More good news

In addition to the recent spate of positive economic reports, we have some good news on the policy front:

WASHINGTON “” Kevin M. Warsh, who was the Fed’s chief liaison to Wall Street, will resign from the central bank’s board at the end of March, giving President Obama yet another chance to leave his stamp on the Fed.

In an unusual move, Mr. Warsh, 40, had publicly expressed skepticism about the Fed’s $600 billion plan, begun in November, to buy bonds to lower long-term interest rates and stimulate bank lending.

This will strengthen Bernanke’s hand, making it less likely that he will be forced into a premature exit strategy.

My suggestion to President Obama is that he appoint a conservative QE2 supporter to the Fed.  Take a look at the impeccable credentials of this AEI economist.  A distinguished record of service, expertise in monetary economics, and he even looks conservative.  He’d clear the Senate more quickly than Nobel-prize winner Peter Diamond.

Speaking of Fed appointees, the left is waking up to the importance of the Fed:

Obama is a smart guy. His people are smart people. No doubt they are well aware of the benefits of stocking the courts with left-leaning judges and ditto for the Fed.

Yes, Obama’s a smart guy—he knows enough to rely on expert opinion on topics like monetary policy.  Unfortunately, those experts (also smart guys) were telling him in early 2009 that monetary policy wasn’t important.

Six months ago Brendan Nyhan made the following observation:

It’s shocking to me how little attention is being given to the Federal Reserve by the Obama administration and its supporters.

Matt Yglesias was on this issue well before most progressives; here’s his take:

On the Fed, my best understanding is that they just didn’t think the Board of Governors nominations would matter. In retrospect, I think that was a huge (and still underrated) mistake but they made it at the time for the pretty good reason that for the past two or three decades nobody saw instances of BOG nominations mattering to monetary policy.

That’s right, but it doesn’t go quite far enough.  The reason why BOG nominations didn’t matter is that monetary policy did a pretty good job during the Great Moderation.  But by early 2009 it was obvious that the economy needed a lot more stimulus.  So why didn’t Obama move more quickly? 

The answer is simple; in early 2009 it was hard to find a single respected liberal macroeconomist who was forcefully arguing that monetary policy was far too tight for the needs of the economy.  (There weren’t many conservatives forcefully pushing the issue either.  But that’s a moot point as Obama probably shares Krugman view that conservatives are a bunch of Neanderthals, and thus wouldn’t have paid attention.)

In retrospect, Obama might have been better off following the advice of this right-of-center blogger.

PS.  Now that I’ve finally have gotten some positive links from Krugman, I guess it’s time to stop teasing him.  Fortunately there is no need to, as even progressives are now providing a few (very gentle) jabs at blogging’s most famous liberal. 

PPS.  Haven’t had much time recently—I hope to respond to Ryan Avent’s questions this weekend.  This piece of fluff shows I’m still alive and kicking.


Tags:

 
 
 

52 Responses to “More good news”

  1. Gravatar of Ram Ram
    10. February 2011 at 19:40

    Michael Woodford. The only compelling objection I can think of is that working for the Fed might reduce his productivity as a researcher. In his favor is every qualification one can think of for this position.

    As for Obama, the most important consideration in his favor may be that Woodford contributed to the president’s 2008 campaign:

    http://fundrace.huffingtonpost.com/neighbors.php?type=name&oldest=1&lname=Woodford&fname=Michael&search=Search

    Good on the merits, sympathetic on the politics. I feel like this is a no-brainer.

  2. Gravatar of Ram Ram
    10. February 2011 at 19:43

    For a taste of his views on practical issues of monetary policy, I recommend:

    http://www.ft.com/cms/s/0/4d54e574-d57a-11df-8e86-00144feabdc0.html#axzz1DcOXHNne

  3. Gravatar of Rien Huizer Rien Huizer
    10. February 2011 at 19:49

    Thanks for reprinting your open letter. Question: did QE2 include a lot of foreign and inflation-linked paper? I guess that was about the least debatable yet most controversial point in your argument. The interest on excess reserves issue is one that keeps me wondering why it is not being done? Who/what benefits?

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. February 2011 at 21:00

    Scott,
    Yes, as you commented in the previous blog entry, it is weird how we often think alike:

    https://www.themoneyillusion.com/?p=8801#comment-56897

    Hmmm. Maybe you’re stealing my ideas. Or maybe I was attracted to your blog for a reason. 🙂

  5. Gravatar of Edwin A Edwin A
    10. February 2011 at 21:51

    oh oh..

    John Makin: “On a more fundamental level, a large part of the problem with QE2 is tied to the fact that monetary policy is being asked to do too much to sustain a tepid, postcrisis U.S. economic expansion.”

    http://www.aei.org/outlook/101008

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. February 2011 at 22:04

    John Makin? No Scott. No more AEI scolars please. I’ve read enough about the Tooth Fairy for one day:

    http://baselinescenario.com/2011/02/09/paul-ryan-criticizes-bernanke-for-failing-to-contain-tooth-fairy/

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. February 2011 at 22:07

    Surely there’s someone else who’s much more reasonable and competent that we can sneak under the Republican radar screen:

    http://www.bentley.edu/academics-research/faculty_research/faculty_database/faculty_detail.cfm?id=2804

  8. Gravatar of Full Employment Hawk Full Employment Hawk
    10. February 2011 at 22:58

    “Unfortunately, those experts (also smart guys) were telling him in early 2009 that monetary policy wasn’t important.”

