First convince the economists
Tyler Cowen has a recent NYT column that includes this observation:
For instance, there is a good case to be made for monetary expansion, given the current low rate of inflation and high rate of unemployment. But if fear of inflation puts off the American public, such a policy will again underperform, relative to what we have learned in textbooks. There won’t be a credible commitment to see the monetary stimulus through, as people panic that resulting inflation will be used to redistribute wealth. (Although Sweden and Switzerland have had effective monetary policies recently, both of those countries have especially high rates of trust in government.)
I’ve made similar arguments, but I think this is too simple. The deeper problem is that most American economists don’t agree with the claim that monetary stimulus could fix much of the problem, if only it was not constrained by popular skepticism. Most macroeconomists in America think either that Bernanke is doing a good job, or that the Fed is too expansionary. The Fed tends to do what a consensus of macroeconomists thinks they should do. Fix the mistaken view of American macroeconomists, and you’ve gone 90% of the way toward fixing our AD problem.
In the short run we’ll lose. But I’m heartened that the smartest young people in America (bloggers like Evan Soltas and Yichuan Wang) agree with market monetarism. In the long run the AD-deniers will be dead, and market monetarism will win.
PS. Yichuan has a good critique of my claim that growth was normal during the 1970s. I accept his general argument, but I still think the 3.2% figure is pretty accurate. Both 1970 and 1980 were similar phases of the business cycle (mild recession years) so I think 3.2% is close to trend growth for that decade. If the higher inflation rate was raising RGDP in 1980 by 2%, then trend growth would have been 3% for the decade, and my qualitative judgment would still hold. Recall that even market monetarists assume that money is neutral in the long run. I believe that by 1980 workers had mostly adjusted to the higher NGDP growth. Note that inflation rose by more that than NGDP growth between 1970 and 1980, mostly because 1980 saw a big oil price spike. But Yichuan’s argument applies to increases in NGDP growth, not inflation.
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17. June 2012 at 13:06
You are harming your case for NGDP targeting & a role for ‘tight money” in the contraction of 2007-2009 with your special pleading that high inflation and yet more Keynesian ‘stimulus’ will provide a non-problematic fix for what ails the American economy in 2012, where prices are still rising in the face of productivity growth, which should be giving us more goods at lower prices.
The America economy is growing, productivity is increasing and prices should be falling.
We have an unemployment problem, and a demand for goods is not a demand for labor.
17. June 2012 at 13:10
I read Yichuan’s response, impressive and interesting stuff.
It reminds me somewhat of the debates about Fed policy in the early oughts, was Fed policy too loose? Beckworth claims that it was because Fed policy was underestimating a positive supply shock mostly imported from China and Asia( As I recall he uses a slightly different estimate of NGDP).
17. June 2012 at 13:12
The deeper problem is that most American economists don’t agree with the claim that monetary stimulus could fix much of the problem, if only it was not constrained by popular skepticism.
That is because inflation will prolong needed corrections, and will also encourage new problems that will later need correction.
Fix the mistaken view of American macroeconomists, and you’ve gone 90% of the way toward fixing our AD problem.
There isn’t an AD problem. NGDP has been rising 4-5% since 2010.
But I’m heartened that the smartest young people in America (bloggers like Evan Soltas and Yichuan Wang) agree with market monetarism.
There are many times more intelligent young people who disagree with central banking and market monetarism.
Yichuan has a good critique of my claim that growth was normal during the 1970s.
Heh, I said the same thing.
Guess this is a habit. Like I said here, Sumner agrees with me only when it is “safe” to do so. Never when I am alone.
It’s kind of like when one person says to another at the dinner table “Karl, can you please ask Major_Freedom to pass me the salt?”
I’m loving this by the way. It’s so deliciously satisfying.
17. June 2012 at 13:13
Greg Ransom:
We have an unemployment problem, and a demand for goods is not a demand for labor.
Greg gets it.
17. June 2012 at 13:14
OGT:
I read Yichuan’s response, impressive and interesting stuff.
Why thank you.
17. June 2012 at 13:25
Also on your post I think your overly discounting the effect of politics on the economic consensus, John Taylor, for example, seems to bend his opinions significantly in the direction of the Republican political consensus.
17. June 2012 at 13:34
I think you’re right about American economists scott (which probably applies to most economist worldwide). I was reading Cochranes blog today and he just outright dismisses monetary stimulus in much the same way that Rajam was, offering no explanation for why it wouldn’t be effective.
I saw Bill Woolsey call him out on it a few weeks ago, but he was ignored.
