The Fed’s bizarre call for infrastructure spending

Here’s something that caught my eye:

Federal Reserve officials are increasingly making the case that Congress should spend more money to stimulate the economy, with an eye on the infrastructure package that could hit the agenda next year.

Federal Reserve Chairwoman Janet Yellen and Vice Chairman Stanley Fischer have both nudged Congress in recent speeches. They said federal spending that bolsters demand and increases the labor force would take pressure off of monetary policy and help grow the economy.

“There are ways in which the response of fiscal policy to shifts in the economy could be strengthened, which could help take some burden off of monetary policy,” said Yellen in a September press conference.

“Fiscal policy has traditionally played an important role in dealing with severe economic downturns,” said Yellen in an August speech, suggesting work on “improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals.”  (emphasis added)

I don’t use the term ‘bizarre’ lightly, as this stuff is not just wrong, or doubly wrong, it’s quintuply wrong.  It’s not even slightly defensible:

1.  The Fed claims the economy does not need any more demand stimulus.  Indeed any boost to AD from more spending would be offset by tighter money.  So what’s the point?

2.  Even if fiscal stimulus were needed, it should be done via tax cuts.  It’s not efficient to vary spending for anything other than standard cost/benefit reasons, where benefits do not include demand stimulus.  And why should the central bank be telling Congress where to spend money?

3.  The Fed might respond that fiscal stimulus would not boost demand, but it would allow the current demand to be achieved with less monetary stimulus.  But why is that desirable?

4.  The Fed might argue that it would prefer a higher trend rate of nominal interest rates, so that it hit the zero bound less often in future recessions.  But fiscal stimulus is an absolutely HORRIBLE way to achieve that objective:

a.  Fiscal stimulus can only boost nominal interest rates by raising the global real rate of interest.  Just imagine how much fiscal stimulus it would take to boost the global real rate of interest by even 100 basis points.  (Hint: far, far beyond anything Congress would ever contemplate.)  Then think about how Japan did a massive amount of fiscal stimulus in the 1990s and 2000s, and ended up with some of the lowest interest rates the world has ever seen.

b.  In contrast, monetary stimulus can easily raise nominal interest rates by 100 basis points, merely by raising the inflation target from 2% to 3%.  So why would the Fed prefer fiscal stimulus as a way of raising nominal rates?  Is the Fed seriously arguing that the sort of fiscal stimulus needed to boost global real interest rates by one percent is more efficient than simply raising the inflation target by 1%?  And if so, why is it that when inflation targeting was first being discussed and implemented in the 1990s, all of the academic discussion focused on the importance of setting the inflation target high enough to avoid the zero bound problem, and approximately zero effort was devoted to the idea that fiscal stimulus could raise the long term trend real interest rate, if the zero bound were a problem.  Were the economists of the 1990s stupid?

5.  Economists agree, or used to agree that the US and other developed countries face severe long-term fiscal changes, due to an aging population.  The consensus is, or used to be, that now is a good time to start addressing these issues. (Remember Simpson/Bowles?) It would be one thing if the Fed were proposing a short-term fiscal stimulus to boost demand right now.  But they aren’t, they don’t think we need more demand right now. Instead they are proposing a long-term fiscal stimulus, which would massively worsen the already worrisome long-term fiscal trends in America.  A decade ago, sensible economists (like Krugman) criticized these sorts of proposals as reckless, and they were right.  Japan has already shown that decades of fiscal stimulus do nothing to raise NGDP growth, and merely leave you with a higher debt/GDP ratio.  Why would we want to copy Japan’s failed experiment?  All they ended up with is lots of highway projects that are little used, and destroyed some of the once beautiful Japanese countryside.

6.  What does improving education have to do with fiscal stimulus?  The US already spends more on public education than most countries, and education experts seem to agree that the real problem is poorly designed schools or bad home environment, not lack of money.  Would throwing a few more billions of dollars at the LA school system boost growth?  Would it turn the LA system into the Palo Alto system?  How?

