The biggest name of all
David Leonhardt recently suggested that “big-name economists” tend to favor additional monetary stimulus:
IF you were to conduct a survey of the country’s top economists, you would find a fair number who did not believe that the Federal Reserve should be taking more aggressive steps to help the economy. Some would worry that injecting more money into the economy might unnerve global investors or set off uncontrollable inflation. Others would wonder whether, with interest rates already so low, the Fed even had much power to lift economic growth.
But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists “” J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others “” than the camp that believes the Fed has done too much.
A few comments:
1. I’m flattered the NYT considers me a big name, but can help thinking of the old “which one doesn’t belong” jokes.
2. I’m not sure I agree with Leonhardt, although I’d certainly like to think he’s right. A few weeks back I reported a poll that showed 34 out of 36 economists opposed more monetary stimulus. Commenters pointed out that these polls were often biased toward the (more conservative) business economists, so perhaps in academia there is more support for stimulus. Leonhardt could have added names like Rogoff to the list.
But what about the biggest name of all? The big question that just won’t go away is “What does Bernanke really believe?” I’ve seen good arguments on both sides of the debate over whether Bernanke secretly would like to do more. Two pieces of information received in the last week are pushing me toward the secretly wants to do more view:
1. Benjamin Kay sent me the following from the WSJ:
For more than a year, Mr. Bernanke has been urging Congress to use government tax and spending policies to provide short-term stimulus to the economy, tied together with a credible plan to bring down the deficit in the long run.
That is what someone would say if they thought the economy currently needed more AD.
2. And consider this Bernanke argument from his recent Jackson Hole speech:
Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation. As I mentioned earlier, the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed. Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.
Translation: We have a dual mandate, and both criteria call for more stimulus.
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view–the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.
Bernanke has probably used this argument in debates with the Fed hawks. They would quite rightly point to the self-correcting feature of mainstream natural rate models. And Bernanke would quite rightly point out that all macro models leave out important aspects of reality. He could have added that monetary stimulus will speed up the day when UI benefits can be reduced back to 26 weeks (recall that some inflation hawks blame high unemployment on exactly those sorts of structural rigidities.)
PS. When I got married the New York Times did not announce the engagement in their style section. Thus I was quite pleased to learn that I’ve reached the level where my Italian travel plans merit coverage:
Mr. Sumner has become so dispirited by the Fed that, before leaving on a trip for Italy last week, he left a post on his well-read blog, The Money Illusion, under the headline, “Not enough.” The headline, he wrote, “refers to my reaction if the Fed does something while I’m gone.”
Robert Waldmann was less pleased, and made this comment in response to the same quotation:
On the other hand the article does contain news for anyone who thinks that Scott Sumner is reality based. . . .
Sumner just wrote that he doesn’t bother to wait to learn the facts, because he already knows the answer. I knew that was true of him (in general) but you aren’t supposed to say so.
PPS. I’ve returned to a mountain of emails and blog comments (and other responsibilities.) I apologize in advance if it takes me a while to respond. Indeed I probably won’t be able to respond to all blog comments made when I’m gone–but feel free to bring up substantive issues in later posts. Commenters who attached links might have found their comment took a few days to get through my approval mechanism.
HT: Mark Sadowski
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6. September 2011 at 05:03
For more than a year, Mr. Bernanke has been urging Congress to use government tax and spending policies to provide short-term stimulus to the economy, tied together with a credible plan to bring down the deficit in the long run.
Talk about someone who’s not reality based. A sensible person would not say something like this, just as they wouldn’t say they expect Santa to bring them a pony for Christmas.
6. September 2011 at 05:36
Right now, the issue seems to be european banks, and Euro risk. The Fed may be wrestling with the impact of QE on liquidity constraints. European banks are running out of collateral for repos, no new capital is pouring into purchases of euro area debt, and rolling over debt is thus problematic. The ECB has issues, and North countries calling for hard collateral.
Debt linked to hard collateral is an effective reduction in the money supply. It’s an asset grab. Meanwhile, Greek debt is already priced for default – why not get it over with?
The arguments for Spanish punishment are weaker (where was the profligacy and willful govt. deception prior to 2008 like in greece?). ECB is being forced to buy Spanish/Italian debt, NOT because it cares about those countries, but because the markets are forcing it to defend the banks. It complains loudly that it can’t do anything, but look, when the banks are threatened, presto!
I’m starting to suspect that the big game here is geopolitical – it’s about the reserve currency. That made sense in 2008, and it makes sense today. We could be witnessing a hegemonic transition.