    Then they really were not so smart. Smart is as smart does.

    One postion on the BOG was left open from the beginning of Obama’s term. I was puzzled why this position was not being filled. Were the Republicans obstructing? Nobody seemed to be paying any attention to this as far as I could tell. Googling the topic produced virtually nothing.

  9. Gravatar of Full Employment Hawk Full Employment Hawk
    10. February 2011 at 23:11

    ” Unfortunately, those experts (also smart guys) were telling him in early 2009 that monetary policy wasn’t important.”

    And Krugman was arguing that the economy is in a liquidity trap so that monetary policy had lost its effectiveness. I posted a number of messages questioning this, but they simply got lost in the large slew of messages.

    The emphasis by liberal economists was totally on expansionary fiscal policy, while it should have been on a combinaation of expansionary fiscal AND monetary policy. In that case the expansionary effect of the fiscal policy would not have been offset by an offsetting monetary policy in the opposite direction.

  10. Gravatar of Full Employment Hawk Full Employment Hawk
    10. February 2011 at 23:17

    Mark:

    ” Surely there’s someone else who’s much more reasonable and competent that we can sneak under the Republican radar screen:”

    Right On!

  11. Gravatar of Morgan Warstler Morgan Warstler
    11. February 2011 at 04:54

    “One of the divisions in the chapter on Reason in Hegel’s Phenomenology of Spirit speaks about “das geistige Tierreich” (the spiritual animal kingdom): the social world which lacks any spiritual substance, so that, in it, individuals effectively interact as “intelligent animals.” They use reason, but only in order to assert their individual interests, to manipulate others into serving their own pleasures. [7] Is not a world in which the highest rights are human rights precisely such a “spiritual animal kingdom,” a universe? There is, however, a price to be paid for such liberation – in such a universe, human rights ultimately function as ANIMAL rights. This, then, is the ultimate truth of Singer: our universe of human right is the universe of animal rights.
    The obvious counterargument is here: so what? Why should we not reduce humankind to its proper place, that of one of the animal species? What gets lost in this reduction? Jacques-Alain Miller once commented an uncanny laboratory experiment with rats: [8] in a labyrinthine set-up, a desired object (a piece of good food or a sexual partner) is first made easily accessible to a rat; then, the set-up is changed in such a way that the rat sees and thereby knows where the desired object is, but cannot gain access to it; in exchange for it, as a kind of consolation prize, a series of similar objects of inferior value is made easily accessible – how does the rat react to it? For some time, it tries to find its way to the “true” object; then, upon ascertaining that this object is definitely out of reach, the rat will renounce it and put up with some of the inferior substitute objects – in short, it will act as a “rational” subject of utilitarianism.”

    http://www.lacan.com//thesymptom/?page_id=952

  12. Gravatar of Morgan Warstler Morgan Warstler
    11. February 2011 at 05:25

    Scott, it is important now that we remember your insistence that the Fed neutralizes Fiscal spending policy as it wishes.

    For that reason, your own thinking precludes suggesting anyone to the Fed who WOULD NOT neutralize Fiscal.

    Meaning they all have to be anti-government spending programs (tax cuts are not spending), or their approach to QE will be incorrect. They have to be arrogant champions of “only monetary” as fiscal.

    As such, any positive commentary toward Matty needs this caveat – you need to dangle every accolade directly behind the qualifier, “and as soon as he lets go of fiscal as properly stimulative…”

    You need full converts – this is the time to start muscling them over the line. This is when your worm turns.

  13. Gravatar of StatsGuy StatsGuy
    11. February 2011 at 06:44

    “-Faculty, University of Wisconsin-Milwaukee, University of Virginia, University of British Columbia, 1966-76”

    Cheesehead Conspiracy, man. I see through you.

    Seriously:

    Scott, do you seriously believe that Larry Summers, of all people, had no appreciation for the importance of Fed nominations? That Bernanke, whom Summers was in daily communication with, had no appreciation? That Geithner, who worked for the NY Fed (and the guy Obama played basketball with daily), had no appreciation?

    Let me challenge something here. You are very keen to believe that the failures of the Obama Administration early on resulted from an excessive belief in the merits of fiscal policy and the impotence of monetary policy. That is the story you want to believe, and you see facts consistent with this hypothesis (paradigm support).

    I think you are wrong, and if you read Obama’s speeches and Summers’ speeches and Geithner’s speeches, the focus is not there.

    The failure was an excessive focus on the importance of the credit channels (notably, the health of the banks) in creating monetary growth by lending more, rather than a focus on money itself. The conceptual failure by Summers – for whom I have zero sympathy whatsoever given the damage this egotist accomplished – was believing that the key to recovery was making banks solvent and healthy so they would feel good about lending again, with no regard for the solvency and health of the lending targets, nor the demand for credit that results from perceptions of good economic opportunities. Summers put the cart before the horse.

    Summers’ obsession with the shadow banking system, and his apparent belief in a fully deregulated banking system in which banks were perfectly incentive aligned to create credit in a non-dangerous manner, were poison to this administration.
    To Larry Summers…

    It wasn’t a money issue, it was a credit flow issue
    It wasn’t a solvency issue, it was a liquidity issue
    It wasn’t an expectations issue, it was access to funds
    It wasn’t an issue of demand for credit, but entirely of supply of credit
    It wasn’t an issue of lack of collateral, but of unwillingness to loan without collateral
    It wasn’t an issue of asset values (or even belief therein), but an issue of flow of credit to support asset values

    The conceptual failings of Summers were manifold, and permeated the entire administration – in spite of the presence of people like Christie.

