Progressives and “unmet needs”
Conservatives often complain that progressives, aka “liberals,” are insatiable. Whenever they see unmet needs they call for more regulation, or new entitlements.
I’m not sure this criticism is fair, but I think conservatives see two particular problems with the “unmet needs” approach to policy:
1. There will always be problems in society, and hence this approach would lead to a larger and larger role for government. In other words it would put us on the road to you know where.
2. Government regulations aimed at fixing one problem often create new problems. Bank branching regulations were intended to prevent concentrations of financial power. These laws resulted in bank panics in the US, which led to deposit insurance. Deposit insurance created moral hazard, which led to reckless lending by S&Ls. This led to re-regulation of S&Ls in the 1990s, etc, etc. The same dynamic is underway in health care.
How does this apply to monetary policy? As long as there are “unmet needs,” i.e. aggregate demand is short of target, the progressives should be calling for more monetary stimulus. And in this case the conservatives should as well, as monetary stimulus is essentially costless. (On average, the Fed might incur a capital gain or loss, but a non-stimulative policy is likely to create even larger gains or losses to the Treasury.) And monetary stimulus is no more “interventionist” than non-stimulus, just as setting a steering wheel at NNW is no more interventionist than setting the wheel at WNW.
Here’s what puzzles me, why don’t progressives agree with me that the Fed caused the recession, not the bankers?
One answer is that in 2008 many progressives thought the Fed was out of ammo. But in 2009 and 2010, progressives became increasingly critical of the Fed for not doing more to stimulate the economy. Suddenly the Fed wasn’t out of ammo.
Do progressives apply the criterion of “unmet needs” to monetary policy? I think the answer is yes. Look at almost any Krugman column that is critical of the Fed for not being more aggressive. He repeatedly cites data on inflation and jobs. Krugman says there’s no excuse for the Fed to tighten as long as inflation and jobs are below the Fed’s implicit target. And he keeps pressing the Fed to do more. And more. And more. And he’s basically right (although I’d rely on NGDP, rather than inflation and jobs.)
I see that as an “unmet needs” approach to monetary policy. Keep doing more until the expected growth in AD shows no “unmet needs” for more AD. So if this is the progressive approach to monetary policy, doesn’t that mean that the Fed caused the big drop in NGDP between 2008 and 2009 by not following this criterion?
There are only a tiny number of economists who believe the Fed caused the Great Recession with an excessively tight monetary policy, relative to the needs of the economy. Why don’t progressives believe this?
A. They might have thought the Fed was out of ammo in 2008, because rates were only 2%. But if so, why do they think the Fed is not out of ammo in 2010, despite zero interest rates.
B. They might have understood the Fed could have pursued much more aggressive stimulus in 2008, but thought it was inappropriate. But why did they think monetary stimulus was appropriate in 2010 when the economy was already recovering, but not in 2008 when it was falling off a cliff? And why did they call for fiscal stimulus in 2008?
C. They might believe that the Great Recession was not caused by a big fall in AD, but rather by structural problems, and/or Obama’s interventionist policies. But then why do progressives criticize conservatives for making this argument?
It seems to me that the logic of the “unmet needs” approach to policy, combined with the obvious fact that progressives have become highly critical of the Fed for not doing more, points to tight money being the cause of the Great Recession. So why does almost no one agree with me?
PS. For new readers I should point out that it is generally understood that there is no absolute indicator of easy or tight money; interest rates and the money supply are both highly unreliable. When I say “tight money,” I mean tight relative to the policy objective, which is the only meaningful way to talk about the stance of monetary policy.
Tags: Progressivism
1. January 2011 at 15:39
Scott,
My brother is trying to work in campaign management for the Democratic Party (the subject of many arguments as I’m sure you can imagine). Whenever I try to bring up monetary policy his response is essentially “Monetary policy is complicated and technical. Since I can’t really argue one way or another about it, I’ll simply defer to the experts who I assume know what they’re doing, especially since until recently it was never really a big issue, and everybody agreed the Fed should try to keep inflation down. I’ll stick to the more political issues which are typically fiscal, not monetary.”
I wonder if this is common among progressives, that if the Fed wasn’t more aggressive late in 08, they must have had their reasons, and who am I to question it? If they thought it was a good idea to do QE later in 2010, then I guess they still had ammo after all.
1. January 2011 at 16:21
Prof. Sumner,
I suppose one way of finding out would be to ask progressives about their view on the transmission mechanism of QE2.
– The traditional “monetary policy is all about interest rates and liquidity preference” view renders monetary policy useless at the moment.
