Skidelsky on monetary stimulus

For the past 4 1/2 years I’ve had a running battle with commenters who insist that progressives favor monetary stimulus, even if they almost never talk about it.

Obviously some do (Krugman, DeLong, Yglesias, etc.)  But overall I’m just not buying.  Academic economists vote Democratic by a 3 to 1 ratio, and yet I doubt even 10% would say that Bernanke’s policy is too tight.

Here’s Robert Skidelsky:

This new enthusiasm for unconventional monetary policy is the more remarkable in that no one is quite sure how it works. There are several possible transmission mechanisms from money to prices (or nominal income) – notably the bank lending channel and the portfolio rebalancing channel. They have been extensively tested, with inconclusive results.

All of this led John Kay to wonder why so much attention was given to unconventional monetary policies ‘with no clear explanation of how they might be expected to work and little evidence of effectiveness?’ His answer: they are helpful to the financial services and those who work in them.

Here is another answer, given by the Chicago University economist Robert Lucas in the Wall Street Journal. Quantitative Easing, he wrote,  “entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls in the operation of individual businesses, and no government role in the allocation of capital…These seem to me important virtues”.

In short, a happy mix of self-interest and ideology. It has always been thus; which has not stopped economists discussing questions of policy as though the only thing to get right was the theory of the matter!

I think the Summers/Skidelsky/Stiglitz scepticism about QE is much more representative of the left than Krugman.

Speaking of Summers, TravisV sent me the following:

“If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal,” said Mr Summers. “We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates.”

Great.  We are going to base Fed policy on the growth rate of RGDP.  Just like in the 1960s and 1970s.



19 Responses to “Skidelsky on monetary stimulus”

  1. Gravatar of TravisV TravisV
    26. July 2013 at 11:48

    One thing I will say: it’s somewhat understandable that progressives are not enthusiastic about QE. After all, I think that they’re right to argue that a larger and larger share of RGDP growth is going to the top 1% over time. That said, I agree with market monetarists that the vast majority would benefit from higher NGDP and RGDP growth. But the top 1% would benefit vastly more than anyone else. That doesn’t sit well with progressives.

    Progressives really like to emphasize the need for structural reform. Particularly Stiglitz. And I agree that we need it. However, like Krugman, I think we have a national emergency of high unemployment / weak demand. And like Prof. Sumner, I think the Fed could solve that emergency quickly if only it had the understanding and willpower.

  2. Gravatar of Iván Iván
    26. July 2013 at 11:52

    How does QE “entails no price fixing”. Isn’t that its main goal?

  3. Gravatar of TravisV TravisV
    26. July 2013 at 12:00

    By the way, according to Steve Liesman at CNBC, the White House won’t decide on the new Fed chairman until fall at the earliest.

  4. Gravatar of Bill Woolsey Bill Woolsey
    26. July 2013 at 12:00


    I think the goal of QE is for nominal GDP to return to a target growth path. NGDP isn’t a price, so that isn’t price fixing.

    What do you think is the main goal of QE?

  5. Gravatar of Brian Donohue Brian Donohue
    26. July 2013 at 12:03

    To be clear, are you saying monetary policy is too tight today, or is this still about 2008-09?

    Isn’t the Fed buying something like 90% of mortgage bonds these days? I think if you add up all the QEs, we’re approaching $3 trillion. How much more do you envision?

  6. Gravatar of Jonathan Finegold Jonathan Finegold
    26. July 2013 at 12:25

    “I think the Summers/Skidelsky/Stiglitz scepticism about QE is much more representative of the left than Krugman.”

    Why don’t you use Krugman to sell NGDP targeting to the left?

  7. Gravatar of Saturos Saturos
    26. July 2013 at 12:55

    Scott, have you looked at this paper Tyler posted?

  8. Gravatar of ssumner ssumner
    26. July 2013 at 13:04

    Travis, Maybe, but if so that’s pretty sad.

    Ivan, See Bill.

    Brian, Yes, money is too tight, but nowhere near as bad as 2008-09.

    I don’t think we need more QE, just better communication. But if the communication stays where it is, then more QE would help. The markets will tell us when we’ve done enough.

  9. Gravatar of ssumner ssumner
    26. July 2013 at 13:10

    Saturos, Just the abstract. What is the main point?