6. September 2011 at 06:33
“Talk about someone who’s not reality based. A sensible person would not say something like this, just as they wouldn’t say they expect Santa to bring them a pony for Christmas.”
MikeDC, why?
It means cut taxes RIGHT NOW. And cut entitlements SOON AFTER.
And there’s one party that says that over and over and over. And oh yeah, it’s Ben’s party.
Hippies. Don’t. Listen.
6. September 2011 at 07:05
It appears Delong is now officially advocating NGDP targeting, not just as a theoretical explanation for the crisis, but as a real Fed communication strategy: http://delong.typepad.com/sdj/2011/09/thughts-on-paul-krugman-on-macroeconomic-policy.html.
6. September 2011 at 07:40
From the article:
If anything, it can probably claim a larger number of big-name economists “” J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others…
I love how the writer had to clarify for the readers who Paul Krugman was, but no one else needed an explanation.
Scott, you are huge. But remember back in the spring, when you declared mission accomplished and I dissented? How now, Polonius?
6. September 2011 at 07:41
StatsGuy: “I’m starting to suspect that the big game here is geopolitical – it’s about the reserve currency.”
I’m not 100% sure I follow the point, but it seems to be that the ECB is jamming its face into its fist to, what, become an increased share of the world’s currency reserves over time? Forgive me, but I’m reminded (with tongue in cheek) of a Niels Bohr quote: “No, no, you’re not thinking, your just being logical!”
I rather suspect the proximal cause of the ECB’s apparent contradictions to be more organizational. One of the interesting things about the Bernanke quotes (above) is that we have a common framework for interpreting them, and we have some understanding of what kind of consensus “the chairman” might be able to produce in a debate between “hawks” and “doves.”
I suspect that if we got an inside look at the ECB’s dynamics we would see an under-led, inward-looking, ethnically divided, multi-laterally conflicted group in a political and economic context perfectly designed to reinforce all of its decision making flaws. The strategy may be to try to sustain a strategy, but the reality for the forseeable future may be that the ECB bounces from trigger point to trigger point and then later tries to rationalize their moves in terms of some well worn price stability narrative. The shrewder move if you’re managing the reserves of a wealth producing nation, then, might be to add to gold.
6. September 2011 at 07:56
Stats,
Watch Mundell’s video at Economist again.
It is about PENSIONS. He’s very specific pensions need to be no more than 50% of last salary.
As much as we’d like to force Greece to sell hard assets, we can’t do that until we are sure they will respect ownership / rule of law.
6. September 2011 at 08:03
Scott Sumner is a big-name economist, and he did it purely through merit and his blogging. A remarkable development.
6. September 2011 at 08:10
Bob Murphy,
If we’re casting of Hamlet, I think that the lead role has to be played by Bernanke, not you. The RBC guys are Ophelia (they went mad and have disappeared for most of the play) and serious long-term Federal deficit reduction plans are R & G (they pop up now and again, but get killed off for no good reason). I agree with the casting of Scott as Polonius- talking to people who may or may not be pretending to be mad.
And the gravedigger? Morgan, obviously. He may be right, he may be wrong, but he knows a good turn of phrase.
6. September 2011 at 09:28
Obama should propose the following bipartisan appointments for the two vacanies on the BOG, which, after the Republicans block them should be recess appointed:
The Democrat: Brad DeLong
The Libetarian: Scott Sumner
DeSumner could get the unemployment rate down.
6. September 2011 at 09:30
‘I agree with the casting of Scott as Polonius….’
Please! The gasbag who believes, ‘neither a borrower nor a lender be’?
I was hoping he would turn out to be Fortinbras.
6. September 2011 at 09:31
“Sumner just wrote that he doesn’t bother to wait to learn the facts, because he already knows the answer.”
Developments since this was posted show that Scott really did know the right answer. The totally inadequate actions of the Fed and the latest unemployment report show that Scott was absolutely right.
6. September 2011 at 09:41
“Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.”
An extended period of depressed economic activity leads to very adverse hysterisis effects. Not only do long-term unemployed workers lose their jobs skills, but the cutbacks in education expenditures (including increases in college costs) leads to a labor force with significantly less human capital. Similarly the cutbacks in expenditures in infrastructure by the states, and even by the Federal government if the Tea Partiers get their way, leads to less physical capital. Similarly the cutbacks in physical investment by firms because they are experiencing widespread excess capacity leads to less physical capital on the private side. As a result, when the economy returns to potential output, it will be a significantly reduced potential output. This also makes the Debt/GDP ratio significantly worse.