– Appealing to expectations is the economics of the altar. WHY do markets expect QE2 to cause inflation?
– As far as I know, that leaves us with the classic “hot potato” transmission mechanism of excess balances, non-interest bearing money and so on. But, for various reasons, that’s never really caught on amongst progressive economists. In fact, that’s almost true by definition: anyone who takes the “hot-potato” view seriously will reject liquidity traps and fiscal stimulus, which already makes them pretty unprogressive in this day and age, when Krugman and Stiglitz have jumped back to the Keynesianism of the 1960s.
It doesn’t help that even economists have very naive views about money e.g. they tend to focus on narrow measures of money (I remember Krugman arguing that the rise in the monetary base, which coincided with deflation in 2008/2009, proved the liquidity trap beyond all reasonable doubt!) despite the fact that notes & coin make up a tiny proportion of the total money supply. They also focus on individual behaviour with this cash (“What will the saver do with his $50,000 deposit when interest rates are nearly zero?”) when, in fact, most money is used by large corporations and banks.
Anecdotally, I have found it very hard to explain the stimulus effect of quantitative easing to people on the left and the right. That might be just because I don’t understand the economics of it very well myself, but I think it’s also because one has to cover a lot of ground just to get to the point where “boosting nominal GDP by increasing the money supply” isn’t just meaningless jargon.
So, in answer to your question, I don’t think that progressives understand why QE2 works. Krugman basically admits that he sees it as a way of appeasing the irrational gods of the market, while Stiglitz has basically naive-Austrian views on QE2.
1. January 2011 at 17:32
W.Peden, Of course Stiglitz opposes monetary stimulus, so I wasn’t thinking of him. But most of the progressive bloggers I read favor additional stimulus. And they’d keep favoring it as long as there were “unmet needs,” which is precisely my view.
I agree that it’s really hard to explain monetary stimulus to the average person. First you need to explain why it boosts nominal spending, and then you need to explain why that’s a good thing.
1. January 2011 at 17:36
@Scott, can you explain why the Fed’s “target” for NGDP, interest rates, or money (regardless of what measure), has relevance for production of real goods and services? If I understand what you’re saying, everything is to be taken in comparison to the Fed’s implied target(s). Why?
Why would the Fed have any particular insight into any particular target for any particular aggregate variable, or interest rate. And why would we think that having the Fed push interest rates around would result in a useful outcome, when I’m pretty sure you probably wouldn’t think the USDA should be pushing bread prices around. An interest rate is the rental price of using someone else’s money, right? Prices that aren’t determined by willingness and ability of people don’t contain information about relative scarcity, right?
I must admit that you rather lost me when you wrote, “And monetary stimulus is no more “interventionist” than non-stimulus, just as setting a steering wheel at NNW is no more interventionist than setting the wheel at WNW.” I must not be up on my three-letter acronyms.
This economist does agree with you that the Fed played a large role in facilitating (not to say “caused” exactly)the most recent recession. The Fed has played a commanding role in every recession since 1913. But why do you think the role played has been too little money compared to a target the Fed set? The role seems to have been about inflating one or another nominal bubble that ultimately had nowhere to go except bust. The history of recessions seems to be consistent with the bubble explanation, even though W. Peden dismisses this notion as naive Austrian thinking. Calling it naive doesn’t make it so.
The Fed is never out of ammo, of course. The Fed absolutely has the ability to contract whatever measure of money you’d like to use as a measure. The Fed also has the ability expand whatever measure of money you’d like to use, so long as the U.S. Treasury wants to spend, which want is evidently without limit.
Speaking of “unmet needs” is surely nothing more than a rhetorical device, right? Krugman, smart as he surely is, cannot believe that more money equates to more cheeseburgers,cars, and all the rest. Who really cares what progressives think or believe about monetary policy. What really matters is what’s true about monetary policy, not what progressives think about it.
Do you really believe that somehow the Great Recession is due to people on a large scale,simultaneously all of a sudden not wanting real stuff? I’ve never thought that idea passed the sniff test, really. Please explain.
So, “tight money,” which I take it is your explanation of recessions, depends entirely on how much money exists compared to what the Fed thinks should be the case? Please elaborate; I can be persuaded, but it will require logic, not just assertion.
1. January 2011 at 17:58
Dan, I’m not surprised by the attitude of those economists who don’t follow monetary policy, I am surprised by the attitude of those who do.
David, I don’t favor having the Fed manipulate interest rates, so we agree there.
