The best lack all conviction, while the worst // Are full of passionate intensity

Part 1:  Why is Svensson silent?

In previous posts I have struggled with trying to understand why other economists don’t speak out for easier money.  If you look at Krugman’s writings on liquidity traps it would seem that he should support a more expansionary monetary policy.  More specifically, he should support an explicit inflation target.  And perhaps he does; but he almost never chooses to talk about it.  Another example is Frederic Mishkin, his four key principles of monetary theory underlie my entire argument.  But in a May 2009 AER article he had nice things to say about recent Fed policy.  Yesterday Marcus sent me a paper by Lars Svensson which provided by far the starkest example of this phenomenon.

As you may recall Svensson in known for favoring a policy of “targeting the forecast.”  He also favors a “flexible inflation target,” which means central banks should try to keep inflation low and stable, but also should try to minimize fluctuations of real output around the national rate.  It’s not NGDP targeting, but it’s awful close.  He strongly reiterated both of these views in a September 21, 2009 speech in Holland.  And that’s not all, when the Swedish Riksbank voted to follow the Fed in cutting rates to 0.25%, Svensson dissented.  Not because he opposed a rate cut, but rather because he thought rates should be cut even more steeply.  And most strikingly, while the Fed and other central banks were paying banks to hoard reserves, he got the Riksbank to adopt my highly radical suggestion of a negative rate on reserves, a penalty for not putting the money to use.  This guy must have some really critical things to say about recent central bank policies throughout the world!

Read this and weep.  Not even a tiny criticism of any central bank practices during the period when both inflation and real output forecasts were clearly falling far below target in almost every country.  Now before people write in and say that sitting central bankers are not allowed to criticize each other, consider that he does have things to say about central bank policy during the sub-prime bubble.  And it is certainly possible to make at least mild, vague criticisms that are not directed against any specific central bank.  Something like:

“The experience of the past 12 months shows the importance of always setting policy at a level expected to produce on target AD growth. When policymakers let expectations of inflation and output growth fall below target levels the economy is likely to underperform.  This may lead to costly reliance on fiscal stimulus.”

I really don’t think the restraints on central banker speech apply to vague generalizations about world-wide trends.  If it does, then they shouldn’t be giving speeches at all, they should just keep their mouths shut.  But I notice that central bankers have no trouble exercising free speech when they are defending their policies.

The connection with the Yeats quotation is this:  Svensson is a Scandinavian.  They are a race that has a reputation for lacking passionate intensity.  Before I get accused of racism, let me acknowledge that I am 1/4 Scandinavian.  I don’t think Krugman lacks passionate intensity; I’ll let readers decide his motive for not speaking out forcefully on monetary policy.

Part 2:  With conservatives like these, who needs liberals?

The Economist had a recent article entitled “Muzzled.”  The subtitle is:  “Politics stop the Fed from expanding an asset purchase scheme.”  The article argues that the recent asset purchase programs in the US and UK have been successful, and that as a result the UK has decided to expand the program. However, the US decided not to do so:

If the programmes are doing some good, why is the Fed not expanding them? The outlook has improved, for one thing: America’s economy is levelling out, it noted on August 12th. But the main reason is political, not economic. The Fed’s Treasury-purchase plan prompted charges that it was inviting hyperinflation and had subordinated itself to the government’s deficit needs. Alan Greenspan, a former Fed chairman, says inflation will exceed 10% if the Fed fails to shrink its balance-sheet and raise rates, and 3% for a time even if it does.

Needless to say, that is not the Fed’s view: it still foresees rising unemployment and falling inflation. But many officials have concluded that, for now, the benefits of buying more Treasuries do not outweigh the costs of a damaging rise in inflation expectations and a perceived loss of independence. Even the ultimate weapon is useless if you are too nervous to use it.  (Italics added.)

So let me get this straight; the Fed is responding to the outcry that high inflation is just around the corner, even though the markets show well below 1% inflation expectations for the next 24 months, and even though this is “not the Fed’s view”?  And where is this political pressure coming from?  Who is warning of hyperinflation, those on the left, or those on the right?  Here is an imaginary phone conversation between two completely fictitious bloggers:

Robin:  Say Batman, do you have any interesting tidbits for my blog?  Any more dirt on Cochrane or Fama?