    Krugman, to his credit, identified Summers’ intellectual failings, but came back with an insufficient response. Retrospectively, we will never know for sure whether the increase in bank reserves was due to the DeLong argument, or due to the IOR (everyone agrees IOR was dumb, but no one agrees just how important it was – including many economists you respect). My argument, from the very beginning, is that we could guarantee Demand recovery by printing money and spending it (the Joe Gagnon counterpoint to the great DeLong/Sumner gladiatorfest)

    Finally, the best counterpoint to the argument that “Summers was an idiot” is that Summers knew precisely well what he was doing, and chose NOT to use monetary policy because it would have shown that the economy could recover while allowing certain banks to go under. He needed the systemic implosion to justify TARP and other supports. You can call this a conspiracy, but consider the emphasis in late 2008 (when Obama was president elect) through February 2009 on banks before even the stimulus… Moreover, with the immediate success of the _announcement_ for QE2 in March 09, how could anyone think Bernanke’s team was unimportant? Bernanke and the Fed were ubiquitous in the Press, but Obama left the appointment empty till spring of 2010.

    Your theory just doesn’t make sense – that the obsession with fiscal policy blinded them to the importance of the Fed. I don’t believe it for a second.

  14. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 07:07

    “You need full converts – this is the time to start muscling them over the line. This is when your worm turns.”

    I think that Scott sees economics as a science and not as a system of theology.

    “Scott, it is important now that we remember your insistence that the Fed neutralizes Fiscal spending policy as it wishes.”

    That appears to be an empirical assertion about what the Fed does, and not what it AUGHT to do.

  15. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 07:17

    “Scott, do you seriously believe that Larry Summers, of all people, had no appreciation for the importance of Fed nominations? That Bernanke, whom Summers was in daily communication with, had no appreciation? That Geithner, who worked for the NY Fed (and the guy Obama played basketball with daily), had no appreciation?

    But if they appreciated the importance, why was there no attempt to fill the positions?

  16. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 07:29

    “That appears to be an empirical assertion about what the Fed does, and not what it AUGHT to do.”

    When the economy is struggling to recover from a depressed state, the Fed, instead of neutralizing the effects of an expansionary fiscal policy, should reinforce it with an expansionary monetary policy. That is why Obama should have filled the vacancies on the BOG with people who take the Fed’s madate to achieve maximum employment seriously as quickly as possible.

  17. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 07:35

    “and as soon as he lets go of fiscal as properly stimulative…”

    Scott’s position, if I understand it correctly is that expansionary fiscal policy does increase aggregate demand and NGDP growth, but it is ineffective because the Fed will offset it with a less expansionary (or contractionary) monetary policy. This appears to imply that if the Fed does not offset the expansionary fiscal policy, fiscal policy is stimulative.

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 08:42

    The use of BOG as an anacronym is strangely full of double entendres.

    From Wikipedia:

    “A bog, quagmire or mire is a wetland that accumulates acidic peat, a deposit of dead plant material””often mosses or, in Arctic climates, lichens.

    Bogs occur where the water at the ground surface is acidic, either from acidic ground water, or where water is derived entirely from precipitation, when they are termed ombrotrophic (rain-fed). Water flowing out of bogs has a characteristic brown color, from dissolved peat tannins. Bogs are very sensitive habitats, of high importance for biodiversity.”

    And from American Heritage:

    “v.tr.
    To cause to sink in or as if in a bog: We worried that the heavy rain across the prairie would soon bog our car. Don’t bog me down in this mass of detail.

    v.intr.
    To be hindered and slowed.”

    A brief additional reflection on this entry:

    1) As I recall recent history, there was a mind numbing focus on banks and the credit channel during the current administration’s transition, and Bernanke was largely responsible for that. (Remember the big congressional emergency meeting over TARP? Bernanke by all inside accounts appeared to be in a panic.)
    2) Bernanke supported the fiscal stimulus implying that monetary policy was limited in effectiveness until the financial sector recovered.
    3) Put #1, and #2 together and you have a President who was not hearing that monetary policy could do anything more from the one person who was truly responsible for it.

  19. Gravatar of Ram Ram
    11. February 2011 at 08:59

    Looks like Matt Yglesias likes my suggestion (but no acknowledgement–what gives?):

    http://yglesias.thinkprogress.org/2011/02/price-level-targeting/

  20. Gravatar of Scott Sumner Scott Sumner
    11. February 2011 at 08:59

    Ram, A few comments:

    1. Yes, he would be the best choice
    2. Knowledge of monetary economics is obviously not a major factor in Obama’s decisionmaking. (Look at the three previous choices.)
    3. Small political donors should not have their names released, that has a chilling effect on political involvement.

    Rien, The Fed put interest on reserves into effect to prevent excessive inflation (from the big increase in the base.)

    I don’t think the Fed is buying many foreign bonds, but am not sure. I also don’t know about indexed bonds.

    Edwin, Well, nobody’s perfect.

    Mark, Obama’s not silly enough to pick someone like me. Makin’s consistently argued that monetary stimulus was needed.

    Full Employment Hawk, So smart people never make mistakes? How many smart people are there then? But yes, I agree that we tend to overrate how smart some of these people really are. Even Larry Summers haters always say he’s quite smart. That’s true in an absolute sense, but maybe not true relative to the needs of the job.