6. September 2011 at 09:49
Patrick R. Sullivan,
If only we had Milton Friedman as a ghost, I’d be happy.
6. September 2011 at 11:21
Rob, perhaps – But if ECB “policy” were merely the output of organizational dynamics, I’d wonder at the coordination they achieve when feet held to fire, or at the incredibly boneheaded moves like increasing the rate several months back. Very hard to comprehend.
6. September 2011 at 12:03
Scott,
Now you know how Krugman feels. Ignorant trolls obviously mischaracterize statements he makes all the time.
6. September 2011 at 12:03
Welcome back, by the way.
6. September 2011 at 14:52
But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing…
I still say it’s Larry Summers’ fault — the guy who apparently set the White House “no need to fill those empty Fed seats” policy for years.
Has he said anything anywhere about needing more monetary stimulus yet?
Every crisis needs someone to blame for it. If I have to name one name, I name Larry Summers. He’s the one to blame. That’s my story and I’m sticking to it.
6. September 2011 at 15:38
MikeDC, Good point.
Statsguy, I agree about Europe being a key factor right now. I suppose the reason they don’t get it over with in Greece is that it won’t be over–it would spread to the next, and then the next, and so on. The Europeans won’t do the one really effective policy, easier money, so they just keep kicking the can down the road, trying to prevent contagion.
Not sure I follow the hegemony argument.
Shane, Glad to welcome DeLong to the club–I believe he mentioned NGDP targeting once before.
Bob, I’m not in the “wait and see” school of policy-making like almost everyone else. For me the metaphor is steering a ship. There is no “mission accomplished”. Every nudge of the steering wheel is a tiny victory or tiny defeat. But the helmsman can never rest on his laurals. QE2 helped a bit by reducing unemployment (maybe) from 9.8% to 8.8% over 5 months. But since then the Fed’s let the wheel drift in the wrong direction. I don’t make predictions–I let the markets do that. I just want to the Fed to keep policy at a level where the markets expect success. The markets never expected QE2 to be enough, but they thought it would help. It ended up being far too little.
If you made lots of money selling stocks short, I congratulate you. That would have been a much wiser investment than selling T-bonds short on the expectation that QE2 would lead to high inflation. Didn’t some people make that prediction?
Rob, Very good observation about the ECB, and I love the Niels Bohr quotation.
Benjamin, Thanks, and commenters helped force me to sharpen my arguments much more than they might realize.
W. Peden, I’ve only read Hamlet once, and seen it once, so I’ll defer to your much superior knowledge of the casting.
FullEmployment Hawk, I wonder how Morgan will react to your use of “DeSumner.” He coined “DeKrugman.”
Patrick and W Peden. I vaguely recall someone trying to have Bernanke deliver Hamlet’s famous soliloquy here last year: “To ease or not to ease” Does anyone else recall?
FEH, I was surprised by Waldmann’s criticism. Surely he understood my comment as a prediction, and one that I was 99.99% sure to have been right about.
There are two kinds of hysteresis. The left emphasizes loss of job skills, the right emphasizes the role of the welfare state (especially in Europe.)
Mike, For quite some time I’ve known that many commenters underestimate Krugman. Many of these are people I know and respect. So it’s not something I’m only beginning to understand. Krugman has flaws, but in my view they are subtle flaws, not bonehead mistakes. I’d like to believe the same about myself, but no one can judge their own blog.
6. September 2011 at 15:39
Jim. I suspect you are right about Summers.
6. September 2011 at 16:24
“I wonder how Morgan will react to your use of “DeSumner.” He coined “DeKrugman.” And he has been treating them as the bad guys.
The thing to note is that DeLong, and to a lesser degree Krugman, support the monetary policies you advocate. His guy, Perry, is opposed to them.
6. September 2011 at 17:01
I don’t think it’s reasonable to say DeLong or Krugman support the monetary policies Sumner advocates at all. To keep the ship analogy going, they might profess to leave the same port and follow the same path for a while, but they’ve got very different destinations in mind. For ships, that’s fine, for a monetary policy it’ll be damn messy.
