President Obama: Get Mankiw on the Fed ASAP!
First let’s get the bad news out of the way. Greg Mankiw is much too kind to the Fed:
Mr. Bernanke became the Fed chairman in February 2006. Since then, the inflation measure favored by the Fed “” the price index for personal consumption, excluding food and energy “” has averaged 1.9 percent, annualized. A broader price index that includes food and energy has averaged 2.1 percent.
Either way, the outcome is remarkably close to the Fed’s unofficial inflation target of 2 percent. So, despite the economic turmoil of the last five years, the Fed has kept inflation on track.
Two quick reactions:
1. Remember the man who drowned in the lake that averaged 2 feet in depth?
2. Remember the Fed’s dual mandate?
Nonetheless, Mankiw (who I’ve recommended before) is the perfect choice. He’d fly through the Senate. Academically impeccable Bernanke and Mankiw, both Republicans, would form a one-two punch that the hawks couldn’t resist. And he’d be pushing for the most expansionary policy that is politically realistic:
What the Fed could do, however, is codify its projected price path of 2 percent. That is, the Fed could announce that, hereafter, it would aim for a price level that rises 2 percent a year. And it would promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.
Even better, Mankiw has anticipated the argument of the hawks, and pre-empted it:
Such an announcement could help mollify critics on both the left and right. If we started to see the Japanese-style deflation that the left fears, the Fed would maintain a loose monetary policy and even allow a bit of extra inflation to make up for past tracking errors. If we faced the high inflation that worries the right, the Fed would be committed to raising interest rates aggressively to bring inflation back on target.
MORE important, an announced target path for inflation would add more certainty to the economy. Americans planning their retirement would have a better sense about the cost of living a decade or two hence. Companies borrowing in the bond market could more accurately pin down the real cost of financing their investment projects.
This puts sand under the tires of the Obama administration. Yes, they would no longer be able to do anything with fiscal stimulus (zero multiplier), but if you’ve been reading the news you know that’s not happening anyway. It is an insurance policy against fiscal tightening. And it lets the Obama people push the SRAS as far right as they can, knowing the Fed has committed to keep up with AD. Bye-bye to Paul Krugman’s depression economics. Hello to supply-side econ. You do an emergency two year cut in minimum wages. Don’t think a Democrat can cut wages? Have you been following the Socialists in Greece? Cut UI benefits to 52 weeks max. Cut the employer side of the payroll tax for two years, and raise the employee side equally. Worried about the effect of the employee side on AD? You haven’t been paying attention—price level targeting means adverse demand shocks don’t matter, because they’re offset.
I think Mankiw knows the oil shock is probably about over. That means the economy’s slack will push inflation back down toward 1% to 1.5% over the next few years. This policy would force the Fed to move aggressively. And the more Obama tries to reduce business costs, the more he forces the Fed to boost the economy.
I’m sure most people read Mankiw and thought “blah.” He doesn’t have the extremism of this blog. But he’s a very canny pragmatist, and is much better at the practical side of politics than I am. My role in life is to try to rearrange people’s brain cells. It’s people like Mankiw that actually make the world run.
I don’t know if he’d accept the job, but it never hurts to ask.
HT: Marcus Nunes, JTapp
Update: I forget to mention that they should target core inflation—a robust recovery might push up oil prices. Oh, and cut government wages for two years, to free up more NGDP for private hiring.
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30. July 2011 at 14:08
You want the same guy who wrote that trashy piece in the NYTimes to get a job? Are you serious?
http://moslereconomics.com/2011/03/27/harvards-mankiw-a-disgrace-to-the-economics-profession/
30. July 2011 at 14:19
I’ve always wondered if UI should be an immediate lump sum and the amount should vary with the unemployment rate. Some sliding scale where the lump sum is equal to 13 weeks of current benefits when unemployment is 10%. The goal being to pay people for the higher likelihood of long term unemployment, but give them incentive to get right back into the workforce whenever possible.
For example:
Weekly wage=$1,000
Unemployment 13*0.6*$1,000=$7,800
Unemployment=7.5% -> 26*0.6*$1,000=$15,600
Unemployment>10% -> 52*0.6*$1,000=$31,200
The benefits would be much smaller if you try to collect them again within the first two years so as to discourage abuse.
30. July 2011 at 14:21
“Some sliding scale where the lump sum is equal to 13 weeks of current benefits when unemployment is 10%.”