    You said;

    “Nobody seemed to be paying any attention to this as far as I could tell.”

    You weren’t reading my blog back then. 🙂

    Morgan, You’re the last person I would have expected to bring Lacan and Zizek into the comment section. I’m impressed.

    Regarding fiscal neutralization, I plan a post soon. Makin’s a conservative; it’s hard to believe he’s a big fan of fiscal stimulus.

    Statsguy; you said:

    “Scott, do you seriously believe that Larry Summers, of all people, had no appreciation for the importance of Fed nominations? That Bernanke, whom Summers was in daily communication with, had no appreciation? That Geithner, who worked for the NY Fed (and the guy Obama played basketball with daily), had no appreciation?”

    Yes, I think Summers probably blocked Romer from having much access to Obama. Your comments about the credit channel doesn’t undercut my views. If they thought the credit channel was key, they would have thought Bernanke was doing a fine job, and no need to add people to the BOG. But that is not real monetary policy, hence they didn’t understand the need for real monetary stimulus (QE, lower IOR, higher inflation target, or level targeting, etc.) So I was right, they didn’t see the need for real monetary stimulus.

    I never really had much debate with DeLong over monetary stimulus.

    The final comment about Summers is too conspiratorial for even me (and I’m no fan of Summers.)

    We did do a $800 billion dollar helicopter drop (spending paid for with new base money) and it didn’t work. Fiscal stimulus was a counterproductive distractionm from the monetary stimulus we really needed.

    Full Employment Hawk, I agree with your reply to Statsguy. I was amused to see you quote yourself, not something I see very often. 🙂

  21. Gravatar of Ram Ram
    11. February 2011 at 09:10

    Prof. Sumner,

    I actually agree about the chilling effect of donation disclosure. I was interested merely because I figured being a Republican would be a strike against a potential nominee in Obama’s eyes. But feel free to delete that part of my comment if you wish, I would have no problem with that.

  22. Gravatar of Scott Sumner Scott Sumner
    11. February 2011 at 10:59

    Mark, Good points about Bernanke, and your definitions give new meaning to the economy being BOGged down.

    Ram, Don’t worry about the donation info, my comment was addressed at the FEC, not you.

    It’s very possible Yglesias got the idea for promoting Woodford from you. He does read this blog. I seem to recall Yglesias already knew about Woodford, but so did I, and I forgot to mention him until you reminded me.

  23. Gravatar of Ram Ram
    11. February 2011 at 11:15

    I kid, of course. It matters less to me who or what reminded Yglesias to promote Woodford than the fact that a relatively prominent blogger working for a relatively influential think tank is promoting Woodford, or similarly capable people, for this very important position. And as for your suggestion, I think Makin would be a great choice, too. I’m not someone who thinks we should have public institutions whose well-functioning depends upon appointing extraordinary individuals to leadership positions, but alas that’s what we’ve got and we have seen over the last couple of years what kind of damage can be done by powerful people with outdated or confused views on macro.

  24. Gravatar of StatsGuy StatsGuy
    11. February 2011 at 11:15

    @ ssumner

    You are laying primary blame on Obama’s advisers’ attention on fiscal stimulus as the reason he ignored Fed nominations. No, it’s because of their attention to credit channels and bank balance sheets. I _agree_ they underestimated nomination importance (and have said that for months), I disagree why.

    @ Full Employment Hawk (& ssumner)

    “But if they appreciated the importance, why was there no attempt to fill the positions?”

    “the importance” of what? Of credit channels?

    Because the composition of the Fed members and their views were already consistent with the recommendations of the credit channel hypothesis, and because the actions recommended by the credit channel hypothesis were already taken / being taken. They’d already gotten TARP, and everything else Summers wanted to rescue the banks and dark pools, so all Summers really wanted was time to be proven correct (and smart).

    It was only after they finally started figuring out that the credit channel hypothesis was inane, and there _really_ was a demand problem, that they started getting scared about the composition of the Board.

    Your replies to this consist of the argument that they spent so much time on the stimulus package. That’s a hoax. The stimulus package was always much smaller than folks like Krugman wanted, and was intended to be small because people like Summers didn’t believe in it. Much of it was tax cuts (yay). Most of the remainder consisted of support to states (to get them through the tough patch till the credit channels were fixed and credit was flowing again) and of discretionary spending on programs that Obama wanted anyway, and which would have appeared in subsequent discretionary spending bills if not in the stimulus package.

    No one in the administration really believed in fiscal stimulus (except as a palliative to Congressional grandstanding), certainly not Bernanke, Geithner, Summers – TWO of whom were Republicans and third of which was a Rubinite.

    You see far too much of the world as a battle between keynesians and monetarists, and frame too many events in this context.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 12:59

    Scott wrote:
    “Morgan, You’re the last person I would have expected to bring Lacan and Zizek into the comment section. I’m impressed.”

    At the risk of sounding condescending I agree. Honestly I had never heard of Jacques Lacan or Slavoj Žižek and I haven’t read Hegel or Marx since I was compelled to by Chicago. Between this and his posting of Jerry Reed tunes I’m seeing Morgan in different light more each day.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 13:16

    And recalling earlier blog comments, between links to blog entries on Freud’s compulsions concerning open fires and riffs on the philosophy of Wittgenstein things are getting a little long haired around here.