The passage I quoted is modern progressivism at its worst.  A lot of nice sounding bland generalities, that mean nothing.  I mean seriously, “working training”?  What a brilliant idea!!  Amazing that humanity never thought of that before, in 5000 years of human history. While we are at it, let’s reduce federal spending by 10% solely by cutting “waste, fraud and abuse”, without touching any “needed programs”.

And if the Fed is so worried about unemployment, how about telling the government not to raise the minimum wage to $15/hour?  Let me guess, that would not sound progressive.


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48 Responses to “The Fed’s bizarre call for infrastructure spending”

  1. Gravatar of Market Fiscalist Market Fiscalist
    30. October 2016 at 06:21

    ‘In contrast, monetary stimulus can easily raise nominal interest rates by 100 basis points, merely by raising the inflation target from 2% to 3%. So why would the Fed prefer fiscal stimulus as a way of raising nominal rates? ‘

    Assuming constant velocity then the only way to boost inflation is to increase the rate at which the money supply expands.

    This can be done by

    1. Increasing the deficit by having the govt cut taxes or increase spending. This is then funded by selling bonds that the CB buys back

    or

    2. The CB buying bonds with new money. This will earn the CB lots of interest which it will give to the govt and enable it to spend more or tax less.

    Is there really a huge difference between these options ?

  2. Gravatar of Christian List Christian List
    30. October 2016 at 07:12


    The Fed claims the economy does not need any more demand stimulus. Indeed any boost to AD from more spending would be offset by tighter money. So what’s the point?

    I don’t want to play the party pooper but in the quotes you gave the great Yellen seems to claim otherwise. There seem to be at least two Yellens, who seem to give rather inconsistent and even paradoxical statements.


    What a brilliant idea!! Amazing that humanity never thought of that before, in 5000 years of human history. While we are at it, let’s reduce federal spending by 10% solely by cutting “waste, fraud and abuse”, without touching any “needed programs”.

    I thought the same thing when I read:

    “looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals.”

    Brilliant! Please everybody but hurt nobody important.

    Reminds me of the Brad DeLong style of economics: Let’s promote more fairness and equality but make sure that my guys still come in first place every time.

  3. Gravatar of Peter K. Peter K.
    30. October 2016 at 08:22

    If you have “too much” monetary policy without proper regulation of the financial markets you get what what we saw in 2008: a massive asset bubble which popped and led to a shadow bank run.

    Yes monetary policy was bad during that time but it’s sort of besides the point.

    The banks didn’t allocate investment or risk very well, which led to a massive fall in employment, in NGDP and led to hysteresis with reduced potential output. It led to Trump winning the Republican primary with his demagoguery.

    Sorry, free-market ideologues. Those are the facts. If the Fed and the banks didn’t do such a poor job, then government investment in infrastructure wouldn’t be such a no-brainer.

    We need regulations to prevent bank runs. We need a central bank that isn’t paranoid about inflation.

    In the 2000s, competition with low wage China led to the loss of well paying jobs. The Fed and banks replaced that loss of demand with an unsustainable housing bubble. And the banks allocated risk as to make a shadow bank run probable.

  4. Gravatar of ssumner ssumner
    30. October 2016 at 09:38

    Market, You asked:

    “Is there really a huge difference between these options ?”

    Yes there is, option #2 is far more efficient.

    Christian, I assure you that Yellen doesn’t think we need more demand stimulus. Look at her recent comments on the economy. If she did, she’d be advocating a rate cut.

    Peter, You said:

    “The banks didn’t allocate investment or risk very well, which led to a massive fall in employment, in NGDP and led to hysteresis with reduced potential output.”

    Is this some kind of joke? Banks caused hysteresis?

