Conservatives for monetary stimulus

This article in the National Review is a very fair and balanced look at the pro- and anti-monetary stimulus camps.   Ramesh Ponnuru points out that a number of economists generally regarded as right of center have favored monetary stimulus and/or a higher inflation target.  He mentions John Makin, Greg Mankiw, David Beckworth and yours truly.  There are others as well, many of whom have blogs (Bill Woolsey, etc—I won’t try to mention all the names because I’m never sure who likes being called conservative.  I prefer the term ‘right-wing liberal.’)  The article also mentions George Selgin’s productivity norm.  BTW, people have asked me about his co-authored piece on the Fed (which is excellent) and I plan a post soon.

The article points out that the left is also split, although among professional economists I think liberals are significantly more in favor of stimulus.  Brad DeLong has a new post that shows the famous graph of NGDP growth falling far short of trend, and then makes this point:

The problem with our economy is not that something bad happened to our productive capacity while the flow of nominal spending continued to blip along, it is that something bad happened to the flow of nominal spending and that carried real production and employment down with it. At the moment our flow of nominal spending at $14.7 trillion per year is some 12% below its pre-2008 trend. And in the absence of any 12% decline in prices and wages, that shortfall in spending has to produce our current macroeconomic distress: there is not enough “money” to support enough of a flow of spending to chase all the goods we could produce. We don’t have a deficiency of real supply (for whatever reason). We have a deficiency of nominal demand.

That’s what John Walter Bagehot would say. That’s what Irving Fisher would say. That’s what Jacob Viner would say. That’s what Milton Friedman would say.

And they would say that it is a central bank’s business to intervene in asset markets to boost the flow of nominal spending back to what everybody expected it to be and counted on it being

Excellent points.  But before DeLong does too much conservative bashing, he might want to ask which two blogs were best known for presenting quite similar arguments for monetary stimulus in February 2009, and what was the political orientation of those two bloggers.  And by late 2009 you could have added Bill Woolsey.

HT:  JimP, for both links.

The progressive inflation hawks

Paul Krugman and Joe Stiglitz are brilliant Nobel-prize winning economists.  Both have been known to be somewhat caustic in their criticism of others.  Most importantly, both are public intellectuals who often criticize the orthodox establishment from a liberal or progressive vantage point.  I used to think they were sort of similar.

Until now.  In the field of macro, Krugman >>>>>>>>> Stiglitz.  Check this out:

NEW YORK (Reuters) – Ultra-loose monetary policies by the U.S. Federal Reserve and the European Central Bank are throwing the world into “chaos” rather than helping the global economic recovery, Nobel Prize winning economist Joseph Stiglitz said on Tuesday.

A “flood of liquidity” from the Fed and the ECB is bringing instability to global foreign exchange markets, Stiglitz told reporters after a conference at Columbia University.

“The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy,” Stiglitz said. “It’s doing nothing for the American economy, but it’s causing chaos over the rest of the world. It’s a very strange policy that they are pursuing.”

And here is Robert Reich:

Washington is actively pursuing a weak dollar as a jobs policy. (The dollar just plunged to a six-month low against the euro.)

How? The Fed is keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down. Every time another Fed official hints the Fed will start printing even more money (“quantitative easing” in Fed speak) the dollar takes another dive.

Meanwhile, Congress is ginning up legislation to allow the President to slap tariffs on Chinese imports because China is “artificially” keeping its currency low relative to the dollar.

But using a weak dollar to create American jobs is foolish, for two reasons.

First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.

At least a half dozen other countries are now actively pushing down the value of their currencies. Japan recently sold some $20 billion of yen in order to keep the yen down, the biggest ever sell-off in single day.

Last week, Brazil’s Finance Minister lashed out at the US, Japan and other rich nations for letting their currencies weaken to spur jobs. Brazil’s high interest rates are attracting global investors and pushing up the value of Brazil’s currency. This is crippling Brazil’s exports and fueling unemployment.

Perhaps Krugman will have to send out another memo to Ezra Klein, as it’s hard to keep track of which side are inflation hawks and which side is pro-stimulus.  No matter how often I criticize Krugman for one thing or another, at least you can sense some sort of coherent model—you understand why you disagree.  It’s often a very minor point of interpretation; is monetary or fiscal stimulus more likely, or did Japan really try to escape its liquidity trap?

