The biggest roadblock to recovery

I’ve consistently argued that the Fed does what a consensus of economists thinks they should do.  There’s no great mystery as to why we don’t have faster growth in aggregate demand, faster growth in NGDP.  Most economists think were are doing just fine.  Here’s the latest survey:

WASHINGTON (Reuters) – U.S. business economists said the Federal Reserve’s easy money policies have been effective but they do not think the central bank should pump more money into the economy, a survey showed on Monday.

Just over 60 percent of economic professionals polled by the National Association for Business Economics felt the Fed’s two rounds of quantitative easing had been a “success,” the survey said.

However, 81 percent of economists surveyed said the Fed should not pursue another round of quantitative easing or bond-buying this year.

.   .   .

Although the majority of business economists said that Fed should commit to maintaining low rates for a period of time, only 6 percent said the central bank should keep the key federal fund rates at exceptionally low levels through 2014.

The latest National Association for Business Economics report was conducted between February 15 and March 6 of this year. It surveyed 259 business economists and others who use economics in the workplace.

It could have been worse.  At least most economists don’t believe in liquidity traps—that surprises me.  In 2007 I would have guessed that 10% believe in liquidity traps.  By 2009 I would have guessed 75%.  The actual number is apparently below 40%, although it’s hard to be more precise (as QE might fail for many reasons.)

DeLong and Summers are trying to convince their colleagues that we need fiscal stimulus.  A more productive use of their time would be to convince their colleagues that we need more stimulus.  Once that happens the Fed will snap to it.  And then we won’t need fiscal stimulus.


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14 Responses to “The biggest roadblock to recovery”

  1. Gravatar of W. Peden W. Peden
    27. March 2012 at 16:46

    I suspect a significant portion of those 40% will have Austrian School/New Classical School type objections to QE’s success, rather than liquidity trap objections.

    I wouldn’t rule out the possibility that you were right (or close to right) on both of those two estimates i.e. liquidity traps were passe in 2007, but came temporarily back into interest in 2008-2009 when economists panicked and forgot a lot of what they knew because of a crisis of confidence in their subject. Now that people have got their heads together, they’ve recalled that they never really accepted any of that liquidity trap stuff based on some persuasive argument.

    Even that might be too extreme: when people accept liquidity trap logic, they’re often unsure whether or not they’re saying that monetary operations at the zero bound are totally ineffective or simply need to be on a vast scale to be effective. This is complicated by the fact that “liquidity trap” is used in many, MANY different senses by different Keynesians. I’m not even sure if Tim Congdon’s list here is comprehensive-

    http://critical-reaction.co.uk/3010/05-02-2012-the-pathologies-of-capitalism

  2. Gravatar of dwb dwb
    27. March 2012 at 16:55

    I dunno why Krugman and DeLong are silent on fed stimulus recently (see below). Maybe they’ve given up or feel you are pounding the table hard enough. Maybe it’s a secret liberal conspiracy to scare conservatives with bigger government so that they will organize and pressure the Fed. Maybe it’s a secret liberal conspiracy to get conservatives on the record contradicting themselvesl. Calling unemployed people lazy, or promulgating weird theories of how wealth shocks destroy potential output.

    They’ve gotta know that Congress will close up shop soon for the elections until next year, so the FOMC is their best hope for stimulus before the election. Fiscal stimulus is not in the cards.

    Maybe someone should ask them…

    http://krugman.blogs.nytimes.com/2010/07/22/joe-gagnon-is-right/

  3. Gravatar of dwb dwb
    27. March 2012 at 16:58

    last two paragraphs:

    http://krugman.blogs.nytimes.com/2011/04/24/qe2-disappointment-wonkish/

  4. Gravatar of Justin Irving Justin Irving
    27. March 2012 at 17:27

    The truth behind ‘belief’ in liquidity traps is likely worse. I have heard oft-quoted business economists say 1. we are in a liquidity trap 2. QE is effective but if we do anymore, it should be sterilized so as not to spark inflation (gaaaa!?) Most business economists don’t even really know what a liquidity trap is, besides it having something to do with a zero bound. And let’s not start on reasoning from price changes…

    My hypothesis is that in the 80s and 90s, theoretically grounded practitioners gave out oversimplifed sound bites to avoid scaring away reporters. Their underlings payed close attention but never got a sound theoretical foundation (never learned that there is only one flavor of AD) and now a big chunk have literally forgotten graduate macro, or never learned to begin with. The big problem is that graduate macro is so goddamn schizophrenic, that most people just train for the tests without ever deeply grasping it.

  5. Gravatar of Morgan Warstler Morgan Warstler
    27. March 2012 at 18:18

    “I dunno why Krugman and DeLong are silent on fed stimulus recently (see below).”

    Huh?

    it is OBVIOUS.

    They’ve seen the end game. They KNOW exactly what happens with NGPLT, the Federal Govt. shrinks. Public employee unions die. Davis-Bacon gets dumped. Morgan runs around laughing maniacally at lefty bloggers for the next 20 years.

    That is not an acceptable outcome for them.

    It would be for Summers, but he just got shat on by the leftist press for ruining the Obama Administration on Day 1.

    So DeKrugman played him into supporting Fiscal no-matter-what.