  27. Gravatar of Contemplationist Contemplationist
    11. February 2011 at 13:52

    I, too was surprised by Morgan bringing up Lacan and Zizek. However, I have nothing but contempt for those two. They belong in an asylum.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 14:10

    Well, frankly, I had never heard of either of them. And I haven’t read Hegel or Marx in years so that reveals my preferences. But still, one ought to read widely, if for no other reason than to know exactly why one is against them.

  29. Gravatar of Skippy Skippy
    11. February 2011 at 15:04

    Someone in Yglesias’ comment section recommended Barney Frank for the position. I think my brain literally broke when I read that.

    Anyway, I second Woodford…

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 17:49

    Hey, I like Woodford. Scott likes Woodford. Ram likes Woodford. Yglesias likes Woodford. You like Woodford! (In all likelihood a very high percentage of the readers of this blog like Woodford.)

    But would Obama nominate him? And furthermore would the Senate approve?

    P.S. I don’t even want to think about what inspires one to think Barney Frank would be a good pick for the BOG.

  31. Gravatar of Dustin Dustin
    11. February 2011 at 18:07

    Barney Frank? Oh my God.

    I’d like to see Obama nominate anybody who sees eye-to-eye with Sumner, Woolsey, Beckworth, Hendrickson, and anybody else who has an enlightened view of monetary matters.

  32. Gravatar of Ram Ram
    11. February 2011 at 18:08

    I don’t know if Obama would nominate him, or if the Senate would approve his nomination. But I think it’s plausible that if he were the nominee, his most vocal cheerleader would be Bernanke himself. These days, it is difficult to say whether that would improve or worsen his prospects for confirmation, but one thing it would be very hard for the opposition to do is to find a reputable economist who has anything negative to say about him (besides that they think they disagree certain particulars of his views, which would be true of every nominee). I once did skimmed a bunch of econ professor blogs to see if anyone had anything negative to say about Woodford, and I just couldn’t find it (again, besides technical criticisms that everyone has of everyone else’s work).

    I realize all of this may be completely orthogonal to the confirmation process, but the more arbitrary opposition to him seems in the media, when they can’t find anything but crackpots who think he’s unqualified, the harder it will be for his confirmation to be held up, I think. But my case for him is more on the merits than the politics–who really knows how the politics will play out?

  33. Gravatar of Morgan Warstler Morgan Warstler
    11. February 2011 at 19:16

    Oh good lord. Boys, you need to watch the Perverts Guide to Cinema. If you want a copy, I’ll dropbox it to you.

    http://www.youtube.com/watch?v=8sFqfbrsZbw

    I spent years and years doing Phil and Rhetoric for debate. My great great aunt is a dead author named Dawn Powell who said,

    “The artist who really loves people loves them so well the way they are he sees no need to disguise their characteristics””he loves them whole, without retouching. Yet the word always used for this unqualifying affection is “cynicism.”

    And my favorite:

    “Whoring of mind and body can be a jolly, zestful end in itself but it is cheapened by those who find sentimental, lying excuses for it.”

    So when I was 16 I followed George Will and the Grateful Dead, and it went from there. I always thought I missed the Circle Bastiat, but I got to spend time around Bruce Goldberg learning Wittgenstein:

    http://www.lewrockwell.com/orig3/reisman1.html

    I honestly forgot about the deconstruction on utility along the lines of the fake rat thing (it’s just the willingness to assert the glass is half empty without admitting what your are giving up):

    http://crookedtimber.org/2010/11/page/2/

    And Tyler then linked lacan, and I thought Scott should DEAL WITH IT.

    Anyhoo, there’s not that much under the sun, and ya’ll act like we’re smashing atoms in here.

    —–

    On the subject, FEH and Mark – which you hope to skip over, and Scott, you really do owe it to them and everyone else:

    When Scott or Makin talks of Fiscal stimulus in any kind of positive light they mean TAX CUTS…. which is why so much of this is wasted btus.

    If you are having a conversation, where everyone’s using one word to mean multiple things… they are likely

    Tax cuts are not stimulus, they are not the government spending money. Stimulus = government spending money. Before there is even paper and ink, money exists in its first state in the pockets of private men.

    What the government takes from them (for its good cause) we call taxes.

    When it decides for whatever reason to not collect them, that it is admitting OUTLOUD that it is better for the money to stay where it is.

    This is undeniable: it is tacitly ceding the ground of “best use” because it is harder to raise taxes later and of course, the deficit means it will will have less to spend – unless it gets the “growth” – so it is still placing its bets on the private sector.

    When however the government spends $1T in extra debt – that is Fiscal Stimulus – and Scott and Makin are against it more often then young men turn down sex.

    It isn’t like I don’t say this over and over:

    The moral heart of arguing is about finding policy – in the very best debates, both sides intentionally fill in the other’s guys best argument for him – you do not want to win because the other guy made a mistake.

    And that’s why rudeness, or rather the intentional meticulous effort to “not sell” is how to divine the mind-of-god truth.

    Socrates (who I don’t believe existed) was tried for making the weaker argument the stronger. That’s rhetoric.

    But it presumes that there is indeed a weaker argument; and so by taking both sides of the argument, and removing all emotional artifice, removing all proselytization, by making each argument as free of rhetoric as possible, you can figure out the lesser of two evils – and that is the truth.

    Long wind up to punchline… Every time Scott takes a flyer on getting right down into the dirty and saying, “Dear proggies, government debt is not worth your good cause, he is kicking his own idea in the teeth, and adding the friction of rhetoric to the endeavor.”