That should say 52 weeks when unemployment is 10%. I meant 13 weeks of benefits when unemployment is 5%.
30. July 2011 at 14:46
Mankiw is a famous and distinguished economist. Mosler . . . not so much.
B, I’ve thought about the lump sum idea too. But now I gravitate toward self-insurance. Everyone should be required to put aside saving into an account to be used if they become unemployed.
30. July 2011 at 15:09
Tell me where Mankiw was right and Mosler wrong with respect to Mankiw’s horrible NYT piece?
30. July 2011 at 15:33
Mankiw is a famous and distinguished economist. Mosler . . . not so much.
Mosler is a distinguished financial specialist. Now we might argue whose credentials are better, those of someone who mae his fortune as practitioner in finance and businessman or someone who just teaches and writes books with nonsense like the money-multiplier and then is puzzled when he finds no empirical evidence for it.
As a non economist, my choice is clear. The financial crisis has had one positive effect: it has clearly proven how overrated economists are, and what a waste of human endeavour most of the economics profession is. (Nothing personal here)
30. July 2011 at 16:35
Bernanke needs to be fired. Mankiw would be a nice replacement.
Real-gDp peaked in the 3rd qtr of 2007 @ $13,326T. It has failed to reach that level as of this 2nd qtr 2011 (4 years later) – @$13,270.1T
(1) Given that any expansion of commercial bank credit involving loans to, or purchases of securities from, the nonbank public, results initially in the creation of an equal volume of new money in the banking system.
A significant part of the growth in the money stock since Sept. 2008 is not due to an expansion of commercial bank credit, but merely reflects the shifting of the savings/investment deposit type accounts at commercial banks (i.e., esp. small time deposits & retail money market accounts from m2), & other depository institutions into those categories included in m1.
In addition, a larger proportion of all commercial bank deposits were increasingly highly concentrated in “reserve bound”, money center banks.
Nothing really has happened, except that a larger proportion, of a larger volume of money, is transaction-based (or largely non-interest bearing).
However, this shift does represent a de facto TIGHTenING on the part of our monetary authorities. I.e., the FED did not “offset” the rise in required reserves vis a vis the stagnant growth in commercial bank credit.
(2) IOeRs are contractionary, induce debt deflation, & induce dis-intermediation (an outflow of funds from the non-banks/financial intermediaries or a stoppage in the flow of savings into real-investment). I.e., IOeRs alter the construction of a normal yield curve, they INVERT the short-end segment of the YIELD CURVE -known as the money market.
The non-banks are the most important lending sector in our economy — or pre-Great Recession, 82% of the lending market (Z.1 release, sectors, e.g., MMMFs, GSEs, etc.). Every effort should encourage the flow of monetary savings thru the non-banks (the customers of the commercial banks). Re-directing monetary savings does not reduce the size of the CBs because money flowing to the non-banks actually never leaves the CB system in the first place.
30. July 2011 at 16:44
They will listen to Mankiw because he is an outloud small government fiscal conservative.
Make note Scott.
30. July 2011 at 16:55
If Mankiw has nerve, and does what he knows is right (and listens to Milton Friedman and Scott Sumner), and has an aggressive monetary policy, then I am for him.
But please, no more feeble dithering at the Fed like the Bank of Japan.
Sheesh, why don’t we just outsource monetary policy to the Bank of Japan.
Short property , my friends.
30. July 2011 at 17:07
“Since becoming Federal Reserve chairman in 2006, he has kept inflation very close to an unofficial target of 2 percent”
With 7 billion people on this planet you would have to continually contract the money supply to keep prices from rising. A 2 percent target is too low.
30. July 2011 at 17:08
Mosler is shit brain. Listen to him screw the pooch:
http://www.youtube.com/watch?v=IieZHLTExws&feature=related#t=5m50s
At 6:10 Mosler mentally stumbles and fucks up his own story line.
He wants to affirm, “We are taxed because the government wants to not cause inflation.”
But instead, he flubs it and says “without taxes, the government won’t get to buy anything.”
Deep down Mosler thinks the government CAN buy everything and then hand it out.
—–
What’s worse, I found Mosler sneaking in to a Tea Party event, and now that I have my eye on him, if he does it again – he will get tarred and feathered.