I have no idea where these guys are coming from.  A currency war causes everyone to lose?  Why is that Mr. Reich?  Because it leads to high inflation?  And what causes the high inflation?  Rising AD?  And what is the point of the fiscal stimulus you favor?  Higher AD?

The name of my blog never seemed more appropriate.  We’re hardwired to think disputes must be over who gets what—who’s favoring the capitalists and who favors the workers.  It’s much more than that.  It’s mass confusion about the nature of monetary policy.  Krugman and Stiglitz are distinguished economists with impeccable progressive credentials, and they both can’t be right.  The AFL-CIO opposed FDR’s dollar depreciation of 1933, even though it led to a rapid increase in production.  Every day that goes by I’m reminded more and more of the intellectual climate during the 1930s.  We’ve learned nothing.

HT:  Liberal Roman

Thank God Matt Yglesias is not a Rawlsian

I always thought the Rawlsian minimax principle was rather odd.  Recall that John Rawls once argued that public policies should be implemented if and only if they improved the welfare of those who are worst off in society.  I came up with all sorts of bizarre counterexamples, like what if a public policy massively improved the welfare of the top 99%, but slightly reduced it for the bottom one percent.  Say it made them $2 worse off.  At the time, I never thought my silly thought experiment would ever show up in the data.  Until today.  I found this graph at Matt Yglesias’ blog:

Yglesias argues that this graph shows that the British public did better under the Labour party than under the Conservatives.  He bases that claim on the fact that most of those in the bottom half did better.  I have no problem with that argument; it’s based on solid utilitarian reasoning.

As an aside, I still think the Conservatives did more to improve Britain.  They inherited a country going down the tubes, and made some very painful decisions to shut down a lot of uncompetitive manufacturing and mining.  The made the economy more efficient.  They ended double digit inflation.  These reforms hurt various sectors of the public, but were needed in the long run.  In contrast, Labour inherited an economy in very good shape, and left a fiscal train wreck when they left office in 2010.  And a bad recession.  Notice the data only goes up to 2008—let’s see how it looks in 2 years when we have the full data showing the Labour government’s entire term in office.

But I digress.  My main argument here is that Yglesias is quite rightly ignoring Rawls’ silly maximin principle.  The poorest of the poor didn’t do well under the Conservatives (losing about 0.2%), but they did even worse under Labour, losing 1.1%.  Rawls would clearly vote Conservative, but for the wrong reason.

If I thought this graph actually captured all the effects of government policy, I’d probably vote Labour.  But as I said, my hunch is that Labour was dealt a somewhat better hand.  And I think their record will look worse when extended up to 2010.

No soul-searching on the left?

Soon after China began its economic reforms a curious pattern developed.  Many of those who quickly rose to prominence in the business world had spent the 1960s and 1970s as members of the Red Guards, torturing and killing people to advance the glorious cause of socialism.  I suppose we shouldn’t be surprised; the highly ambitious and talented are not necessarily particularly ethical, and often rise to the top of any social hierarchy.  Much the same pattern can be found in other former communist or fascist countries.  A sort of convenient amnesia sets in and all crimes are forgotten.

There’s probably no reason to decry this state of affairs, no matter how unfair it may be.  The gains to China from moving past Maoist policies are so great that it would be silly to slow the progress with a lot of score-settling.  Still, it isn’t exactly pleasant to watch.

I was reminded of this phenomenon when I read a recent Washington Post story on the empty seats at the Fed:

Then there’s monetary policy, the Fed’s core function. There is now a strange situation in that the institution in charge of guiding the U.S. economy has only one PhD economist among its top officials, Chairman Ben S. Bernanke. The other three currently serving governors are not monetary policy specialists (they are Tarullo, a former law professor, Duke, a former banker, and Kevin Warsh, a financial markets expert). Two of Obama’s nominees are economists, San Francisco Fed president Janet Yellen and MIT professor Peter Diamond. This is, as it happens, a pretty terrible time for the Fed not to have as many smart economists in its upper ranks as possible; the central bank faces a massively consequential decision over the coming months of whether to undertake new steps to try to boost the economy.

