Fisher explains why more NGDP growth won’t help

CNBC discusses the views of Dallas Fed President Fisher:

Signs are rife that the U.S. economic recovery is slowing, with retail and housing sales down, manufacturing slowing, and unemployment at a stubbornly high 9.5 percent. Some Fed officials, including Fed Chairman Ben Bernanke, have recently raised the possibility that the Fed may need to ease monetary policy further if the economy worsens.

Fisher said such a move would be ineffective, and could even make matters worse.

Businesses are distressed and dispirited by uncertainty over upcoming rule changes and are unable to conduct long-term planning, he said.

“They are calling time-outs and heading to the sidelines while they wait for the referees to settle on the rules of the game,” Fisher said. “If this is so, no amount of further monetary policy accommodation can offset the retarding effect of heightened uncertainty over the fiscal and regulatory direction of the country.”

I don’t get this at all.  There was lots of governmental activism during the Lyndon Johnson years, and yet rapid NGDP growth led to rapid RGDP growth.  During FDR’s first term there was far more activism and far more uncertainty than right now, but fast NGDP growth led to fast RGDP growth.  I’m no fan of Obama’s policies; I think they have modestly increased the structural rate of unemployment.  But monetary stimulus remains the key to recovery.  It will also eventually lead to fewer policies that reduce aggregate supply, such as extended UI benefits.

Fisher sought to assure his audience that the Fed will not allow itself to be pushed into printing money to resolve the deficit and signaled he would would oppose any further easing on that basis.

Of course he has things exactly backward.  Many of the spending programs that he doesn’t like were undertaken precisely because monetary policy reduced NGDP nearly 8% below trend between mid-2008 and mid-2009.  And the current recovery is anemic, with NGDP growing at less than 40% of the rate it grew during the 1983-84 recovery.

Calling price stability the Fed’s “ultimate goal,” he said the U.S. central bank will not tolerate either inflation or deflation.

“The Federal Reserve is absolutely committed to its goal of achieving price stability,” he said. “This entails keeping inflation extremely low and stable.”

I’ve already said enough about “opportunistic disinflation.”



27 Responses to “Fisher explains why more NGDP growth won’t help”

  1. Gravatar of Benjamin Cole Benjamin Cole
    30. July 2010 at 17:08

    Former fed guy says quantitative easing is okay, in Forbes …seems like the Fed is sending out a lot of signals…..

  2. Gravatar of scott sumner scott sumner
    30. July 2010 at 17:32

    Benjamin, I hope you are right.

  3. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2010 at 17:56

    After we dump Obama, Fisher looks like the next Fed Chair to me.

    Scott, you really show your eggheadness here dude. That you don’t HEAVILY weight the argument that capital is uncertain reeks of amateurism.

    As I keep saying, this is not the Great Depression, this is NOT the 60’s. That we ever allowed those kind of people (government folk) to wield against business – let them wield so much power PROVES HOW DUMB THEY WERE – its right up there with the stupidity of racism, putting up with priests molesting children, smoking, littering, and not letting gays marry and have kids.

    I get you have a Great Depression book coming out, and if your lessons can be trumped simply by saying, “Scott back then we also had the Klan” – well then your book doesn’t have half as much oompf!

    I’m sorry. If it helps, I’ll still by your quaint history book.

    Of course the goal is to not print money – except for population growth – that’s half as good as the gold standard – it truly limits progressives, its just another tool we use to ensure even a man as popular as Obama once was – never comes near the tax policies of FDR.

    The only thing truly better for the rights of savers and builders – will be a single global currency – monetary union without political union.

    Then all government will have to woo the rich, and cut the bennies, or they will be Greece. it’s been a long slog, but we’re winning – you keep trying to split the difference, likely because you are an egghead… yes yes, a right wing egghead… but still one who thinks capital isn’t FREAKED OUT.

  4. Gravatar of Mattias Mattias
    31. July 2010 at 00:24

    It’s ironic that when the republicans talk about business leaders they make them sound like whining little school girls. “There’s so much uncertainties”, “We don’t know what the rules will be” etc. These are supposedly the same leaders that invest heavily in China, India, Africa etc. The problem is the too slow growth in USA. If there was more growth the rewards of investing would be more promising.

