Living in a dream world

Here’s the NYT:

The sheer size and scope of the package would have been unthinkable only a couple of weeks ago. Administration officials said they hoped that its effect on a battered economy would be exponentially greater than its $2 trillion cost, generating as much as $4 trillion in economic activity.

Really? Four trillion more in economic activity in a $21 trillion economy? At a time when firms are closing down due to social distancing, and consumers will not be out spending money? How is this magic supposed to work?  Why not claim $40 trillion?  Or $400 trillion?

The legislation, which is expected to be enacted within days, is the biggest economic relief package in modern American history, dwarfing the $700 billion Wall Street bailout in 2008 and the $800 billion stimulus bill passed in 2009.

Dwarfing?  Really?  Nominal GDP in early 2020 is 50% larger than back in 2008.  How does a $2 trillion (loan plus spending) package in 2020 “dwarf” a $1.5 trillion dollar (loan plus spending) package in 2008-09.  Maybe I’m not too good at math.

I’ll have more posts when I’ve had time to digest this package.  No doubt there are a few good provisions (especially beefed up unemployment compensation and aid to hospitals), but sending $1200 checks to everyone is a crazy waste of money.  And exactly how is the aid to small businesses supposed to work?

On a more upbeat note, the mainstream media finally seems to be waking up to the fact that the Fed never runs out of ammunition. Devan Stormont sent me this David Ignatius piece from the WaPo:

When the Fed cut interest rates to zero on March 15, some analysts thought the Fed had exhausted its arsenal. But that turned out to be wrong. Ten days of creative policy followed, as the Fed demonstrated that in backstopping the markets by buying debt, it never runs out of bullets.


And this is a more subtle point, but equally important:

One measure of success for Powell will be if people decide in retrospect that his crisis moves were unnecessary. They’ll have the luxury of not understanding how much worse things could have been if the central bank hadn’t taken strong action.

Unfortunately, I don’t expect us to have that “luxury”.

I previously congratulated the Fed for indicating a willingness to buy unconventional assets such as corporate bonds.  The actual policy news is both better and worse than I assumed.  Worse in the sense that this is being done under a program where any Fed losses must be backstopped by the Exchange Stabilization Fund, which limit show much they can buy.  Better in the sense that Congress seems about to dramatically increase this fund, so that the Fed will be free to buy a much larger quantity of risky assets if necessary.  (I’d still prefer they not do so until conventional ammo is exhausted.)

For years I’ve argued that Congress should allow the Fed to buy a much wider range of assets in an emergency, and that Congress should also tell the Fed not to let fear of losses on its portfolio of bonds hold it back from doing whatever it takes to achieve its Congressional mandate.

Update:  Early last week I asked why anyone who was investing for the long run (and didn’t need to sell) would prefer a 10-year Treasury to a 10-year TIPS.  At the time, the TIPS spread was 0.63%.  Today it’s 1.04%.

You’re welcome.

And I still wonder, as even 1.04% seems really low.

HT:  TravisV.



47 Responses to “Living in a dream world”

  1. Gravatar of agrippa postumus agrippa postumus
    25. March 2020 at 10:17

    you mewl that money is tight. money is tight is always the issue in all contractions. but you never ask why money is tight. no, the inquiry does not end with liquidity preferences, bc that avoids the issue of why liquidity preferences rise. they rise bc only labor produces value. and during a contraction no one knows if their labor has a definite future at least as good as before. money is credit. credit allocation needs credit analysis. that can’t be done at a global or macro level. its disappointing that you never get to the root of tight money beyond preferences. beyond barter, money is always tight, absent credit. one person has to evaluate exchanging value of labor for credit, or advancing money on promise of future value of labor. dislocation is a reset of expectations of credit being paid. your macro solutions are not solution, merely salves till the next reset.

