Mental health bleg

Ramesh Ponnuru has a new piece in the National Review, which begins by quoting Alan Blinder:

The Federal Open Market Committee has now cut interest rates twice, by 0.25 percentage point each time, as “insurance” against a downturn. But there are no serious signs of recession; most forecasters see growth continuing near 2%. Nor can monetary policy undo the damage from tariffs. Nor does half a percentage point buy you much insurance.

There are reasonable arguments for and against cutting rates. So, unsurprisingly, the FOMC is divided. History may prove Mr. Powell and the Fed’s doves right—or wrong. For myself, I’d prefer that the Fed save its limited ammunition until they see at least a few whites of a downturn’s eyes. Then, by all means, fire away.

Ponnuru quite rightly points out that Blinder has things backwards.  Other things equal, cutting the policy rate tends to boost the neutral interest rate, thus giving the Fed more ammunition (here I mean ammunition in the conventional Keynesian sense—they actually have almost unlimited ammunition).  Indeed many of Blinder’s fellow Keynesians have called for a more expansionary monetary policy specifically for the purpose of giving the Fed more ammunition.  So there seems to be a split even within the Keynesian community.

Obviously Blinder is a much more accomplished economist than I am, so I wonder if I am missing something.  More broadly, I see more and more examples of prominent economists making seemingly absurd claims, such that low interest rates represent easy money.  What’s going on here?  Am I going crazy?



24 Responses to “Mental health bleg”

  1. Gravatar of E. Harding E. Harding
    21. September 2019 at 14:32

    The more public-facing the intellectual, the less accurate he tends to be.

  2. Gravatar of XVO XVO
    21. September 2019 at 14:55

    Are they just supporting their favorite political party?

  3. Gravatar of ssumner ssumner
    21. September 2019 at 15:01

    XVO, Definitely not. These guys care too much about their reputation among their fellow economists to make obviously false statements. Even if his preference for not cutting rates now were political (and I have no reason to believe that), he’d have used some other explanation if he agreed with me that cutting rates adds to ammunition.

  4. Gravatar of Benjamin Cole Benjamin Cole
    21. September 2019 at 15:44

    More broadly, I see more and more examples of prominent economists making seemingly absurd claims, such that low interest rates represent easy money. What’s going on here? Am I going crazy?–Scott Sumner.

    In the Temple of Orthodox Macroeconomics, the Hall of Tinfoil Hats is becoming crowded.

    Another question: In the recent past (though evidently now forgotten) the Fed conducted a QE program of $50 billion a month in order to reduce long-term interest rates, although there was a complicated Operation Twist for a while.

    Okay, the Federal Reserve just conducted $275 billion of QE, and may do another $625 billion up through October 10. The purpose of this latest round of QE is to provide liquidity to the commercial banking system, but the operation is just the same. The Federal Reserve digitizes money and buys bonds.

    Um. Er. So if the Fed does not call the purchase of bonds a quantitative easing program, then it is not a quantitative easing program?

    And if the national government issues bonds and the national central bank buys bonds…that is not a helicopter drop?

    I am headed to the Hall of Tinfoil Hats.

  5. Gravatar of bill bill
    21. September 2019 at 15:46

    You are not crazy.

  6. Gravatar of dlr dlr
    21. September 2019 at 16:45

    here is an attempt at a favorable reading of that perspective:

    we know that the fed sets not only the current rate, but also expectations for all future short term rates contingent on economic conditions. so we could imagine a crazy fed that cut 200bps last week but also promised to raise rates at every meeting thereafter until unemployment hit 10pct. inflation breakevens, the stock market and expected nominal growth all plunge despite the huge rate cut. the fed immediately regrets its move and wants to reverse course, but some pundits argue that mere forward guidance won’t get it done. but because rates are now already zero the only concrete action it thinks it can take is QE. this the fed not only tightened but also used up its ammunition at the same time. contrast that with a fed that issued the same crazy guidance without cutting rates thus preserving 200 points of concrete cushion , and they are in an even worse position.

    if blinder believed that the market’s view of the fed’s reaction function relies very little or not at all on the current action, he might argue that the cuts are worse than superfluous. to be a consistent position in some plausible equilibrium you need to believe that concrete steps like actual rate cuts have asymmetrical importance (due perhaps to time inconsistency or some other unknown credibility problem) in different contexts: they are critically important to raising quickly plunging nominal expectations when at the zero bound but not too important in many other cases such as modulating a fairly stable nominal backdrop.

  7. Gravatar of DonG DonG
    21. September 2019 at 17:03

    I have total faith in NGDPLT.

  8. Gravatar of P Burgos P Burgos
    21. September 2019 at 17:45

    Is “easy money” shorthand for “fed actions that tend to increase the NGDP growth rate”? Rate cuts are supposed to be stimulative because they reduce the nominal cost of borrowing money. So I wonder if it just isn’t just that they are using language in a consistent way, but one that assumes that the Fed can only influence NGDP growth, not control it. Because if the Fed controls NGDP growth, then you can sensibly talk about the Fed having a contractionary stance if NGDP growth is slowing. But if the Fed doesn’t control NGDP growth, then it seems reasonable to talk about the Fed doing expansionary things even as NGDP growth slows down.