17. June 2012 at 14:00
Just when you think you’ve seen off the left-wing endogenous money theorists, here come the right-wing endogenous money theorists…
17. June 2012 at 14:10
Major how did you and Greg not link up already? This is the first you’ve met? Here’s a guy you’ll probably agree with all day
17. June 2012 at 14:17
Tyler writes: “Too much debate is focusing on textbook remedies [for our slack economic performance], and not enough on just how much trust [in government] has been broken.” But Tyler presents no measure of the degree of this loss of trust, nor even any real evidence that it has recently increased. (That people have become poorer and so feel they cannot afford as much government as before does not show that they have become more *mistrustful* of government.) Nor does he consider whom to blame for the (alleged) loss of trust: is the public’s mistrust of government right or wrong, justified or unjustified? Tyler sounds wistful when he writes: “We have become skeptical of our own macroeconomic authorities and abilities, and that, in turn, makes successful policy harder to pull off.” But public skepticism also makes it harder for government to put in place bad policies that would be unsuccessful.
I have no real evidence about public mistrust, but my guess is that it would apply more to aggressive deficit spending by Obama than to aggressive monetary easing by Bernanke (and rightly so), so Tyler’s remarks are more apt for fiscal than for monetary policy.
17. June 2012 at 14:56
Greg, Haven’t you noticed that I’m opposed to Keynesian stimulus? Keynesians want fiscal stimulus.
MF, Yichuan has forgotten more economics than you’ll ever know.
OGT, But I think it’s more than politics. Most economists vote Democratic. Why don’t they support more monetary stimulus?
ChargerCarl, I see very few economists on either the left or the right calling for more monetary stimulus.
David, Tyler is making a political argument, which is a very different type of endogeneity.
Philo, I agree.
17. June 2012 at 15:38
Ah… I was referring to M_F here.
17. June 2012 at 16:30
Mike Sax:
Major how did you and Greg not link up already? This is the first you’ve met? Here’s a guy you’ll probably agree with all day
Link up? Agreeing with others online is not all that uncommon.
ssumner:
MF, Yichuan has forgotten more economics than you’ll ever know.
Haha, everyone who agrees with market monetarism “has forgotten more economics” than those who disagree with market monetarism “will ever know.”
It’s an empty platitude.
17. June 2012 at 16:33
I am trying to search through my copy of Capitalism, Socialism, and Democracy for Schumpeter’s quote about how science progresses through the old professors’ dying off.
17. June 2012 at 17:58
Here’s another theory. Ben (and/or the FOMC) don’t care what the textbooks say or mainstream economists thinks. They now how to boost economy. They are just waiting to get rid of Obama and discredit the Democratic Party before they do it.
If you discount the present value of higher future income and employment from better future policy, a few years of high employment might be a good trade-off.
17. June 2012 at 18:08
@John Thacker
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”
Max Planck, Scientific Autobiography and Other Papers
17. June 2012 at 18:31
Another excellent blog by Sumner.
Side note to Sumner: You recently pondered how could there be such standout young economists as Soltas and Wang.
The same thing is happening in chess—many young grandmasters.
Why? I think it is the Internet.
Young chess players are able to play many games, every day, against the computer (at a high level) or other players, online. In short, they get many times the practice of the old days.
Soltas and Wang are able to read so much online now, as opposed to the old days. They can read several items a day about Market Monetarism. Excellent!
I would like to think even those a step or two away from old fogie-dom (1955 models) are able to read a lot about monetarism online, and also “get up to to speed.”
17. June 2012 at 19:51
Do academic macro-economists really change their minds? It seems to me that they are mostly set in their beliefs and they see confirmations everywhere they look. That group will never have consensus and thus never have influence.
I do think you can change the minds of people in the financial industry. They are practical and paid to right. You convince the economists at JP Morgan, et. al, and they will influence the Fed.
18. June 2012 at 00:34
Two questions from a non-economist (and apologies if these have been answered before).
1. A common non-economist concern I’ve heard regarding higher inflation (e.g. with the Fed doing NGDP level-targeting in an under-performing economy) is that it destroys wealth. Is this true, and what is the market-monetarist response?