  2. Gravatar of Ray Lopez Ray Lopez
    25. March 2020 at 10:17

    Sumner: “Finally!!!!!” Ray: Finally Sumner answers the question I posed him weeks ago about as to how the Fed is expected to not run out of ammunition if they are limited to government paper. I had said they would run out of ammo unless they were allowed to buy junk commercial paper. I was vindicated by this post. And note the mechanics, which apparently caught Sumner by surprise: the Exchange Stabilization Fund. This is interesting and deserves more inquiry. Apparently I’m not the only one concerned with the Fed bloating their balance sheet with toxic junk paper (which Sumner once said doesn’t happen, well, it will now unless we taxpayers are careful).

  3. Gravatar of Ray Lopez Ray Lopez
    25. March 2020 at 10:21

    @agrippa postumus – you advocate the labor theory of value? LOL! Even Marx would repudiate this obsolete doctrine in the age of robots. Labor is trash. Only capital matters. Ask me: I’m in the 1% since I inherited or are due to inherit money from my 1% relatives. It’s not what you know but who you know and what your bank account shows. Everything else is trash. Including education (I have more degrees than you, likely).

  4. Gravatar of ssumner ssumner
    25. March 2020 at 10:46

    Ray, You are completely clueless. Please try to pay attention to what I write.

  5. Gravatar of Ray Lopez Ray Lopez
    25. March 2020 at 12:13

    @ssumner – I apologize for my trollish post, but I try and understand you somewhat. But you’re sometimes hard to figure out. Now, indeed you probably have heard about the Exchange Stabilization Fund (which I had never heard of) contrary to my implication. For those readers like me, (the Brookings site Sumner links to): “By providing funds from the ESF, the Treasury is agreeing to cover losses on the Fed’s emergency lending. If there are losses, the taxpayers are on the hook” – so we taxpayers are on the hook, and this is not really Ben Cole / MMT “helicopter money”.

    In fact, I urge you, Dr. Sumner, to blog on why keeping the taxpayer on the hook is a bad idea. Why not simply backstop the dollars lent by the Fed with the commercial paper given by the borrower? Say Boeing is in trouble. Boeing would ask for money from the Fed with nothing more than “I.O.U”s issued by Boeing, no need for an Exchange Stabilization Fund. Agree @SSumner? Or was this implicit in your answer?

    PS–I believe I once read New Zealand does not require central bank members (or is it the bank itself? Forget now) to have any reserves, i.e., 0%, so they can more easily create money by the push of a button, MMT style. Sumner should blog on this topic as well. It would make the ‘geometric series’ multiplier 1/(1-x) much bigger if x can approach 1 (i.e., no reserves needed by Fed member banks)

  6. Gravatar of Christian List Christian List
    25. March 2020 at 12:33

    It’s an important point of monetary policy that taxpayers are not on the hook. Why would they be on the hook? They are not on the hook. Is it possible that you didn’t understand something very basic?

    But don’t be upset, the vast majority of people do not understand this point. This is also a very important reason why monetary policy experts like Scott are not popular amongst the public. People do not understand the advantages of monetary policy over fiscal policy. If they understood, Scott would be a rock star. One of the best there ever was.

  7. Gravatar of agrippa postumus agrippa postumus
    25. March 2020 at 12:58

    list: there is no monetary policy. there is credit allocation policy. money is credit. credit allocation is fiscal. lopez is arrogant, insolent, boastful and disrespectful, but not ignorant.

    sumner is no rock star, just another monetarist looking for a windshield.

  8. Gravatar of markw markw
    25. March 2020 at 13:00

    Prof Sumner,

    I’m a fan and I understand that in general you think the Fed should manage the economy (by adding GDP growth to its charter??). I also understand your general dislike of fiscal stimulus. But in this case, what is the alternative to sending coronavirus shut-ins checks?

  9. Gravatar of Christian List Christian List
    25. March 2020 at 13:19

    list: there is no monetary policy. there is credit allocation policy. money is credit.


