If not now, when?

A recent WSJ article provided Bernanke’s response to this question by Brad DeLong:

D. Brad Delong, University of California at Berkeley and blogger: Why haven’t you adopted a 3% per year inflation target?

The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

1.  First of all, if the Fed really wanted to anchor expectations they would announce an explicit target.  The 3% target suggested by DeLong may or may not be optimal.  Most economists prefer a slightly lower figure, but given how the Fed has shown itself incapable of operating in a zero rate environment, it is equally plausible that the trend rate should be higher.  But the Fed refuses to set any explicit target.

2.  The Fed itself called for fiscal stimulus last year.  Isn’t the purpose of fiscal stimulus to increase aggregate demand?  And doesn’t higher aggregate demand increase inflation, at least in the long run?  So if Bernanke is opposed to higher inflation, why did he advocate fiscal stimulus?  And if Bernanke no longer thinks the economy needs more aggregate demand, why not just tell Congress that the economy needs no more stimulus, because there is plenty of demand out there?  And what is causing the high unemployment?  Maybe “recalculation” as Kling argues, or maybe perverse government incentives, as Casey Mulligan argues.  Bernanke is certainly entitled to his opinion.  Bu does anyone think he would dare offer those opinions to Congress?  So he hides behind the phony risk of high inflation, just as the Fed did in the early 1930s.  The same Fed that Bernanke claims caused the Great Depression.

3.  Why not level targeting?  Bernanke says it works in theory.  In 2003 Bernanke said Japan should adopt level targeting.  Bernanke’s former colleague Woodford says we need it right now, and indeed anytime we are in a liquidity trap.  So where is Bernanke’s leadership?

4.  Why the focus on long run inflation expectations?  Sure, they are reasonably well-behaved.  But the real problem is the very low inflation since mid-2008, and the low expected inflation over the next two years.  These low inflation expectations are consistent with an economy suffering from a severe demand shortfall in the near term.  And not just according to my model, but according to the sort of new Keynesian model that Bernanke has used his entire professional life.

5.  The Fed currently has no explicit inflation target.  How would setting such a target “cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward.”  That makes no sense at all.  Again, maybe 3.0% isn’t the right target.  But the Fed has to ask itself these questions:

a.  Do we want a higher level of AD?

b.  If so, what sort of inflation would result from the optimal level of AD?

c.  Then set an explicit target at that level.

If the optimal rate of inflation is exactly the same as the current expected rate (which is implied by his answer) then is the Fed is implicitly claiming that additional AD would be unwelcome in an economy with 10% unemployment, an economy where this year’s NGDP will fall at the fastest rate since 1938.  Does the Fed really want to say that additional AD would be unwelcome?  They can’t have it both ways.  If we need additional AD, then we need higher inflation expectations.

I found this answer infuriating because he danced around all the important issues.  He talked like we were back in the 1970s, when the biggest challenge was getting a lower level of actual and expected inflation.  Bernanke doesn’t seem to realize that inflation targeting is not a one way street, it doesn’t mean always targeting inflation at current rates or lower.  If you are serious about inflation targeting and have a symmetrical response function, then by necessity there will be times when you wish inflation to be a bit higher.  And if this is not such a time, a year when we have experienced the first deflation since 1955, then will there ever be a time when the Fed tries to boost inflation expectations?  If not now, when?

PS.  I don’t always agree with DeLong, but this was a great question.  Appropriately direct and to the point.

PPS.  Several people have asked my about Bernanke being named Time magazine’s Person of the Year.   This AP news story called it Time’s “highest honor.”  It is amazing how few people know that the designation is not an honor, it merely indicates who was most influential.  Apparently Time thought he did a good job, but past winners include people like Hitler, Stalin and Khomeini.  On the other hand Osama didn’t get named in 2001, so perhaps Time has chickened out on giving the designation to the most influential person, fearing a loss of subscriptions when bad guys are “honored.”   In any case, the whole process is just as ludicrous as the Academy Awards and Nobel prizes for Peace and Literature.

Update:  Here are comments from Free Exchange and DeLong.

HT:  Ian

Update#2:  A commenter mentioned Will Wilkinson’s post, which is much better than mine.  If only we could combine my knowledge of monetary policy with Will’s writing skills.