  5. Gravatar of scott sumner scott sumner
    31. July 2010 at 04:41

    Morgan, The most intense arguments tend to be among fellow libertarians.

    Mattias. Exactly.

  6. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2010 at 07:28


    No we make them sound like the sexiest chicks, the dirtiest chicks, the ones who if they show up at your party – you are golden, a rock star for the ages. And if you keep cool, when they come en mass, you have been delivered, it is the best party ever…. and it lasts for years.

    Also, when they are happy, you can forget about punch bowls, the only requirement is you just keep the party budget down, and do not charge very much at the door. The bigger the crowd gets, the more naked the gals get, and feats they’ll perform will make even the ugliest angry eggheads better for the experience.


  7. Gravatar of Jon Jon
    31. July 2010 at 09:06

    The reply is that business is an act of guessing about future income. You incur costs today to earn tomorrow. Income tomorrow depends on the inflation rate and the growth in real expenditures.

    When either of those vary there is ceteris paribus more risk. Asset prices fall and it’s harder to find profitable ventures on a risk adjusted basis. So you get liquidation of re surplus to cash. A process which partially mitigated in that a lower inflation rate also lowers cash yields.

  8. Gravatar of Lord Lord
    31. July 2010 at 09:12

    Uncertainty is what the Fed has been creating over these many months. They need to stop blaming others and look in the mirror.

  9. Gravatar of DanC DanC
    31. July 2010 at 09:23

    China and India are moving toward more pro business policies, the risk reward balance encourages investment.

    The Obama polices and a Democratic supermajority are likely to soon end. Why not wait until you are more certain of the future direction?

    The Reagan plan: reduce tax complexity, reduce marginal tax rates, reduce the growth of government, and reduce government regulations.

    The Obama plan: increased tax complexity, increase marginal tax rates, increase the growth of government, and increase government regulations.

    Which plan encourages growth and prosperity?

    What did LBJ activist polices cause in the long term? Given the lesson, why wouldn’t business people be more forward looking today – given that few today would support many of the economic views of the sixties.

    What would American growth have looked like if India, China, and Eastern Europe were not crippled by socialism? America under LBJ was the dominate economy with a growing educated work force exporting to a recovering world. Markets are more competitive today.

    Placing extra burdens on a strong young person is not the same as placing a burden on an older weaker person.

    I am uncertain at what point Scott thinks the growth of the state becomes a heavy burden for private sector.

    Could the economy grow with monetary stimulus? Some perhaps. If the bounce from monetary stimulus is greater then the weight of fiscal policy.

  10. Gravatar of JimP JimP
    31. July 2010 at 09:31

  11. Gravatar of Benjamin Cole Benjamin Cole
    31. July 2010 at 12:41

    Just re-read this posy. Ugh.

    “Calling price stability the Fed’s “ultimate goal,” he (Fisher) said the U.S. central bank will not tolerate either inflation or deflation.’

    O really? Gee, I thought “economic prosperity” should be the ultimate goal, for the Fed or any other government entity. I will take three percent inflation and economic prosperity over price stability and long-term recession any day of the week. Fisher, evidently, has a different point of view. Fisher should move to Japan and enjoy the price stability,. He can keep a wad of yen in his apartment, and re-count them every morning, warm in the glow that they have not lost value since the last time he counted them.

    Was Fisher’s comment a slip of the tongue–or is a man deeply confused by what are the real goals? Fisher sounds like a man with a fetish for money, instead or a reverence for the way true wealth is made–by working, researching, investing, producing.

    Mattias: Great point. I call it “right-wing hysterical sniveling.”

    Jeez, get over it. Obama is not great, but we have seen worse–Nixon instituted wage and price controls! We have seen far worse.

  12. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2010 at 12:52

    Benjamin Cole,

    1. Economic Prosperity is best achieved without inflation or deflation over the long term – because it gives no quarter to liberal politicians.