Batman:  Not today, but I’m still in a state of shock over how well our plan is working.  I thought for sure that when demand started collapsing the right would turn to an inflation targeting scheme to boost demand.  I tried not to mention it in my blog, but all they had to do was read my old papers from 1998.

Robin:  Yeah, instead that went around claiming that demand wasn’t the problem, because wages were flexible so the market must be at equilibrium.  Plus that silly monetarist fixation on the money supply.

Batman:  After 15 years of rapid money growth and steady deflation in Japan you’d think they would have given up on simplistic versions of the quantity theory.  And the best part is that it left the door wide open for fiscal stimulus.   If Bernanke had enacted a monetary stimulus program aggressive enough to produce a satisfactory recovery, there is no way Congress would have enacted all those government projects that are very necessary, but that the right opposes.

Robin:  John Stuart Mill sure was right; the conservatives really are the stupid party.

Before people jump all over me for being mean, let me emphasize that these aren’t my views.  I actually oppose more fiscal stimulus and I like Cochrane and Fama.  I am just trying to imagine how some purely fictitious bloggers on the left might look at things.

What’s the connection to Yeats?  Look at the last line of the Economist quotation.  While the Fed is “too nervous” to do what’s right, the conservatives are full of passionate intensity about how hyperinflation is just around the corner.

Part 3:  It’s (not) different this time.

I’m old enough to remember every recession since 1970.  And in every single case we heard over and over again that “it was different this time.”  I wish one of my commenters would help me dig up one of those ominous old Time or Newsweek quotes from some garden variety recession like 1991 or 2001, which warned that things were far worse this time; that it wasn’t at all like previous recessions.  Of course this happens every time:

1.  1970:  Inflation isn’t falling like other recessions; wages are not responsive this time.

2.  1974:  The big oil shock, this one is supply-side.

3.  1980:  This one is caused by Carter’s credit card restrictions.

4.  1982:  No bounce back this time, the rust belt jobs are gone forever.

5.  1991:  The S&L bubble burst, many banks failed, and commercial real estate was overbuilt.

6.  2001:  This time it was the tech bubble bursting, not a drop in AD.  Plus 9/11.

I don’t need to tell you what people are now saying, even though by some measures this is the most normal business cycle since 1937-38.  Recall that the standard Keynesian/monetarist view of business cycles is that they are caused by a reduction in AD, or NGDP.  In 2009 NGDP is like to fall at the fastest rate since 1938.  Of course there are other things going on, as there were other things going on in all those other cycles, and there were other things going on from mid-2006 to mid-2008, when unemployment was relatively low.

Update:  A commenter named Jeremy just found one.  In this link Alex Tabarrok notes how much it sounds like recent reporting on the recession.

So everyday around the US 1000s of economists go into the classroom and teach the AS/AD model of recessions, putting most of the emphasis on AD shocks.  And every time an actual recession comes along most of them say “this one is different, it’s not like past recessions.”  But let a few decades go by and they’ll be saying the opposite, that it was just a fall in AD.  And the biggest irony?  Most economists supported fiscal stimulus last year, even though that policy only makes sense if a lack of AD is the cause of the downturn.

I finally got around to looking at the much talked about collection of essays in Critical Review on the current crisis.  In the introduction Jeffrey Friedman proudly makes this comment:

“Nobody on these pages argues that it was just a normal business-cycle recession, or even a normal popped asset bubble”

So this survey of diverse views contains 11 essays, none of which argue that the problem was a fall in AD, despite the fact that the government responded to the recession with a massive fiscal stimulus program.  I’m not complaining that I wasn’t invited—I’m not well known.  I am complaining that someone like Robert Hetzel wasn’t invited.

I don’t want to be too hard on Jeffrey Friedman; he has lots of really intelligent things to say on regulation.  And almost anyone else would have done the same as he did.  But it is still very disappointing.

Part 4:  What did Michael Jordan bat against Double A pitching?

Today, everyone is a macroeconomist.  Check out this recent piece praising the General Theory, written by perhaps the world’s most distinguished legal scholar (sent to me by Dilip and Marcus.)  Note this passage from the last paragraph:

Keynes wrote, ‘Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slave of some defunct economist.’

Indeed.  The GT claims to model changes in NGDP, but is unable to explain the level of NGDP.  An easy flaw to overlook if you are not a macroeconomist trying to think rigorously about modeling the dynamics of business cycles.

