The economics profession is very good at keeping secrets
The economics profession is very good at keeping secrets. For instance, there has been very little discussion of how the effect of US fiscal austerity in 2013 was offset by monetary stimulus. One year ago Joe Weisenthal wrote a story that shows another example of the secretive nature of economists. He points out that economists were reluctant to publicly thank the Brits for running an experiment on monetary stimulus at the zero bound:
The Entire World Of Economics Is Secretly Thankful To The UK Right Now
Economists might not say it publicly, but privately, everyone is extremely appreciative of the UK right now.
That’s because the UK has been a great laboratory of economic ideas in recent years.
For one thing, the Cameron government came in with a mandate to undergo austerity, and now people are talking about the country going into a triple-dip recession.
Furthermore, the Bank of England has hired Mark Carney (the former Bank of Canada) chief to be its next governor.
Carney is speaking today at Davos, taking the contrarian viewpoint that monetary policy is not maxed out in most countries.
So Carney’s strategy at the BOE should be interesting to watch, to see if he could conjure something up to reverse the UK’s slump.
All I can add is that over the past 12 months economists have done brilliant job of keeping the results of this experiment secret. Economists should be put in charge of the CIA.
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3. February 2014 at 18:38
Why stop at the CIA? If they ran the NSA, the data collection would have never gotten leaked. And the data would have lead to some pretty impressive empirical work.
3. February 2014 at 19:54
Another secret is the UK economic performance post-QE taper — it’s been good. They’ve been loading up the monetary base and now are letting a better rate spread develop to promote more loans. The bottom line is more economic activity.
Why don’t our markets see this?
3. February 2014 at 20:41
Chart: The One-Year Move Of Every Major Emerging-Market Currency
http://www.businessinsider.com/emerging-market-currency-y-o-y-chart-2014-2
3. February 2014 at 21:25
Excellent post.
Maybe I could write something fancy.
But fancy hasn’t worked.
I say this:
Dang it! Shut up and print more money.
3. February 2014 at 22:00
The extent to which fiscal stimulus has been abandoned over the last couple of years in Britain is debatable, if this post by Simon Wren-Lewis (Oxford economics prof.) is anything to go by:
http://mainlymacro.blogspot.co.uk/2013/12/osbornes-plan-b.html
Benjamin Cole,
Re your proposal to “shut up and print more money”, both MMTers and market monetarists would agree. The difference between them is what to do with the extra money. Market monetarists say “have the central bank buy assets”. As an MMTer, I say “No: that channels money into far too narrow a section of the economy. The money should be spread more widely throughout the economy: to rich and poor, public sector as well as private sector.
3. February 2014 at 22:09
Ralph Musgrave,
Are you happy or sad that QE3 / the Evans rule were implemented?
On balance, do you view that monetary expansion as a net positive or a net negative?
4. February 2014 at 01:24
Ralph,
if you target NGDP, there will be no difference between buying assets or doing helicopter drops/tax cuts/government spending. Asset prices will rise no matter what. The target, not the channel, matters.
For public relations reasons only, I agree that helicopter drops would be better. Here in Europe (Germany) people think that buying government bonds is a kind of bailout for southern states. “Pop monetarism”, giving money straight to the people, looks more fair to people, but the effects will be just the same as if you buy bonds or private assets or whatever.
What Carney should do, is choose the right target (5% NGDP level targeting) and communicating it crystal clear. If he does that, he could give all the “printed” money to his children. It wouldn’t look good, people would be angry for good reasons, but it would work.
4. February 2014 at 01:49
Yes, plus there is also some great deal of viewing even the most simple and unambigous facts in a quite strange way. Here is an excerpt from one of the latest Krugman’s articles titled “The Low-inflationary Trap”:
“And yes, Europe is very much in a trap … , it’s crossed when monetary policy starts being limited by the zero lower bound, which happened years ago.”
Yes, Europe is years against a zero lower bound as is shown when for instance Trichet increased interest rates between May and July 2011 from 1% to 1.5%
4. February 2014 at 02:20
Travis,
I can’t see the relevance of your question to my above points, plus I don’t claim to be an expert on the Evans rule. But in my unexpert opinion, the Evans rule (tying Fed policy to a specific level of unemployment or a specific rate of inflation) is too restrictive.
Re your 2nd question, I don’t think it makes sense to say that monetary expansion is inherently a positive or negative. Depends on the circumstances. E.g. given a collapse in consumer and/or business confidence, then monetary expansion is desirable isn’t it?
