Here’s Martin Feldstein:

Why then the recent revival of interest in fiscal stimulus? By the fall of 2007 it became clear to many economists that the current downturn is different from previous recessions and that monetary policy would not be effective in bringing us back to full employment.

I’ve always wondered how the economic profession could have been so oblivious to the need for the Fed to increase expected NGDP growth in late 2008.  Now we find out that as early as 2007 many economists had made up their minds (for some mysterious reason) that monetary stimulus wouldn’t work in this crisis.  What is that reason?  I haven’t a clue.  We know from 1933 that unconventional monetary stimulus can create fast NGDP growth, even with near zero rates and a completely dysfunctional banking system.

Here’s a recent Financial Times letter where David Glasner (an expert on monetary history and reader of this blog) responded to one of Feldstein’s recent FT essays:

Why then is inflation “unwanted”? Mr Feldstein maintains that it would jeopardise the credibility of the Fed’s long-term inflation strategy. But it is not clear why Fed credibility would be jeopardised more by a temporary increase, than by a temporary decrease, in inflation, or, indeed, why credibility would be jeopardised at all by a short-term increase in inflation to compensate for a prior short-term decrease? The inflexible conception of inflation targeting espoused by Mr Feldstein, painfully articulated in Federal Open Market Committee minutes, led the Fed into a disastrous tightening of monetary policy between March and October 2008, while the US economy was falling into a deepening recession because of a misplaced concern that rising oil and food prices would cause inflation expectations to run out of control.

Feldstein’s worry about inflation seems hard to reconcile with his earlier views.  QE won’t work, because it won’t boost AD.  QE is bad, because it will boost inflation.  How many times have we seen that bizarre dichotomy?  Once again, QE boosts inflation if and only if it boost AD.  Do we want more AD, or not?

Of course QE2 was highly effective at boosting AD.  How do I know?  Because Martin Feldstein just told me so.  (Maybe he read Glasner’s letter.)  Perhaps we ought to have done that highly effective QE back in 2008, when we really needed it.  Instead we had nearly every major macroeconomist saying that monetary policy was out of ammo, and we should either do fiscal stimulus, or do no stimulus at all.  What a sorry period that was for the field of macroeconomics.

How about setting up a blue ribbon AEA panel to investigate why nearly the entire economics profession (excluding a few people like Robert Hetzel and some of my fellow bloggers) had a collective brain freeze between September 2008 and March 2009.

HT:  Statsguy



13 Responses to “Feldstein–>Glasner–>Feldstein”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. March 2011 at 15:26

    Feldstein wrote:
    “By the fall of 2007 it became clear to many economists that the current downturn is different from previous recessions and that monetary policy would not be effective in bringing us back to full employment.”

    Who are these “many economists”? I want names!

    I remember thinking in the summer of 2007, after a year of inverted yield curves, why wasn’t the Fed being more aggressive in lowering the fed funds rate? Now I find out that apparently “many economists” felt monetary policy was ineffective, so evidently I was worrying about absolutely nothing. (Or was I?)

  2. Gravatar of Scott Wentland Scott Wentland
    3. March 2011 at 18:29

    If you organize that panel, I’ll certainly be in that audience.

  3. Gravatar of Morgan Warstler Morgan Warstler
    3. March 2011 at 18:46

    Perhaps it is because they wanted Fiscal Stimulus for other reasons.

    I mean IF IT WORKED! then liberals could take over the economy.

    Which is why you need to be so much more attack oriented or you will not get the kind of policy you want.

    If your message is:

    “CUT GOVERNMENT SPENDING and oh btw, if things sputter a bit, and we need to make sure the economy soars… we’ll can always just sprinkle some QE3 crack on it, and everyone will STILL think it was rightwing policy choice.”

    It will be very hard for you not to be taken seriously.

    Ask yourself which part of Uncle Milty they liked the most.

    Be honest.

  4. Gravatar of William William
    4. March 2011 at 05:43

    Once again, QE boosts inflation if and only if it boost AD.

    As usual, I’m still just trying to understand what you’re saying, so forgive me if this sounds like nitpicking. Should this be “only if,” not “if and only if”? Horizontal AS is possible, right? Or am I thinking of this totally in the wrong way?