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38 Responses to “If not now, when?”

  1. Gravatar of david glasner david glasner
    17. December 2009 at 12:42

    This was my comment on free exchange

    It is shocking that an economist of Bernanke’s stature, whose considerable academic reputation rests largely on his research into the monetary causes of the Great Depression, would commit himself to a policy of suppressing short- and intermediate-term inflation expectations. In doing so, he is repeating the mistakes of his predecessors at the Fed who, during the Great Depression, opposed proposals for drastic monetary easing to counteract deflation, because they thought such policies would be inflationary. After the vicious deflationary downturn that started in 1929, inflation to restore the pre-Depression price level was necessary and did not lead to a collapse of confidence in the dollar as the pro-deflation alarmists had warned.

    In 1933 an international monetary conference was held in London. It called for a renewed commitment to the dysfunctional international gold standard, which, as Bernanke knows very well, was the ultimate cause of the world-wide deflation that was driving the downturn. Roosevelt rejected that proposal and instead advocated restoring price stability at the 1926(!) price level. Keynes wrote the next day that Roosevelt was not just right to reject the international monetary conference proposals, but magnificently right. Bernanke, who knows all this, is not just wrong, but horrendously wrong.

  2. Gravatar of Scott Sumner Scott Sumner
    17. December 2009 at 12:53

    David, Very well put. I wish you had written this point.

  3. Gravatar of jsalvatier jsalvatier
    17. December 2009 at 13:22

    http://www.willwilkinson.net/flybottle/2009/12/17/bernanke-and-the-pringles-problem/

  4. Gravatar of MIke Sandifer MIke Sandifer
    17. December 2009 at 13:22

    Dr. Sumner,

    After this response by Bernanke, do you still support his re-nomination? If so, is that only because you see no alternative?

  5. Gravatar of Joe Calhoun Joe Calhoun
    17. December 2009 at 13:30

    Hey Scott, you got a mention in the NY Fed Current Issues:

    “These views have led to proposals aimed at discouraging banks from holding excess reserves. The proposals include placing a tax on excess reserves (Sumner 2009) or setting a cap on the amount of excess reserves each bank is allowed to
    hold (Dasgupta 2009).”

    http://www.newyorkfed.org/research/current_issues/ci15-8.pdf

    I haven’t read the paper yet so I don’t know what conclusions they draw.

  6. Gravatar of David Pearson David Pearson
    17. December 2009 at 13:48

    Scott,

    This is the stongest, but by no means the first, indication that Bernanke sees no need to stimulate AD. Is he happy with the current level of AD? I believe the answer is no. Rather, he sees that the desired level of AD will be achieved naturally once banks provide credit to the economy. Presumably, he thinks this will happen imminently.

    The problem with Bernanke’s view is that it depends heavily on credit supply being the key obstacle to NGDP growth. If, in fact, the obstacle is really credit DEMAND, then his gamble will go very badly. What’s interesting is that Bernanke has been steadfast in downplaying the role of leverage as an impediment to credit growth. There was not “too much leverage” to begin with, so how could leverage stop consumers or firms from borrowing? This really boils down to the “recalculationist” thesis. I would say Bernanke is the principal opponent of the recalculationist view. If anything, he sees the financial crisis as a — deep but transitory — “miscalculation” on the part of financial firms.

  7. Gravatar of David Pearson David Pearson
    17. December 2009 at 14:02

    BTW, there is a further consequence of the “save the banks” approach. The political backlash to bank bail-outs is growing, as evidenced by the 16-7 Committee vote on the Bernanke confirmation. Given the Sanders/Shelby “hold” on the nomination, the senate needs 60 votes to bring the Bernanke confirmation to a vote, and it may be close in the end. Is this the kind of support that a Fed Chairman can draw on to implement an innovative change in monetary policy (i.e. inflation targeting)? I don’t think so…

  8. Gravatar of StatsGuy StatsGuy
    17. December 2009 at 14:41

    For a very long time, I’ve obscured the better part of my good sense by allowing myself a small sliver of hope. Lesson well learned – time to go short very soon.

    I had hoped that the issue was the Fed’s lack of understanding; they understand perfectly well, and their actions clearly do reflect their priorities. 2008 was not a mistake, it was a choice. In the Fed’s mind, their monetary policy was appropriate; the mistake was their failure to act even earlier and more aggressively to bail out the banks. It is abundantly clear that the Fed is more concerned about its own reputation than the US economy.