    And FEH, you meant “should” not “ought”

  34. Gravatar of ssumner ssumner
    11. February 2011 at 19:48

    Ram, I agree.

    Statstguy, Fair enough–I’d say they were distracted by both. But we’ll never know.

    Mark, I am more and more impressed with Morgan’s writing skills. In another thread he went from the internet, to God being a 16,000 year old platypus residing on a comet, to Jonathan Livingston Seagall, all in three sentences. I see a career in gonzo journalism for Morgan. The next PJ O’Rourke (the young PJ.)

    Contemplationist, Tyler Cowen had a link to a long essay from Zizek a few days ago–that’s probably where Morgan got it.

    Skippy. Here’s how messed up America is: Frank going from Congress to the Fed might improve both organizations.

    Ram, Senator what’s-his-name put a hold on Diamond because he wasn’t a monetary economist. I can’t imgaine that occuring with Woodford–he’d have to invent a different phoney excuse.

  35. Gravatar of Scott Sumner Scott Sumner
    11. February 2011 at 20:00

    Morgan, I’m eternally grateful. I’ve been looking for the Zizek film for a long time. I had no idea it was on the internet. I have little interest in Zizek’s political ideas, but do have an interest in his aesthetic views.

    Hmmm, maybe the internet does have some value to a “horrible old man” like me.

  36. Gravatar of Morgan Warstler Morgan Warstler
    11. February 2011 at 20:20

    Scott, np, there is nothing not on the Internet.

    There’s really not that many things in the world.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 20:26

    Morgan,
    OK, you’re freaking me out on at least 17 different mental levels. But still on at least one of these levels I truly think you are totally wrong. When I get my head reattached I’ll let you know which one that is.

  38. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 20:47

    Morgan,
    OK. You followed the Dead at 16 (1986?). Which shows did you attend? I’m just wondering. (I was probably there.)

  39. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 21:44

    “Stimulus = government spending money.”

    According to that definition, expansionary monetary policy is not stimulus.

    “Tax cuts are not stimulus,”

    The way the term stimulus is normally used, stimulus is anything that increases aggregate demand. (And therefore also NGDP growth.) Expansionary monetary policy is stimulus because it increases aggregate demand. Government purchases are stimulus because they increase aggregate demand, and tax cuts are stimulus because they increase consumption or investment expenditures above the level it would be if the cuts had not been made and therefore increase aggregate demand. This is the way the term is generally used in debatese about monetary policy.

  40. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 21:50

    “When Scott or Makin talks of Fiscal stimulus in any kind of positive light they mean TAX CUTS…. which is why so much of this is wasted btus.”

    I would rather have Scott speak for himself on this. Scott: On the basis of the postings I have read, my understanding of your position is that fiscal policy, whether it involves government spending or tax cuts does affect aggregate demand, but this will be offset by the central bank conducting a monetary policy in the opposite direction that neutralizes the effect of the government spending and tax cuts on aggregate demand and therefore aggregate demand is not affected by them. THEREFORE the government spending is a waste of money. If this is not a correct interpretation, please clarify.

  41. Gravatar of Full Employment Hawk Full Employment Hawk
    11. February 2011 at 21:59

    “Michael Woodford. The only compelling objection I can think of is that working for the Fed might reduce his productivity as a researcher.”

    Woodford may well not want his productivity reduced for the sake of having 1 of 7 seats on the BOG. Alan Blinder left the postion of Vice Chair once he saw that he could not become Chair.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. February 2011 at 23:50

    It occurs to me I need to make general declaration. Despite the fact I have admitted to following NASCAR, bluegrass and old American cinema in the last few weeks that in no way makes me a human being. I am still the huge pretentious academic economic prick I’ve always been.

  43. Gravatar of marcus nunes marcus nunes
    12. February 2011 at 02:39

    Plosser is willing to discuss “alternative rules”:
    “It’d be nice if we could get into a debate about what’s the best rule to follow. We may disagree, but just getting to the point where we could discuss the various benefits of different rules” would be progress.

    His personal pick would be an inflation target. This gets back to credibility, one of his four principles of policy making. “The central bank in a country with a fiat currency is the only entity capable and responsible for ensuring price stability. Nobody else can do it. That’s why the central bank exists. So it’s got to be that that’s job one.”

    http://online.wsj.com/article/SB10001424052748704709304576124132413782592.html?mod=WSJ_Opinion_LEADTop

  44. Gravatar of Morgan Warstler Morgan Warstler
    12. February 2011 at 05:10

    Scott can speak for himself, but this is my evidence:

    1. Somewhere here he says, if you are going to have Fiscal Stimulus, the stimulus to have is tax cuts. I think then you’ll see I first demanded we use unique words for unique concepts.

    I cut myself off last night. Note to Scott: Please use Disqus, not being able to edit posts is like flying on a 747 in 1967.

    When people use the same word for different ideas, it is about the avoidance of communication – they are cheating themselves, and the other side. See: Gay Marriage. Government stole the word marriage to gain authority and the rites of marriage became marriage rights. Gays want to have civil acceptance, not be given the ability to stand at the front of grandma’s church wearing ass-less chaps. Funny thing though, to grandma that’s what marriage is – that other legal stuff, she could care less about.

    2. Scott likes tax cuts, but he routinely says he’s less than thrilled, convinced on Fiscal to increase AD. That would indicate a pretty clear line between Milton Friedman’s “anything that makes government smaller” is good for growth approach to macro vs. DeKrugman’s “disparity demands bigger government,” even if that means printing money.

