Jaws dropped

Yesterday I was chatting with some highly intelligent acquaintances.  They do follow the news, but they weren’t economists.  Thus they had only a superficial understanding of the intricacies of monetary policy.   Both liberals and conservatives were represented.   At one point I mentioned that the Fed could boost aggregate demand.  They asked why the Fed did not do so.  I pointed out that Bernanke had clearly indicated that the Fed had plenty of ammunition, but that the Fed saw an equal risk of too little spending leading to recession, and too much spending causing the economy to overheat.  The Fed thought the current level of spending was about right.  They thought the current level of nominal incomes was about right.  The unanimous response of my acquaintances?  Check out the title of this post.

Sometimes I wonder what would happen if the broad American public actually understood the thinking of the elite economists who manage our policy apparatus.  If they understood that all that fiscal stimulus was done (to no avail!) because the Fed was too timid to act.



23 Responses to “Jaws dropped”

  1. Gravatar of Morgan Warstler Morgan Warstler
    9. August 2011 at 16:38

    Yeah, when I say, “Sumner wants to print money and give it to banks” they’ll close their mouths.

  2. Gravatar of Bryan Willman Bryan Willman
    9. August 2011 at 16:58

    Actually, if the “easy money” is stuck in the banks, maybe the thing to do is to print money and hand it out to citizens.

    As in, every person gets $2K just for a being a citizen.
    (So a family of 3 gets $6K)

    Set this up as some kind of “gift”, so there are no taxes.

    I suppose, ideally, make this money be prone to evaporation, so people have to spend it, but using it to pay down debt would make life better too, just more slowly.

    (300M x 2K -> $600 billion, or about the size of the previous feeble stimulus, but blasted directly into the hands of citizens.)

    If *that* didn’t produce spending and inflation (or a big reduction in debt overhang allowing for spending soon after) it really would be time to stock up on canned food and ammunition.

  3. Gravatar of cassander cassander
    9. August 2011 at 17:57

    Bryan> That’s actually a thought I’ve had for a while now, glad to know I’m not the only crazy one. It seems that economists have spent a lot of time thinking about how much central banks should stimulate, but almost none on the process by which they stimulate. The current system is opaque, convoluted, creates an incestuous relationship between big banks and the government, and is completely incomprehensible to the average voter. True helicopter drops (i.e. having the fed give everyone money) would stimulate more per dollar of stimulus, be more equitable, more progressive, and more comprehensible.

  4. Gravatar of Bob Murphy Bob Murphy
    9. August 2011 at 18:03

    Scott, you should have told them, “Of course, there are schools of thought out there that think the macroeconomic situation can’t simply be boiled down to ‘too little spending’ or ‘too much spending.'” Then maybe they would have gone back to complaining how hot it’s been.

  5. Gravatar of Joe Joe
    9. August 2011 at 18:29

    Scott, what place does the Wicksellian natural rate of interest have in your mode of thinking?

  6. Gravatar of Benjamin Cole Benjamin Cole
    9. August 2011 at 19:50

    You ought to see the reactions I get when I tell people who ought to print money and secretly goose payouts at racetracks.

    Seriously, no believes us. Like when I tell people prices are only up 2.6 percent from three years ago. They say the BLS is lying.

    The Far East is looking better all the time.

  7. Gravatar of John John
    9. August 2011 at 22:30

    My jaw drops everytime I read this blog and see an entire complex economic system reduced to NGDP which the author thinks can be easily manipulated to guarantee stability by printing money. Quick question, if nominal spending and aggregate demand stimulate employment, how come more people were employed 10 (by number not %)years ago when both were lower?

  8. Gravatar of Morgan Warstler Morgan Warstler
    10. August 2011 at 01:05

    Bryan, to do it correctly, the Fed has to print money and igve it ONLY to the Tea Party (everyone against QE).

