Focus on this

Paul Krugman asks a very good question:

If there’s one piece of conventional pundit wisdom that annoys me most, it’s the constant refrain that Obama was wrong to pursue health care, that he should have focused on the economy instead.

For the question people saying this never answer is, what would that focus have consisted of?

Yes, Democrats would be in better shape if the economy were in better shape. Duh.

So when you say Obama should have focused more, what policies are you talking about? A bigger stimulus? As far as I can tell, almost no pundits are saying that. So what other concrete policies do they have in mind? I have never gotten an answer.

I’ve been providing an answer for almost two years, but not many people were listening.  President Obama took office with two Fed seats open, and proceeded to wait 15 months before even nominating anyone for the positions.  (A third seat eventually opened up.)  In addition, he had the opportunity to re-appoint Bernanke, or choose his own Fed chair.  I’ll give him a pass on Bernanke, as I’m not sure he’s really the problem.  But what about the other two?  And this isn’t some sort of right-wing shot at Obama, I recall DeLong and Yglesias also suggesting this was an unforced error. 

Would it have mattered?  Obviously that’s hard to say, but I think there is evidence suggesting that it would have mattered at least a little bit.  Recall that the QE talk first started at the end of August and early September.  This was in response to an economy that had obviously been weakening ever since the euro crisis in the spring pushed up the value of the dollar and depressed stock prices.  So why did the Fed wait until November to act?  Reporters who seem to have inside information suggest that the Fed had some serious splits between the hawks (mostly at the regional Feds) and the Board of Governors (which only had four of the seven seats filled.)  The Board normally dominates decision-making, especially since William Dudley at the New York Fed has a permanent seat on the FOMC, and seems to strongly support Bernanke on the need for more stimulus.  But in mid-September, despite the obvious need for more stimulus, the Fed did nothing.  In early November the Fed finally acted.  Interestingly, by this time things were looking slightly better.  Stocks had risen strongly and some of the most recent economic data was much rosier than in August and early September.  So what was different about early November?  It was the first opportunity for Obama’s appointees to vote on policy.  The cavalry arrived, but 15 months late. 

I suppose we shouldn’t be too hard on Obama; he’s not a trained economist.  How could he have known that monetary policy can be highly effective at the zero bound, when prominent Democratic-leaning pundits were assuring him back in early 2009 that nothing more could be done on the monetary front and the only hope was fiscal stimulus?

PS.  Too bad Obama doesn’t read Tyler Cowen; here’s what he said a few weeks after Obama took office:

Here is the excellent Scott Sumner: an open letter to Paul Krugman.  It’s also the best recovery plan I’ve seen so far, by far.  It’s too good to excerpt, so you’ll have to click through and read the whole thing.  From my point of view, right now the whole world should be beating a path to Scott Sumner’s door.

He has two unpublished book manuscripts [actually one] and he probably would be free to meet with President Obama as well.

(I know, when I start praising myself it’s time to seriously consider retirement.  I promise two more posts soon that have a little more substance and less fluff.)



13 Responses to “Focus on this”

  1. Gravatar of Mario Mario
    5. November 2010 at 14:35

    I’m inclined to give the Fed (and by extension Obama, I suppose) a pass on not acting until November. If the board decided what they needed to do was another round of QE in mid October, for instance, I don’t think anyone could expect them to actually pass that until after the election for fear of injecting themselves into the race and risk an electoral backlash that could threaten their political neutrality (or possibly worse, looking like they were purposefully trying to influence the election). If you can accept that as a reason for delay, I think you can see how that same thinking is just as easy to come to in mid-August, maybe even as early as the spring.

    I have no doubt that Bernanke keeps those sorts of political calculations in his mind, so while I can’t know exactly when he decided that QE2 was his next move, I can be fairly sure that his decision to act was quite a bit earlier than his announcement, but it unfortunately fell in the window of non-activity. If he had come to the QE conclusion at the same point in 2009, I think there would have been no delay at all.

  2. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    5. November 2010 at 14:45

    I always thought that the biggest mistake Krugman ever made was not telling Obama about FDR’s monetary policy.

    Fortunately now I know that it was Eggertsson’s mistake. His email to Krugman about FDR’s monetary policy has reached Paul’s inbox almost two years too late.

  3. Gravatar of scott sumner scott sumner
    5. November 2010 at 15:34

    Mario, I find it hard to believe that monetary policy was a big issue in the mid-term elections. Not one person in a hundred even knows what QE is. But I can’t say you are wrong—that might have been in the back of Bernanke’s mind. if so, I think he made a big mistake.

    123, Yes, although I had assumed Krugman knew of his 2008 AER piece–maybe not.

  4. Gravatar of Shane Shane
    5. November 2010 at 15:42

    Why not build some level of money-financing of fiscal policy into the system by eliminating Treasury and charging the Fed with generating both Reserve Notes and government debt? When tax revenues shoot up during a boom, inaction, i.e. failing to decrease the amount of debt sold, would always tighten policy, while when revenues decrease during a bust, inaction, i.e. failing to sell more bonds, would always be stimulative.

  5. Gravatar of Lee Kelly Lee Kelly
    5. November 2010 at 15:43

    I know, when I start praising myself it’s time to seriously consider retirement. I promise two more posts soon that have a little more substance and less fluff.