    The unbelievably sad thing about this, by the way, is that the anti-establishment folks in the US will take the failure of current policy as proof that the Fed’s efforts were doomed to failure, and will blame the failure on too much monetary stimulus rather than too little.

    I am more pessimistic now than I was in February…

  9. Gravatar of David Beckworth David Beckworth
    17. December 2009 at 14:55

    I find it curious that Bernanke is so worried about inflation expectations becoming unanchored when the Philadelphia Fed’s Survey of Pofessionl Forecasters shows 10-year average infation expectationas are well anchored and have not waiverd in this crisis. I graphed these expectation series here.

  10. Gravatar of Simon K Simon K
    17. December 2009 at 15:26

    I’m beginning to worry that this is fundamentally a public choice problem. When there’s uncertainty, banks and investors tend to move into safer assets. That increases their exposure to inflation. That reduces the supply of credit, and the productive sector of the economy tends to suffer, which is essentially where we are right now.

    To get out of the hole, the fed has to reduce the return on riskless assets to force investors to take risks ie. it has to create inflation. But investors don’t want to be forced to take risk – the bank’s balance sheets are in bad shape, savers 401(K)s are still looking bruised, and the economy as a whole doesn’t look too hot. They’d like to sit and clip coupons for a few years until things look better. But the rest of use really need them not to do that, hence the need for looser money.

    Which way does this go? Unfortunately wall street and the AARP have phenomenal lobbying power compared with people who actually do things, who have better things to do with their time than write letters to senators.

    This goes some way, I think, to explaining Bernanke’s vague insistence on continuing to be vague about what he’s doing. He knows he needs to create liquidity. He knows the economy won’t recover without it. But he can’t afford to scare wall street and have medium term rates rise in response – that would make the banks balance sheets look even worse, and make them even more reluctant to lend. So he’s trying to create inflation without creating the expectation of inflation. Unfortunately, as you’ve said, Scott, nominal GDP expectations are much more powerful, at least in the short run, than the direct effect of increases the quantity of money on nominal GDP. I think we just have to hope what he’s done is powerful enough …

  11. Gravatar of StatsGuy StatsGuy
    17. December 2009 at 16:27

    I have a silly question for David Beckworth about the graph he presents:

    Up until 1997, the 1 year expectations line roughly tracks the 10 year line. Then, in 1997, the 10 year expectation line flatlines – the lack of variation in that line is itself extraordinary – but 1 year expectations periodically dip.

    Is this meaningful, or just a data artifact or some sort? Is it indicative of systemic bias in expectations? It looks like a sort of truncation effect – as if professional forecasters seem unwilling to give a number below 2.5%, so if evidence points to a reality lower than 2.5%, forecasters just say 2.5%.

    The Fed, believing expectations really are 2.5%, thinks it’s doing a pretty fine job, and then reality undershoots.

  12. Gravatar of marcus nunes marcus nunes
    17. December 2009 at 17:47

    StatsGuy
    In 1997/98 there was the deflationary impact of the Asia crisis. Oil went down to $10/b! In 2001/03 there was the fall out from the 01 recession (with NGDP growing at around 3%) Remember Bernanke´s 02 speech “Deflation: Let´s make sure it doesn´t happen here”?
    Naturally short term expectations reflect these short term factors.

  13. Gravatar of David Beckworth David Beckworth
    17. December 2009 at 17:53

    Statsguy:

    I think the difference between the two expected inflation series is that forecaster think over the long-run (10 years) the Fed will make sure the average inflation rate will be around 2.5% but in the short run they know there can be deviations from this value due to various economic shocks. Ultimately, I would intrepret this remarkably stable long-run inflation forecast as meaning the Fed has earned some serious inflation fighting credibility amongs the forecasters. I guess Bernanke is concerned he might loose it.