Libertaer,
I agree that fiscal and monetary stimulus are similar in that in both cases asset prices will rise, but there’s a big difference between printing $Xbn and buying assets, and in contrast, printing $Xbn and raising public spending or the state pension. The asset price increase in the case of monetary stimulus has to be bigger, at least initially.
Re your last paragraph, I agree that NGDP can be expanded by any amount you like by concentrating stimulus on a few specific areas (assets or Carney’s children). But that is distortionary. Or put another way, we can only assume that the marginal utility of all goods and services is equal (if it weren’t, consumers would reduce consumption of one set of goods and increase consumption of another set). Thus if NGDP is to be expanded, then output of all goods and services, or at least a wide range of goods should be expanded, in order to obtain maximum utility.
4. February 2014 at 03:58
Ralph Musgrave:
Thanks for your comment.
I like the idea that new money somehow goes out equally to everybody, but I wonder politically how to make that work.
My idea for a national lottery, more winners than losers, small bets only and $10k annual winnings max (SS numbers provided to collect winnings) is deeply under-appreciated. It’s like trying to convince people that Billy Barty is an NBA great.
Beckworth says (I think) have the Fed credit taxpayer bank accounts. That sounds dicey to me, but it is closer to what you want.
The expanded food stamp program, oddly enough, accomplishes some of what you want. Today they do not use stamps, they just get a EBT card and start spending the money. However, like many people, I wonder about the work ethic if people get free money.
I respectfully disagree with you that the public sector should get any more money; I would like deep cuts in DoD, DHS, the VA, USDA, Commerce, HUD and maybe some agencies I forgot. Sadly, public agencies must be sunsetted on regular schedule. They just do not evolve properly.
Anyway, with the system we have now, I still shout, “Dang it! Shut Up and Print More Money!”
Especially when the PCE deflator is below 1 percent and falling….
4. February 2014 at 05:21
Ralph, Benjamin,
I like the idea of a tax holiday. IIRC, Scott thinks you get the most bang for your buck by cutting the employer side payroll tax.
IMHO, a sales tax holiday might be good. Could you do a per capita block grant to the states with instructions to do a broad sales tax holiday starting on date X?
4. February 2014 at 05:27
Ralph Musgrave –
“Market monetarists say “have the central bank buy assets”. As an MMTer, I say “No: that channels money into far too narrow a section of the economy.”
That depends on what assets they buy. Treasuries are probably the most widely held assets in the world, and mortgages are probably the most widely owed debt in the country. I don’t see how the Fed buying those assets (QE) could be considered narrow by any reasonable standard.
As for giving the money to everyone, would you favor reciprocity, i.e., taking money from everyone when it’s time to tighten? I don’t think so. And that’s the issue. Market monetarists aren’t opposed to all government spending, we’re against pretending it’s a free lunch, or pretending that we need to spend more government money to increase NGDP. We could have any level on NGDP we want even if the federal government spent only 1% of GDP.
Therefore, we should evaluate every spending program on its merits. A bridge is broken and unsafe? Ok, fix it in the most cost effective way possible, regardless of what the inflation rate happens to be. A hostile power is threatening to invade and we need to increase defense spending? Ok, do that regardless of the level of NGDP. Some program is ineffective and unneeded? Cut it regardless of the unemployment rate.
And if we need more or less NGDP simply adjust the monetary base to hit that target.
4. February 2014 at 05:34
Ralph, I addressed the Keynesian flip flops on stimulus in a recent post.
JV, I plan a post on that.
4. February 2014 at 06:04
Great discussion. Here are my 2 cents. There’s another approach – a hybrid between monetary and fiscal policy, which enables central banks to expand money supply thru real monetary flows, rather than just printing money that people can stuff in bank accounts or plow in an asset bubble. More importantly, such approach cuts through the ideological divide and should garner support from both the right and the left. I describe in detail here tinyurl.com/l4mdmrv
4. February 2014 at 06:11
Benjamin,
The decision as to how much spending goes to the public sector is a PURELY POLITICAL decision. As economists (and I assume that’s what we claim to be) we shouldn’t express views on political matters: we should design systems that suit any political party: left or right.