  9. Gravatar of F.W.Taussig F.W.Taussig
    21. September 2019 at 20:22


    You asked: Am I crazy?

    I would say, no, but I am really surprised by your level of frustration with what seems to me to be a simple question of semantics…namely,colloquial misuse of a ” Terms of art”.

    ” Easy Money” in the popular mind is literally defined as something like …central bank lowering of (nominal) interest rates. The obvious logic being that debt will be “easier” to service ( in a nominal sense and ceteris paribus) now that interest rates are lower. How is this anything other than a sensible colloquialism?

    If the fed funds rate is lowered the fed is doing “easy money”… BY DEFINITION!

    Webster: Easy money is a phrase that often refers to the presence of low interest rates.

    wikipedia: An easy money policy is a monetary policy that increases the money supply usually by lowering interest rates.

    And if you read Sydney Homer, you will agree that we are in a period of low interest rates, and the fed has just lowered rates so the definition applies and the use is valid.

    Maybe you need to forge a neologism which concisely transmits your insight on the matter. I’m not kidding…

    As for your disappointment in your learned colleagues, why top experts in such a well worn domain do not agree on the definitions of the most basic concepts is beyond me. Econ is a very odd duck.

  10. Gravatar of Benoit Essiambre Benoit Essiambre
    22. September 2019 at 03:59

    Seeping in my timeline recently: Tweets in support of MMT concepts from elite economists who, just a year ago, would have been the ones explaining to us why it’s wrong.

    Aliens who control the world are running gas-lighting experiments on us? The elite have been drugged and brainwashed clockwork orange style? What else could it be???

  11. Gravatar of Michael Rulle Michael Rulle
    22. September 2019 at 05:56

    I cannot know for certain whether A. Blinder is a better or worse economist than Scott, but I do remember Blinder using econometric models, with results measured out to 3 decimal points to “prove” his forecasts (with about 50 degrees of freedom) of Obama’s fiscal policies were valid. While my own sense of disbelief in his methods maybe ought not be taken seriously, I do recall the terrific Arnold Kling—-when he still had his blog gig on EconLog—-finding AB’s work, on that score at least, preposterous.

  12. Gravatar of Michael Sandifer Michael Sandifer
    22. September 2019 at 10:21


    OT some, but might help restore your sanity. Have you heard the Trade Talks podcast? It features an Economist US trade correspondent and a scholar at the Peterson Institute. It’s very in-depth and sane on the US trade wars. Very informative.

    Here’s a particular episode on Huawei you might like:

    And here’s Krugman at his non-ideological best, on his topic of supreme expertise:

  13. Gravatar of Kgaard Kgaard
    22. September 2019 at 13:25

    There is a powerful incentive for elites to deliberately introduce error into the economics profession — and they do so.

    If proper Fed policy is viewed as being simply a mechanical response to changes in futures markets, WHAT WOULD WE NEED THE FED FOR? (Answer: Not much.)

    The true purpose of the Fed is socialization of banking-industry losses during crises. So banking interests need to keep the Fed around (and prestigious) for that reason. As such, they need everyone to be as confused as possible about monetary policy — in order that they pay homage to the Fed’s thinking on these matters.

  14. Gravatar of ssumner ssumner
    22. September 2019 at 14:10

    Burgos, You said:

    “Is “easy money” shorthand for “fed actions that tend to increase the NGDP growth rate”?”


    FW. You said:

    “If the fed funds rate is lowered the fed is doing “easy money”… BY DEFINITION!

    Webster: Easy money is a phrase that often refers to the presence of low interest rates.

    wikipedia: An easy money policy is a monetary policy that increases the money supply usually by lowering interest rates.”

    Sorry, but I’ll take a definition of easy money from the number one monetary economics textbook, not Websters or Wikipedia. Or do you want to claim that money is tight during hyperinflation (when rates are high)? Is that your view?

    Benoit, You said:

    “in support of MMT concepts”

    I hope to God that you don’t define “MMT concepts” the way Ben Cole does.

    Thanks Michael.

    Kgaard, That’s just silly.

  15. Gravatar of Benjamin Cole Benjamin Cole
    22. September 2019 at 15:59

    Scott Sumner- you do not have to worry about Benjamin “Tinfoil-Hat” Cole. Check this out from Bloomberg today. You have to worry about Ray Dalio and Stanley Fischer.


    “It’s like a design competition. Hardly anyone thinks central banks can fix a stalling world economy with their current tools. So some of the biggest names in finance are trying to invent new ones.

    The proposals so far – including recent entries by billionaire Ray Dalio and monetary policy maven Stanley Fischer – have one thing in common: They foresee the once all-powerful central bankers taking a more junior role, and collaborating with governments.

    That type of stimulus used to be taboo, in part because it risks eroding the independence from politics that monetary policymakers prize – and President Donald Trump is already threatening. History is littered with cautionary tales in which blurring the lines between central bank and Treasury coffers led to runaway inflation.