  10. Gravatar of Jack Cunningham Jack Cunningham
    26. July 2013 at 13:21

    Fed policy is also mandated to be concerned with unemployment.
    I hesitate to take a position here as I’m not sure if more QE would be that great but I’d also say that Fed policy is too tight, but how much looser can it be and how beneficial would that be? Would you prefer the Fed to make a statement setting a NGDP rate of something between 3-5%, if this statement was made yet monetary policy alone couldn’t reach this target very fast would you be in favour of a fiscal stimulus?

  11. Gravatar of Tom Brown Tom Brown
    26. July 2013 at 14:50

    Scott you write:

    “Academic economists vote Democratic by a 3 to 1 ratio”

    but perhaps that has more to do with their preference for Democrats on other issues they find important like science, education, the separation of church and state, foreign policy, the environment, and voting rights.

    Personally, my trump issue is magical thinking: I’d take a lying, cheating, well-informed, rational, evidence demanding sociopath over a self-deluded, ignorant, anti-scientific magical thinker any day… no matter how “well meaning” they were.

  12. Gravatar of Ashok Rao Ashok Rao
    26. July 2013 at 19:41

    “I think the Summers/Skidelsky/Stiglitz scepticism about QE is much more representative of the left than Krugman.”

    Several Democrat senators have written to Obama supporting Yellen. Not because they don’t like deregulation (maybe that too), but their perception that Yellen is committed to growth at the zlb.

  13. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. July 2013 at 20:49

    I am not sure Robert Skidelsky can be characterised as a man of the left. A former person of the left perhaps.

  14. Gravatar of ssumner ssumner
    27. July 2013 at 05:41

    Jack, If monetary policy couldn’t make it, then yes. But monetary policy can do the job, so there is zero probability that I’d ever say “monetary policy isn’t enough, add fiscal stimulus.”

    The Fed can always do “more.”

    Tom, I’d say Keynesians out-number monetarists by 3 to 1 as well.

    Ashok, Maybe some day they’ll ask Bernanke a question on monetary policy–like why is it not more expansionary?

    Lorenzo, I don’t know much about him other than the Keynes biography. But isn’t he on the left on the question of monetary policy? Doesn’t he favor fiscal stabilization policies?

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. July 2013 at 06:05

    Scott. Yes, he does. His analysis of the fundamental problem is all credit channel. That and his greenery makes him mainstream European I suspect. Which I guess is to the left by US standards …

  16. Gravatar of Donald Pretari Donald Pretari
    27. July 2013 at 09:05

    The Point of both QE and a Reinforcing Stimulus is to raise Expectations of Inflation. By doing so, it is hoped that Investors will move their money from Safe Investments to Riskier Investments which will provide the kind of Investment that will beat and outrun Inflation. Risky Investments include Stocks and Corporate Bonds/ Loans to Businesses. Hopefully, the Businesses will use the investment to invest in New Projects that will Employ more People. These Investments are Essential to produce a Growing Economy.

    It is true that some people will argue that this won’t work. They might be right. But it’s important to note that, even if they do nothing, they are making an Investment Decision. If they are wrong, they will lose money to Inflation.

    In my view, this is also the view of Keynes. When Keynes writes that it doesn’t matter what the Govt Invests In, He is simply pointing out that, from the point of view of the Reinforcing Stimulus, it is the fact that the Govt is Borrowing Money/Going into Debt, that Raises Expectations of Inflation. The idea being that, somewhere down the line, the Govt will have to Pay More Interest to induce Investment in Govt Bonds, Etc. It is only in this limited sense that it doesn’t matter what the Govt invests in.

    This Proposal might not work. I am simply pointing out that there is nothing spooky or fuzzy about it. It is a straightforward use of Incentives/ Disincentives to get Investors to hopefully make a more productive use of their assists.

  17. Gravatar of jknarr jknarr
    27. July 2013 at 10:28

    Smoke and mirrors. I’d just love to hear how self interested and ideological he thinks fiscal policy is.

  18. Gravatar of Ashok Rao Ashok Rao
    27. July 2013 at 11:27

    “Ashok, Maybe some day they’ll ask Bernanke a question on monetary policy-like why is it not more expansionary?”

    Scott, one of them asked something to the effect of “would there be a difference in Bernanke’s policies if the Fed only had an inflation mandate”. The answer was, basically, no.

  19. Gravatar of ssumner ssumner
    28. July 2013 at 08:25

    Donald, Yes, but I’d rather they just rely on monetary stimulus.

    Jknarr, Good point.

    Ashok, That’s what I’ve been saying.

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