The economy does best when monetary policy is stable. Of course stability is in the eye of the beholder, but I believe low and stable NGDP growth is the best policy, and the one most likely to produce low inflation and no severe business cycles. Throughout history a highly unstable NGDP is usually associated with a highly unstable RGDP. The reasons are probably associated with sticky wages and prices. Thus when NGDP falls, because wages and prices are sticky RGDP falls as well.
You said;
“Do you really believe that somehow the Great Recession is due to people on a large scale,simultaneously all of a sudden not wanting real stuff? I’ve never thought that idea passed the sniff test, really. Please explain.”
No I think people want just as much stuff today as 3 years ago, the problem is monetary, not a lack of wants from the public. The root cause of the problem is falling NGDP combined with sticky wages.
You said;
“The Fed is never out of ammo, of course. The Fed absolutely has the ability to contract whatever measure of money you’d like to use as a measure. The Fed also has the ability expand whatever measure of money you’d like to use, so long as the U.S. Treasury wants to spend, which want is evidently without limit.”
I see monetary stimulus as an alternative to Treasury spending. We’ve wasted enormous sums on fiscal stimulus precisely because the Fed let NGDP fall. If NGDP had continued growing at 5% year after year, Obama never would have got Congress to approve fiscal stimulus, as it wouldn’t have been needed.
You said;
“Speaking of “unmet needs” is surely nothing more than a rhetorical device, right? Krugman, smart as he surely is, cannot believe that more money equates to more cheeseburgers,cars, and all the rest.”
In fact he does believe this when we are in a recession, but not otherwise. And I agree with him.
Regarding your final question, any monetary indicator has flaws. For instance low interest rates can indicate easy money (liquidity effect) or tight money (resulting from deflation.) In my view there is no absolute standard of whether money is easy or tight. Instead, we should focus on whether it is too easy or too tight to hits the Fed’s objective. I favor a stable NGDP growth objective. Others favor stable prices. Some favor a fixed price of gold. There are any number of possible policy objectives, and in each case there is a monetary policy stance that is most likely to hit that objective. So I judge monetary policy in terms of whether it provides the right amount of NGDP growth. In 1980 money was way too easy, despite 20% interest rates, because NGDP was growing at double-digit rates. In 2009 NGDP fell at the fastest rate since 1938, hence money was too tight, despite near zero rates.
1. January 2011 at 18:27
@Scott, when the Fed buys T-bills, notes, or bonds, the first and most notable outcome is that the U.S. Treasury either buys real stuff or transfer money to households or businesses who will buy real stuff. Is that right?
But what is it that causes more real stuff to appear, ready to be bought, especially over a span of time as short as one or two years? If you say producers of goods and services had excess capacity, which I guess is what Prof. Krugman wants to say, then please explain why they had excess capacity in the first place. To leave that out seems avoid the real question. It has always seemed to me that talking about insufficient AD is begging the question.
I understand that low or high interest rates cannot tell us by themselves whether money is “tight” or “loose.” In my opinion, velocity is the adjustment that keeps money frfom being either too tight or too loose. Am I just wrong about that?
I also understand that nominal wages and some other prices can be “sticky” downward. But I’ve personally always thought that argument was overstated considerably. In the end, if stuff (including labor services) goes unsold, prices will be pushed down by competition among sellers of stuff (including labor). Aside from government enforced transfer payments, unemployed workers will eventually accept lower nominal wages, won’t they? We are seeing even now that housing prices are falling, aren’t we?
It does seem to me that recessions are the phenomenon of businesses having turned out to be wrong about what goods and services consumers would buy. Any particular business could be wrong about that, but what would lead a whole bunch of them to be wrong all at the same time? That’s the real burden of the question about what causes a recession, I think.
When a bunch of business turn out to be mistaken about the willingness and ability (both are required) of consumer to buy particular goods and services, all at the same time (e.g., 2007 – 2009), I really can’t see how the Fed buying U.S. Treasurys on a large scale is going to change the root problem.
You have stated multiple times that cranking up the quantity of money will do the trick, but you have still not explained how. Do you base your recommendation purely on the association of NGDP and RGDP moving about together, or do you have a comprehensible story to go along the association. And given that there is an association, are you certain which is the horse and which is the cart, and if so, how so?
1. January 2011 at 20:05
It is a subtle distinction – one that you may call philosophical – but it is regarding the meaning of the word “cause”.