  5. Gravatar of E. Harding E. Harding
    30. October 2016 at 10:36

    Great post, for once. Couldn’t have said it better myself. Sad to say, there are all too many professors at good universities who actually believe these doctrines you just refuted -that monetary policy is basically ineffective unless at some unspecified level above the ZLB, and that, given the weak economy (despite 5% unemployment) fiscal stimulus is still basically a good idea.

    “Banks caused hysteresis?”

    -I don’t think it’s a stupid idea; why else the sharp worldwide productivity slowdown after 2008, which continues even unto this day?

    “There seem to be at least two Yellens, who seem to give rather inconsistent and even paradoxical statements.”

    -Bingo, Christian.

  6. Gravatar of Jerry Brown Jerry Brown
    30. October 2016 at 11:41

    Scott, I am pretty sure you can follow the reasoning behind Peter K’s comment, even if you disagree with it. “Banks caused hysteresis?” is probably not the best understanding of that comment. What I think he was saying is that poor risk management by banks along with poor policy by the central bank led to a large increase in the value of a particular asset- housing. When the price of that asset fell very quickly, the poor risk management by the banks was exposed, leading to a run on shadow banks and the financial crisis and a deep recession that, in turn, set up the conditions that allowed for hysteresis to occur. I know you don’t believe in asset bubbles, but it is a mistake to dismiss Peter K’s comment as some kind of joke.

  7. Gravatar of Ram Ram
    30. October 2016 at 12:21

    This isn’t too mysterious, I think. The Fed is under pressure from the left not to raise interest rates, and under pressure from the right to raise interest rates. Of course, whether to raise or lower rates is not the right way to think about monetary policy, but this is what the political forces acting on the Fed look like at the moment. If the Fed encourages the fiscal authorities to spend more, then the left will let them off the hook for raising interest rates, since they get fiscal stimulus instead consisting of spending on their various priorities. The right, in turn, will turn their attention away from the Fed, who will be raising rates as they wish, and will instead complain about the fiscal authorities engaging in wasteful spending. This basically shifts scrutiny from both sides away from the Fed and towards the president and congress, while not impacting the Fed’s ability to hit its target.

  8. Gravatar of Kevin Erdmann Kevin Erdmann
    30. October 2016 at 12:31

    Peter, what if everything you believe is wrong? Exactly where were those lost manufacturing jobs being replaced by unsustainable construction jobs? Pittsburg? St. Louis? They weren’t building houses. Dallas and Atlanta were, but prices there were moderate there. How about where prices were highest. LA? NyC? San Francisco. They had neither a loss of jobs nor a rise in construction jobs. Is there anywhere that your story holds? Phoenix and Las vegas? It really doesn’t hold there either. But in any case, a couple small metro areas don’t determine national labor markets. The thing you think happened didn’t really happen.

  9. Gravatar of Steve Stein Steve Stein
    30. October 2016 at 12:37

    What’s being lost in this discussion (starting with the Fed, itself) is that significantly greater infrastructure spending is needed FOR ITS OWN SAKE, irrespective of its stimulative effect.

    The last thing the country needs right now is another controversy over an irrelevant point. Whether fiscal or monetary policy is better suited, at this time, to promote economic growth is an argument that we can go round and round about, but either way, our bridges, roads, ports, terminals, pipelines, and power grids require massive new investment.

    If we want to discuss ways to reduce the obstructions to the infrastructure rebuild/repair process, that might be useful (Canada and Germany, for example, generally take about one fifth the amount of time to complete major projects than does the US.) But to waste breath on whether infrastructure is the most efficient ‘stimulus’ at the moment seems to be little more than mental self indulgence.

  10. Gravatar of Paul Paul
    30. October 2016 at 12:42

    Is it obvious that raising the inflation target is so non-distortionary? You have to do something with that money (the fed isn’t giving it away as tax breaks either), and if you buy a trillion dollars of some particular class of assets (e.g. low risk debt) then it seems like you are bound to create some distortions. Perhaps quantitatively the effect is much smaller?