    2. I’m glad you agree that we have seen far worse, from far more historically ignorant politicians (Nixon / FDR / all of the old ones)… said another way… FDR would NEVER be so dumb as do half the progressive shit he did before in today’s terms… said another way, one becomes less progressive as people have more of their basics covered. Ours is a far more prosperous time, we know that ALL came from technology and capitalism, none of it from government… it came in spite of government.


    “The Obama polices and a Democratic supermajority are likely to soon end. Why not wait until you are more certain of the future direction?”

    This is EXACTLY what Scott misses – the tide is turning, better to get our fiscal house in order, bring the capital to the table with honey, not vinegar – then if we need his actions, we can give credit to the Republicans.

  13. Gravatar of Benjamin Cole Benjamin Cole
    31. July 2010 at 13:18


    I see no ill in minor inflation, many economists actually say it is beneficial…at this place I would call for some inflation, to get real estate markets moving again, and de-leverage.

    I have zero faith the R-Party will ever even propose a balanced budget again, and little faith the D-Party will. Ergo, some inflation will help pay down the debt we have built up.

    Theft from bond-holders? Everyone takes a risk when they invest or lend. Stockholders have been creamed since 2000, and many real estate owners too. Deflation would be theft from them.

    BTW I am no pal of Obama’s, though I thought he might be better than the alterntative (as we have no real third party in USA right now).

    I thought he should have made Jobs Job One, forgotten about comprehensive national health insurance, and gotten the hell out of Iraqistan ASAP. We will blow $3 trillion in Iraqistan before this is done, and are targeting $1 trillion annually in DoD, VA and Civilian Defense and Homeland Security outlays–all borrowed money. We have runaway federal spending. Defense spending is up more than 80 percent real terms in this decade.

    The Fed should blow the doors open, and print money until the plates melt, and anything else to get the economy going.

    Good luck on getting either party to rein in spending, but I hope they do. The Red Bloc, also known as the Red State Socialist Empire of farm and rural states, sucks down a lot of federal money. Check out The Tax Foundation studies on which states pay more than they get back from DC, and which states are subsidized. It could be an eye-opener for you.

  14. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2010 at 14:50

    Benjamin, thats far too simple an analysis:

    1. Repubs would take a BBA if they could get one in a split second. That’s a fact.

    2. Since they can’t, since Reagan they taken the horrible but next best tack – blow out the deficit, so Dem Presidents have to deal with it BECAUSE the Fed is ACTUALLY a wing of the Republican party.


    This was brutally proven true when Clinton campaigned on “invest” in ’92, and by his inauguration he had met with Greenspan and announced there would be NO investment at all, there would only be budget balancing – indeed his first action – DADT in the military – was seen by all as a incredibly stupid opening move, but taken in my analysis, it was the only thing he could do for his side that was FREE.

    Obama of course knows all this, and was bound and determined not to be Clinton – fat chance – he’ll either get boxed in 2010, bend over and be the GLORIOUS DEM who rubber stamps the Republican tax redo (and hopefully raising the age on SS and Medicare) – or he’ll get booted.


    You have to see the full scope of things:

    1. bankrupt the government
    2. have the Fed hold the line on inflation
    3. send in the bond vigilantes

    And ALL THAT’S LEFT is austerity. It isn’t pretty, but god damn it sure beats the last policy of letting Dems get elected buying votes with other people’s money (1913-1968).

    As I keep saying, Scott worries about moving the economy forward even during “stimulus big government Obama,” others worry about making sure the internal social incentives get fixed for all time. And on that score, we’re been winning ONLY SINCE 1980.

    This is a long war, and Scott doesn’t seem to get it – the real question is WHY WHY WHY some really really smart guys at FED (and he notes BOJ) – who can obviously target NDGP – don’t.

    And the answer is that Scott wants to win the battle, and others want to win the war.

  15. Gravatar of Doc Merlin Doc Merlin
    31. July 2010 at 15:34

    While the fed does tend to relax monetary policy more when republicans are in office… I think thats more to do with reliance on IS-LM analysis and a flawed understanding of the fiscal multiplier. If treat the fiscal multiplier as larger than it actually is, then any fiscal austerity will cause the fed to excessively loosen monetary policy. Also, any fiscal profligacy will cause the fed to excessively tighten monetary policy.