The economy was humming along quite nicely in 2007. However, the change was that banks went and lent money to people who couldn’t pay them back, and at the same time, housing values went down. This caused the banks to lose lots of money, and also since they were so highly leveraged, they were insolvent. Now, the mechanism by which this affected the real economy is debated – it is a mixture of a sudden and drastic loss in confidence, a tightening of lending by banks, and other factors – but AS A CONSEQUENCE of the subprime mortgage fiasco the economy plummeted.
This is where the causation lies, therefore. With the idiot bankers who went bankrupt.
Now the Fed tried acting, but for sure they were too conservative, even as they were hailed as being the most pro-active Fed in a long time. Perhaps this was because it was impossible, in the midst of the storm, to gauge how bad things were. Perhaps it was because the more prudent thing to do was to wait and see. They were wrong, but this does NOT mean that they actually caused the recession. Without the subprime mortgage fiasco there would be no recession. I also think it unlikely that the Fed could have completely averted any recessionary impacts post-Lehman. Maybe they could have, maybe not. I’m not an expert there, but it seems like it was inevitable that the banks had caused a downturn.
Thus, I place the causation at the feet of the banks while asking the Fed to do more to a) mitigate the effects and b) to do more to get us out.
Having the ability to mitigate a recession does not imply that you caused the recession, imo.
1. January 2011 at 20:23
Well, here’s one progressive’s view, in ranked order:
1. Fiscal stimulus primarily going to the poor/unemployed
2. Monetary loosening
3. Fiscal stimulus primarily going to the rich/employed
With the ranking based on a combination of “more effective” and “morally superior” (in my opinion). We (well, Krugman) would argue that 1 was more effective than 2 via zero bound arguments, but not that 2 was completely out of ammo. And it wasn’t until 1 seemed politically impracticable that the left started arguing for 2 — and eventually some segment acquiescing to 3.
I have come around to your view that fiscal stimulus in the face of “tight” money is likely ineffective at improving the economy. But I still think unemployment insurance improves the quality of life, and inasmuch as the downturn is temporary … at some point in the future, currently “tight” monetary policy will start to look “loose” … at least I hope! If I didn’t think things would eventually improve (i.e. that monetary policy would eventually look loose), then I would consider even unemployment insurance ineffective.
As far as the bankers vs the Fed as the primum movens? I think you may have answered it yourself: the financial collapse essentially made prior monetary policy suddenly look much tighter relative to a policy objective of GDP growth, full employment or inflation targets. The demand for safe assets (cash, T-bills) suddenly jumped after Bear Stearns, Lehman, etc. Now I agree that the Fed could have immediately reacted with a massive loosening of monetary policy that may have prevented the recession. Using your steering wheel analogy, the Fed was driving north and the bankers caused a big boulder to fall in the road. Turning west may have theoretically avoided the rock, but as I’m not an economist, and I think economists would disagree in good faith on this point, who knows if that boulder didn’t fall too close and leave no time for the Fed to steer out of the way? I may be wrong, but it seems we’ve never tried monetary stunt-driving before.
At least that’s why I blame the banks for trading derivatives outside of an open market and operating at extremes of leverage rather than the Fed for not acting vigorously enough.
1. January 2011 at 20:26
Regarding progressives, I think the problem is that most of them just don’t have a coherent understanding of monetary policy, and in particular the way that it works. (This, however, is something you could say about more than just progressives.) Like most people, they take cues from their official and unofficial leaders. So when Paul Krugman advocates monetary stimulus (albeit with the caveat that it may not work) they trust his judgment. And if he doesn’t blame the Fed for causing the recession, then they don’t understand why they should either.
In Paul Krugman’s case, I think the problem is that his mental model is just too limited, and I think he takes those limitations in his model to be actual limitations on monetary policy in the real world. For example, he–like most economists–seems to focus on interest rates too much. He sees monetary policy as operating primarily (but not exclusively) through interest rates, when there are actually several other transmission mechanisms. So when he talks about QE and how it might work, he talks about how it can raise the inflation rate, and how that in turn will lower real rates. It’s a bit awkward, but he can see a route to the policy working.
I think his main problem, however, is that he doesn’t view monetary policy as working through expectations. Hence, he thinks the Fed would have to do some god-awful amount of QE in order for it to be effective. Hence, he never talks about level targeting. Both of these, I think, can be best understood as working through expectations. Krugman seems averse to expectations, or at least disdainful of it, and I think this is in part because he associates it with Chicago and all the conservative economists it produced.