    I’m genuinely unclear and confused on this point. Is this a standard argument that has run its course and is by now well-understood?

    In any case, I’d agree with the diagnosis that partisans prefer to use macroeconomic arguments as soldiers for causes which they support on other grounds. The pattern seems nearly universal.

    Note in particular that Yellen probably thinks that the government should be raising taxes to spend more on infrastructure, so from that perspective it is reasonable to prefer infrastructure spending to tax cuts—doing anything else would be ceding ground in the great and central policy struggle. It’s not super surprising that both sides care more about pushing what they see as the most important issue, rather than just accepting the technocratic option (though often one side or the other will by coincidence find itself on the same side as the technocrats, in this case it’s the right).

    Re point 3: it seems like banks feel bad about having giant balance sheets, and so would prefer the government run up debt rather than having to do it themselves. That doesn’t seem particularly economically efficient or coherent, but it seems pretty plausible to me as a layperson.

  11. Gravatar of Rajat Rajat
    30. October 2016 at 12:48

    I basically agree with Ram, which also explains why Yellen doesn’t set a higher inflation target – because the Right would hate it! Scott, you used to say that the Fed does what the median (macro)economist thinks it should do. Maybe you need to augment that model with a political pressure variable?

  12. Gravatar of E. Harding E. Harding
    30. October 2016 at 16:23

    “Phoenix and Las vegas? It really doesn’t hold there either.”

    -Why so?

    “But in any case, a couple small metro areas don’t determine national labor markets.”

    -Why not?

  13. Gravatar of rtd rtd
    30. October 2016 at 18:09

    Maybe Yellen feels that stronger productivity growth via ““improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals” raise the average level of interest rates and assist the central bank with greater scope to ease monetary policy in the event of a recession?

  14. Gravatar of ssumner ssumner
    30. October 2016 at 18:11

    Harding, You said:

    “Banks caused hysteresis?”

    -I don’t think it’s a stupid idea; why else the sharp worldwide productivity slowdown after 2008, which continues even unto this day?”

    Why else? Global warming? The Super Bowl halftime show? Locusts? I can think of a billion equally implausible causes.

    Jerry, OK, it’s not a joke, but it’s also not an idea I am going to waste time commenting on.

    Ram, I see no evidence that the Fed cares what its critics think. Why should they? The critics are powerless. The Fed does what a consensus of economists favors. Right now most economists favor fiscal stimulus, so the Fed echoes that claim.

    Steve, This is a monetary policy blog, not an infrastructure blog. I actually have done a few infrastructure posts. Feel free to comment on them. Nonetheless, getting monetary policy right is extremely important, as we saw in 2008. So I’ll keep talking about it even if other people are more interested in bridges.

    Paul, You said:

    “Is it obvious that raising the inflation target is so non-distortionary? You have to do something with that money (the fed isn’t giving it away as tax breaks either), and if you buy a trillion dollars of some particular class of assets (e.g. low risk debt) then it seems like you are bound to create some distortions. Perhaps quantitatively the effect is much smaller?”

    If you raise the inflation target to 3% then the Fed’s balance sheet would be much smaller.

    You said:

    “In any case, I’d agree with the diagnosis that partisans prefer to use macroeconomic arguments as soldiers for causes which they support on other grounds. The pattern seems nearly universal.”

    That’s a pretty bizarre claim to make here, given that I clearly do not do so. I favor big tax cuts. But I never advocate them for purposes of fiscal stimulus. Thus I oppose most GOP tax cut proposals precisely because they will balloon the deficit. I’m sure that I’m not the only honest person in the world, there must be at least 3 or 4 others out of 7 billion people.

    Rajat, Nope, they continue to follow the median economist, and ignore the ranting of Congressmen.