    (It is worth nothing that the 1-year is a GDP deflator forecast and its average is lower than the 10-year which is a CPI forecast. There is a 1-year CPI forecast that has moves similar to the GDP Deflator, but whose average value is around 2.5%)

  14. Gravatar of marcus nunes marcus nunes
    17. December 2009 at 17:56

    StatsGuy: More to the point, in 01/03, you have productivity growing close to 4% yoy! Given the 2% inflation “norm”, the sharp decrease in iflation induced the Fed to crank down i. In the end this only served to impart an unwelcome instability in NGDP growth, a factor behind the problems we are experiencing at present.

  15. Gravatar of Jon Jon
    17. December 2009 at 18:15

    Bernanke doesn’t seem to realize that inflation targeting is not a one way street, it doesn’t mean always targeting inflation at current rates or lower.

    In the passage you quote Bernanke seems to be assuming that an inflation target means a commitment to a higher rate of inflation than currently possible. Even his opening points this way: “The public’s understanding of the Federal Reserve’s commitment to price stability…” You’d think he was talking about the BoJ.

    I think the most plausible view is that
    1) Inflation is precisely where the Fed wants it to be
    2) The Fed wants people to think inflation is low to hold inflation expectations lower than they otherwise would be– to support a prolonged real-effect from their low interest-rate policy.
    3) The Fed isn’t targeting the same inflation measure that it wants the public to fixate on (see point #2).

    So in this sense: Bernanke is a smart guy. He means what says. He realizes that an explicit target would belie the benefits of having a public and an (undisclosed) private index as these would naturally fluctuate with respect to each other–either revealing the lie or suggesting that the Fed is incompetent.

    No this does not violate the EMH–as a consequence of the uncertainty as to what the Fed is really doing. Having an explicit goal would endanger the uncertainty and lead back to neutrality which is precisely the reason to have uncertainty about what is really going on.

  16. Gravatar of JimP JimP
    17. December 2009 at 18:36

    This is an interesting idea:

    http://blogs.ft.com/economistsforum/2009/12/monetary-policy-time-for-true-quantitative-easing/

    Monetary policy: Time for true quantitative easing
    December 15, 2009 3:13pmby FT

    begin quote
    Unfortunately, this (real QE) is still not happening in Japan. And even in the US and UK, where central bank policies have been more promising, the concept has not been fully applied: central banks created more credit themselves, but are now already talking about exit strategies, despite having failed to increase bank credit creation used for productive purposes (as opposed to financial speculation).

    There are many ways to achieve this, on which I have written elsewhere. The simplest would be for the governments to stop their mind-boggling amount of bond issuance and instead borrow the entire public sector borrowing requirement from the commercial banks. They are under-loaned, thus reserve or capital adequacy requirements are no hindrance to their credit creation and hence monetary expansion. Broad credit used for GDP transactions would be jump-started, demand would soar and the recession would end within nine months. Yet, policy-makers in the rest of the world seem keen to learn the lessons from Japan the hard way.
    end quote

  17. Gravatar of rob rob
    17. December 2009 at 18:36

    Correct me if i am wrong, but this admission by Bernanke seems pretty fucking dramatic. as in sell sell sell. adding satire to tragedy, the senators who have attacked him have for all the wrong reasons. i see no reason for hope here. i am now short short short us equities (but long long long the growing sugar bowl i mean bubble.)

  18. Gravatar of StatsGuy StatsGuy
    17. December 2009 at 19:09

    “There is a 1-year CPI forecast that has moves similar to the GDP Deflator, but whose average value is around 2.5%”

    Thank you – that helps a lot.

  19. Gravatar of marcus nunes marcus nunes
    17. December 2009 at 19:25

    Inflation as “temptation”. In the end inflation (or NGDP) targeting would have similar effects and noone would feel “cheated”.
    http://www.voxeu.org/index.php?q=node/4413

  20. Gravatar of ssumner ssumner
    18. December 2009 at 06:07

    jsalvatier, I just added a link to the Wilkinson post at the end of my post. It is excellent.

    Mike, I guess not. In the past I was actually neutral on Bernanke. I didn’t think he did a good job, but thought his replacement would be just as bad.

    Joe, Thanks. It is just one more example of the Fed admitting that the intent of the program was contractionary.

    It is important to keep in mind that the excess reserves
    in our example were not created with the goal of lowering
    interest rates or increasing bank lending significantly relative to pre-crisis levels. Rather, these reserves were created as a by-product of policies designed to mitigate the effects of a disruption in financial markets. In fact, the central bank paid interest on reserves to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions. In such a situation, the absence of a money-multiplier effect should be neither surprising nor troubling.”

