Does Obama know something that Leonhardt, Frum and Zakaria don’t?
I’ve recently noticed a lot of columns discussing the issue of economic stimulus. When the articles are written by journalists, they almost never include any discussion of the pros and cons of additional monetary stimulus. Here are examples by David Leonhardt, David Frum and Fareed Zakaria, but there are many more out there.
Leonhardt says we need more stimulus, and seems to think fiscal stimulus is the only option. Zakaria sees the argument for more fiscal stimulus, but also asks how we can get corporations to do more with their cash hoards. Frum is skeptical of Obama’s fiscal approach, but challenges his fellow conservatives to come up with alternatives:
But if Krugman’s direct government expenditure is not a very good policy answer, his dire economic warning remains a haunting policy question. What can we do to accelerate economic growth and job creation? For those of us on the free-market side of the debate, the question is even more haunting: What’s our countervailing idea?
Readers of this blog might be tempted to dismiss these reporters as ignorant fools. But they are highly respected reporters coming from diverse ideological perspectives. Why should they know that additional monetary policy is an option? Unless you are a professional macroeconomist, where would you get that information? I have no reason to believe that Obama knows something that these three journalists don’t know. I assume Obama is equally ignorant of the fine points of unconventional monetary stimulus. Given that Obama let several Board of Governor seats remain unoccupied for more than a year, it seems highly unlikely that he understands that monetary stimulus is our only real option today.
In commenting on the David Leonhardt piece, Tyler Cowen suggested:
I do not see why we are discussing this issue without placing monetary policy at the center of the analysis.
Yes, but how do we do it? Those of us in the blogosphere know about the possibility of unconventional measures like QE and/or higher inflation targets. And I think it is fair to say that this knowledge is pretty widespread; Krugman, DeLong, Yglesias, Tim Duy, Andy Harless, Ambrosini, James Hamilton, Ryan Avent, Nick Rowe, Bill Woolsey, David Beckworth, Josh Hendrickson, and many other bloggers have discussed these options. They certainly aren’t some sort of secret, or some oddball strategy that is only discussed at this blog. But almost no mainstream journalist or mainstream politician, of any ideology, seems to even know that additional monetary stimulus is an option.
Perhaps someone who reads this blog knows of somebody who knows somebody on the Congressional committees that will be interviewing Obama’s Fed nominees. If so, here are some questions to ask:
1. Ben Bernanke has often argued that monetary policymakers don’t run out of ammunition once rates hit zero. Do you agree?
2. Ben Bernanke has often argued that the depressed level of aggregate demand in Japan since 1994 could have been avoided if the Bank of Japan had tried unconventional monetary stimulus. Do you agree?
3. In 2003, Ben Bernanke suggested that the Japanese should have set a higher price level target once interest rates hit zero and conventional monetary stimulus was no longer possible. Would a higher price level target policy boost aggregate demand in the US?
4. Last year Janet Yellen suggested that “We should want to do more.” What does that means? Does Janet Yellen disagree with Bernanke’s view that monetary policy does not run out of ammunition once rates hit zero?
5. Does it make sense to increase the budget deficit at a time when monetary stimulus could also be used to increase aggregate demand?
I generally have little interest in conspiracy theories—with monetary economics so poorly understood, who has the need for nefarious plots? Some might argue that shining a light on this issue won’t help, that the problem is inflation hawks at the Fed who already know that monetary policy is effective at the zero bound. I don’t agree, and the analogy I’d use is the Iraq War. Even if you think than Bush and Cheney were determined to attack Iraq, and simply used WMD as an excuse (and I’d rather not debate that issue in the comment section) unless there had been a widespread belief in the press and Congress that Saddam was working on WMD, the Administration wouldn’t have had enough political support to go to war. For similar reasons, without widespread ignorance about the effectiveness of monetary policy at the zero bound, the Hoenigs, Plossers, and Lackers of the world would be far less influential. The Fed is even more dependent on the whims of Congress than the Supreme Court; so you can be sure that the Fed pays a lot of attention to public opinion.
You guys might not realize this, but you and the readers of other economic blogs are members of a highly select secret society. We know how the developed world can recover more quickly, without increasing budget deficits. Let’s try to make our society less secret and less selective.
PS: There were dozens of articles just like Zakaria’s written in 1937-38. How much longer before we hear talk of a “capital strike” from those on the left?
Tags:
5. July 2010 at 10:37
Perhaps, we need a more direct approach. Have you considered an open letter to the president? You could write a letter spelling out the parts of your position that Krugman won’t disagree with and have all those economists you mentioned sign on to it (and more if you can). Then send it to the NYT and the white house. Perhaps that would start the mainstream media talking about this a little more. It would be especially great if you could get both Krugman and some famous right-leaning economist (I don’t know any names here; too bad Friedman isn’t still alive) to sign on to it at the same time; who could ignore that?
5. July 2010 at 10:45
You’re right – we should have a more aggressive monetary policy.
If we had a press core that had a clue, rather than people who don’t understand economics and who would rather talk about political games than substance, we would be in much better shape.