30. July 2011 at 17:08
Re: self-insurance
My thought was Federal UI is all about addressing aggregate risk, that’s why it comes from the same institution that prints money. Your idea seems better suited for normal unemployment. We might as well tell people they can take money out of 401(k) penalty free during unemployment. (Is that allowed? I don’t have a 401(k) yet.)
If we think of 5% unemployment as normal, a check equivalent to 13 weeks of benefits is very low by Western European UI standards and would compliment yours nicely. My program only shows its teeth when there is a big shock. That’s why my example was exponential. 5%/7.5%/10% unemployment -> $7,800/$15,600/$32,100.
Reading your blog has given me respect for the power of the Fed, but I still think I want one automatic fiscal stimulus of last resort. Unfortunately this idea won’t satisfy the technocratic left that’s in love with public works stimulus.
30. July 2011 at 17:45
MamMoTh,
Perhaps being an economist I’m biased, but, in contrast to your experience, in the years leading up to this crisis, I acquired additional respect for my profession, and lost what little I had for those in finance and business.
Those with the most practical experience, especially in real estate, were among the most wrong about the economy. (I can sill hear clearly the voices of the talking heads explaining that “real estate always goes up 10% a year” on Fox News). And in our current economic mess, I’d argue that finance and business people, who base their views on personal experience, are completely useless.
This is a situation that cries out for fundamental thinking. Those who have actually thought through the economics of our sitution have done far better than those with loads of basically irrelevant practical experience, and a organizer full of finance formulas, which they don’t know how to derive and consequently can’t memorize.
P.S. Morgan is basically right about Mosler, although his words would not be my first choice of adjectives (I can think of some worse ones).
30. July 2011 at 18:15
Mark Sadowski,
Who let the finance people flourish? Who said its best we just let the private sector regulate itself? Who said acting in the rational self-interest(the only possibility in your model, but that’s another annoyance) allocates goods and services best?
You did…for you to say that modern day economics, neoclassical economics, has had no role with your bullshit models that start at the wrong point of departure, is insane. You are a delusional maniac. You are the perfect example of what is wrong with the economics profession as it stands. There is nothing “fundamental” in your thinking, its simply stuff nobody can understand and that, unlike functional finance(ie MMT) doesn’t really give a shit about unemployment and output. Morgan is not right about Mosler, morgan is a maniac like you though in the more strict sense.
Now go confess your sins at the altar.
30. July 2011 at 18:18
Keep in mind, this is the link to the full article written by Mankiw, the same Mankiw that Sumner thinks is so special…just look how much of an idiot he is:
http://www.nytimes.com/2011/03/27/business/27view.html
30. July 2011 at 18:34
Payam Sharifi,
You wrote:
“Who let the finance people flourish? Who said its best we just let the private sector regulate itself? Who said acting in the rational self-interest(the only possibility in your model, but that’s another annoyance) allocates goods and services best?”
Not me, not me, not me (neither me nor everybody in my profession). Wrong three times! (As my graduate mathematics for economists prof once said.) Get thee to a university!
And you wrote:
“You did…for you to say that modern day economics, neoclassical economics, has had no role with your bullshit models that start at the wrong point of departure, is insane.”
With respect to macroeconomic stabilization policy I consider myself a Monetarist, not a Classicist. The fact that you don’t understand the difference underscores what I hate most about MMT acolytes. (That is, their fanatical and mind numbing devotion to ignorance).
30. July 2011 at 19:03
Payam,
I think Mosler’s piece is only comprehensible if you actually are familiar with his thinking. If you don’t know MMT or Mosler’s ideas, that blog post is incomprehensible and only makes him look like an idiot. And from what I did gather in that post, it sounds like Mosler believes there is no limit (in any sense of the word) on how much the US government can spend, since it can always print more money to cover its expenses. That’s some crazy talk right there.
While we are talking about that Mankiw column (which strikes me as a perfectly reasonable summation of mainstream public finance’s predictions about the future, unless the US gets its fiscal house in order), it is striking to me how much mainstream economics and Rawlsian philosophy are actually compatible. Rawls proposes that we should focus on the utility of the very least well off. Most economists/utilitarians believe in a less extreme version of this principle (diminishing marginal utility of income/consumption). In practice, the policy implications are markedly similar.
One policy reform Mankiw advocates (and which most public finance economists would also support) is broadening the tax base and cutting back or reforming non-means tested welfare programs (e.g. Medicare/Social Security) so we can spend more on welfare for the needy — something which hits “the middle class” while protecting the least poor. Left liberal Rawlsians really should be endorsing more “neoliberal” policy programs.