    1. this gets rid of moral hazard – new money goes to savers, not debtors agitating for themselves and their voters.
    2. it buys off the political votes.
    3. the $ goes to the folks who WON and deserve to buy the hard assets.

    When the left is SERIOUS about QE (or Fiscal stimulus), they’ll pay off the Tea Party.

  9. Gravatar of Dtoh Dtoh
    10. August 2011 at 02:55

    Morgan says
    “Sumner wants to print money and give it to banks.” This political backlash is exactly what is wrong with the asset purchase approach, and why the Fed needs to be able to set capital reserve ratios. With that policy tool the discourse would no longer be about the Fed “printing” money; it would be about the Fed forcing the evil banks to stop hoarding cash.

  10. Gravatar of Pat Pat
    10. August 2011 at 05:50

    You led your friends nicely with the overheat business. Some people think the economy might “overheat” – omg jaws drop!

    You could’ve said “some people think that inflation may get too high if banks stop sitting on their excess reserves before 2013 which would force the fed to either let it happen or diminish the credibility of their future statements.”

  11. Gravatar of Scott Sumner Scott Sumner
    10. August 2011 at 06:32

    Morgan, Not give it to the banks, but sell it to the people.

    Byran and Cassander, Don’t give it away, sell it. But make sure the banks don’t hoard it. There’s no need to give it away; much better to reduce our national debt (otherwise we’ll need higher taxes in the future.)

    Bob. I agree that spending isn’t everything–but there is such a thing as too little spending, and it’s not hard to spot.

    Joe, I don’t think about it very often. But it’s one way of explaining how interest rate targeting affects the economy.

    Benjamin, I agree about the Far East.

    John, It’s not about the dollar amount of NGDP, it’s about the amount relative to expectations when nominal wage and debt contracts were negotiated.

    Dtoh, Negative IOR would also stop them from hoarding cash.

    Pat, “Some people” obviously doesn’t include the bond markets.

  12. Gravatar of Bryan Willman Bryan Willman
    10. August 2011 at 07:11

    I should note that my literal “teleport money into bank accounts” scheme is monetary not fiscal. There is no govt debt created. The citizens who get the money might use it to reduce their private debt, but it has no effect at all on govt debt.

    You don’t “sell” it to people because many people right now don’t want to “buy” money because they’d incur an obligation to repay it someday.

    Note that the thing I propose is *deliberately intended to be inflationary* – that’s the point….

  13. Gravatar of W. Peden W. Peden
    10. August 2011 at 07:26

    Bryan Willman,

    “I should note that my literal “teleport money into bank accounts” scheme is monetary not fiscal.”

    I agree, although I think that Post-Keynesians would define it as fiscal policy because it involves changing the quantity of assets (in this case, cash) rather than the composition held by the central bank.

    Anyway, the key thing with any stimulus is that someone, somewhere, somehow, has more cash than they want to hold. Everything else is detail.

  14. Gravatar of Rob Rob
    10. August 2011 at 07:34

    I see this post as something of an invitation to non-economists, so here goes.

    The argument I’ve heard (and I find it persuasive as a consumer) is that QE quickly finds its way into food and energy prices, which panic’s consumers and suppresses demand overall. What’s wrong with this argument?

    I also don’t understand why the Fed and ECB (in their geographic mandates, respectively) don’t directly buy a substantial slice of questionable sovereign debt and take “systemic risk” off the table. “Oops, we goofed, don’t do it again.” Why tiptoe around and/or use indirect methods that have less-targeted effects? What am I missing?

  15. Gravatar of dtoh dtoh
    10. August 2011 at 08:14

    Negative IOR is a step in the right direction, but a) unless they are very negative, banks may just bite the bullet, b) it doesn’t stop banks from hoarding cash, c) it will funnel a lot of funds into the T-Bill market (feed the beast…politically controversial), and d) it doesn’t give you the granularity of a flexible capital reserve ratio, which for example would allow you to set a 30% equity reserve ratio on balances with the Fed and a negative 30% equity reserve ratio on new loans to SMBs (political apple pie).