    What is troubling is that late last year they were opposed to more monetary ease.

    David Pearson, Those are good points. I agree Bernanke would prefer more AD right now, and agree the real problem is that he is opposed to more AD going forward. Regarding the politics of the nomination, if only a Senator had asked DeLong’s question and then aggressive follow-ups to pin him down on whether faster demand growth would be desirable.

    A few months ago I watched Bernanke in a Congressional hearing and was surprised at how poorly he answered the questions. I would have loved to see Congress put him on the spot regarding the Fed’s passivity about the low level of AD.

    Statsguy, Yes that was a very discouraging answer. It was almost like Bernanke felt he had to respond to all the rightwingers looking over his shoulder, rather than the logic of the question DeLong asked. Has he been co-opted by the hawks at the Fed? Who knows, but in DeLong’s post he pointed out that the Bernanke of 5 years ago would have answered this question differently.

    Not to beat a dead horse, but I also think this kind of answer shows the damage done by our focus on inflation targeting. If we instead focused on level targeting of NGDP, he would have had no where to hide, clearly more NGDP is desirable after falling 8% below trend since mid-2008. I hope one innovation to come out of this crisis is a shift of focus to level targeting, hopefully NGDP or some level targeting version of the Taylor Rule.

    David Beckworth, Yes, and again I think the real problem is excessively low inflation over the next two years.

    Simon, I agree with part of your commnet, but this attracted my attention:

    “He knows he needs to create liquidity. He knows the economy won’t recover without it. But he can’t afford to scare wall street and have medium term rates rise in response – that would make the banks balance sheets look even worse, and make them even more reluctant to lend. So he’s trying to create inflation without creating the expectation of inflation.”

    The only explicit example of the Fed targeting a higher price level was in 1933, and the stock market soared under the program. Yes, some coupon clipper are hurt, but on balance the effects are positive for the investment community, just as the effects of deflation are negative.

    I’ll do the rest soon.

  21. Gravatar of ssumner ssumner
    18. December 2009 at 06:44

    David Beckworth, I just read your new post and was especially interested in the David Wessel comment. I have often worried that Bernanke is not a strong leader. It is possible that his response is not his true feelings, but rather that he feels he must parrot official Fed policy, which he was not able to change. Least anyone think I am making excuses for Bernanke, this interpretation is equally bad in my book, and would also indicate that a new leader at the Fed would be appropriate.

    Statsguy, This may be a weak explanation for the graph, but I’ll try. I think that in the 1990s 3% inflation was viewed as “normal”. However now the normal rate seems to be about 2%. I think for many years forecasters assumed that the current rate of less that 3% was an aberration, and only gradually caught on to the fact that 2% had become the “new normal.”

    David Beckworth, I think your answer to statsguy is also reasonable. I’d add that Bernanke missed an opportunity. If he had tried to convey a level targeting goal, he might have been able to raise inflation expectations for a few years, and yet prevent long term expectations from becoming unanchored. Rather than shoot for 3% long term inflation, why not shoot for a price level path that rises 3% a year for 3 years, and 2% thereafter? I’m not saying they’d be able to hit it perfectly, Obviously they’d fall short in the very short run, but it would raise real interest rates without giving up the Fed’s long term 2% implied goal.

    Marcus, Yes, focusing on inflation rather than NGDP causes problems. And the last few years are a perfect example.

    Jon, Those comments are plausible, but again this is why I find the inflation rate targeting debate so maddening. In the new Keynesian model inflation targeting is a form of demand management. Perhaps 10 year inflation expectations are on target, and appropriate. But no one in their right mind thinks that the level of demand over the next three years is on target and appropriate. Bernanke really needed to say something about AD, as it was obvious that DeLong was mentioning 3% inflation not because it is a good thing in and of itself, but because DeLong correctly understands that inflation targeting is one way of boosting AD.