    Dude you went full retard right there. It seems to me that you don’t understand basic stuff as well. To make it perfect you should add: “interest rates are the price of money”. But thank you, it was really entertaining.


    Maybe you two are both great, and I mean this, because you might have shown the two different things that people so often completely misunderstand about monetary policy.

  10. Gravatar of Ray Lopez Ray Lopez
    25. March 2020 at 14:14

    @Christian List – you stupid? The US taxpayers *are* on the hook when the Fed accepts commercial paper, if the Fed later cannot flip it, the Fed (and thus the US taxpayer) eats the cost. Stupid German. The difference with the “Exchange Stabilization Fund” is the Fed must limit their purchases of commercial paper to such amount as backed by said fund (I doubt the retard will understand what I just wrote but others will). So removing this Stabilization Fund will allow for easier helicopter money (unbacked by anything other than a promise to pay by the US govt)

    And in other news (Associated Press today): “PARIS (AP) — Young German adults hold “corona parties” and cough toward older people.”

  11. Gravatar of sty.silver sty.silver
    25. March 2020 at 14:27

    Is sending money to people really that bad? I get that it’s not an answer to the crisis, but is it really net negative? Don’t we want the government to do redistribution in ways that aren’t explicitly harmful to the economy or create bad incentives? Why does the utilitarian argument for redistribution not apply here?

  12. Gravatar of ssumner ssumner
    25. March 2020 at 14:41

    Silver, I favor redistribution, but let’s focus on recovery right now. We shouldn’t be spending a lot of money on redistribution in the midst of a crisis.

    And if we must do redistribution right now, how about paying for it with taxes? And should we be redistributing money to families making $150,000 when we have lots of homeless people?

  13. Gravatar of CD CD
    25. March 2020 at 15:39

    I don’t know if you saw this, but apparently Powell told Trump he has more even arrows in the quiver:

  14. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2020 at 15:49

    Stray thought: the federal government plans to send a check perhaps for $2,000 to $3,000 to 130 million American households.

    Every year the federal government taxes away an average of $10,000 from every one of those 130 million households to finance the Department of Defense, DHS, the VA, the black budget, and prorated interest on the national debt. That is, outlays for the above named agencies come to $1.3 trillion dollars.

    So this year the government will tax away $10,000 (for the above-named agencies only) but then send back $2,000 to $3,000 to every American household.

    My own view is that the federal government is effectively engaging in helicopter drops at a time when that is necessary. The US Federal Reserve will buy a lot of Treasury bonds at the same time the government will be issuing a lot of Treasury bonds and running a large deficit. Michael Woodford says that to helicopter drop.

    I do not think anyone anymore believes the Federal Reserve will someday shrink its balance sheet. Oh, maybe a little here are there, but does anyone really think so?

    Before us is a lot of bad options.

  15. Gravatar of msgkings msgkings
    25. March 2020 at 16:03

    @Ben Cole:

    The current bill has only $1200 going to people making under $75K, or couples under $150K, with I think $500 for their kids. Not $2-3000 to every household.

  16. Gravatar of foosion foosion
    25. March 2020 at 16:29

    >>$1200 checks to everyone is a crazy waste of money.>>

    Send the money out quickly now, get it back from the unworthy (however defined) later through taxes. And it’s not everyone, it cuts back as msgkings explains above.

    >>And exactly how is the aid to small businesses supposed to work?>>

    If administered by our current leader, badly.

  17. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2020 at 16:38

    Msgkings: Yes…so an average family of three would get a check for $2,900.

    Anyways, I said $2,000 to $3,000.

    Hey, my idea was for a holiday on payroll taxes and a sharp reduction in withholding rates on income taxes. It would be nice if we reduced confiscating what people earn.

    Another nice idea would be to reduce outlays for the agencies I mentioned by 30% and give back $3,000 every year in reduced taxes to every American household.

