Brian Donohue Brian Donohue
    29. July 2013 at 11:48

    Thanks for the reply Scott. Please don’t apologize for any snark- it’s part of your appeal.

    OK, you’ve already admonished me not to reason from interest rates. Now inflation data goes out the window? If this is about some difference between the GDP deflator and CPI, it seems to me these measures generally tell a similar story.

    As far as working harder, there has been no vacation over the past 5 years among the 100 million or so of us continuously plying our trade in the private sector during that time- on the contrary.

    I feel like you, and a lot of economists, think the business cycle should be banished if it could be. But to me, such a rhythm is seen in just about every business: periods of too much work, expansion, scrambling for resources, putting ‘cost’ on the back burner; followed by periods of retrenchment and reassessment. This vital feature is exactly what’s missing from government. Since WWII, private sector employment has reliably dipped every 3 years or so.

    The longest post WWII period of uninterrupted private sector job growth, 49 months, came between July 2003 and July 2007. Hmmm.

    Contrast with the public sector, which only ebbs once a generation or so- twice since WWII, in the early 1980s and now- and always amid much weeping and gnashing of teeth, though the scale of any cataclysm is peanuts compared to what the real world has been through.

    My own theory is that 9/11 blew the cover off any discussion of cost, and allowed us to spend our way out of what would have been a tough recession anyway, trading it in for a fin de siecle party and subsequent hangover.

  18. Gravatar of Ashok Rao Ashok Rao
    29. July 2013 at 12:33

    Did Krugman really change his view? His initial column – one where he says they’re both good – made it pretty clear that Obama would have a lot to explain for if he didn’t nominate Yellen.

  19. Gravatar of Geoff Geoff
    29. July 2013 at 16:38


    “We’ve just seen how much damage even a hint of Fed hawkishness can do”

    Seriously, will it kill this guy to consider something other than immediate short term consequences? It’s like he believes Keynes’ quote “in the long run, we’re all dead” to mean “don’t think of the next day, just the right now.”

    It’s like if he was presented with a drunk, and that drunk decided to rest for a couple hours to sober up, Krugman would say he’s an idiot for letting himself get a hang-over, and that his short term predicament is “proof” that drinking less is a terrible idea.

  20. Gravatar of Geoff Geoff
    29. July 2013 at 16:41

    I love it how all the inflationist yahoos are coming out of the woodwork to throw Summers under the bus, because he dared speak the unspeakable, namely, that maybe the Fed causes bubbles when it unleashes a “dovish” stance.

    Can’t have him in charge.

  21. Gravatar of Obama the Inflationist « J.uris D.ebtor Obama the Inflationist « J.uris D.ebtor
    29. July 2013 at 18:05

    […] And Sumner; […]

  22. Gravatar of Michael Michael
    30. July 2013 at 03:12

    So, even John Taylor comes out with a (lukewarm) endorsement of Yellen over Summers:

    “Like Yellen, Summers rationalizes the recent discretionary deviations from rules-based policy as due to special factors, but his words reveal less willingness to endorse a rules-based policy strategy, even in normal times, with a preference that government officials should simply “act more wisely” in their discretionary interventions.”

    Isn’t the main problem with the Taylor rule that it is backward-looking, in both its derivation and in its policy recommendations?

  23. Gravatar of Saturos Saturos
    30. July 2013 at 05:32

    Has this been posted?

  24. Gravatar of ssumner ssumner
    30. July 2013 at 06:45

    Steve, Good point.

    Brian, There have been expansions that lasted for 9 years (the 1960s and 1990s.) Australia’s gone 22 years.

    Ashok, Yes, but my point was that he thought they were similar on monetary policy. Now he has doubts.

    Michael, That’s good news.

    Saturos, About 10 or 15 posts back. Don’t you read all my posts any longer? 🙂

  25. Gravatar of Brian Donohue Brian Donohue
    30. July 2013 at 07:15

    Government employment grew 50% in the 1960s, private employment grew 28%. What could possibly go wrong there?

    More fundamentally, you continue to treat the business cycle as a Bad Thing to be Avoided. I don’t think I’m being Austrian here, just a guy who’s spent his life in the private sector, mostly at small companies. The forest fire analogy springs to mind.

  26. Gravatar of Suvy Suvy
    30. July 2013 at 09:22

    Extremely strong fiscal policy is the single most dangerous thing when thinking about risk. It makes our deficits very difficult to cut from a demand side perspective and would literally make us turn Japanese with ballooning government debts and deficits. We need to slowly reduce our deficit while printing money to ease the effect. It will be somewhat painful, but we have no choice.

  27. Gravatar of Suvy Suvy
    30. July 2013 at 09:25

    There are consequences for running massive government deficits that balloon government debt. They just take time to show up. “Monetary stimulus” isn’t what causes major levels of inflation because the “monetary stimulus” isn’t enough in size. If you print $1 trillion a year and give it to bondholders in an economy with a GDP of $16 trillion and total assets of around $60 trillion, it’s not going to create inflation.

    If you keep running deficits to keep demand up and are forced to monetize them while your yield curves are flat and some supply/demand shock hits to shift your yield curve, that’s when you’re forced to print massive amounts of money to create the levels you’d see for a major inflation.

  28. Gravatar of ssumner ssumner
    31. July 2013 at 07:10

    Brian, Forest fire analogies aren’t particularly useful. You need a good argument as to why millions of people suffering involuntary unemployment is a GOOD THING. I don’t see you presenting one.

  29. Gravatar of Brian Donohue Brian Donohue
    31. July 2013 at 10:47

    I’m sorry, the baseline was unsustainably high. Huge tax cuts, trillion dollar wars, Medicare expansion, trillions in annual deficits. Aggressive expansion of employment in public and private sectors. Houses for everyone! All spigots open! Where was the ‘monetary offset’? I know I’m not supposed to look at CPI, but it grew at 3.4% per year in the six years up to June of 2008, 5.5% in the final year.

    What did Buffett say? When the tide goes out, you see who’s swimming naked. I don’t think the tides are as subject to control by the Fed as you imagine.

    Monetary ineptitude in 2008-09 has a role in the story, maybe a bigger one than I admit, but there were many other sins in need of expiation. Yes, there are millions out of work. But there are tens of millions who have got the message and have made painful adjustments. Contrary to what you read in the papers, a lot of Very Good Stuff has happened in the past few years (e.g. consumer balance sheets), it’s just not a lot of fun.

  30. Gravatar of Brian Donohue Brian Donohue
    31. July 2013 at 10:59

    Scott, if I may extend my Buffett analogy, the Fed’s QE program can be seen as an attempt to keep the tide in, in effect telling people it’s A-OK to keep swimming naked, which is why, although i ‘get it’ from a macro perspective, it concerns me from a micro perspective. Lots more people are wearing swimsuits now, which feels less fragile to me, less like we’re ‘redlining’ than we were in 2006.

    This is not data, and I am not an economist, I know. I don’t presume to be able to demonstrate anything to you in your realm, just point you in the right direction. 😉

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