1. January 2011 at 23:29
I recall reading through the comments sections here over the last year (I’ve been reading most of them), there have been some comments against monetary stimulus for the lack of ability to direct the distribution of it. And herein lies what I suspect to be the problem with progressive ideologues in power who are unwilling to compromise, take their redistributive bent irrationally far and become a stumbling block to practical and timely solutions to the problem. It is quite irrational to insist against raising all boats because evil rich people might get some when every day that goes by without an effective solution more and more impoverished are being created out of the margins.
I make these assumptions based on what I know about the people who were on Obama’s economics team and many who testified before congress regarding the stimulus package. And I think, perhaps, it highlights a problem with the economics profession being intertwined with politics to where many have simply lost their integrity. The book “Supercapitalism: The Transformation of Business, Democracy, and Everyday Life” by Robert Reich is one book that provide a clue to the answer for part of the question presented in this post. To be honest, it made my eyes bleed, but I picked it up because the term “Supercapitalism” was used by Mussolini in all the glory of his demagoguery. Of course that doesn’t mean Mr. Reich’s intentions were bad, but I really have to wonder why he would regurgitate principles of a fascist economic model and try to sell it as something uniquely American or even beneficial. Surely, he must have known what he was doing.
2. January 2011 at 02:34
@Bonnie
I think your point about the inability to direct monetary policy towards helping the poor is accurate, but I do think monetary stimulus is just not directed enough rather than not directed at all: the fear of generating inflation from monetary policy falls slightly higher on people with assets that would be devalued (the rich) rather than those who spend all their income as it is earned or who have debt (the poor).
The key observation is that the objection to loose monetary policy has been coming mostly from various elements of the right; the left runs the gamut from ambivalent (e.g. Krugman) to tepid enthusiasm (e.g. Yglesias).
But yes, redistributing wealth from the rich to the poor is a guiding aim, regardless of how much the left tries to hide it — just like undoing previous redistribution is the aim of the right. This works incredibly well at figuring out the motives for any proposed economic policy on either side, regardless of what the politicians say in public 🙂
2. January 2011 at 02:48
Scott,
You admit use of MP for reaction to NGDP but you refuse use of FP for the same reason. According to your view both lead to nominal spending, so why the prejudice? Please do not use welfare issues or rational anticipations because they are irrelevant to my point.
2. January 2011 at 03:43
My New Year resolution #99 comes into effect. Once I read a line with explicit or implicit reference to “The Road to Serfdom” I immediately stop reading. This approach will save valuable lifetime.
2. January 2011 at 05:41
“I agree that it’s really hard to explain monetary stimulus to the average person. First you need to explain why it boosts nominal spending, and then you need to explain why that’s a good thing.”
Printing money is not hard to understand. There’s a very nifty QE2 video that explained it to millions of Youtube watchers…
The real question asked then was, “why don’t they just call it the printing of the money?”
Call it printing money Scott, that’s what it is.
Now, with that fixed, let’s see how that informs our discussion… we need to figure out how to convince people that “printing money is good.”
Well the natural opponent of printing money are those people who actually have money, SO perhaps the way to print money and win acceptance is to print the money and give it directly to the people who actually have money.
That was the beauty of Cochrane’s approach was that the paid off cash (new money) was given to the people who placed bets…. they “won” the money fair and square, instead of “the goldman sachs” getting to sell treasuries at a profit… or what we assume is a profit.
I can’t say this enough, to do monetary easing focus on not handing out cash to bankers anymore than you hand it out to poor people…. and you’ll put it on its best possible footing.
2. January 2011 at 10:30
I think that people like Congressman Ryan do recognize an unmet monetary need. They are floating ideas about eliminating the full-employment target, not I think because they suddenly have seen the light on this issue, or even because they even really want this policy to be enacted. They are trying to bully the Fed into not fixing the economy under a democratic president like it did in Reagan’s first term. I have to agree with Krugman’s assessment of Ryan as a hypocritical huckster who seems to care for little else but Republican victories.
Krugman has his own problems, though. It’s not that he does not recognize the effects of expectations like Jason suggests; rather, he only considers negative expectations as effective. I think this ultimately has little to do with a preference for interest rates over other channels of monetary policy transmission. Like the rest of the left (and I would consider myself in this group), he is terrified of the possibility that someone already rich might do well–that there might be collateral benefits for the wealthy without collateral damage to them. So he is ideologically limited to proposing monetary policy like the 4% inflation target, which works via sticks rather than carrots, beating down the affluent with threats of inflation rather than offering the possibility of rising returns in capital markets (a major transmission mechanism for NGDP targeting, no?)
2. January 2011 at 10:46
Sorry Jason, I meant Alexander. You and Bonnie had already said a lot of what I said, actually!