    It’s never too late to turn over a new leaf 😛

  6. Gravatar of Benjamin Cole Benjamin Cole
    5. November 2010 at 15:44

    Another ace commentary from Scott Sumner. The best economic commentator going right now.

  7. Gravatar of JimP JimP
    5. November 2010 at 16:15

    Remembering back – without checking – I remember post after post and article after article from Krugman saying that monetary policy was helpless and only a gigantic stimulus would do the trick. One presumes Obama read those posts.

    I think the economist most responsible for our present situation was Paul Krugman – his gigantic ego and endless errors.

    Remember when he (and Stiglitz) wanted to nationalize the bank? Now that would have been a confidence booster – not.

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. November 2010 at 16:53

    Krugman never heard about proposals to cut the corporate income tax? Or the payroll tax? He needs to talk with someone other than his wife.

  9. Gravatar of david david
    5. November 2010 at 20:33

    Krugman supported temporary payroll tax cuts. He rejected corporate tax cuts due to their low multiplier. At least, that’s what his blog says.

  10. Gravatar of Bonnie Bonnie
    5. November 2010 at 21:55

    I don’t know so much about what Obama was supposed to do in his ‘laser-like’ focus on the economy, although I agree that tending to the Board of Governors instead of hitting the links might have helped. There were other things Obama and his Democrats were working on that I felt were inapproriate during an economic crisis, i.e., cap & trade, card check, employer health care mandates, etc… nearly each of these being thousand plus page documents full of supply side micromanagement with uncertain economic impacts. I’m aware they wanted these things, and some of them might even be necessary (although I disagree with most of it), but when it’s one’s time in the White House, one has to play the hand that is given and not necessarily the one that is desired, especially when each hand runs counter to the other. It seemed to me, that Obama and Congress existed on another plane where economic reality just didn’t factor into the legislative agenda, and when they were forced to look like they were doing something about the economy, they just threw money at the problem while hurling insults and threats at capitalists. We can see how well that worked.

  11. Gravatar of Defennder Defennder
    5. November 2010 at 22:31

    I think it’s hard to blame Obama for not doing more on the monetary front. If the President had attempted to push for looser monetary policy and a far more aggressive QE you can bet the Republicans + conservative Dems (who retained a filibuster minority) in the Senate would have pushed back real hard and accused him of trying to inflate and devalue the US dollar, trying to pack the Fed with easy-money economists the same way FDR tried to pack the Supreme Court.

    The end result is that nothing would have been accomplished, half-hearted monetary policy might have turned out the same way fiscal policy went. Pundits would have been talking about how Fed independence matters, inflation-mongering would have reached paranoid levels on the airwaves. In the end, something like Krugman’s Op-ed would still hold true. Simply substitute “stimulus spending” with “aggressive QE” and there you have it.

    One should never lose sight of the fact that first and foremost, outmoded parliamentary procedures such as the filibuster, secret Senate holds and frivolous objections were why many things were left unaccomplished in these 2 years.

  12. Gravatar of Shane Shane
    5. November 2010 at 23:29

    @Bonnie–I think it was the product of the checklist mentality (apologies to Atul Gawande). Remember, Obama and his experts fixed the economy first thing into the term–then it was onto the next problem. Except, of course, they did no such thing, barely counteracting anti-stimulative spending at the state level because they wanted to be sympathetic to the concerns of Collins, Snowe, and the late Senator Specter, who think that 1.5 trillion in spending would influence voter behavior much much more than 787 billion. Clearly, marginal increases in spending make very little political difference, although they may have some real policy impact. Even the most hardened anti-fiscal hawk has to admit that there shouldn’t be government layoffs in a time of near depression. Right? Professor Sumner?? ANYONE???

    @Deffender–I think Professor Sumner is 100% correct when he says that the obsessive focus on fiscal policy helped sabotage potentially stimulative monetary policy. But the other thing to consider is precisely what you point out–the right’s culpability for creating a rabid anti-government skepticism of any action whatsoever. For the hard-right activists, Monetary Stimulus=Fiscal Stimulus=Socialist Confiscation of Wealth. And so when Obama idiotically talks of “belt-tightening,” Bernanke too gets the message that his efforts are not wanted. We need a more rational right (Professor Sumner being the shining counterexample) and a more courageous left.

  13. Gravatar of scott sumner scott sumner
    6. November 2010 at 10:44

    Shane, I don’t see how that would help. The Fed already has all the tools it needs, it just doesn’t use them.

    Lee, I’ll promise to start being good . . . tomorrow.

    Thanks Benjamin.

    JimP, Yes, he left that impression to most readers.

    Patrick and David, I recall him arguing that payroll tax cuts were deflationary (by lowering business costs), and hence the government needed to spend more, not cut taxes. The government finds it hard to spend lots of money quickly, except through transfers–which are essentially tax cuts.

    Bonnie, Yes, Obama should have focused on recovery, and not on new regulations that slow the recovery.

    Defennder, You are flat out wrong, the filibuster wasn’t the problem. He waited 15 months to even nominate anyone. The nominees would have sailed through early on before the GOP picked up the Scott Brown seat. Obama was still very popular. He didn’t need to pressure the Fed, just get his people on the Fed. It would have been easy in January 2009.

    Fiscal stimulus is nowhere near powerful enough, it would have made little difference whether it was 800 billion or 1.3 trillion. The problem was monetary. If they did more fiscal stimulus, the Fed would have done less monetary stimulus like QE1, and we’d be in exactly the same spot.

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