Morgan,
I must have missed something — since when did you have such a huge disagreement with the ideas of the Tea Party?
30. July 2011 at 19:08
Keep in mind that many of these MMT “acolytes” are in fact random people who happened to become interested in what it has to offer, and comment on its behalf. I on the other hand am a PhD student, so don’t throw us in the same boat. Nevertheless, its stupid to make such a comment about a school of thought that only cares to look at how government actually operates. Why don’t we wait till the ASSA conference next year, when Sumner will have to deal with Wray and Kelton face to face, and see if you stand by your own ignorant comment.
I was going to say that if you were a macro person only that it wouldn’t necessarily apply to you(even IF you were a neoclassical), but the fact that you don’t put blame where its due and instead say that you RESPECT it is pretty damning on your ability to judge where the economics profession truly stands.
30. July 2011 at 19:09
Payam, Right from the get go he’s off base. A government can certainly live beyond its means. Much of Latin America did in the 1950-90 period. High inflation was the result. Plus some debt defaults.
MamMoth, I certainly agree that economists did very poorly in this crisis. As I said in my previous post, BTW.
Flow5, I agree money has actually been way too tight.
Morgan, Conservative, but not a crazy.
Benjamin. He’s the best we can hope for, albeit less than I’d like to see.
B, Yes, I suppose that’s the idea, but as you know I think monetary policy is the only force that can address aggregate risk.
Everyone–HOW ABOUT TONING DOWN THE LANGUAGE!
30. July 2011 at 19:16
Johnlee,
Actually, you are quite right about Mosler, I have had some of my colleagues make the same comments about him(in terms of him trying to emphasize the fact that government is not financially constrained)…but he does say there is a real limit in that INFLATION is a concern, so its not really crazy talk.
The US does not need to get its fiscal house “in order”, you public finance types are a wee bit too much into the finance and not into the economics. Read Moslers seven deadly innocent frauds of economic policy(only because his book sums it up best, and its short and an easy read), http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf , from page 9 to 68.
30. July 2011 at 19:20
johnleemk,
Huh?
30. July 2011 at 19:23
Only in those countries with a sovereign currency is it applicable to our situation, mentioning the debt defaults is of course the reason why types like Mosler mention over and over and over again that it is not applicable to us.
Morgan isn’t crazy but functionally a conservative like him is no different, so you engage him the same way 🙂
BTW morgan, much of what MMTers advocates is no different than the tea party, though the emphasis on government is certainly a huge point of departure. But don’t joke about tarring or feathering him, or I’ll make sure I’ll be there too to tar and feather you.
30. July 2011 at 19:36
Morgan,
“What’s worse, I found Mosler sneaking in to a Tea Party event, and now that I have my eye on him, if he does it again – he will get tarred and feathered.”
I might be a little dumb here, but how I read it is that you find it egregiously offensive that Mosler is beginning to associate with the Tea Party…
30. July 2011 at 19:43
At first I was like “Good god, how could someone be THAT ignorant and awful… Mankiw is without question one of the most thoughtful and well respected people in the profession…”
Then I saw “MMT” and it all made sense. I think you’ve invoked a real scourge of lunatics Scott- sort of like Andolfatto and the Ron Paul people.
30. July 2011 at 19:55
Payam Sharifi,
You wrote:
“Keep in mind that many of these MMT “acolytes” are in fact random people who happened to become interested in what it has to offer, and comment on its behalf. I on the other hand am a PhD student, so don’t throw us in the same boat.”
You threw yourself there. Don’t complain to me about the company that you chose to keep.
And wrote:
“Nevertheless, its stupid to make such a comment about a school of thought that only cares to look at how government actually operates.”
What comment, the comment that alludes to the fact that MMT followers, frequently make baseless claims about others beliefs, such as you chose to make about mine? I can understand why “random people” make such ignorant assumptions, but if you are really an economics PhD student you should know better.
And wrote:
“Why don’t we wait till the ASSA conference next year, when Sumner will have to deal with Wray and Kelton face to face, and see if you stand by your own ignorant comment.”
I might actually be able to make it this year and would enjoy a healthy debate. At least Wray and Kelton are economists (unlike the usual MMT rabble).
You wrote:
“I was going to say that if you were a macro person only that it wouldn’t necessarily apply to you(even IF you were a neoclassical), but the fact that you don’t put blame where its due and instead say that you RESPECT it is pretty damning on your ability to judge where the economics profession truly stands.”