    JimP, That’s an interesting article and I think he is right about Japan. I am not going to give a snap judgment about the commercial bank financing of the deficit. I’d like to think about it and hear what others have to say.

    rob, Yes, the senators attacked him for all the wrong reasons. Or maybe the right reasons, but the right reasons of lesser importance.

    marcus, In the 1930s a conservative centrl bank was unwilling to use expansionary monetary policy to prevent a depression. Instead we got high inflation in the late 1940s after we had run up a big debt. Will it happen again? Will the Fed eventually resort to high inflation to clear up the problem that could have been prevented with much more modest inflation rates.

  22. Gravatar of Matthew Yglesias » Ben Bernanke and the Pringles Problem Matthew Yglesias » Ben Bernanke and the Pringles Problem
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    […] Krugman unloads on this a bit and Scott Sumner has an excellent technical discussion of the problems with Bernanke’s answer. And Will Wilkinson delivers a potent metaphor about […]

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    18. December 2009 at 13:13

    […] Scott Sumner: I found this answer infuriating because he danced around all the important issues.  He talked like we were back in the 1970s, when the biggest challenge was getting a lower level of actual and expected inflation.  Bernanke doesn’t seem to realize that inflation targeting is not a one way street, it doesn’t mean always targeting inflation at current rates or lower.  If you are serious about inflation targeting and have a symmetrical response function, then by necessity there will be times when you wish inflation to be a bit higher.  And if this is not such a time, a year when we have experienced the first deflation since 1955, then will there ever be a time when the Fed tries to boost inflation expectations?  If not now, when? […]

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    […] the rest of the world seems crazy. Even Cowen and Sumner seem to think changing the inflation target right now would be a good […]

  25. Gravatar of Lee Kelly Lee Kelly
    18. December 2009 at 14:36

    Perhaps the federal government is worried that even moderate inflation may spook the market for treasury bonds.

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    […] Surely we gain a little each time events teach us these painful lessons.  So even when I read this sort of depressing quotation from George Harriso . . . I mean Ben Bernanke, I still refuse to give up hope.  Someday we will […]

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    […] generally has excellent macro posts, so I thought I would respond to his criticism of those (like me) who seemed to take DeLong’s side regarding the desirability of a 3% inflation […]

  30. Gravatar of ssumner ssumner
    19. December 2009 at 11:43

    Lee, Maybe so. But the purpose of fiscal and monetary stimulus are the same—higher AD. So if they don’t want more inflation, then they shouldn’t be doing fiscal stimulus either.

    I still think most people in the government do still want more AD. They just don’t seem to realize that means more inflation as well.

  31. Gravatar of Pacer Pacer
    20. December 2009 at 04:56

    Yes, so we have a vicious cycle of depressed AD and rising unemployment. But let’s consider that the ‘desired’ baselines for those items came about in an environment where both aggregate demand and employment in the U.S. were dependent on massive borrowing from abroad. I believe the same is still true even today. In effect US net borrowing has subsidized both AD and employment in this country–we’ve been moving both jobs and spending forward from the future (essentially what borrowing does). Someday that equation has to reverse.

    To move forward, I think we have to deal with the following problems:
    1) the highest .1% of earners are taking way more than their productive contribution from the economy–this is mainly a problem because their earnings are largely not reinvested in this country. Related to this theme is the disproportionate role of the financial services industry at the expense of ‘hard’ industries;
    2) many people in this country are economically unemployable even at minimum wage. Forcing employers to give them jobs just makes us less competitive collectively;
    3) too much of our domestic demand is satisfied with imports–primarily oil and manufactured consumer goods. The problem here is that what is spent on these things often comes back in the form of lending which must someday be repaid, not in the form of trade for finished products with American labor content;
    4) We are fighting to maintain a standard of living that isn’t justified by our value to the rest of the world. And in doing so we emphasize consumption and frivolous spoils over prudent investment (a side effect of television politics).

    I don’t have all the answers, but am pretty sure that the machinations of the Fed (monetary jiggering) is if anything a very tiny part of the solution.

    Where I would like to see policy discussion go, but have little hope it will, is toward industrial policy, a massive campaign of investment in infrastructure (paid for with a national sales tax which includes energy purchases) and a return to the system we once had in which state legislatures elected their US Senators–not popular elections.