  18. Gravatar of Student Student
    25. March 2020 at 16:56

    The new case data looked great today… 3rd consecutive decline in the growth factor, first time in a while it’s dipped below 1.0. Seems the social distancing is working. Hope this continues until we beat this thing. Let’s hope the data isn’t bogus (lack of testing) and that we don’t end it to soon and get a second wave. 🤞

  19. Gravatar of msgkings msgkings
    25. March 2020 at 16:57

    @Ben Cole:

    You also said 130 million households. Not gonna happen.

    And how do you give Federal tax rebates to the 50% or whatever it is of Americans that do not pay Federal income taxes? I guess you can get most with reduced payroll taxes.

  20. Gravatar of Michael Watts Michael Watts
    25. March 2020 at 17:15

    It takes some guts to describe $4 trillion as “exponentially greater” than $2 trillion.

  21. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2020 at 18:41


    First, I would like everyone to go back to work. But we have decided on shutdowns.

    Second, I would like tax holidays on people who work for a living.

    Third, the tax holidays do not preclude cutting a federal check for every household. If ever, now is the time for such checks.

    As I have said, we have a lot of bad options thrust upon us, once we decide to stop working.

    I do get a grim (very grim) chuckle of out American “libertarians” who, at the slightest whiff of personal danger, have adopted the jodhpurs and epaulettes of statist martinets….a police state is okay, but they are perturbed about sending checks to ordinary American households. Even though the police state has shut down employment.

    This unfolding scenario views a bit like a dystopian low-budget movie. The bad guys are comic-book characters come to life….

  22. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2020 at 19:04

    I realize my comments on a monetary policy blog will not influence national policy anywhere.


    Hong Kong, population 7.4 million, is a small governmental jurisdiction, reasonably well-governed in terms of public health (small regions, few borders, have advantages in this regard).

    They keep getting flare-ups of C-19, and returning to lockdowns.

    Hong Kong has had 410 known C-19 cases and four deaths.

    I see nirvana for “first responders” and public health agencies in the US, maybe for years to come. No herd immunity ever obtained but recurrent “flare-ups.”

    Prayer vigils for vaccines.

    Is there the slightest chance the US will not see recurrent flare-ups of C-19 as soon as lockdowns are eased?

    And what is the exit strategy for lockdowns? California said the lockdowns might last three months, And then what? A month of near-normalcy and then another lockdown, ala Hong Kong?

    Dudes…you need to put your thinking caps on.

    Side note: Okay, the de facto open borders policy for immigrants. Explain lockdowns but open borders….

  23. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2020 at 19:10

    “On March 2, after several weeks of shutdown, most of Hong Kong’s 180,000 civil servants returned to their offices, with the private sector following their lead. It all seemed fine until March 16.

    But now, with the number of confirmed cases nearly doubling in the past week, Lam explained that it’s time to adjust. As of Wednesday, only residents will be allowed back in the territory. Civil servants are back working at home and strict quarantine measures are in place once again.:


    Scott Sumner entitled this post “Living in a dream world.”

    Truer words were never spoken…

  24. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2020 at 20:18

    “Florida has a message for New Yorkers: Please don’t visit. And if you do, prepare to sit in quarantine or risk jail. Hawaii, which also thrives on tourism, is asking visitors to stay away for a month. And Alaska is requiring a 14-day quarantine for anyone entering from, as Alaskans put it, Outside.”—NYT.

    Lockdowns, hysterical media, economic collapse…then banning of outsiders. National Guard call-ups….no meetings of more than two people allowed in NYC…I guess you are allowed to hug your wife….for now….

  25. Gravatar of Michael Sandifer Michael Sandifer
    25. March 2020 at 20:54

    For those interested, here are fresh comments offered yesterday by two doctors on YouTube I follow that address the question of balance between slowing the spread of the virus and minimizing damage to the economy.

    As far as I can tell, the broad consensus among various experts is that we need to be very strict in following lockdown guidelines, at least until the appearance of new cases doesn’t threaten to overwhelm the healthcare system. Once that occurs, especially with increased capacity for testing and tracking, we can start to relax the lockdowns in specific ways, gradually, and with great care.