I never said that the economics profession came out of this crisis unscathed. I merely pointed out that in my opinion, by contrast, the business and finance professions came out of this crisis utterly demolished. Anyone who still looks to “business economists” for economic policy guidance is very much looking in the wrong place.
P.S. Scott, I just want to point out that the only profanity used in this thread is that by Morgan (what else is freaking new) and by Payam (and, of course, by my comments quoting Payam).
30. July 2011 at 20:10
Obama nominating George W. Bush’s chief economic adviser to the Fed. I wouldn’t be surprised actually…he continually undercuts his progressive base in an effort to win the favor of people who despise him.
“It’s people like Mankiw that actually make the world run.”
Or not. Didn’t Mankiw endorse massive tax cuts in the face of two, trillion dollar wars? Didn’t Mankiw completely fail to foresee the 08 financial collapse?
30. July 2011 at 21:46
1) Greg Mankiw is currently advising Romney, so he might have a conflict of interest.
2) I bet the hawks could resist the Bernanke/Mankiw combo. The Fed seems to be full of hard money ideologues.
30. July 2011 at 22:32
Mark, you narc!
johnleemk,
Um, I’m happy to enlighten you on the general motivations of the Tea Party.
They tend:
1. to own hard assets.
2. to live at the upper middle class part of community.
3. to own small businesses.
4. to hate the Fed for printing money.
5. to hate the government for not admitting that the Tea Party are the leaders of the country.
6. to hate the Fortune 1000 management for rent seeking – encouraging regulations and tax policy that favors corporatists.
7. AND MAINLY hate that the banks weren’t forced to sell every home loan for pennies on the dollar without TARP. Many of them expected to and DESERVE to become landlords.
Now why exactly do you think they’d LIKE dirty hippies who say since the government has a monopoly on money, it should print and redistribute wealth, and tax to hearts content?
It’s ok if you just say “wow i didn’t know.”
30. July 2011 at 22:37
Ah, ok. I misunderstood the implication of your tar-and-feather threat.
30. July 2011 at 22:40
Payam & Mosler, I’m not kidding. Be smart.
Show up again at a Tea Party event, and when I message them what his argument is… he’ll be stripped nekkid and turned out like a crack whore on youtube.
You have no idea how angry the owners of hard assets are.
This is their country, their money policy, and their government.
You are aliens.
30. July 2011 at 22:46
Morgan,
You wrote:
“Mark, you narc!”
You forget, I used to be a public high school math teacher. As an ex-government employee (actually, since I’m currently working for the University of Delaware and Rowan University, I guess I still am a government employee) I merely turned you in for your own good.
30. July 2011 at 23:59
“Hello to supply-side econ. You do an emergency two year cut in minimum wages. Don’t think a Democrat can cut wages? Have you been following the Socialists in Greece?”
Yes, true, we european are doing a perfect suplly-side policy. The only problem is that policy contracts the demand and gorwth is negative, but for european economist this idea of AD
doesn´t exist.
Te official doctrine here: yhe only problem has been very bad fiscal policies, that is not a matter of monetary policy. The only matter of MP is inflation.
31. July 2011 at 03:39
http://moslereconomics.com/2011/07/30/mmt-to-congress-you-are-the-scorekeepers-for-the-us-dollar-not-a-player/
31. July 2011 at 04:23
Congress to MMT: We are score-keepers for the US dollar AND we are a player. And no one is going to take our score-keeping seriously if we keep awarding our own team free points.