PS.   Jordan batted .202.  I guess brilliance in one field doesn’t always carry over to another.

PPS.  Most have probably read Yeats’ famous poem, but in case you haven’t:


Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: a waste of desert sand;
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Wind shadows of the indignant desert birds.
The darkness drops again but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?

I was startled when I first noticed it was written in 1919.  It really nails the interwar years.



18 Responses to “The best lack all conviction, while the worst // Are full of passionate intensity”

  1. Gravatar of Jeremy H. Jeremy H.
    27. September 2009 at 09:11

    Alex Tabarrok dug up this Time story:

    Note that the article is written in Jan. 1992, while NBER dates the cycle as bottoming out in Mar. 1991.

  2. Gravatar of jean jean
    27. September 2009 at 09:29

    For Krugman, there are two possibilities:
    _He thinks that quantitative easing will fail quite the same way as in Japan due to the stubborn refusal of an explicit inflation target.
    _He thinks that by promoting fiscal stimulus, he will help the Democrats to raise the public budget.

  3. Gravatar of rob rob
    27. September 2009 at 09:50

    This sentiment explains why I don’t believe most statements by global warming alarmists pass the smell-test. But that is another subject…

  4. Gravatar of Current Current
    27. September 2009 at 10:31

    This points to one thing that Scott doesn’t talk about much though. How is the Fed to pull money out once the recovery begins in earnest?

    Will the normal process of selling bonds work?

  5. Gravatar of ssumner ssumner
    27. September 2009 at 10:52

    Jean, yes, those are two possibilities

    rob, I think there is a bit of both with global warming. these is some real science, and some alarmism.

    Current, Open market sales, or higher interest rates on reserves. Either will get the job done. But again, before we work out an exit strategy, we need an entrance strategy. Unemployment is expected to top 10% next year.

  6. Gravatar of ssumner ssumner
    27. September 2009 at 11:04

    Thanks Jeremy, What would I do without all you commenters. I just added it to Part 3 of the post.

    BTW, people need to warn me if I go too far. I hope there aren’t any liberal bloggers out there who think my “Robin” is meant to represent them.

  7. Gravatar of Dan Dan
    27. September 2009 at 11:33

    Welcome back, Scott.

  8. Gravatar of Niklas Blanchard Niklas Blanchard
    27. September 2009 at 13:25

    Jean –

    I would say that Krugman is silent on monetary stimulus because he views the collective action of achieving X result as more important than X being achieved. Monetary stimulus does not entail the type of collective action that Krugman seeks.

    I suppose that this ties in to your second point, but I tend to agree with Dan Klein and Harika Barlett the promoting the social democratic political ethos is more important to Krugman than any actual result of it’s promotion.

  9. Gravatar of Current Current
    27. September 2009 at 13:40

    I think Niklas has a point.

    Recently a British libertarian blog some new illiberal law was being discussed a commentator called Jay Thomas said:

    “The statist is not motivated purely or even mainly by results. Statism is not a philosophy rooted in discovery of pragmatic solutions to social problems. At the root of this kind of legislation is the belief in Society (ie the state apparatus) as a source of moral authority. The state needs to express its moral disapproval of vice and wickedness. Legislation as an expression of that disapproval is a moral and just end in and of itself, regardless of any practical impact it may or may not have.
    Passing such laws is a symbolic act. Government must ‘send a message’ to the flock. If it doesnt legislate (uselessly or not) it forsakes its moral authority.”

    The same is surely true of deficit spending. If the government doesn’t do so it’s authority to do so is eroded. As a Labour parliamentary candidate wrote recently “power is one of our principles”.

  10. Gravatar of colin colin
    27. September 2009 at 15:45

    “BTW, people need to warn me if I go too far. I hope there aren’t any liberal bloggers out there who think my “Robin” is meant to represent them.”

    I’m disappointed if your Batman and Robin aren’t Krugman and DeLong. Because that is very funny. And if you can’t be explicit because you don’t think they’d take it well, all the worse. I thought this was the internet.

  11. Gravatar of ssumner ssumner
    28. September 2009 at 06:10

    Thanks Dan,

    Niklas, I think Krugman does want results, but I also think he wants a bigger government. Perhaps he sees stimulus as killing two birds with one stone.