2. Sumner (and MM’s in general?) dislike (Keynesian) fiscal stimulus. If I understand correctly, one big problem is that the (supposed?) benefits of such stimulus only occur if the Fed’s actions are held constant, but in reality the Fed can change it’s actions in response the stimulus, thereby undercutting any/most positive effects. So my question is this: if for some reason the Fed’s hands were tied, and we knew that it could not change policy in response to fiscal stimulus (e.g. a Fed chair who insists on governing by consensus, but is head of a bitterly divided and contentious FOMC), and assuming the economy was stuck in a liquidity trap (or high unemployment with interest rates near zero, and incredibly low NGDP growth), then in such a case is there still a strong argument against fiscal stimulus?
18. June 2012 at 03:25
The market expects more help from Fed this week
http://www.cnbc.com/id/47853777
18. June 2012 at 03:26
“(One) reason we expect the euro to push higher has nothing to do with Greece. We think the Fed is going to open the door to further stimulus (on Wednesday),” Ashraf Laidi, Global Chief Strategist at City Index told CNBC Asia’s “Squawk Box” on Monday. Laidi forecasts the euro-dollar will move as high as 1.2850 this week.”
http://www.cnbc.com/id/47853777
18. June 2012 at 04:48
Scott, I think Greg has a point in the sense that it is not irrelevant what the growth rate of NGDP is. One thing is RGDP growth – another thing is the development in wealth.
During the 1970s the NGDP growth was not only higher than during the Great Moderation, but it was also significantly more volatile. The very high level of volatility in NGDP in my view was a key reason to the horrific development in global assets markets during the 1970s.
NGDP volatility tend to be higher with higher rates of NGDP growth. This has a clearly negative impact on equity prices, bond prices and house prices. This in my view is the real cost of lack of NGDP stability.
So it is not important whether NGDP grwoth is high and volatile or stable and moderate.
This of course goes back to the old discussion about “stimulus” vs rules. If we “forget” to argue within a rules based framework then I fear we will fail in our efforts.
18. June 2012 at 04:52
read Tim Duys post “communications failure” and tell me you are not getting through.
i think you have convinced a lot of economists, including one at the Fed. there os progress.
who knows what they’ll do. maybe a language “clarification” but not much more, if history is a guide.
18. June 2012 at 05:08
Some very good news from the UK: http://marketmonetarist.com/2012/06/18/vince-cable-gives-me-hope/
18. June 2012 at 05:37
Scott- If you look at the major liberal leaning public intellectual economists, Romer, DeLong, Krugman, or Eichgreen, for example. Most of them support accommodating monetary policy coupled with less austere/stimulative fiscal policy, which happens to be the baseline Democratic policy. I don’t doubt the causation goes both ways there as well.
18. June 2012 at 05:52
Tyler is with you.
Check the straussian reading:
The problem is trust (expectations) so what we need is the central bank to drift the expectations toward a better equilibrium. He can’t say it because he don’t want to scare other economists, but he’s trying to get the medium economist to think we need more stimulus.
18. June 2012 at 05:59
Joel,
As a non-economist, let me answer your questions:
1) depends on what the wealth is doing. If it is in commodities or stocks or tangible or real property, it is not affected by price level. If it is currency hedges or derivatives it is a zero-sum game. Bills and bonds are affected by the change in expectation. Cash is destroyed.
2) the Fed has to accommodate the Keynesian spending or it will be neutralized. Doing nothing means sticking to the same target (inflation), which is not accommodating.
18. June 2012 at 06:19
David. That’s better.
John Thacker, Science progresses one funeral at a time.
dtoh, Extremely unlikely because Bernanke doesn’t like the modern GOP. And they destroyed McCain in late 2008, so it doesn’t fit the facts.
Ben, Good point, it must be the internet.
DonG, Of course they change their minds, think of the new Keynesian revolution of the early 1980s.
Joel, You asked;
“A common non-economist concern I’ve heard regarding higher inflation (e.g. with the Fed doing NGDP level-targeting in an under-performing economy) is that it destroys wealth. Is this true, and what is the market-monetarist response?”
Just the opposite–inflation would destroy wealth in an underperforming economy. Money would be tighter with inflation targeting, which would reduce RGDP and real wealth.
In the case you describe, there is an argument for fiscal stimulus, but only tax cuts, not changes in government spending.
Lars, I don’t agree that Greg has a point, but I do agree, that volatile NGDP was also a problem, not just high NGDP growth.
dwb, See Lars’ new post (and mine) for even more evidence.
OGT, I can’t empasize enough that EXPANSIONARY MONETARY POLICY IS NOT THE BASELINE DEMOCRATIC POLICY. The Democrats in Congress and the President have shown zero interest in monetary stimulus. Obama says it’s impossible once rates hit zero. The Dems in Congress agree. Most Democratic economists agree with Obama. The names you mention are very much lonely voices crying in the wilderness.