    But right now, deflation is the big threat. An emerging consensus says the next downturn may need to be fought with direct and permanent injections of cash – often called “helicopter money’’ – and that central banks can’t deliver it alone.”

    An “emerging consensus”! Send in the choppers…

    I never could tell the difference between MMT, helicopter drops, or the situation in which a central bank buys debt while a national government issues debt.

    Has the MMT crowd prevailed?

  16. Gravatar of Doug M Doug M
    22. September 2019 at 16:09

    The bullets metaphor is incorrect. It suggest that it is the change in rates itself that periciptates growth in demand.

    I see it more like a tap. Lowering rates allows the monetary base to grow faster. It is this enlarged base of money that becomes demand growth.

  17. Gravatar of Kgaard Kgaard
    22. September 2019 at 18:29

    Well the elites have deliberately introduced fraud into other other social sciences (anthropology, psychology and history, in particular) so why wouldn’t they do the same in economics?

    Why is the Philips Curve still taught when a 9-yo can look at the chart and tell you it’s a fraud? The existence of that fraud is benefiting someone.

    Climate science ditto. Fraud is profitable.

  18. Gravatar of andrew weintraub andrew weintraub
    22. September 2019 at 19:04

    Many years ago – more than twenty five – Alan Blinder gave a lecture on monetary policy at Temple University. He superimposed a graph of the money supply over time on a graph of the consumer price index over time. It showed no apparent correlation. But when he was asked about a possible lag in the price index, he stammered a bit, seemed flustered, and reluctantly moved the price index graph to the left, introducing a lag, which showed a close relationship.

    And he’s a more accomplished economist than you are?

  19. Gravatar of Benjamin Cole Benjamin Cole
    23. September 2019 at 02:08

    Samuelson says lone central banks do not influence interest rates much. Globalized capital markets dilute lone central bank powers,

  20. Gravatar of ssumner ssumner
    23. September 2019 at 08:40

    Andrew, Great economists often stumble when they criticize a model that is outside their area of expertise, say monetarism, supply-side, Austrian, etc.

  21. Gravatar of Justin Justin
    23. September 2019 at 13:45

    Is Blinder really a more accomplished economist? I suppose people who defended the geocentric model despite all the evidence were accomplished too. Time will tell. Blinder is big on those multi equation models you solve with Newton’s Method. The models that don’t forecast well, don’t have microfoundations (not that those models forecast well either). Blinder has favored fiscal stimulus, he doesn’t accept the monetary offset. He promoted “cash for clunkers”. If that’s accomplishment well…

  22. Gravatar of Christian List Christian List
    23. September 2019 at 14:35

    I love the epitasis, which becomes clear in the last entries:

    1) the critique by Bill Gates
    2) Economists don’t even agree on basic fundamentals
    3) What is the traditional model????
    4) “What’s going on here? Am I going crazy?”

    To answer your last question: Yes, yes, and yes.

  23. Gravatar of Benjamin Cole Benjamin Cole
    23. September 2019 at 21:55

    Here is a funny one, The Fed has already re-started QE–even before ant recent announcements.

    The above Fed chart (set to three months) shows that the Fed balance sheet grew by $80 billion from Sept. 10 to Sept. 17. That is before the Fed started its most recent liquidity-QE program! In other words, the Fed must have started fighting a liquidity program before announcing as much.

    There seems to be confusion on the web whether the Fed’s most recent QE-liquidity is unwound every morning, or is cumulative.

    As the Fed is being blurry about this, and Powell has talked about expanding the Fed’s balance sheet, I suspect the Fed is going add several hundred billion to its balance sheet in Sept. through Oct.

    An interesting question is whether the Fed is going to increase its balance sheet in future liquidity events. In short, we are moving to perma-QE.

    Maybe that is the plan. The US moves to a MMT policy, but never says as much, The Fed buys back several hundred billion of bonds every year, with digitized cash.

  24. Gravatar of Jeff G. Jeff G.
    27. September 2019 at 15:10

    Here is my interpretation of Blinder’s comments:
    In the back of his mind he has a model of the economy that works something like this:
    1. Inflation is a function of agent’s inflation expectations.
    2. Infaltion expectations are influenced by Fed statements & actions.
    3. Recessions happen because random exogenous shocks hit the economy.
    4. The Fed can offset these shocks but can not observe them in real time.
    5. A responsible Fed must balance the negative effects of sending the wrong signal to agents by responding to non-existent shocks or over-reacting to small shocks vs. the positive effect of properly responding to exogenous shocks.
    At this moment in time, Blinder has a low prior that we’re experiencing a significant negative shock. Thus, the potential negative effect of lowering rates too early are greater than the potential positive effect of lowering rates on time. But rather than try and articulate all this to a general audience, he just says something folksy like “save your ammo” or “wait ’til you see the whites of their eyes.”
    Scott, I know you don’t subscribe to this story. But on the surface, it doesn’t seem “absurd,” right? And it’s more nuanced than low/high rates = easy/tight money.

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