  15. Gravatar of Carl Carl
    30. October 2016 at 18:34

    Scott:

    You said “I favor big tax cuts. But I never advocate them for purposes of fiscal stimulus. Thus I oppose most GOP tax cut proposals precisely because they will balloon the deficit.”

    Which tax cuts do you advocate?

  16. Gravatar of Christian List Christian List
    30. October 2016 at 20:28

    @Steve Stein

    Canada and Germany, for example, generally take about one fifth the amount of time to complete major projects than does the US

    Funny that you mention it. In Germany they are telling a very similar story but the other way round. Those stories must go round and round and round. The truth is: The Green Party is very strong in Germany. Just imagine a few thousand Jill Steins as regulatory authorities. It’s a disaster. Since about 20 years you won’t get any major infrastructure project done in Germany, at least not with massive delays and cost increases. Just google projects like “Berlin Brandenburg Airport” or “Stuttgart 21” if you don’t believe me.

  17. Gravatar of Anand Anand
    30. October 2016 at 20:41

    The statement by Yellen reminds me of the “conjunction fallacy”, which is a well-known mental bias. (http://lesswrong.com/lw/ji/conjunction_fallacy/)

    Briefly, for humans, it is often the case that if you ask them whether the events A & B are more probable than event A itself, they often say that A & B is more probable. For instance, people may consider the event “Soviet Union will invade Poland and there will be nuclear war” to be more probable than “there will be nuclear war”. Or in other words: if you add more details to an improbable story, it increases the credibility of the story.

    Yellen might be engaging in this same kind of thing by saying we need more fiscal stimulus and worker’s training and this and that and the other thing.

  18. Gravatar of Anand Anand
    30. October 2016 at 20:45

    To play Devil’s Advocate for a bit:

    Couldn’t the Fed be simply signalling by the statement that they will not engage in monetary offset if there is fiscal stimulus?

    Of course, it may still be true that fiscal stimulus is wasteful and less efficient than monetary stimulus, which you deal with later in the post.

  19. Gravatar of Art Deco Art Deco
    31. October 2016 at 05:43

    It’s less bizarre if you consider the possibility that Yellen is confusing two roles: her role as governor of the central bank and her role as a resident of metropolitan Washington with certain policy preferences. Also, she was appointed to that office by politicians, and the BO administration has been (more than any other) chock-a-block with people who know nothing of economics or business; suggest one of these someone’s called in a chit

  20. Gravatar of Benjamin Cole Benjamin Cole
    31. October 2016 at 06:01

    Excellent blogging.

    Add on: The US government spends $1 trillion a year on national security (DoD, VA, black budget, pro-rated debt). We have no military adversaries.

    How about cutting that $1 trillion in half and cutting taxes by $500 billion a year?

    Dudes, infrastructure spending is peanuts.

  21. Gravatar of Scott Freelander Scott Freelander
    31. October 2016 at 08:15

    Dr. Sumner,

    The only explanation I can think of consistent with the Fed calling for infrastructure spending is that the Fed thinks it will boost RGDP potential. That’s an interesting perspective, but one would think they would want to at least consistently hit their inflation target before determining how low potential RGDP might be in the future. Also odd, if this is their perspective, is a lack of call for some deregulation and cuts in certain other areas of government spending, which would presumably boost GDP potential.

    But, it makes me wonder whether Yellen and Fischer really do think the Fed is mostly out of bullets, or whether they simply think it’s too risky to use options they see as available to them.

  22. Gravatar of Doug M Doug M
    31. October 2016 at 08:56

    Peter K,

    “If you have “too much” monetary policy without proper regulation of the financial markets you get what what we saw in 2008: a massive asset bubble which popped and led to a shadow bank run.”

    I would say that the problem wasn’t lack of regulation, it was poorly constructed regulation. The only reason that the shadow banks existed was “regulatory arbitrage.” Regulation pushes money into the shadows, where it then becomes poorly disclosed to the public.