  5. Gravatar of Richard Allan Richard Allan
    4. March 2011 at 05:53

    William, I think I remember Scott saying “The AS curve is never completely flat”.

  6. Gravatar of Benjamin Cole Benjamin Cole
    4. March 2011 at 11:19

    It is remarkable–the same guys who howled against QE now seem to accept it, but say, “Ooh, no, no QE3!”

    Feldstein falls into this camp.

    As I have said, nothing succeeds like success. If the Dow rallies, and the economy grows, then QE is regarded as a winner, despite mitigating or other favorable circumstances.

    A general could fight brilliantly but lose a battle due to circumstances beyond his control. Or, he could fight stupidly, but if he wins, all is forgiven, and he is regarded as a winner.

    Same for QE.

  7. Gravatar of Bob Murphy Bob Murphy
    4. March 2011 at 18:57

    Feldstein’s worry about inflation seems hard to reconcile with his earlier views. QE won’t work, because it won’t boost AD. QE is bad, because it will boost inflation. How many times have we seen that bizarre dichotomy? Once again, QE boosts inflation if and only if it boost AD. Do we want more AD, or not?

    The answer is “not,” or rather, “How can you possibly hope to summarize the health of the entire freaking economy with a single number? Are you batsh*t insane?!” 🙂

    I grant you that Feldstein might be contradicting himself, but for the record I (a) think QE “won’t work” and (b) think it will cause inflation. For evidence, I point to Zimbabwe. There is nothing contradictory about my positions. I could be wrong, but it’s not a surface contradiction. Only if you think “It’s AD, stupid” is it a contradiction.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 19:01

    The only thing that makes sense of your views to me is to imagine that the slope of the AS curve is amazingly flexible (and it ain’t).

  9. Gravatar of Scott Sumner Scott Sumner
    5. March 2011 at 06:54

    Mark, If you and I saw the problem, why didn’t (most) others? I’d guess a perfect storm of distractions. We went quickly from soaring commodity prices in mid-2008, to financial crisis in the fall to the zero bound in December. I think economists were so mesmerized by those headline events they lost track of monetary stimulus.

    Scott, I’ll let you know, but don’t hold your breath.

    Morgan, That’s part of it, but Feldstein is a Republican!

    William, In theory yes, but in the real world AS curve always have some slope. Just consider the part of the CPI that is made up of imported goods. QE makes the dollar fall, and the price of imported commodities like oil rises immediately.

    Benjamin, The analogy using generals is a good one.

    Bob, And for my evidence I point to Japan, which did QE and got very little inflation. It’s a closer analogy. We just need to do a little more than Japan, but a lot less than Zimbabwe—that shouldn’t be hard.

  10. Gravatar of bill woolsey bill woolsey
    5. March 2011 at 14:17

    Monetary policy “means” the Taylor rule.

    Adjusting the Federal Funds according to observed inflation ad the GDP gap won’t solve the problem.

    Also, Feldstein is a Republican. Exactly. And he advocated pumping up _military_ spending. Let’s cut marginal tax rates (and average tax rates at the same time) and increase military spending. The deficit increases, yes. Maybe this increases the natural interest rate.

  11. Gravatar of Scott Sumner Scott Sumner
    6. March 2011 at 09:05

    Bill, I can think of better uses for money than military spending. (Or are you describing his views?)

  12. Gravatar of Rien Huizer Rien Huizer
    6. March 2011 at 12:08


    An AEA panel is maybe too much, but questioning the combination of diagnosis and cure is OK. I guess mr Feldstein is (politically) not very interested in business cycle management and does not mind the odd unnecessary casualty on the road to inflation-less bliss. I remember the days when high quality munis were yielding over 8%.. Man maybe it has nothing to do with fighting inflation in one’s youth, but simply lack of interest in avoiding uncessessary cyclical pain. As a european, I would be cynical towards any politician proposing any kind of cure for the cycle (better to make sure the damage occurs somewhere else), especially a fiscal one, but in the US, it is relatively more difficult to dismiss demand management approaches involving fiscal policy (and much harder to avoid the cycle).
    And as you claim, Scott, there are ways to conduct monetary policy beyond where I thought it would work. Well, let’s try and see if it does!

  13. Gravatar of ssumner ssumner
    16. March 2011 at 15:45

    Rien, I’d be surprised in Feldstein doesn’t care about the business cycle.

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