From all reports, Bernanke has lost interest in stimulating the economy and the Republicans in congress have decided it’s in their political interest for the economy to be a mess.
Public opinion polls show that jobs are a vital concern. This doesn’t fit into the prevailing narrative, so it’s ignored. Would more reporting help push Bernanke? Couldn’t hurt.
5. July 2010 at 11:08
@foosion
I believe that the jobs issue is partially separate from the NGDP issue (as the 70’s taught us).
5. July 2010 at 11:18
John, I am working on a paper with another economist who has done research on the Depression. If that works, I might try to interest all Depression researchers into signing a joint letter in support of monetary stimulus.
I can’t do much by myself, but when combined with better known economists it might make a difference.
foosion. You said;
“From all reports, Bernanke has lost interest in stimulating the economy and the Republicans in congress have decided it’s in their political interest for the economy to be a mess.”
No all reports, a few weeks ago I linked to a Telegraph article claiming Bernanke was currently battling the inflation hawks at the Fed.
Maybe I am naive, but I find it hard to believe the Republicans are that evil.
5. July 2010 at 11:33
@Scott, remember Rush Limbaugh’s “I hope Obama fails”? How about Bill Kristol’s classic “oppose Clinton healthcare, because if it passes people will like government and that would be terrible”? How about the recent spate of Republicans abandoning bills they had sponsored or long supported (Graham on climate and McCain on immigration are two examples)?
The Telegraph article is a good sign. Going back to your post, where’s the coverage in the US papers?
5. July 2010 at 11:46
I’m thinking infographics, that tells about monetary stimulus with a lot of pictures and humor — edutainment. Possibly a comic, or a list (x ways to solve the crises that nobody even thinks of!) But it should be really good, look really professional. I have to think about this some more.
5. July 2010 at 11:47
I don´t kow well this aspect of the question -very important obviously. Is it really true that the Republicans are boycotting the capacity of FED to a more aggresive policy? is it conservative instinct or an a electoral strategy? is there a result of the Ron Paul´s campaign to control the FED?
Obviously, if the public opinion don´t back the FED, Bernanke can not act. When the times of Bundesbank, German public opinion was its most important support, far more than the Parliament or Government. The independence of the Monetary Authority is the best counterbalance of the Fiscal one, I think.
i suppose that the critics against Greenspan´s policy is a influent factor in public oppinion.
5. July 2010 at 11:48
In defense of Leonhardt, I believe he understands that there is more that the Fed can do to boost AD; for example,
http://www.nytimes.com/2010/06/23/business/economy/23leonhardt.html?dbk
A more charitable view is that these journalists believe that fiscal policymakers (i.e., the president & congress) are more responsive to criticism from prominent journalists than monetary policymakers. This is probably true — while the Fed may not be completely independent of political pressure, it is much more independent than the executive and legislative branches. Moreover, what can journalists tell Bernanke that he doesn’t already know? They’re reduced, as you and Leonhardt are, to observing that the Fed doesn’t seem to be listening to the Bernanke of the recent past.
Either Bernanke has changed his mind, or as the Telegraph article claims, he’s losing the ideological battle to other FOMC members. If the former, it’s unlikely that journalistic criticism is going to point out to him something he doesn’t already know. If the latter, it’s the other members that have to be pressured or persuaded, which is even harder to do since Bernanke is easily the most responsive FOMC member to political pressure given that he’s in the most visible position.
Obviously, the president won’t do something just because Leonhardt writes a scolding column, but he’s much more likely to be influenced by the views of many persuaded consumers of news, which Leonhardt may influence, however diffusely. There’s really not much anyone can do to influence the non-Bernanke FOMC members. That reflects a dysfunctional relationship between the Fed and the public. I’m not sure what the solution is.
But yes, Leonhardt et. al. should do more to scrutinize Obama’s failure to nominate board members and those members’ views on monetary policy. They might actually have some influence on that score.
5. July 2010 at 12:58
foosion, Did Rush want Obama to fail politically, or did he want a depression in the US with millions unemployed so that the Republicans would do better? If it was the latter, then shame on Rush.
I’d have to look at the exact quotations.
woupiestek, Maybe I am just a reactionary, but I have a hard time envisioning comics changing Bernanke’s mind.
Luis, In my entire life I don’t ever recall a Republican politician offering an opinion on unconventional monetary stimulus. Not saying it hasn’t happened, it is just that I have never seen it. They have lots to say about fiscal policy, however.
Ram, You said;
“In defense of Leonhardt, I believe he understands that there is more that the Fed can do to boost AD”
I am afraid that that article lowers my opinion of Leonhardt. I can’t make heads or tails of the argument, nor can I tell whether he is reporting Bernanke’s views or his own view. He seems to argue:
1. Monetary stimulus might raise inflation expectations
2. Higher inflation expectations might raise interest rates
3. Higher interest rates might kill the recovery.
That argument violates not one but two basic principles of economics:
1. Inflation raises nominal rates not real rates.
2. It confuses a shift in demand with a movement along a demand curve. If rates rise because of more aggregate demand, it will not reduce AD, rather you move up and to the right along an AS curve. (The argument could be better made with IS-LM, but I don’t understand IS-LM.)