Arthur, Yes, Tyler has frequently said he agrees with my call for a more expansionary monetary policy. That’s no secret.
18. June 2012 at 06:30
Thanks DonG.
I don’t quite understand your response to 2, but maybe my question was ill-posed. I’m trying to determine if there is economic consensus regarding the effects of fiscal stimulus keeping Fed actions fixed. Perhaps a more practical question is: if interest rates are near zero, unemployment is very high, and inflation is consistently under target, and the government employs fiscal stimulus, is the Fed really going to counteract it in order to keep inflation at its consistent under-target level?
18. June 2012 at 06:31
I’m slow. And thanks Scott.
18. June 2012 at 07:42
Maybe a hint that you have to own the language — and “stimulus” is owned by the other team. You are tacitly endorsing the Keynesian vision, as far as most everyone goes when they hear this language. Rival ideas are powered by rival language.
“Greg, Haven’t you noticed that I’m opposed to Keynesian stimulus? Keynesians want fiscal stimulus.”
18. June 2012 at 08:36
“partly because the public, rightly or wrongly, doesn’t see them as ways to rebuild confidence.”
Do you ever get annoyed by the word confidence? I find that it is used to mean many different things. For instance, TC seems to use it to mean a coordinating equilibrium. Monetary policy won’t work, because people believe it won’t work. Nevermind, that many people believe it won’t work, because it would cause inflation (isn’t that working?). Other times, it seems to imply credible commitment. And most frustratingly, it often implies the public has a rationally pessimistic view of the future. The problem is that the outlook IS bleak, not that the public believes that its bleak.
18. June 2012 at 08:45
Joel Fish:
You asked:
A common non-economist concern I’ve heard regarding higher inflation (e.g. with the Fed doing NGDP level-targeting in an under-performing economy) is that it destroys wealth. Is this true, and what is the market-monetarist response?
ssumner replied:
“Just the opposite-inflation would destroy wealth in an underperforming economy. Money would be tighter with inflation targeting, which would reduce RGDP and real wealth.”
How in the world is “inflation would destroy real wealth in an underperforming economy” a statement that is “just the opposite” of what Joel said? You’re agreeing with the statement that inflation destroys real wealth! Or was it a Freudian slip?
The second sentence in the response is even more funny. If money would be tighter in inflation targeting, which would reduce real wealth, how is THAT “the opposite” of what Joel said about inflation destroying real wealth?
Talk about confusion up the wazoo.
What Sumner made a disaster of was the fact that yes, inflation does destroy wealth in an underperforming economy GIVEN the same fiscal policies are in place. He just likes to blame anyone but the fed for this, so he says something like “it’s because taxes weren’t cut”, much like someone barreling down a highway at 50 mph over the speed limit blames the other drivers for not getting out of his way, which is what allegedly caused the accident.
Inflation destroys real wealth by two main processes.
1. Inflation increases nominal profits. But because those additional nominal profits are taxed at the going rate of taxation, it prevents businessmen from fully replacing the worn out and used up capital goods they use in their production processes. Why does it prevent businessmen from doing this? Because inflation ALSO increases the prices of capital goods. Thus, the after tax additional profits generated by inflation, are not sufficient enough to replace, let alone more than replace, worn out and used up capital goods. As a result, inflation, in combination with taxes on profits, eats into capital formation.
2. Inflation gives the illusion that people are richer than they really are. For example, it makes people believe that the increasing price of their homes during the housing boom represents real wealth accumulation, when it is really just devaluation of money manifesting itself in home price increases. Inflation encourages over-consumption of resources that would otherwise have been saved and invested in production processes.
Ever wonder why the US lost its relative dominance of its industrial capacity? It’s in large part because the US dollar is the reserve currency of the world, and so we could consume at the expense of the world, which is the same thing as saying we didn’t accumulate the capital needed for such consumption ourselves. It’s also in large part because of decades and decades of persistent government deficits, which has diverted trillions of savings away from the market, towards the government’s consumption, and those they give the money to.
Your next question:
If I understand correctly, one big problem is that the (supposed?) benefits of such stimulus only occur if the Fed’s actions are held constant, but in reality the Fed can change it’s actions in response the stimulus, thereby undercutting any/most positive effects. So my question is this: if for some reason the Fed’s hands were tied, and we knew that it could not change policy in response to fiscal stimulus (e.g. a Fed chair who insists on governing by consensus, but is head of a bitterly divided and contentious FOMC), and assuming the economy was stuck in a liquidity trap (or high unemployment with interest rates near zero, and incredibly low NGDP growth), then in such a case is there still a strong argument against fiscal stimulus?