    Current, I think Thomas Sowell has written on the tendency of the left to want to plan, manage, and control society.

    Colin, I was originally thinking about doing it that way, but I thought Batman and Robin might be better, as it suggests that one is in charge.

    You are right that almost anything is allowed on the internet. I just don’t want to be come as annoying as some of the other bloggers I read. But maybe I already am. Who can judge themselves?

    Everyone, I’m surprised no one has any thoughts on Svensson’s reluctance to speak out. The post is much more about him than Krugman.

  12. Gravatar of 123 123
    28. September 2009 at 10:11

    ECB’s Trichet has already made the point that Fed has mismanaged inflation expectations in a speech few months ago, so perhaps Svensson felt that it is better to focus on the hammer and nails syndrome – the belief that interest rates are the best tool for banking system supervision. He also wanted to defend Fed’s policy in 2002-04.

    I have an impression that Svensson differs from you in the following ways:
    – he thinks that financial panics have large supply side effects
    – he thinks that NGDP expectations are not important in stopping runs on the banking system
    – his views on the banking system are compatible with Bernanke’s credit channel theory

  13. Gravatar of Admiral Admiral
    28. September 2009 at 12:29

    In fairness to Michael Jordan, batting .202 even in the minor leagues isn’t too shabby for someone who hasn’t seriously played in a decade or more. And even then, it takes a talented athlete to do such.

    Thanks for posting. I think you were definitely a little too rough on the Austrians recently in your post about how everyone is wrong — except you. It seems like you agree on most things, but may weight them differently in importance. But I’ll keep reading to see if I can learn more.

  14. Gravatar of ssumner ssumner
    29. September 2009 at 16:23

    123, Those three observations about Svensson’s views are defensible. Indeed the first is certainly true for Sweden. But would you agree that he almost certainly thinks the Fed policy of paying interest on reserves was a mistake? You have to admit that going to a negative interest rate is a pretty extreme gesture. Svensson is hardly a run-of-the-mill central banker. And he dissented on a cut to 0.25% as being not expansionary enough.

    Admiral, Yes, but I’d say the same about Posner’s essay. It is better than the average person could write, but way below what you’d expect from a trained economist. Or should I say “well-trained economist?”

  15. Gravatar of 123 123
    3. October 2009 at 11:48

    Scott, I don’t understand why you think that domestic financial panics have large supply side effects only in Sweden, but not in the USA.

    You wrote:
    ” But would you agree that he almost certainly thinks the Fed policy of paying interest on reserves was a mistake?”

    I like to give specific answers to questions “What would Firedman say?” or “What would Kling say?”, but there are two plausible answers to the question “What would Svensson say?”:
    1. It was a mistake.
    2. The real mistake was too higher Fed funds rate, and interest on reserves is just a tool to achieve Fed funds rate target. Focusing public attention to a technical detail of interest on reserves deflects the attention from the real mistake – too high Fed funds rate in Q4 2008.
    I just don’t know which of these two answers conforms to Svensson’s view.

  16. Gravatar of ssumner ssumner
    4. October 2009 at 06:19

    123, I meant that Sweden suffered a real shock when the world economy collapsed, something they could do nothing about. They have a very open economy, and export capital goods. They were hit by a big, adverse, real shock. I don’t even know much about the Swedish banking system. Even if their system was fine, Sweden would have had a severe recession.

    I don’t see the interest on reserves program as a way to lower interest rates, I see it as a way to increase the money multiplier (even if rates are stuck at zero.)

  17. Gravatar of 123 123
    9. October 2009 at 07:22

    I agree that many countries were hurt by collapsing world trade. But my impression was that Svensson thinks that domestic financial panics have large supply side effects in both open and closed economies.

    When rates are stuck at zero, by paying negative interest on reserves it is possible to lower effective policy target rate to something like -0.2 or -0.3 percent. But I think the size of QE (preferrably in the form of credit easing) and expectations about future path of QE are much more important than the precise rate of interest on reserves.

  18. Gravatar of ssumner ssumner
    11. October 2009 at 07:23

    123, I think we agree, I have never viewed an interest penalty as being important because it lower rates substantially, I agree the effect is marginal. Cash held by the public at zero yield limits how much T-bill yields can fall. It is the QE effect that seems more important to me.

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