  26. Gravatar of ssumner ssumner
    25. March 2020 at 21:35

    markw, You said:

    “But in this case, what is the alternative to sending coronavirus shut-ins checks?

    What is a coronavirus shut-in? I have no idea what you are talking about. If you are referring to people like me, I don’t want a check.

    CD, Thanks for that link. ASAIK, no Fed chief has ever said they were out of ammo, probably because they never have been.

    Ben, Why do you think Trump has an open borders policy?

  27. Gravatar of Payam A Payam A
    25. March 2020 at 23:45

    Can we have a prediction market on Hypermind for what the true fatality rate (as opposed to CFR) of COVID-19 will eventually turn out to be?

    I’m gonna be betting on < 0.1% :

    26. March 2020 at 01:48

    Scott, hope it’s obvious to you now that we clearly need to be auctioning the unemployed.

    We call it ENDLESS JOBS™

    But with it in place, every single person fired, furloughed etc, would be getting a weekly check BUT also being bombarded with offers to work from home, do deliveries, be a Certified WHAN SURVIVOR™ babysitter, walk around disinfecting everything on Earth.

    And those people nobody offered work to, would be able to sit at home with free money.

    We’d be PUTTING our foot on the Digital Deflation pedal. TONS MORE JOBS would be work from home.

    We can do all the monetary stuff you want, but right this minute we could have LFP not falling off a cliff.

  29. Gravatar of Benjamin Cole Benjamin Cole
    26. March 2020 at 02:30

    Scott Sumner:

    President Trump? Jeez, what is his real-deal policy on anything? Trump says his policy is for tighter border security, but maybe it is just the same de facto open border.

    So…in the real world, we have lockdowns and effectively open borders. Only maybe 1 million people a year come in through unauthorized channels.

    Hong Kong cannot contain COVID-19, even in a little city-state with limited entry. Reapted lockdowns….

    Though perhaps the type-O Latin Americans are resistant….let us hope for small favors…

  30. Gravatar of Benjamin Cole Benjamin Cole
    26. March 2020 at 03:05

    Scott Sumner ponders interes rates, and thinks they might go back up some day.

    Well, maybe.

    The trend of the last 40 years has been to lower inflation and interest rtes, and globally, Often, after each recession, inflation and interest rates are a notch lower.

    This next recession may be a doozy, and sui generis. Bu the US could come out this recession a notch lower on both inflation and interest-rate counts. If we come out….

  31. Gravatar of cove77 cove77
    26. March 2020 at 03:41


    did you see this? thoughts? thanks

  32. Gravatar of cove77 cove77
    26. March 2020 at 03:41


    did you see this? thoughts? thanks

  33. Gravatar of cove77 cove77
    26. March 2020 at 03:43

  34. Gravatar of msgkings msgkings
    26. March 2020 at 07:44

    @Michael Sandifer:

    THIS is what I was talking about:

  35. Gravatar of Michael Rulle Michael Rulle
    26. March 2020 at 08:11

    Re: “biggest ever”

    Yes, pols and media are forever making this error—who knows why. Trump does this all the time, of course. But in yesterdays “presser” he said something I have never heard a pol say before. He actually said FDR, adjusted for time value (he did go to B-school after all!), might have been larger than this program. Of course one of the issues is how big the program is—counting everything as if loans were the same as grants, etc, etc—but not my point.

    The press in innumerate of course—and a president adjusted for time value of money—one old news, one new news.

  36. Gravatar of Christian List Christian List
    26. March 2020 at 09:23

    On the plus side: China says they have zero new cases. So now they finally admit that Hong Kong and Taiwan are not part of China. Good!

  37. Gravatar of Negation of Ideology Negation of Ideology
    26. March 2020 at 09:28

    Like the editors of the National Review, I think it makes more sense not to think of this as a stimulus bill:

    “It is principally trying to enable the temporary shutdown of much of the economy with the least humanitarian damage.”