Positive Money has actually thought that one thru. They advocate a system where the SIZE OF stimulus (fiscal and monetary) is decided by a committee of economists, while the MAKE UP of any stimulus package is left to politicians. Word search for “committee” here:
https://www.positivemoney.org/wp-content/uploads/2013/11/Sovereign-Money-Final-Web.pdf
Negation of Ideology,
OK: Treasuries and mortgages are a wide selection of assets. But that completely leaves out shares in corporations. Plus I don’t see the logic in concentrating on ASSETS. I.e. I think current spending as opposed to capital items or capital spending should be part of any stimulus package.
Re recopricity, that’s a potential political problem: raising taxes can be politically unpopular. However, the UK lowered and raised its sales tax (VAT) during the crises. We didn’t have riots when the tax was raised. Also I don’t think that raising payroll taxes would cause riots.
I agree there is no “need to spend more government money to increase NGDP”. As to whether government spending is a “free lunch”, that depends whether the economy is at capacity or not. If it’s not, then it ought to be possible to raise public (or private) spending without anyone anywhere making any sort of sacrifice. On the other hand if the economy is at capacity, then obviously an increase in public spending must be matched by a reduction in private spending.
I agree that “we should evaluate every spending program on its merits.” Re your last paragraph, MMTers and market monetarists agree that to effect stimulus, the monetary base should be boosted. But MMers say “buy assets”, while MMTers say “spend the money on a wide selection of stuff”.
4. February 2014 at 07:01
Is it a secret where the first ‘e’ in your title went?
4. February 2014 at 14:43
Ben Cole,
Why not get rid of the minimum wage/labor market restrictions/occupational licensing so that anybody can get a job. Then print money to pay people who are making very little. Give say $15,000 to anyone making less than 50-100K per year with the cap being randomly selected every year with a lower possibility that the cap will be a number between 40-50K. This way, everyone has an incentive to work and make as much money as possible as well as the ability to do so. This would increase economic production, dramatically lower unemployment, and still allow for something like NGDP targeting. The government would have to cut wasteful spending in areas like defense and other counterproductive and regressive handouts.
I think that this is a good compromise between liberals like yourself and libertarians like me. Keep in mind that before the minimum wage in the 1930s, low skilled workers like African Americans were just as employed as white or more skilled workers. Also, look at countries like Switzerland which has a much more flexible labor market and a much lower natural rate of unemployment.
4. February 2014 at 19:22
Gene, Fixed. That will happen increasingly often as I age.
6. February 2014 at 07:19
Slightly off-topic: State by state unemployment since North Carolina ended EUI in one graph:
http://idiosyncraticwhisk.blogspot.com/2014/02/the-end-of-eui-in-north-carolina-and.html
6. February 2014 at 08:23
Kevin, while charts of past data cannot prove relationships, the chart is consistent with the theory that UI increases unemployment.
6. February 2014 at 12:46
“the contrarian viewpoint that monetary policy is not maxed out in most countries.”
Sigh.
8. February 2014 at 21:46
Kevin, Very interesting graphs.
10. February 2014 at 02:54
Dear Prof. Summer,
Could you write a post explaining clearly the differences between your approach and the NK’s (Woodford-Gali wicksellian approach)please?
Not on the policy recommandation (NGDP targeting vs inflation rate vs levels and so on, I think you explained your views very cleary and there us no consensus among NKs) but more on the way the economy works. I think it would be useful for graduate students (like me) and readers of your blog.
As far as I see it, it is mostly about the effectivness of both monetary/fiscal policies at the ZLB, right?
According to both NK and MM, conventionnal monetary policy cannot be implemented at the ZLB (obviously), but unconventionnal one may work.
Your guess being that there is still a perfect monetary offset at the ZLB whereas NK’s is that the offset is limited/nil. Am I right?
I know you’re not very into the mathematical formalization approach, but if you could just give some insights, thank you very much!
10. February 2014 at 05:52
M. Unlike NKs we don’t think that interest rates are a good indicator of the stance of monetary policy. NKs used to believe that prior to 2008, we still believe it.
Unlike NKs we don’t think interest rate targeting is a good idea.
We put more emphasis on wage stickiness (not price stickiness) as being the key to the business cycle.
Unlike NKs we don’t think interest rates are the most important monetary transmission mechanism, we focus on the hot potato effect and expectations of the future HPE.
Unlike NKs we don’t think the monetary authority needs a structural model of the economy, rather they should target market forecasts of NGDP.
We don’t think monetary offset is “perfect” but rather that it is the baseline assumption. You need strong evidence that fiscal stimulus works. We think fiscal policy can affect GDP, but only in some cases, with some types of fiscal policy.