    In short, you can blame tight money on the fact that the fed acts last, a flawed model of the economy, and congresses’s tendency to overspend.

  16. Gravatar of Benjamin Cole Benjamin Cole
    31. July 2010 at 16:27


    I enjoy your commentaries, but they strike me as a bit on the conspiracy-theoretical side of the coin.

    I think the R-Party never balances the budget as it constituents depend on federal outlays–see Kentucky where per capita net there is $4,000 in federal spending, and the state gets back $1.51 for every dollar they send to DC.

    It will be interesting to watch if and when Rand Paul wins there. I hope he does, I like his spirit. That said, I think he quickly crumples, ramps up the rhetoric, waves the flag, but keeps bringing home $4,000 net for every Kentucky resident. It will be an interesting figure to watch.

    Imagine, a typical Kentucky family of four gets $16k net from the federal

    I wish there was the old wing of the R-Party, the Taft wing (minus its horrible civil rights stance), but it has been replaced by the Reaganite “deficits don’t matter” crowd, now possibly to be replaced by the radio talk show host crowd. Interesting times.

  17. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2010 at 18:25

    Doc, that’s a nice explanation that requires the Fed to less intelligent than you. Mine, takes Scott own argument – that they can do something, but they don’t want to – and explains the real “why,” it isn’t some silly belief of theirs, it’s because the Fed is one degree away from being pro-small business – they are pro bank. But ultimately neither party has any interest in rolling the clock back to unions, taxes, and eggheads. Where I get off the bus is that I want the Fed to screw banks, and to favor small business… the purest libertarian play. Which is the essence of productivity gains – the only thing that actually increases GDP – small businesses bring invention to life.

    Here’s the most recent proof point to my “conspiracy”: Ben just leaned into the microphone and said we’re going to need some more stimulus, and he sure doesn’t mean extending unemployment – he means extending Bush’s tax cuts.

    Look, I’ve been preaching this exact gospel since Stockman let it out that we really were intending to pass on deficits as high as friggin possible. 1981 Reagan, “I’d didn’t come here to balance the budget.”

    Bush I had to go because he violated the singular strategy… leave deficits for Democrats. Clinton did his “Democrats have to balance” job to the T – he wanted 4 more years on the big bird. Bush II did his job – the problem was the last $700B – squarely screwed the small business guys, to aid the banks – and that comes close to ruining Bush’s legacy.

    @Benjamin, I support this tragic strategy, it isn’t a conspiracy. Its the best of a shitty situation.

    But if you imagine that Republicans are really a bunch of poor southern states using the Federal government to steal money from CA and NY – you got it backwards.

    These are states that want to be left alone as their Constitution grants them – and since CA and NY keeps trying to nationalize their interests – these “dumb” southerners are more than willing to use their Constitutional majority of small state status to suck on the tit… since it is there exposed and all.

    But, just like a BBA, if they could trade back for state rights, and devolve power locally they’d give up whatever gains you think they is their motivation as fast as you can say, “Pelosi can suck it.”

    Let me say it again: IF Republicans could get a BBA – 100% would vote yes. If they could get an end to the 13th, and send the money and power back tot he states, 100% would vote yes.

    In all your machinations, don’t lose the plot. There are things some are for and some are against – but the battle is not the war, and purity is not the standard.

  18. Gravatar of scott sumner scott sumner
    1. August 2010 at 05:30

    Morgan, No sex talk please, I’m an ugly angry egghead. I can tell by your picture that you were the guy popular with the girls–don’t rub it in.

    Jon, That sounds right.

    Lord, Agreed.

    Dan C, You asked;

    “I am uncertain at what point Scott thinks the growth of the state becomes a heavy burden for private sector.”

    It’s already becoming an increasing burden, but that doesn’t explain 10% unemployment, tight money does.

    Thanks JimP, I’ll have a post up soon.