    I don’t mean to imply that all regulation is pointless, but good regulation is very hard to craft. The bankers are very smart, and will work to comply with the letter of the law but will circumvent the spirit of the law when it is profitable to do so. They have also shown time and again, their ability to “capture” their regulators. The regulator know exactly what the banks are doing, but they lack the political clout (or perhaps the will) to do anything about it.

    Banks are and have been highly regulated, but so long is profits are private and losses are public there will be a problem. The institutionalization of “Too Big To Fail” only makes the system fundamentally less stable.

  23. Gravatar of Kevin Erdmann Kevin Erdmann
    31. October 2016 at 09:09

    Doug,

    Regulatory arbitrage might explain shadow banking in the 1990s, but I think in the 2000s, what has happened is simply a semantic issue. We don’t consider MBSs issued by the GSEs to be part of “shadow banking”. So, there is a lot of discussion about the rise of shadow banking in the 2000s. But, if you look at the decline in the GSEs (and FHA) during the time, it is a mirror image. If you add the GSEs to the assets of the shadow banking sector, they cancel out, and the growth of those sectors together runs parallel to the growth of commercial banks.

    One of the untold stories of the 2000s is that the GSEs and FHA had countercyclical behavior.

  24. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    31. October 2016 at 10:25

    I can say Japanese countryside is still beautiful

  25. Gravatar of William Peden William Peden
    31. October 2016 at 10:42

    Hi Scott,

    This is a very interesting post. I agree that fiscal policy is mostly irrelevant for interest rates. Why do you think that interest rates were so high in the US in the 1980’s, even after inflation expectations fell? Was it a rise in global risk premia after the Latin American debt crisis began (and Third World debt problems in general)?

  26. Gravatar of MikeDC MikeDC
    31. October 2016 at 11:51

    Even discussing the Fed’s actions here on their merits is indicative of why “Rule of Law” approaches are so hard to maintain and government tends toward bloated authoritarianism.

    I mean, Scott knows very well that the Fed has no business whatsoever talking about this stuff. Which is why he prefaces the Fed’s actions as bizarre.

    But then he rolls right into talking about all the reasons it’s not just inappropriate, but wrong-headed.

    That’s a problem, because by engaging so thoroughly on the “is the action correct” argument, the “are these the right people to take the action” argument is effectively ceded.

    This isn’t just my observation over the years, it’s basically Rhetoric 101. If you go to any law school, the first year civil procedure classes will make clear that you can’t bring up venue once you’ve started arguing the facts of the case.

    Understanding appropriate venue is a completely unheralded libertarian concept. Letting the wrong forum hear important cases is probably the best single explanation for why the government is so bloated and messed up.

  27. Gravatar of ssumner ssumner
    31. October 2016 at 12:25

    Carl, Tax cuts combined with spending cuts. Or tax cuts combined with loophole closing.

    Anand, You said:

    “Couldn’t the Fed be simply signalling by the statement that they will not engage in monetary offset if there is fiscal stimulus?”

    Maybe, but highly unlikely. They are pretty committed to the 2% inflation target.

    Scott, No, they are clearly calling for fiscal stimulus. And they suggested it would boost demand.

    Wasshoi, But as beautiful as before?

    Peden, I’d guess because in the 1980s there were more investment opportunities and the propensity to save was lower for demographic reasons. Also the public’s inflation expectations may have fallen more slowly than actual inflation.

    MikeDc, You said:

    “I mean, Scott knows very well that the Fed has no business whatsoever talking about this stuff. Which is why he prefaces the Fed’s actions as bizarre.”

    Actually I don’t know that, I thought the content of the comments was bizarre. You may be right, but it’s not something I “know”. America’s a free country, and I always assume people are free to speak their minds unless I’m told otherwise. No one has ever told me that the Fed is not allowed to offer advice on fiscal policy. We all know Congress offers advice on monetary policy.