I do think that Yglesias actually goes beyond Tepid enthusiasm though, Jason. He has actually come around to NGDP targeting as a progressive aim, wondering if a lot of the squawking about rising inequality should actually focus instead on fixing monetary policy. He’s argued in at least a few posts that rather than focus on rising income at the top, the stagnation of incomes at the bottom points to excessively tight money over the last decades. So there’s at least one progressive who sees monetary policy as not just hurting the rich through inflation but potentially helping lower income levels.
But you’re right, the overall excitement level is rather tepid. Meanwhile, the Republicans are so scared that Bernanke might actually do his job that they have resorted to threatening the Fed’s mandate. So there is an odd asymmetry between conservative fears and progressive enthusiasm that has few parallels in politics and which explains a lot of its quirkiness.
2. January 2011 at 11:26
In general, libs think they can solve domestic problems with regs and spending. Cons think they can solve global problems with spending and wars.
Taxpayers beware!
2. January 2011 at 13:42
I don’t think it is fair to say Prof. Krugman does not believe in expectations. His views on monetary policy in relation to Japan during the 1990s was all about expectations. The Bank of Japan should commit to higher inflation and convince the market it was acting irresponsibly appeared to be his view. Moreover, any time I have read him he was not saying monetary policy can’t work. His argument seemed to me to be the Fed and other central banks are too conservative to do enough and that prevents monetary policy being as effective as it could be.
2. January 2011 at 14:19
[…] (excesso de demanda de liquidez). Nessa virada de ano alguns revisitaram esse tema. Scott Sumner (aqui) tem um post interessante: Here’s what puzzles me, why don’t progressives agree with me that […]
2. January 2011 at 14:40
David, You asked:
“@Scott, when the Fed buys T-bills, notes, or bonds, the first and most notable outcome is that the U.S. Treasury either buys real stuff or transfer money to households or businesses who will buy real stuff. Is that right?”
No, they don’t generally buy them from the Treasury, they buy them from the public.
As far as the rest of your questions, it would require an entire course in business cycle theory to answer them all. Since you are an economist, I presume you know about all the mountain of evidence in favor of the sticky/wage price model of business cycles, and why 90% of economists believe nominal shocks have real effects. Regarding wage and prices, yes they do gradually adjust. The problem is that NGDP fell 8% below trend between mid-2008 and mid-2009, and wages and prices did not fall anywhere near 8% below trend. Because they didn’t adjust downward by enough, RGDP also fell.
C, You said;
“The economy was humming along quite nicely in 2007. However, the change was that banks went and lent money to people who couldn’t pay them back, and at the same time, housing values went down. This caused the banks to lose lots of money, and also since they were so highly leveraged, they were insolvent. Now, the mechanism by which this affected the real economy is debated – it is a mixture of a sudden and drastic loss in confidence, a tightening of lending by banks, and other factors – but AS A CONSEQUENCE of the subprime mortgage fiasco the economy plummeted.”
I completely disagree. RGDP was fairly flat in the first half of 2008. The economy plummeted in the second half of 2008 becasue of tight money. The plunge in NGDP then made the banking crisis much worse in September 2008.
The initial crisis was no where near severe enough to cause a major recession. And neither economic forecasters nor the markets expected a major recession in early 2008. They did not know that the Fed would let NGDP fall rapidly after June 2008.
You said;
“Having the ability to mitigate a recession does not imply that you caused the recession, imo.”
I agree, but I am saying the Fed caused the severe recession (although a mild recession might have been inevitable.)
Jason, You said;
“As far as the bankers vs the Fed as the primum movens? I think you may have answered it yourself: the financial collapse essentially made prior monetary policy suddenly look much tighter relative to a policy objective of GDP growth, full employment or inflation targets. The demand for safe assets”
I’m arguing exactly the opposite. The financial panic made monetary policy LOOK much looser, but IN FACT it was much tighter.
If we use your boulder analogy, then I’d say that regardless of whether the Fed crashes into the boulder, or goes around the boulder, the key is to resume going down the original highway after the accident. They MUST do level targeting. Their failure to do so has proved very costly. They are now on a completely different highway, and show no interest in trying to return to the original highway. That’s what I mean by level targeting.
Regarding fiscal stimulus, the UI program was made far more generous than in previous recessions, and it didn’t seem to help promote recovery. I’m not saying you are wrong about UI, there is a humanitarian argument for the program. Just don’t expect it to promote recovery–you need monetary stimulus for that.