Massively consequential decision?  Yeah, I guess I’d say so.  But I think we can all agree that at this late stage, nearly three years after the start of the recession, it is nowhere near as “massively consequential” as the decisions of September and October 2008, when expectations of inflation and NGDP growth were rapidly falling below the Fed’s implicit target, and just about everyone agreed the economy needed lots more aggregate demand.

I hope I’m not being impolite by bringing up a few inconvenient truths.  As far as I can recall there were virtually no articles in the leading elite newspapers (WaPo, NYT, LA Times, NYR of B, etc) talking about the urgent need for more monetary stimulus.  Yes, there might have been an occasional off-hand mention of monetary policy, acknowledging that perhaps, in theory, the Fed could do something.  But then the idea was quickly brushed off as a long shot, which shouldn’t distract us from the need for fiscal stimulus.  And all those empty Fed seats in early 2009?  Once again, I don’t recall any sense of urgency on the issue.

Of course the media must get its information from somewhere, and I assume most reporters aren’t experts on the fine points of unconventional monetary policy.  I’d guess they talk to their fellow liberal bloggers and academics.  And what were they saying in September and October 2008 about the urgent need for more monetary stimulus?  How about the first half of 2009, when we desperately needed the stimulus?  Weren’t most of the liberal bloggers saying there was nothing the Fed could do when rates were near-zero?  So here’s my question; if there’s nothing to be done when rates are near zero, then why is the Fed now facing a “massively consequential decision”?  Indeed rates were in the 1.5% to 2% range throughout September and October 2008, so not only was the need much greater at that time, but the Fed’s ability to deliver monetary stimulus was also presumably much greater.  (By ‘presumably’ I mean according to the standard model.)

Here’s Brad DeLong on Obama’s biggest mistake:

In fact, it was recess appointment time at the Fed in August 2009–if not earlier. But it is definitely recess appointment time at the Fed. This is, I think, Obama’s largest and most damaging unforced errors.

If not earlier?  How about January 21, 2009?  Obama didn’t even offer up any names until a few months ago.

Perhaps Obama’s one of those arrogant liberals who believes all right-wingers are morons.  Perhaps he never read any Milton Friedman, and never learned that monetary policy is still highly effective at the zero bound.  Maybe he just read Keynes.  Maybe he just relies on reporters who didn’t know about the “massive” importance of monetary policy in early 2009.  Maybe he relies on liberal economic advisers who didn’t understand the massive importance of monetary policy in early 2009.  So he let Fed seats sit empty, instead of immediately filling them with pro-stimulus academics when his high popularity would have allowed them to sail through the Senate.

I suppose my liberal readers are asking why I am picking on progressives.  I have several answers:

1.  I’ve already done lots of columns picking on the WSJ and conservative inflation hawks.

2.  The hawks still haven’t changed their minds, so there’s no reason for them to do soul-searching.

3.  Consider a partial list of those who understood that monetary stimulus was highly effective in late 2008 and early 2009:  David Beckworth, Bill Woolsey, Josh Hendrickson, David Glasner, Jim Hamilton, Nick Rowe, Mike Belongia, Robert Hall, Niklas Blanchard, Tim Congdon, Tyler Cowen, Bryan Caplan, Robert Hetzel, Earl Thompson, and many others whose names don’t immediately come to mind.  Do you notice there aren’t a lot of left-wingers on that list?  I’ll admit that in between his many columns denigrating the possibilities of unconventional monetary stimulus, Paul Krugman did occasionally call on the Fed to do more.  But it was obvious that he held out little hope for success.

Don’t get me wrong, I’m thrilled to see all the sudden liberal support for unconventional monetary stimulus, and I’m angry about Republican senators using delaying tactics.  But I’m also frustrated by the lack of soul-searching on this issue.  It’s clear to me that if all these liberal bloggers and liberal newspapers (and yes, to us right-wingers even the WaPo is liberal) have suddenly woken up to the fact that monetary policy can be highly effective at the zero bound, then the macro model they had in their heads in late 2008 and early 2009 was in some sense flawed.  You’d expect some sort of re-examination of how we got here.