  16. Gravatar of Pat Pat
    10. August 2011 at 09:17

    Just because bond markets don’t expect inflation now doesn’t mean they might not before mid 2013 – which is why the dissenters prefer to just stick with more vague time frames. Their dissent wasn’t over raising rates right now.

  17. Gravatar of W. Peden W. Peden
    10. August 2011 at 09:59


    If QE “finds its way” into food and energy prices, then it does so by boosting demand. QE cannot cause cost-push inflation.

  18. Gravatar of Morgan Warstler Morgan Warstler
    10. August 2011 at 10:35


    No I’m going to say it my way, not yours.

    And Dtoh admits I’m right – I’ll win the political argument.

    MY QUESTION IS: why do you refuse to accept the political realities?

    It is so boring that keep repeating over and over something we know is true…

    But you NEVER deal with the WHY you can’t have what you want yet.

  19. Gravatar of dtoh dtoh
    10. August 2011 at 11:03

    You may be right politically with regard to your views on taxes, but I think the issue with monetary policy is one of both ignorance and politics. Even people like Scott, who have figured out the need for a more expansive monetary policy still don’t realize that allowing the Fed to set flexible capital reserve ratio requirements would be the best tool to accomplish this. There always seem to be a mental block against simpler more elegant solutions so Scott is stuck pushing a solution which is not only suspect politically, but more importantly is too difficult for politicians and public to understand….not to mention the fact that it is not nearly as effective as adjusting capital reserve ratios would be.

  20. Gravatar of cassander cassander
    10. August 2011 at 19:26

    Bryan> Exactly right. Give every american an account at the bank of Fed and put 2 grand in each one.

    Scott> If you give the money straight to people, you don’t need to worry about the banks hoarding it. Plus just giving it out is fairer and simpler. Unless you have a compelling economic reason that selling it (by which I assume you mean monetize the debt, correct?) is superior to handing it out, shouldn’t we just go with the simplest most straightforward plan? Always, KISS, after all.

  21. Gravatar of Lorenzo from Oz Lorenzo from Oz
    10. August 2011 at 20:05

    Rob: the argument assumes there will be no significant upward supply response. Scott et al’s argument is that, with so much unused capacity, the increase in output will dominate any increases in prices.

  22. Gravatar of Rob Rob
    11. August 2011 at 07:00

    Thanks, Lorenzo (if you are still reading this post).

    Hmmmm…….. The argument is that a depreciating dollar leads to oil price spikes. The spikes panic consumers (who have little corresponding income growth) and cause them to over-compensate elsewhere. In that sense QE contributes to an overall slow down and is self defeating. I’ve heard that in a number of places, although none as knowledgable as this blog.

    I was hoping to hear that the contribution of dollar value declines to oil price spikes are exaggerated or that the spikes themselves are more perceived than real. If the response is to wait for supply, now I’m really worried!

    According to last week’s Wall Street Journal:

    “LONDON””Most European major oil companies posted a surge in quarterly profits last week, but their results were overshadowed by a trend that continues to trouble Wall Street and corporate boardrooms: Nearly every major oil company reported year-to-year oil-and-gas output declines, often in the double-digits.”

    And the electric car seems very far off as well.

  23. Gravatar of Scott Sumner Scott Sumner
    11. August 2011 at 19:09

    Bryan, I’d call that fiscal and monetary policy, but I suppose it’s a matter of semantics.

    Rob, You said;

    “The argument I’ve heard (and I find it persuasive as a consumer) is that QE quickly finds its way into food and energy prices, which panic’s consumers and suppresses demand overall. What’s wrong with this argument?”

    There is no mechanism where this could happen (such as currency depreciation or industrial production growth) that doesn’t boost NGDP and RGDP.

    Why should the Fed bail out Greece?

    dtoh, If you make it 2% negative, they’ll get rid of most ERs. That’s $40 billion a year on $2 trillion.

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