    Benjamin, Yes the Japanese CPI is exactly the same as 1993. That would be heaven for Fisher.

  19. Gravatar of No Inflation, Vows Dallas Fed’s Fisher | FrontBurner No Inflation, Vows Dallas Fed’s Fisher | FrontBurner
    1. August 2010 at 09:45

    […] Sumner thinks this is exactly wrong. tweetmeme_url = […]

  20. Gravatar of eb eb
    1. August 2010 at 10:12

    You are a funny man, Morgan Warstler. But re your prediction that when all you wishes come true, then “…all government will have to woo the rich, and cut the bennies…”, I must say that you’re somehow neglecting the possibility that democratic governments, representing the interest of the majority of citizens, will instead tax the rich. And maybe even bump the bennies.

    What’s to stop them, humorous essays?

  21. Gravatar of Morgan Warstler Morgan Warstler
    1. August 2010 at 16:19

    “What’s to stop them, humorous essays?”

    1. The flight of capital. Just as before 1913 (16th), no state could tax wealth too much, because it simply moved to another state.

    2. That only technology improves people’s lives, and only free markets drive technology. People like cheap stuff.

    3. We’re head towards a world currency, not a world union. Proof point: Mundell overwhelmed and altered Greece forever.

    4. Humorous essays.

  22. Gravatar of azmyth azmyth
    2. August 2010 at 14:39

    I agree this is one of the most exasperating quotations I’ve heard in awhile. He seems to have no grasp on the idea that the Fed is a major source of regime uncertainty, both in terms of their erratic policy, their haphazard banking interventions and the fiscal stimulus and other harmful policies they begged Congress to enact. Even indirectly, they caused Congress to do all sorts of legislation to save their sorry hides come election day this fall to offset their contractionary policy. Regime undertainty is not just some random exogenous shock.

  23. Gravatar of Liberal Roman Liberal Roman
    2. August 2010 at 15:38

    Wow, the Tea Partiers have invaded your blog Scott.

    Anyway, Morgan. I think you might know this already, but you are delusional. As Scott and many others have pointed out, governments have been much more “uncertain” and much more “intrusive” in the past and yet we have still had growth. Look at what the US government did in the 1950s and 1960s. Everything was regulated. Banking was in a straight jacket. Unions ruled. Even trucking, TRUCKING!!, was regulated. THAT IS BEING INTRUSIVE! And yet….we still had growth.

    But now, Obama does…what exactly? I mean seriously, compared to what I just listed, what has he done? In Venezuela, Hugo Chavez controls everything and yet his economy will see higher GDP growth this year than US. Look at Russia. Where, speaking of uncertainty, if you are a businessman, forget about being taxed too highly, there is a good chance you’ll end up dead if you cross the government. They TOO will have higher GDP growth. Look at all of the emerging economies. All of them have much less economic freedom, much less property rights and much MORE uncertainty and yet they all will see higher GDP growth this year than US.

    It has nothing to do with “uncertainty” and it has everything to do with lack of DEMAND!!!!! It’s like you can’t grasp this concept. You don’t want to grasp it because even you know that if you accept that, then you must also accept that the only solution is government action (monetary or fiscal). And that, to you, is unacceptable.

    Look at the latest business surveys. They all say the same thing. “We are not hiring anyone because no one is buying ANYTHING!” It’s a very simple concept. But you won’t and can’t accept that. So, you come up with “regime uncertainty” as your answer. Go and ask Mikhail Khodorkovsky about regime uncertainty.

  24. Gravatar of Morgan Warstler Morgan Warstler
    2. August 2010 at 18:23

    Sorry Roman, I get what you want to be true. En solidaridad! But I’ll stick with the logic of my last post, because of 1-3, this is now a “quick” battle between the small business guys and bankers – all the other special interest folks (unions, public employees, entitlements recipients) are weakened in a downturn, simply by Republican strategy of bankrupting the coffers…. short circuiting the premise of Democracy since 1913, “vote me me get free stuff.” We’ll never see tax rates anywhere near yesteryear – just like we won’t tell gays not to marry – we just have far more learned intelligence, our great grandparents were ignorant and pretty silly.