Alexander, Those are good points. There is also a way to read Krugman where he does blame the Fed. Recall that the reason he didn’t think the Fed could do much was because they had such a conservative reputation that they would refuse to raise the inflation target, or stick to a higher target even if they did so in the short run. In a sense that is blaming the Fed, although I would agree with those who argue that Krugman himself doesn’t look at it that way.
Bonnie, You are probably right about progressives like Reich who opposed monetary stimulus in 2010. But I’m more puzzled by the attitude of the progressives who favored stimulus in 2010.
Jason, You said;
“But yes, redistributing wealth from the rich to the poor is a guiding aim, regardless of how much the left tries to hide it “” just like undoing previous redistribution is the aim of the right. This works incredibly well at figuring out the motives for any proposed economic policy on either side, regardless of what the politicians say in public”
Federal policies have very little impact on the distribution of income. If that’s what the left and right are fighting over, they’re both wasting their time.
Panayotis, I show favoritism to monetary policy because it is far less costly, far more powerful, and is the “last mover.” So if the Fed is doing its job then fiscal stimulus has no effect, but if Congress is doing its job then monetary stimulus still does have an effect. And it’s not just me, Krugman feels exactly the same way, unless rates are stuck at zero. That’s why even Keynesians had basically given up on fiscal stimulus in recent decades.
Stephan, That’s why I wrote “you know where,” in the hope you’d keep reading.
Morgan, You said;
“Printing money is not hard to understand.”
Not hard for geniuses like you, but the average person has no idea why more money leads to more nominal spending. They ask why it would have any effect since rates are stuck at zero, and you are just exchanging zero interest cash for zero interest T-bills.
Shane, I mostly disagree. I think Ryan believes what conservative economists tell him–which is that QE2 is a bad idea.
And I don’t think the distinction between 4% expected inflation and rising asset prices is very meaningful, Krugman’s too smart for that–and recall he supports QE2.
But I did think this comment you made was very shrewd:
“Krugman has his own problems, though. It’s not that he does not recognize the effects of expectations like Jason suggests; rather, he only considers negative expectations as effective.”
Krugman has a pessimistic personality, so you just might be right.
Regarding your second comment, I think almost everyone misread my post. I think the vast majority of progressive economists do support QE2. What mystifies me is that they don’t also agree with my view that the Fed caused the severe recession with excessively tight money in 2008.
Benjamin, Very good point–they are both big government types, merely for different purposes.
Richard, I agree.
2. January 2011 at 15:07
“They ask why it would have any effect since rates are stuck at zero, and you are just exchanging zero interest cash for zero interest T-bills.”
No they do not. Regular folk like me worry exclusively about who benefits FIRST from the newly printed money.
And that nice little video clip on youtube, says clearly, the people who benefit are the Goldman Sachs, because they get to sell T-bill to the Fed at a profit.
You always gloss over this, it began when I first got here – WHO GETS THE PRINTED MONEY is the natural logical question, no one will believe for a second, there isn’t a hand in stream where the money hits the pool.
The question is: assume I’m right, the real concern is the one of screwing the savers, WHY NOT craft a new money policy that puts them at the mouth of the stream?
Why not focus on the issue so ridiculous everyone is concerned about it? Why not directly answer your real critics?
That video did WONDERS to put the QE2 crowd back on their ass, and your response was tepid at best.
It made the very real assertion that GS was benefiting – instead of arguing the point. Since you CARE only about getting more QE, why not create a money policy that specifically screws the GS, and wins over the Tea Party savers brigade?
2. January 2011 at 19:11
@Scott
I think I agree with your point, but maybe I am confused. You have been saying monetary policy has been too tight since even before the crisis right? I was just saying that it became even tighter (relative to policy objectives) after the crisis. Hence the crisis is the cause.
My question is, if the Fed should have known to steer us back on the road using other tools than interest rates, why shouldn’t the bankers have known that the Fed wasn’t going to steer us back on the road?
It seems illogical that bankers would think: “Hey, it’s fine for me to take on these highly leveraged positions because of course the Fed will engage in unconventional monetary policy if it all goes belly up in a big way!” But that is what they would have had to have thought in order not be at least equally culpable for the recession.
2. January 2011 at 19:31
@Jason:
“Hey, it’s fine for me to take on these highly leveraged positions because of course the Fed will engage in unconventional monetary policy if it all goes belly up in a big way!”
1. It isn’t necessary at all. They didn’t take “risky” positions. In fact they took positions they believed were low risk.