    I don’t know this, but I bet if pushed, Scott will say right now the GDP multiplier of stimulus debt spending (not tax cuts) is less than 100% and probably will say years from now when he has a bigger conch that the multiplier approaches zero.

    3. Scott was/is against TARP and the Stimulus – but he has said TARP got paid back (never won the subject of moral hazard though) – so it was better to bail the banks than it was to save Fannie Freddie or Weatherize Homes or keep the Teachers in the Classroom.

    This is a strong indication that he doesn’t believe “anything that promotes AD” is justified – unless he doesn’t think debt spending promotes AD.

    Either way, none of you in good conscience ought to mention Wittgenstein and say the standard practice of Macro is to say “Stimulus increases AD” – it’s too broad, it hurts discussion every single time, because people who violently disagree on the subject of tax cuts vs. spending each hear what the hell they want, and think the speak is on their side.

    Finally, I think the Plosser piece gets into another moral argument brought on by FEH:

    Let’s say 100% of the time the Fed does get to neutralize or grant Fiscal, and that since they have their own target that happens 100% of the time. They trust themselves more, they have the lever.

    If thats is the case, what should the government’s policy be?

    And since that is the case, isn’t it the moral obligation of the Fed to state it explicitly?

    Meaning isn’t this a wikileaks now “known” truth?

    Right now everyone KNOWS there will be less QE if there is more Government Spending to stimulate.

    Once this fact is exposed to the bright lights of sunshine, Democrat administrations and DeKrugman progressives are forced choose: Fiscal or Monetary.

    Right now, they are not making honest policy choices, because they get to pretend they are not dancing with a partner who has taken the lead since the GD.

  45. Gravatar of Rien Huizer Rien Huizer
    12. February 2011 at 06:49

    All of this is a bit confusing. What happened to textbook economics (say, Davis Romer)? Do we have evidence that gvt net spending is a good subtitute for standard private sector spending? What do we know about stability of expectations. What is the effect of the USD economy being attached (by quasi fixed parities) to most of East Asia and the richest oil producers? A lot of what I read these days seems to indicate the the science of economics does not have a lot to offer. Maybe someone should tell the users. And the only relevant policymaker left, the BOG.

  46. Gravatar of Full Employment Hawk Full Employment Hawk
    12. February 2011 at 10:45

    “Scott can speak for himself”

    Agreed!

    “When people use the same word for different ideas, it is about the avoidance of communication”

    I am using the term “stimulus” the way it is most generally used in discussions of economic policy: as a policy that increases aggregate demand. You are the onw who wants to use the term differently and define it a government spending = stimulus. According to that definition, expansionary monetary policy is not stimulus, which shows that you are using the word to mean something else than what it means the way it is normally used and therefore trying to redefine it. And this has nothing to do with Wittgenstein. Using the term in the way that it is commonly used is just plain common sense.

    “This is a strong indication that he doesn’t believe “anything that promotes AD” is justified ”

    I certainly do not think that Scott believes that anything that promotes AD is justified. My interpretation of what he has been saying is that using government spending as a stimulus is a waste of money. The question I am raising is WHY that is his position. My interpretation of his position, and I admit I may be getting this wrong, is that while increases in government spending do increase AD, this will be offset by a contractionary monetary policy by the central bank, so that AD will end up not being affected.

  47. Gravatar of Full Employment Hawk Full Employment Hawk
    12. February 2011 at 11:00

    “Let’s say 100% of the time the Fed does get to neutralize or grant Fiscal, and that since they have their own target that happens 100% of the time. They trust themselves more, they have the lever. If thats is the case, what should the government’s policy be?”

    In that case all government expenditures should be financed out of taxes, except for expenditures that add more to potential output than private expenditures. Such expenditures should be financed by borrowing because having them crowd out the less productive private expenditures is efficient.

    But a strong case can be made that the Fed does not normally do this beyond the point of more than partially offsetting the fiscal policy, especially when the economy is hit by a serious shock from the financial system that damages the financial system and makes the techniques of monetary policy that are normally used (like federal funds pegging) useless. When non-orthodox methods, whose effects are uncertain, have to be used, the Fed is not likely to do any more than inadequate partial offsets. And while monetary policy continues to be effective in increasing aggregate demand (no liquidity trap), whether it is effective ENOUGH to restore the economy to full employment BY ITSELF is under dispute. I reserve judgement on this issue.

  48. Gravatar of Full Employment Hawk Full Employment Hawk
    12. February 2011 at 11:08

    “Right now everyone KNOWS there will be less QE if there is more Government Spending to stimulate.”

    But what is not clear is whether or not there will be MORE QE if there is less goverment spending, which is what is going to happen. The government spending cuts will reduce AD unless they are fully offset with more expansionary monetary policy. I will conjecture that any Fed offset will be very incomplete, so that the government spending cuts that will occur will slow the recovery and keep the unemployment rate high.

    In any case, it is more imperative than ever that Obama fill the vacancies on the BOG with people who take the Fed’s mandate to achieve maximum employment seriously as quickly as possible.

  49. Gravatar of Full Employment Hawk Full Employment Hawk
    12. February 2011 at 11:20

    “That’s why the central bank exists. So it’s got to be that that’s job one.”

    This is New Classical Dogma, representing the New Classical’s value judgements.