  6. Gravatar of ssumner ssumner
    28. March 2012 at 04:24

    W. Peden, You said;

    “I wouldn’t rule out the possibility that you were right (or close to right) on both of those two estimates”

    It’s really nice to read something like that after wading through 100 comments by Major Freeman.

    dwb, Good point.

    Justin, Yes, I’ve done posts on that. It was true in the 1930s, it was true of the BOJ (who warned OMOs would do nothing, but also warned they’d create hyperinflation) and it’s true in America today.

    You said;

    “The big problem is that graduate macro is so goddamn schizophrenic, that most people just train for the tests without ever deeply grasping it.”

    Grad education should teach ideas, instead it teaches technique. That’s a mistake.

  7. Gravatar of Bill Woolsey Bill Woolsey
    28. March 2012 at 04:26

    Are forecasters (business economists,) the most important economists?

    How about this causation–

    The businesses economists bosses (money center bank CEO’s) listen to them. They contact their colleagues on the Boards of Directors of the various Federal Reserve banks, and the Fed listens.

    How do you think academic economists influence business economists (forecasters?)

    What confidence do we have that business economists (forecasters) will be very good at judging the impact of innovative policies? What is the selection mechanism?

  8. Gravatar of John Thacker John Thacker
    28. March 2012 at 06:23

    This is why some of the previous posts blaming Congress (which also means blaming voters) are a bit unfair. Do we really expect Congressmen to be better at economics than economists?

  9. Gravatar of W. Peden W. Peden
    28. March 2012 at 06:30

    Scott Sumner,

    One of the most useful skills acquirable in the humanities is skim-reading. Unless they’re actually addressing the post in an interesting way, I don’t even consciously notice the existence of commentors like Morgan or Major Freedom.

  10. Gravatar of dwb dwb
    28. March 2012 at 07:02

    @ Bill Woolsey

    The businesses economists bosses (money center bank CEO’s) listen to them. They contact their colleagues on the Boards of Directors of the various Federal Reserve banks, and the Fed listens.

    JMO, i think thats about right. Although i would add: many business economists sit on capital or planning committes, or on bond trading desks (where economics knowledge runs deep), put together “macro forecast” and “interest rate strategy” presentations at banks, and give investor presentations. CFOs and most senior executives get pdfs from investment banks (and usually learned macro in an MBA class or two).

    “business economists” also read blogs (calculatedrisk is highly popular) and academic articles. CFA institute for example sponsors seminars and education (and CFA exam and FRM or actuary exams has a ton of economics questions).

    “business economists” have M.A, Ph.D. (or ABDs), and do a lot of work that does not get published for proprietary reasons.

    As far as their ability to “be very good at judging the impact of innovative policies” I would say from what i have seen they are just as good as anyone else (which seems to be these days: really bad). of course, then you have the Jan Hatzuis’s of the world who are very good at it.

    As far as why forecasts suffer from “herd” issues, there is only so much you can divine from the past (and some of these models are very similar because there are only so many variables).

    At the end of the day, much of this is pure expectations: there are a lot of smart people in the business economist pool, but they think the “FOMCs policies have been effective but they do not think the central bank should pump more money into the economy”… because the Fed told them so.

    We dont have any decent forward looking indicators that would tell them otherwise.

  11. Gravatar of Morgan Warstler Morgan Warstler
    28. March 2012 at 07:13

    W Peden. Let me show you the interesting things you missed.

    Scott agrees with me. dwb listed out many possibles, he missed mine, the correct one.

    Scott appears to WANT to sway DeKrugman Summers etc.

    As long as he cares to sway them, you’ll only get glimpses int he right light, here’s one:

    http://modeledbehavior.com/2012/03/26/scott-sumner-on-fiscal-policy/

    THAT’S WHAT HAPPENS.

    Now ask yourself:

    assuming Sumner is right, is that acceptable to DeKrugman?

    does Scott think that’s acceptable to DeKrugman?

    if Scott really thought it was unacceptable to them, why would he continue to reach out?

    these are the interesting questions.

  12. Gravatar of W. Peden W. Peden
    28. March 2012 at 07:49

    Morgan,

    I picked all that up over a year ago.

    I actually agree that selling any monetary policy rule requires winning over the right, since the left will always have a desire for discretionary power. If the left were sceptical enough about discretionary power to seriously endorse NGDP targeting, then they would be at least centre-right.

    (Left and right meaning fiscally liberal and fiscally conservative, of course. That said, it would be interesting to see if liberals are more keen on discretionary/interventionist socially liberal policies and libertarians are more keen on rule-based socially liberal policies; also, if Eastern Bloc-style/fascist social conservative- Stalin et al- are more keen on discretionary/interventionist social conservativism and American-style social conservatives are more keen on rule-based social conservativism. My hunch is that both propositions would be true.)

  13. Gravatar of Benjamin Cole Benjamin Cole
    28. March 2012 at 08:30

    Excellent blogging.

    Yes, print more money.

  14. Gravatar of ssumner ssumner
    2. April 2012 at 05:27

    Bill, I don’t know. But that’s the only survey I could find, and I strongly suspect that a broader survey would show similar results.

    John Thacker, Good point.

    W. Peden, Yes, I’ve learned how to skim.

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