31. July 2011 at 05:09
[…] Scott Sumner disagrees that the Fed has done all it can to combat the slump — once I figure out the specifics of his argument, I’ll share them with you — but he loves the idea of a 2% inflation target and even suggests that Mankiw be appointed to the Federal Reserve Board of Governors. Maybe Mitt Romney (to whom Mankiw is an adviser) can do that. GA_googleAddAttr("AdOpt", "1"); GA_googleAddAttr("Origin", "other"); GA_googleAddAttr("theme_bg", "ffffff"); GA_googleAddAttr("theme_text", "333333"); GA_googleAddAttr("theme_link", "0066cc"); GA_googleAddAttr("theme_border", "f9f9f9"); GA_googleAddAttr("theme_url", "114477"); GA_googleAddAttr("LangId", "1"); GA_googleAddAttr("Autotag", "business"); GA_googleAddAttr("Tag", "depression"); GA_googleAddAttr("Tag", "federal-reserve"); GA_googleAddAttr("Tag", "inflation"); GA_googleAddAttr("Tag", "monetary-policy"); GA_googleAddAttr("Tag", "ben-bernanke"); GA_googleAddAttr("Tag", "cnbc"); GA_googleAddAttr("Tag", "greg-mankiw"); GA_googleAddAttr("Tag", "little-depression"); GA_googleAddAttr("Tag", "mitt-romney"); GA_googleAddAttr("Tag", "new-york-times"); GA_googleAddAttr("Tag", "scott-sumner"); GA_googleFillSlot("wpcom_below_post"); […]
31. July 2011 at 05:12
oh look vimothy the contrarian trying to use rationality to disguise his hatred for government and love for free markets
31. July 2011 at 05:35
Skip,
“At first I was like “Good god, how could someone be THAT ignorant and awful… Mankiw is without question one of the most thoughtful and well respected people in the profession…”
Then I saw “MMT” and it all made sense. I think you’ve invoked a real scourge of lunatics Scott- sort of like Andolfatto and the Ron Paul people.”
Here’s how you can interpret it a different way, pal: within the profession, he’s one of the most popular economists, SURE. The profession itself is looked down upon, however. Hence, the ones who stand for that profession the most are looked down upon the most. Make sense? Anyway, anyone who writes a piece as awful as the one I linked above doesn’t deserve any praise whatsoever. He has no understanding of monetary operations.
31. July 2011 at 05:51
“What’s worse, I found Mosler sneaking in to a Tea Party event, and now that I have my eye on him, if he does it again – he will get tarred and feathered”
This won’t be hard to do. You’ll “catch” him there all the time – he’s given many speeches at tea party events.
He isn’t the greatest public speaker. That does not say anything about the ideas.
31. July 2011 at 05:57
Payam, You do know that Latin American countries had their own currencies between 1950 and 1990, don’t you?
Skip, I certainly wouldn’t lump in Andofatto with those other groups.
Dan, Mankiw would move Fed policy to the left. Isn’t that what you want?
Policy Wank, That’s why Romney refuses to bash the Fed for tight money, like the other Republicans.
Luis. Yes the ECB is not playing ball, which is why the austerity policy isn’t working.
31. July 2011 at 07:00
Hey Prof. S,
I just wanted to express some reservations about the benefits of a minimum wage cut. If people at the bottom of the income scale have a fixed nominal debt burden, couldn’t that only worsen their spending prospects?
31. July 2011 at 09:29
I have a much better recommendation than Mankiw: a parrot I trained to say “print money”.
31. July 2011 at 10:47
Scott, amen on the core inflation point!!
I don’t want to count the number of times I have had to argue to both liberals and conservatives that *core* inflation is what should determine *monetary* policy.
What, is the Fed’s monetary stance supposed to effect whether or not their is a rebellion in Libya? Do these people expect the Fed’s raising of interest rates to alleviate a drought? Sheesh. Core inflation all the way for the Fed.
31. July 2011 at 22:34
You stole this from me!!!!
“Oh, and cut government wages for two years, to free up more NGDP for private hiring.”
I spent last year arguing that under NGDP regime, it makes sense to aggressively cut government spending…. because it buys you more easing if needed.
1. August 2011 at 06:42
Mankiw could better spend his time correcting all the mistakes in his textbook.
1. August 2011 at 07:54
[…] are many ways of grabbing the top of the pole, but I believe Greg Mankiw’s recent proposal is the only politically feasible option at this point, much as I’d prefer […]
1. August 2011 at 08:43
Shocking, But I assumed the Fed would offset any drop in AD, via easier money. That’s the implication of price level targeting.
John, That would work too.
Jason, That’s right.
Morgan, I only steal from the best.
Benedict, I once did a post pointing out a mistake.
1. August 2011 at 09:14
I told you Mankiw was a monetarist at heart. That he said, in 2008, that Keynes was the fellow we could learn from the most did not mean he agree with keynes on everything.