    It makes sense to pay people to stay home, give extra money to hospitals and State governments to deal with the added costs, and to loan money to businesses who have temporary shortfalls in cash due to the shutdown. And as far as I can tell, that’s pretty much what this bill does.

    Of course, it would be better if we ran huge surpluses during normal years and only borrowed when we have a crisis every 10-15 years or so, but we are where we are.

    Also, I wanted to second Michael Rulle’s comment “as if loans were the same as grants”. That’s one of my pet peeves, people comparing loans to grants. Every proposed spending program now seems to start with the argument “If we can afford to give billions to bail out corporations, we can afford … ” (Insert national health care, free college, whatever.) Pure demagoguery.

  38. Gravatar of Esteban Esteban
    26. March 2020 at 09:59

    Perhaps the goal now should be to teach economists that if inflation expectations deviate enough from 2%, it means the Fed has behaved and is behaving incorrectly.

  39. Gravatar of Michael Sandifer Michael Sandifer
    26. March 2020 at 10:17


    I think Alex Tabarrok has the right idea with his comments on that post. I’m always open to changing my view in the light of evidence, I hope. I’ll stick to what the experts on these pandemics recommend, unless there’s a good reason not to.

    If one doesn’t believe in expertise and division of labor, one can’t believe capitalism can work too well.

    Besides, things are becoming much more risk averse here in Jacksonville, FL, without government direction. Publix supermarkets, for example, is not only installing Plexiglass to separate cashiers from the public, but they’re limiting the number of people allowed to shop in the store at any one time.

    Also, I have trouble finding restaurants open at all, even for takeout, apart from some fast food drive-throughs.

    The idea of relaxing the lockdown orders may be naive, in many places at this point. Horse has left the barn.

  40. Gravatar of Thaomas Thaomas
    26. March 2020 at 10:41

    If the Fed were doing its job (keeping NGDP on track) , wouldn’t the TIPS CPI based spread be >2.5%. Still 1.05 is better than 0.5 a week ago.

  41. Gravatar of ssumner ssumner
    26. March 2020 at 12:54

    Payam, If you mean that to refer to infected people, you’d lose badly. If you mean total population of the USA, you’d likely win.

    Thaomas, I agree.

  42. Gravatar of ssumner ssumner
    26. March 2020 at 13:00

    Cove77, I completely agree. See my new Econlog post.

  43. Gravatar of Payam A Payam A
    26. March 2020 at 14:45

    Scott, I meant the infected. According to the WSJ article (which is written by two Stanford professors), the vast majority of the infected people don’t get tested, which pushes the true fatality rate way below the current case fatality rate (CFR) of ~1%.

  44. Gravatar of ssumner ssumner
    26. March 2020 at 15:59

    Payam, Wrong. The current case fatality rate (globally) is over 4%. I agree the actual rate is much lower, but . . .

    Where testing is fairly complete it’s closer to 1%. So 0.1% seems highly implausible.

    Ten of the 712 infected on that cruise ship have died. That’s 14 times their prediction.

    I’m willing to accept 0.5%, but anything lower seems pretty unlikely.

  45. Gravatar of Michael Sandifer Michael Sandifer
    27. March 2020 at 11:37

    Here’s Bill Gates on striking the balance between protecting the public from infection and limiting economic damage. He seems he agrees with consensus expert opinion. There is no middle ground unless and until we get testing and tracking rates sustainably at or above the the rate of active infection.

  46. Gravatar of Darina Confidus Darina Confidus
    28. March 2020 at 10:36

    Now there is no country in which the economy does not suffer in the covid 19 pandemic, and not in all countries the government is able to support the population. Do we not want the government to redistribute in ways that do not cause obvious harm to the economy or create bad incentives?

  47. Gravatar of ssumner ssumner
    28. March 2020 at 21:29

    Darina, Yes, I favor that sort of redistribution.

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