6. September 2011 at 17:04
There’s a section in the Jackson Hole speech where Bernanke discusses commodity prices. That one part drew my attention because it sounded a bit to me like there’s a concern that QE had a negative effect on prices without much bang for the buck. If I understood that correctly, I guess I’m at a loss for what can be done with respect to monetary stimulus because I think the main ones, corn and oil, have supply/demand issues with prices generally responding to changes in the economic outlook. I don’t believe the Fed is responsible the lion’s share of the price changes that have a huge impact on nearly everyone in their ability to make ends meet, and perhaps the reluctance to go ahead with another round of QE has something to do with not wanting to be blamed for it. That might be part of his queue to the government needing to do more with policy to fix some of the market distortions so people don’t feel like the Fed is trying to sock it to ’em.
6. September 2011 at 19:05
Scott,
I mean that you are experiencing it, not merely observing it happening to Krugman.
6. September 2011 at 20:16
“I don’t think it’s reasonable to say DeLong or Krugman support the monetary policies Sumner advocates at all.”
DeLong is now supporting nominal GDP targeting.
6. September 2011 at 21:13
Some thoughts about hysteresis. It may well exist but somehow I believe people, education, skills, and markets, are much more flexible than they’re given credit for. That applies to skills as much as it applies to the welfare state. It appears that from the late 90’s til the mid 00’s, Germany has cleaned up their labour productivity and unit labor costs quite a bit. And in job skills, well we hear that startups are a large factor in job creation in the US. This could not be the case if existing job skills were an issue (in innovative enterprises I presume the skills only appear as they go along).
I am much more inclined to believe in hysteresis in institutions (government not easily growing smaller, e.g.), and in hysteresis as a consequence of institutions than in hysteresis in individuals. When incentives change in the welfare payment structure, say, people react quite fast to them.
Finally – if there is any hysteresis then monetary policies would not be able to be effective. If Scott is right and monetary policies can indeed jumpstart ailing economies then the hysteresis argument falls apart.
7. September 2011 at 04:09
FEH, Good point.
Mike DC, I’d guess DeLong and I could agree on a NGDP target that is significantly higher than current expectations.
Bonnie, That’s possible, but it would be a big mistake on Bernanke’s part. That’s why I keep emphasizing NGDP, which is what he really needs to focus on. The only way the Fed can reduce commodity prices is by driving the US into a deeper recession.
Mike, I’ve experienced it from the very beginning–albeit not nearly as often as Krugman.
mbk, I mostly agree, but hysteresis does not mean monetary policy can’t work. The economy always has people unemployed for a variety of reasons. But I agree that few people are unemployable, it’s more a matter of degree. And I agree that institutions are the main problem–especially in Europe.
7. September 2011 at 06:39
“Finally – if there is any hysteresis then monetary policies would not be able to be effective.”
Not so. Hysterisis affects potential output. Monetary policy can restore the economy TO potential output. The point is that if there is hysterisis, the potential output to which monetary policy restors it will be smaller than it would have been if there had not been any hysterisis.
7. September 2011 at 08:05
Hawk,
I referred to employment hysteresis sensu Scott above, of 2 kinds – employment skills degrade and welfare state puts people out of work. Either hypothesis suggests that employment has shifted in some “irreversible” way, that the economy has found a new equilibrium at the higher unemployment level.
So the idea of hysteresis goes against the idea of a temporary crisis (fixable through whatever means, monetary, e.g.), and towards the idea of a permanent “new normal”. Where exactly we are now w.r.t. this hypothetical new normal is unknown, even if hysteresis is really occurring. So who knows maybe the “new normal” is not at current levels but somehow better, etc etc. There’s a bit “but” though. As Scott has pointed out many times, in some countries in Europe hysteresis has apparently indeed occurred in the 1970’s when unemployment went from 2-3% in the 60’s to a stable 10% give or take a few and has not budged from this in decades, no matter what policies were thrown at it.
But all this is still moot in my eyes, to me all sorts of historical examples show that new incentives can reverse seemingly cemented realities, even in Europe (I used Germany’s unit labour cost as an example).
7. September 2011 at 08:10
Welcome back Scott, I thought about you when I read this Times story about Dick Cheney’s memoirs:
“And in the epilogue, Mr. Cheney writes that after undergoing heart surgery in 2010, he was unconscious for weeks. During that period, he wrote, he had a prolonged, vivid dream that he was living in an Italian villa, pacing the stone paths to get coffee and newspapers.”
http://www.nytimes.com/2011/08/25/us/politics/25cheney.html?_r=1
9. September 2011 at 04:42
[…] now Scott’s back, and his printing press is more powerful than ever. In the comments of a recent post, I was congratulating Scott on his enhanced visibility in the press, but then […]
9. September 2011 at 17:45
beowolf, He probably was in an alternative universe.