Yes, I know there are only so many hours in the day.  It’s very time-consuming writing posts pointing out that right-wingers don’t know how to read, or are completely nuts.  But perhaps liberal bloggers could set aside just a few minutes to consider whether, like a broken clock that’s right twice a day, right-wingers might once and a while stumble over an important insight.

Why start off with the Cultural Revolution anecdote?  My hope is that monetary stimulus happens, and that it works.  But I have a nagging feeling that when and if that happens, all the liberal Keynesians will say “See, it shows the right-wingers were wrong and the left was right.  It shows the economy really did need more stimulus.”

At this point all I want is monetary stimulus, and I don’t much care who gets the credit.  But I hope future historians will keep in mind that while Obama may have made some “unforced errors,” there were plenty of assists from his fellow liberals.  And those policy errors will have caused untold hardship to the unemployed.  It’s great to have your heart in the right place, but you also need to know how the world actually works.

PS.  I had not yet discovered some of the best liberal blogs in late 2008 (Yglesias, Duy, Harless, etc.), so apologies if I’ve overlooked bloggers who were on top of this issue from the beginning.

The extraordinary success of liberaltarianism

I was reading the comment section of Will Wilkinson’s blog, and came across this assertion:

The libertarian effort to convert liberals will be about as successful as the libertarian effort to convert conservatives. Liberals would at base have to share some common ideology with libertarians for that to work, but since they don’t, it won’t.

I couldn’t disagree more strongly.  Liberaltarianism is basically libertarians attempting to knock some sense into liberals on economic issues.  As you may know, I think both left and right wing liberals have basically the same (quasi-utilitarian) values, but different worldviews.  And as you know, I think the right wing worldview is more accurate on most economic issues (although now I guess I have to exclude monetary policy.)

Let’s review what liberals used to believe, before libertarians knocked some sense into them:

1.  In the US, they believed the prices of goods and services should be set by the government.  Ditto for wages.  This took the form of the NIRA in the 1930s.  It took the form of multiple industry regulatory agencies like the ICC and CAB.  By the late 1960s and early 1970s they favored “incomes policies” which were essentially across the board wage and price controls.  Today they generally favor letting the market set wages and prices.  Very liberal Massachusetts recently abolished all rent controls.

2.  In the US, they believed the government should control entry to new industries.  They have abandoned that belief in many industries, and based on recent posts by people like Matt Yglesias, are becoming increasingly disillusioned with remaining occupational restrictions.

3.  They favored 90% tax rates on the rich.  Today they favor rates closer to 50% on the rich.

4.  In most countries liberals thought government should own large corporations.  Today most liberals around the world think large enterprises should be privatized.  Over the next few decades there will be trillions of dollars in new privatizations, and very few nationalizations.

Sure the recent crisis has created setbacks, such as the government takeover of GM.  But the long run trend around the world has been strongly liberaltarian, and will almost certainly remain so for the foreseeable future.  Just the other day Denmark decided to cut unemployment benefit eligibility from 4 years to 2 years.  Think about what that means.  Two French researchers (Algan and Cahuc) found that Danes had the most liberal/civic-minded attitudes on Earth.  They argued that Denmark was the country most suited to have social insurance programs, because the non-deserving would be less likely to abuse the programs in Denmark than in any other country.  Yet even in ultra-honest Denmark it was found that a large number of workers mysteriously found jobs immediately after their unemployment benefits ran out.  So they are cutting back.  Denmark already has the freest markets in the world, and now they are shrinking their welfare state.  No wonder the Danes are so happy, despite dreary weather.

I see people like Brink Lindsey as trying to make pragmatic libertarians better understand their role in the ongoing policy debate.  We are not engaged in some sort of Manichean struggle between good and evil.  We are trying to convince well-meaning policy wonks like Matt Yglesias of the virtues of free markets.  Whether success on that front would actually change public policy depends on how civic-minded (or “liberal” in the original sense of idealistic) the society is.  In very civic-minded societies liberaltarian ideas are accepted much more easily that in less civic-minded societies, where rent-seeking may be endemic.  In the long run, the only hope for those societies is a change in attitudes.  I believe that occurs through the narrative arts.  Progress seems slow, because the problems seem so overwhelming.  But taking the long view, the progress we have already achieved has been mind-boggling.

Good luck to Brink and Will in their new jobs.