    The Fed was definitely not set up to stabilize the price level. It was set up to create an elastic currency that adjusted to the “needs of trade.”

    A strong case can be made that the most central, most basic function of a central bank is to act as a lender of last resort during a financial crisis.

    Currently the Fed has a dual mandate: To achieve price stability and maximum employment.

    Maximum employment, it’s not just a good idea, IT’S THE LAW!

    If Plosser is not willing to abide by the law, he should recuse himself from voting on the FOMC.

  50. Gravatar of Scott Sumner Scott Sumner
    12. February 2011 at 13:25

    Morgan, Yes, but often those things on the internet are hard to find.

    Full Employment Hawk, You are mostly right, but cuts in MTRs also have a supply-side effect. The most effective cut might be in the employer share of payfoll taxes, which offsets nominal wage stickiness.

    Marcus, You said;

    “Plosser is willing to discuss “alternative rules”:
    “It’d be nice if we could get into a debate about what’s the best rule to follow. We may disagree, but just getting to the point where we could discuss the various benefits of different rules” would be progress.”

    I completely agree.

    Morgan, You said;

    “Right now, they are not making honest policy choices, because they get to pretend they are not dancing with a partner who has taken the lead since the GD.”

    That’s right, liberal non-economists would be shocked at just how dishonest the fiscal stimulus argument really is: “You mean we have to run up trillion dollar debts just because a few unelected regional Fed presidents are horrified by the thought of 2.0001% inflation?” Yup, that’s the reason.

    Yes, I’d also prefer tax cuts to spending increases, although we can’t really afford deep tax cuts right now. And I agree on gay marriage. Suddenly you are making sense, or else you’ve converted me.

    Rien, I’ve no problem with the textbooks. Mishkin’s text tells us everything we need to know about the crisis:

    1. Low rates don’t mean easy money.

    2. Look at asset prices instead.

    3. Monetary policy is highly effective at the zero bound.

    The problem is that almost the entire profession ignored his textbook in 2008.

    FEH, You said;

    “My interpretation of his position, and I admit I may be getting this wrong, is that while increases in government spending do increase AD, this will be offset by a contractionary monetary policy by the central bank, so that AD will end up not being affected.”

    That’s part of it. The other part is that a given rise in NGDP can be done at near zero cost with monetary policy, or at a very high deadweight cost with big deficits.

    You said;

    “The Fed was definitely not set up to stabilize the price level. It was set up to create an elastic currency that adjusted to the “needs of trade.””

    I agree, you can argue that NGDP is much closer to the Fed mandate of prices plus employment than is inflation targeting.

  51. Gravatar of Morgan Warstler Morgan Warstler
    12. February 2011 at 13:49

    FEH, Maximum employment is immediately available via a Guaranteed Income (auctioning man-weeks) plan to replace minimum wage and unemployment insurance.

    At $1 per hour (with $5 more from Obama) there will be 20M+ more employed people. And there will not even be a man-week bid won at $1 per hour – even at $2.50 per hour (and $4.25 from Obama) that’s $100 per week for a full time: Maid, babysitter, gardner, you name it. I doubt with 20M+ workers for sale at auction every week, there will be one who sell for less than $3 per hour (and $3.75 from Obama). That means call centers no longer in India, iPhones made here, you name it.

    The point is you can’t morally scream “sticky wages” if you are supporting political policy that makes wages sticky. That makes you, say it with me brother, the Inflated Wages Hawk.

    —–

    On topic, we have all agreed at length that the Fed has a 2% CPI target (Scott’s bernanke put)- and they do not want to over shoot it… so let’s not expect pro-active anything at less than say 1.5%.

    This is why I have been saying LOGICALLY, if we want to get on with it – YOUR SIDE should be demanding massive cuts to public employee pensions and wages.

    Yes logical, you say:

    “But what is not clear is whether or not there will be MORE QE if there is less government spending, which is what is going to happen. The government spending cuts will reduce AD unless they are fully offset with more expansionary monetary policy.”

    Precisely because you are afraid of timidity from the Fed, you MUST be bold in the cuts to Fiscal.

    You MUST have cuts so great on the Fiscal side, that we absolutely experience a fall in AD and a drop in CPI below the put – you need to make 100% sure Ben must rush in with something like the Nuclear option.

    A good liberal in this position goes all in… he says, “look motherf’er, it’s ALL on you, here’s an end to Davis-Bacon” – if monetary can’t carry the water completely on its own, you have PROVEN Fiscal is needed.

    Your side isn’t powerless, it’s just that you don’t like the real card you have to play.

    And I think you are not playing it because you are afraid pure QE works, that we get double dipped progress:

    1. Deflationary effects bringing massive productivity gains in the public sector.

    2. QE plays backstop to keep the stock market happy.

    Finally,

  52. Gravatar of Full Employment Hawk Full Employment Hawk
    12. February 2011 at 19:50

    “Maximum employment is immediately available via a Guaranteed Income (auctioning man-weeks) plan to replace minimum wage and unemployment insurance.”

    I don’t know enough about such a plan to comment on it but it sounds as if the government would be playing the role of the Walrasian auctioneer, which would require very extensive government interventions in the marketplace.

    “You MUST have cuts so great on the Fiscal side, that we absolutely experience a fall in AD and a drop in CPI below the put – you need to make 100% sure Ben must rush in with something like the Nuclear option.”

    I don’t believe in playing political chicken with people’s jobs. And the outcome is more likely to be another Great Depression.

Leave a Reply