    GDP growth as a % is meaningless for comparison.

    As to DEMAND, I’ve got my preferred solution, and I’m posting here trying to get it discussed – it’s time to liquidate 4M foreclosed homes (to start) for pennies on dollar, but only allow private capital to buy with 30-40% down. Liquidate the insolvent banks, and in the process improve the balance sheets of small businessmen everywhere. Cost of credit needs to go up anyway. And the lower middle class need to save another 10-25% in rent.

    If you can give me some real negative effects from this policy to consider, I’d love to read them.

  25. Gravatar of Liberal Roman Liberal Roman
    2. August 2010 at 21:27

    Pardon my ignorance Morgan, but besides reason #1, nothing else in your post made any sense. And I already talked about #1. Where is this capital running to? I can tell you where it’s running to. It’s running to US Treasuries. (Look at the yields!)

    I think the thing that most reveals you as delusional is the following statement: “GDP growth as a % is meaningless for comparison.” Then what is meaningful? Are there any metrics besides, “Morgan believes the economy is going up ISM Number”.

    Anyway, I think ultimately this will backfire on you big time Morgan. Here is how I see the next 20 years of America playing out. You guys will continue to choke all stimulus spending. Democrats will lose because they will be blamed for your parties intrangience. Obama will lose in 2012 and will be seen as a disappointment. Your guy will take over in 2012 and will propose the usual GOP response: tax cuts. He will get them. They won’t help. The public will quickly turn on your guy, just like they did on Obama. And yet, because of the broken political system, nothing will get done for another 4 years as the economy slowly flushes itself down the deflationary toilet.

    In 2016, the public will have had enough. A real populist will emerge. Someone who will make Obama seem like Milton Friedman. He will win. And he’ll change things in much more dramatic ways than Obama ever dreamed or you feared.

    Scott actually commented on this in his post “A little inflation or a little socialism?”

  26. Gravatar of scott sumner scott sumner
    3. August 2010 at 05:28

    azmyth, I agree.

  27. Gravatar of Morgan Warstler Morgan Warstler
    3. August 2010 at 07:04

    @Roman, are you really saying Chavez GDP is growing faster than the US is real dollar terms over past 10 years?

    I assume you mean the % growth is higher, and that of course is meaningless – they are little tiny economies – getting a new computer increased their GDP 1% – you get my point? Adding 1 + 2 is a big jump. 10 + 1500, not so much.


    Obama still has a chance to win in 2012, but he’ll have to make like Clinton and focus 110% on balancing budget – I think raising the age of entitlements is his ending welfare.

    So you understand 2 and 3:

    2. Government cannot make people’s lives better – only technology does (also only productivity gains truly increase GDP). Example: refrigeration bought us women’s rights which bought us then Prohibition… and we had to live through that to get rid of it… there are things we try and throw away… high taxes and state run society is a nasty blip in our past, like slavery.

    Our poor live remarkably better than they did in 1980, but wages never really went up much, why? Because the rapid technology gains got them a far better life for the same amount of money.

    Here’s another example: any given specific medical treatment over time gets cheaper… the ones that are cashed based (cosmetic surgery, lasik, etc) gets cheaper even quicker, why? Because price sensitivity is a positive thing, and government by its very collective nature tends to remove that from the market. But healthcare costs continue to go up! Yep, and they will for a long long time, because after people have enough rooms, and toys, the thing they want to spend their money on is longer lives – we all want BMWs for health care, and we get them here. So, give up MRIs and CT Scans and you can have Cuba care for the masses. Live 10-20 behind the bleeding edge and we can provide Soup Kitchen Care for those without – BTW, that’s what Obamacare becomes – two tiers of service, one mildly out outdated, the other not.

    3. Mundell convincing Europe to go Euro essentially ended the style of government of the South states – they are all Northerners now. The point is that the Euro will survive, and it is FEASIBLE to have monetary union without political union – in fact it is preferable, because the fat states must learn austerity quick. We had it here before 1913, and when we finally get a world currency – we’ll have it again.

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