Was responded with:
“In the case you describe, there is an argument for fiscal stimulus, but only tax cuts, not changes in government spending.”
But is the argument sound?
It is “safe” to accept (well, the existence of) the argument for fiscal stimulus here, because this is a failure of the Fed to target NGDP. This is why Sumner says the government should not reduce spending, because that would reduce NGDP further. But the economist knows that the only true tax cut is a spending cut. Cutting taxes but maintaining spending, with a hands tied Fed, means that the difference has to be made up for by more borrowing, which will divert even more savings away from investment and towards the government’s spending, which, you guessed it, destroys real wealth.
Considering how Sumner not only claimed that inflation would destroy real wealth is somehow the opposite of inflation destroying real wealth, but also called for more wealth destruction as a cost of NGDP not falling from where it was at some arbitrary past time, I don’t know if there is a worse answer to two seemingly simple questions.
I hope I answered your questions satisfactorily.
18. June 2012 at 08:47
Joel Fish: “keeping Fed actions fixed”
What you have in mind, is probably not a meaningful question. The Fed is a reaction function: it looks at current economic conditions, and makes its action choices based on what it sees. You seem to be imagining a Fed that picks all its actions (e.g. how much OMO to do) long ahead of time, and then will “fix” them, and not change them, even if fiscal stimulus comes. No central bank works like that.
So the answer to your hypothetical is: yes, fiscal stimulus would work in that case. But that case doesn’t describe the real world.
“is the Fed really going to counteract it in order to keep inflation at its consistent under-target level?”
This, in fact, has been exactly the historical experience. (And even more so in Europe and Japan.)
And BTW: the “counteract” could be passive. I.e., they would have done additional monetary stimulus, but then because things are looking “a little better” (due to fiscal stimulus), they choose to postpone that additional monetary stimulus. These counterfactuals can be hard to judge.
18. June 2012 at 12:08
Scott
Extremely unlikely because Bernanke doesn’t like the modern GOP. And they destroyed McCain in late 2008, so it doesn’t fit the facts.
Do you think Mitt typifies the modern GOP. Re McCain, why spend bullets on a lost cause.
18. June 2012 at 18:32
Scott- Undoubtedly, you read more academic macro than I do, so perhaps my examples are not indicative of the left center macro consensus.
However, when you look at things through a fiscal policy/reaction function matrix, I think I am closer to the Democrtatic political consensus than you are. Essentially they want relative fiscal easing, but they do not want the Fed’s reaction function to counter act it. They’re for passive easing.
In Sumnerian terms anyone for more AD is necessarily for looser monetary policy. Si?
20. June 2012 at 05:50
Greg, I focus on ideas, and don’t get obsessed with terms. I’m sure I use lots of terms that Keynesians also use, like “GDP” and “unemployment”. That doesn’t make me a Keynesian.
dtoh, McCain wasn’t a lost cause before the economy tanked.
Mitt has said he’d fire Bernanke–would you want to wreck the US economy to help someone who wants to fire you for being incompetent?
I’ve met Bernanke, and he seems like a typical academic. There’s nothing in his personality that suggests that sort of Machiavelianism–maybe Greenspan would.
OGT, You said;
“In Sumnerian terms anyone for more AD is necessarily for looser monetary policy. Si?”
I think you are confusing two different concepts. It’s true the Dems should be for monetary easing, but with people like Joe Stiglitz telling them QE is bad, they decided not to be in favor of it. That’s a tragedy.
20. June 2012 at 22:44
Tyler Cowen wrote:
“But if fear of inflation puts off the American public, such a policy will again underperform, relative to what we have learned in textbooks. There won’t be a credible commitment to see the monetary stimulus through, as people panic that resulting inflation will be used to redistribute wealth.”
Although the Fed may not be moved by popular opinion there is some truth to what Cowen says. I find most people believe that monetary stimulus will:
1) Do nothing
2) Cause Inflation without growth
3) Help rich people without helping anyone else
4) Increase Debt
5) Cause Asset Bubbles
6) Cause a financial crisis
So many misconceptions, so little time.
But I agree, the biggest problem is other economists who believe number 1, most of whom seemingly have little familiarity with history.
P.S. I’ve managed to dig up a number of research papers and compose statistical evidence recently that serve as talking points to help disprove these misconceptions.