  32. Gravatar of TheMoneyIllusion » The definition of insanity is . . . TheMoneyIllusion » The definition of insanity is . . .
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    20. December 2009 at 12:13

    […] to deal with severe unemployment, even though in theory the proposal would work.”  Read the answer yourself and see who you think is right: The public’s understanding of the Federal Reserve’s commitment […]

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    […] to deal with severe unemployment, even though in theory the proposal would work.”  Read the answer yourself and see who you think is right: The public’s understanding of the Federal Reserve’s commitment […]

  35. Gravatar of ssumner ssumner
    21. December 2009 at 13:57

    Pacer, I don’t support “industrial policy” I hasn’t worked well for other countries.

    I don’t understand your point 2. What firms are we forcing to hire workers? And who isn’t qualified to work? Most jobs require very little education.

  36. Gravatar of Simon K Simon K
    21. December 2009 at 17:40

    Scott – Thanks for the reply, as always.

    Its obvious in retrospect (except to a few hard money types) that inflationary policy in 1933 benefited everyone. But its not obvious to everyone from that it would do so now, because its obvious (in retrospect) that in 1933 the economy was operating below capacity, whereas there are people now who believe its not, because the currently under-utilized capital and labor can’t be used profitably at this time. I think this is nonsense, but I offer Arnold Kling as an existence proof of someone who isn’t wilfully ignorant but does believe this.

    There’s a spread of plausible views on how much the economy can grow before the money supply needs to be tightened, far broader than it normal times, and it seems (based on the very unscientific sample of people I talk to) that people tend to believe in the projections that would be worst for their particular position WRT inflation, and therefore advocate for the policies that would help them most. For purely selfless reasons of course. As a fairly young person in a well-paid job and with most of my net worth tied up in a debt-laden house, advocating for risking mild inflation to maintain growth, I’m no exception 🙂

    But people take these position on the assumption things will otherwise be okay. The banking and investment lobby would refer lower inflation, provided it doesn’t hold back growth. I’d prefer higher inflation, because I don’t want to risk holding back growth. I read your basic point (in laymans terms) as being that the level of inflation needed to maintain growth is higher than most people thing right now, because NGDP fell so far so fast during the firs year of the recession.

  37. Gravatar of Pacer Pacer
    22. December 2009 at 08:03

    ssumner –

    I agree that industrial policy has many pitfalls. It worked horribly in the former Soviet model, where resources were forced into inefficient industries in inefficient places (cotton in Uzbekistan stands out to me). My idea was an industrial policy along three lines: 1) to capture the intellectual property developed at our fine universities first and foremost for the competitive advantage of the U.S., including changes in immigration rules that would force foreign-born PhDs to stay rather than go; 2) self-sufficiency in critical areas, such as subsidies to restart rare earth metals mining/refining in the U.S.; and 3) encouraging the development of high-human-value manufacturing industries through incentives, patent-sharing (related to #1 above), and educational incentives to make Americans fit for high-paying jobs in said industries.

    Similarly, when I say that we have too many unemployable people, I mean people who lack the skills to compete in a global environment with global wage pressures. To maintain our standard of living we cannot have a large percentage of the population in minimum wage jobs that even at $7/hr would be outsourced if that were feasible (can’t deliver hot fries from India). If anything those jobs should belong, as they once did, to entry-level part-timers i.e. high school students. Unfortunately, we just don’t have a very well-educated workforce which on the whole merits compensation on the order of 5-10 times the going rate in developing countries. But that’s what we need–to be Japan or Switzerland where our labor is truly worth more and can be paid more relative to other countries.

    All that, of course, assumes that we want to continue our massively disproportionate consumption of the world’s natural and human outputs. We do, right? Therefore, we need to be, in aggregate terms, more brainy than brawny in relation to the other peoples of the Earth.

  38. Gravatar of ssumner ssumner
    22. December 2009 at 18:16

    Pacer, I am not opposed to bringing in more educate immigrants. But I do think that people tend to overstate the role of education. People can learn on the job and become highly productive.

    Another blog (Caplan?) pointed out that most of the houses built in recent years in the Southwestern US were built by labor that was uneducated workers from little villages and farms in Mexico. And yet these workers had four times the productivity of similar workers building housing in Latin America. The most important thing is to have a good economic system. If you do, even workers with relatively little education can easily compete in the global economy.

    I think the US already leads the world in innovation, so I’d rather focus on the dysfunctional areas of our economic system (health care, public schools, the legal system, etc.)

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