A couple quick points to make:
1) yes, level targeting is a big deal – it would have fixed SOO many problems
2) we still have very bad measures of inflation, as you note, but the recent discussion over consumption substitution really highlights that point. have you done a post on that? You should…
3) I thought a while back the Fed wouldn’t be able to engage QE until there was a massive negative shock. Looking more likely…
4) Someone needs to recognize that the economic headwinds we face are not one-time-liquidity issues. There are large scale demographic and supply-side issues that are confounding everything as well. ISM just got obliterated, BUT oil is still near $100. The US needs to reconcile itself with a lower share of global consumption, and there are only a couple ways to do that. If we commit to only 2% inflation, we need to recognize that the “adjustment” process is going to take another 5-10 years at least, and will see further massive shifts from debtors to creditors. We’re going to be on life support until the world economy gets back in equillibrium, except we keep trying to pull the plug whenever the patient shows signs of activity.
1937. BTW, remember all those silly folks who said that Smoot Hawley “caused” the depression to turn into the great depression? Well, we haven’t seen new trade barriers in the last few years (yet); I never did buy the Smoot-Hawley narrative.
1. August 2011 at 09:28
Statsguy. I don’t see how Mankiw is a monetarist. After all, he’s proposing the (New Keynesian) idea of price level targeting, not the monetarist idea of money supply targeting, or even QE3.
The real weakness you describe will lower the real interest rate. That means we need an aggressive monetary policy. NGDP targeting is a policy for all seasons–it would automatically address real weakness–but we won’t do it.
I agree S-H didn’t cause the Depression, but I don’t think anyone would have said it was a necessary condition in any case.
1. August 2011 at 13:58
> He’d fly through the Senate.
If Obama wanted him in Fed, that would be a reason enough for Republican to filibuster him. That’s how GOP works these days.
1. August 2011 at 14:00
I didn’t notice this initially in the NY Times article:
“N. Gregory Mankiw is a professor of economics at Harvard. He is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.”
This makes Romney more appealing to me. Romney might be the most encouraging Republican economically, if he can resist the hard-money influence that seems rampant today.
1. August 2011 at 19:05
“I think Mankiw knows the oil shock is probably about over.”
In the first half of 2008 we faced an incipient adverse supply shock. This would have become a serious problem if the Great Recession had not killed it. The recovery of the world economy has begun to reignite it. If the recovery in much of the rest of the world continues this will, once again, become a serious problem. Keeping the rate of inflation at only 2% in the face of such an adverse supply shock will make our current depression worse.
1. August 2011 at 19:08
“It is an insurance policy against fiscal tightening.”
With nominal wages very sticky downward at low levels of inflation, most of the effect of fiscal tightening would be on output and unemployment and very little on the rate of inflation. Therefore additional fiscal tightening would bring about only a weak, inadequate response from the Fed and cause the unemployment to get worse.
1. August 2011 at 19:14
“Everyone should be required to put aside saving into an account to be used if they become unemployed.”
That’s a mandate. Conservatives used to favor mandates, like . for example, Romey’s health insurance mandate in Mass. But now they are adamently opposed to mandates.
1. August 2011 at 20:52
“And it would promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.”
There is some ambiguity here. If the rate of inflation falls below 2% for a while when the economy is depressed, does getting back to the target price path mean returning to 2% inflation, or does it call for a rate of inflation of greater than 2% until the price level is back to where it would have been if the rate had remained at 2%. If the unemployment rate is to come down, reinflation will be as neccessary as reflation was under Roosevelt.
Once an economy has become depressed with a rate of inflation of less than 2%, in order for the economy to recover, prices have to rise, and simply holding the rate at 2% will not permit the needed price increases and therefore will keep the economy depressed.
4. August 2011 at 08:48
[…] Sumner beat me to it, but this is the best recommendation I can see Nonetheless, Mankiw (who I’ve recommended before) is the perfect choice. He’d […]
13. August 2011 at 11:30
Jason, I’m liking Romney more everyday.
FEH, Regarding your first comment, I am talking about core inflation.
You said;
“With nominal wages very sticky downward at low levels of inflation, most of the effect of fiscal tightening would be on output and unemployment and very little on the rate of inflation. Therefore additional fiscal tightening would bring about only a weak, inadequate response from the Fed and cause the unemployment to get worse.”
I don’t follow your logic. The same flat SRAS applies on the upside for monetary stimulus.
You said;
“That’s a mandate. Conservatives used to favor mandates, like . for example, Romey’s health insurance mandate in Mass. But now they are adamently opposed to mandates.”
And how is that relevant?
Regarding level targeting, there is no ambiguity. If inflation falls below 2%, you must raise it above 2%.