Even worse, if he understands the importance of monetary policy, why was it not even mentioned in the other article I cited? It is certainly highly relevant, as Tyler Cowen indicated.
5. July 2010 at 13:02
I’d phrase the questions as “… monetary policymakers still have ammunition even after rates hit zero” to avoid a double negative. You don’t want whoever actually asks the question to have any chance of losing one of the negatives.
5. July 2010 at 13:09
I agree that the article’s argument is a bit confusing (or confused). I cited it not to show that Leonhardt is an A+ student in monetary theory, but rather to show that he is aware that additional monetary stimulus is an option (reflected, for example, by his citations of Bernanke’s past statements and Joe Gagnon’s plans for massively ramping up QE). I think that he, and many other (but not all) reasonable commentators, understand that the Fed is not doing everything it could do. He and others may not understand the finer points of what more it could be doing or why doing those things would work, but they’re aware and that should count for something (they’re journalists, after all, not economists).
You’re right, however, that he shouldn’t have devoted two seemingly unrelated columns to monetary policy on the one hand and fiscal policy on the other. He should have explained (perhaps over both columns) that both monetary and fiscal policy could be more aggressive. He also should have explained that the monetary authority moves last, and hence that fiscal policy depends for its effects largely on whether or not the Fed approves.
All I want to say is that we need not categorize commentators into two neatly separated groups: those in the know, and those not in the know. I think there are degrees of understanding, and I think that people who may not understand something perfectly may nevertheless contribute something of value, like conveying the views of those in the know in an accessible manner. Leonhardt seems to me to (mostly) do that reasonably well.
5. July 2010 at 16:53
Congressmen are not interested in monetary policy, because only fiscal policy actually involves them. It’s all about them. Advocating a particular monetary policy has little effect on their reelection prospects, so they just don’t care. There’s no reason to.
5. July 2010 at 16:54
Ron Paul always talks monetary policy, but he isn’t exactly your typical congressman.
5. July 2010 at 18:10
SS: Would you care to comment on Keynes’ letter to FDR in the link below…JMK seems to advocate QE (buying long term treasury) but was against currency devaluation. isn’t your theory – the devaluation is what did it vs. fiscal policy – in terms of pulling US out of depression?
http://www.zerohedge.com/article/inflation-seen-nations-salvation-redux-how-keynes-grew-hate-keynesianism-and-love-monetary-b
5. July 2010 at 19:36
The Fed is cloaked in comparison to federal fiscal outlays. So, more reporting on fiscal.
I agree with the sentiments of many here that people who believe in QE need to get a megaphone into the debate.
In fact, I would think active monetarism would offer a “third way” out of the current economic mess–neither heavy fiscal spending, nor draconian cuts, nor tax cuts for the rich, but rather a policy-neutral method of stimulating the economy.
Later, Congress can go back to the age-old arguments about what to cut, where to spend.
For now, I am posting on several other econ-blogs thoughts about QE. It is a feeble first effort, but better than nothing. If everybody does it, it may get onto the radar as “an idea that’s out there,” and from there we can more-strategically push it forward.
We may wish to also start labeling those who want neither fiscal nor monetary stimulus as the “do-nothing crowd.”
I would think the right-wing would embrace QE. But I think they are stuck by habit in the “we need tight money”: groove, that it has become a mantra.
Right now, with unit labor costs falling, with asset prices down and soft, with 10 percent unemployment, we need monetary stimulus. Inflation is dead.
6. July 2010 at 00:00
My aim is not changing Ben Bernankes mind. According to you that is not even necessary; he just needs more political support. But “making our society less secret and less selective” might be achieved by spreading some of our ideas in a popular, viral format. Frankly, I have no idea how to do this. Maybe it is simply impossible.
6. July 2010 at 06:11
JeffreyY, Yes, that’s a good suggestion.
Ram, Those are good points. But I think most journalists don’t know that the Fed could do a lot more, or at least have such a shaky understanding of monetary theory that they take a “If Bernanke isn’t doing more, he must have a good reason” perspective.
I believe that if most journalists knew what you and I know about monetary stimulus, the Fed’s failure to act would get daily news coverage on par with the oil gusher in the Gulf.
Jeff, Yes, but many Democratic Congressman will lose jobs this fall because of Fed policy.
Doc Merlin, I agree on both points.
Mari, In the first quotation he criticizes the NIRA, and he was of course exactly correct. It reduced AS.
His second point argues that the US was in a liquidity trap, and that monetary stimulus could not work. Keynes was wrong about that. New Keynesians no longer accept that view, and point to FDR’s dollar depreciation program (which Keynes opposed at the time he wrote the letter.)
Benjamin, Those are good points.
Woupiestek, I thought my blog was a sort of virus.
6. July 2010 at 11:27
Yes, but you don’t want me to suggest that you start blogging more, do you?
6. July 2010 at 18:02
[…] – Scott Sumner […]
7. July 2010 at 07:09
woupiestek, NO!!
10. July 2010 at 08:14
[…] on July 5th I said this in response: I’ve recently noticed a lot of columns discussing the issue of economic […]