2. It wasn’t that they believed that the fed would do unconventional monetary policy to help them. They believed the government would /directly/ bail them out if anything went wrong. They turned out to be right. Every single one of the large retail banks and investment banks and insurance companies had their creditors bailed out (except Lehman who’s CEO had a personal feud with the treasury secretary).
3. January 2011 at 08:09
@Scott,
You wrote, “No, they don’t generally buy them from the Treasury, they buy them from the public”
Do you think it makes any difference whether the Fed buys Treasurys directly in the auctions of new issues, compared to buying seasoned Treasurys in the open market? If you do, please explain why, given that Treasury debt is continuously expanding.
You further wrote,
“As far as the rest of your questions, it would require an entire course in business cycle theory to answer them all.
Pardon me for saying so, but that response is a dodge. If a person has clear ideas, those ideas can be explained to another in much less than an entire course taught by university professors. My questions were clear enough. If you can’t answer them, there really is no shame in just saying so.
You wrote further,
“Since you are an economist, I presume you know about all the mountain of evidence in favor of the sticky/wage price model of business cycles, and why 90% of economists believe nominal shocks have real effects.
Yes, I know all about the incredibly unconvincing “mountain” of econometric studies that purport to show the real effects of sticky wages and prices. I also know about the reasons that these studies are unconvincing, and I believe you do too, since you are a highly intelligent analyst. I also know about Ed Leamer’s work and Robert Barro’s work, and the work of tens of other economists who remain quite unconvinced about the sticky wage/price story.
It is more than a bit unconvincing for you to make an appeal to a “mountain” of econometric studies and to claim a “90 percent” consensus of economists, instead of addressing my questions head on.
You ended by writing, “Regarding wage and prices, yes they do gradually adjust. The problem is that NGDP fell 8% below trend between mid-2008 and mid-2009, and wages and prices did not fall anywhere near 8% below trend. Because they didn’t adjust downward by enough, RGDP also fell.”
You just reiterated your claim without explaining in any way, shape or form why we should accept your claim. You say that NGDP fell 8%, and that caused RGDP to fall. What you don’t say is why or how.
My questions stand, having gone completely unaddressed, much less answered. I am completely willing to understand your thinking, but to be convincing, you will have to present your thinking, not just repeat your assertions and offer distracting diversionary remarks about mountains of evidence and 90 percent of economists.
3. January 2011 at 23:27
David,
The sticky wages story is
1) Intuitively convincing
2) Generally accepted by the economics profession on the basis of the evidence
You don’t need fancy econometrics to notice that there’s an unexpected discontinuity in a graph of the rate of nominal wage changes around 0. You just need to gather data and graph it.
I looked at both Leamer’s and Barro’s work and I don’t see any notable papers they’ve written refuting the sticky wages story. It would be big news if they had. As economists they’ve of course written about the topic, and it would be unsurprising if they had an opinion on it, but I don’t see any thorough attempt on either economist’s part to refute the sticky wages story in its entirety.
4. January 2011 at 09:39
Morgan, The cartoons were clever propaganda, but very misleading.
Jason, There is no doubt that the bankers miscalculated the odds of a severe crisis, but just about everyone else did as well. I read that even Roubini was fully invested in stocks during 2008.
David, No, it makes no difference what type of bond is bought.
You said.
“Pardon me for saying so, but that response is a dodge. If a person has clear ideas, those ideas can be explained to another in much less than an entire course taught by university professors. My questions were clear enough. If you can’t answer them, there really is no shame in just saying so.”
Regarding your question on business cycles, I don’t know what to tell you. You say you are an economist, so you obviously know why economists think sticky wages and prices cause real output fluctuations. What more do you want me to say? The empirical evidence is overwhelming, and I cited a source. The logic is simple. If NGDP falls and prices are sticky then RGDP falls.
And if you know about the mountain of evidence, and find it unconvincing, what more can I do. Even Robert Lucas found Friedman and Schwartz’s book to be highly convincing. If you don’t think so, I can’t change you mind. BTW, my views don’t depend on the sticky wage/price transmission mechanism, just on nominal shocks having real effects.
You said;
“My questions stand, having gone completely unaddressed, much less answered.”
You know damn well I answered your question. You seem to be an economist who thinks wages are determined in auction-style commodity markets and no amount of real world evidence that wages are sticky will change your mind.
johnleemk, Yes, he was very annoying. Even many RBC types now accept the idea that nominal shocks have real effects. Any economist who thinks the 50% drop in NGDP in 1929-33 didn’t depress real output would not be taken seriously by the profession. I’m sure even Barro would agree with me on that point.
It’s be like someone at a science blog asking the blogger to defend the theory of evolution.