  28. Gravatar of E. Harding E. Harding
    31. October 2016 at 13:29

    Turns out my pumpkin was vandalized by squirrels, so Trump can’t fix this issue.

  29. Gravatar of William Peden William Peden
    31. October 2016 at 14:19

    Scott,

    Thanks, that makes sense. When I read a biography of Paul Volcker (“The Triumph of Persistence”) I was annoyed at how much discussion of fiscal policy was in there.

  30. Gravatar of rtd rtd
    31. October 2016 at 14:51

    To add to my prior comment (re: “6. What does improving education have to do with fiscal stimulus?”) I would say the problem is quoting quoted material. Here, there is an increased marginal likelihood of losing the meaning translation (the telephone game) & I don’t feel that Yellen’s comments about productivity and education were necessarily about “fiscal stimulus” but about increased productivity raising the average level of interest rates and thus providing the central bank with with greater scope to ease policy in response to a recession (her words, not mine). Maybe others read the Chair’s comments differently, but the two (quoted) quotes were not successive.

  31. Gravatar of Ray Lopez Ray Lopez
    31. October 2016 at 15:40

    A bizarre post by Sumner who projects his own misunderstanding of economics to his audience. In fact, go here: http://www.infrastructurereportcard.org/grades/ and note the grades given for crumbling US infrastructure, mostly D’s, with a few D- grades. The kind of grades Sumner deserves for his blog.

  32. Gravatar of MikeDC MikeDC
    31. October 2016 at 17:34

    America’s a free country, and I always assume people are free to speak their minds unless I’m told otherwise. No one has ever told me that the Fed is not allowed to offer advice on fiscal policy. We all know Congress offers advice on monetary policy.

    Sure, it’s a free country, yadda yadda. Not what I’m talking about. People are free to do what they want in their capacity as private citizens. When they’re working for a public institution with a fiduciary responsibility to focus on X, I don’t think we should humor their frolic into topics Y and Z.

    Congress, unfortunately, is more or less the residual claimant on governmental power. So in a very real sense, they can talk about whatever they want.

    The Fed’s mandate is much narrower. And the bottom line is there’s always an opportunity cost. The more time, money and effort they spend focusing on stuff that is not what they’re tasked with doing, the less they have available to work on their actual job.

  33. Gravatar of Benjamin Cole Benjamin Cole
    31. October 2016 at 18:38

    While one central banker, Yellen, is calling for infrastructure spending, another, Claudio Borio of BIS, is rhapsodizing about deflation, and contending central bankers should pop “bubbles,” but not intervene doing “busts.”

    http://ngdpadvisers.co.uk/2016/10/31/fed-economists-see-no-recession-central-bank-mouthpiece-claudio-borio-embraces-monetary-asphyxiation/

    You see, central banks know when bubbles are false prices (forget Eugene Fama and EMH) and also know there are never “reverse bubbles.” So says Borio.

    Dudes, recession in 2017? Maybe.

    The central banks are increasingly signaling they are loath engage in “stimulus.” Borio says the reason inflation and interest rates have been trending down for 30 years is central bank over-easy accommodation, which leads to periodic bubbles and busts.

    Yes, that is the result of sustained easy money: lower interest rates and lower inflation. So says Borio.

    Investor beware.

  34. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    31. October 2016 at 20:09

    Sumner-sensei

    No road infrastructure construction destroyed the country side.
    It helps the local economy.
    New national road is nice and cozy (strange English?)
    , full of beautiful scenery (country side).

    Roadside station is enjoyable.
    https://en.wikipedia.org/wiki/Roadside_station

    I think the 90s-00s the BOJ historical super massive tight money destroyed the country side.
    For example, I am so disappointed the scenery of Oarai.(a famous town for “GIRLS und PANZER”)
    https://en.wikipedia.org/wiki/Ōarai,_Ibaraki

    Because, maybe, marginal area (the countryside) is more weak for tight money.
    Countryside change ratio, elasticity of condition is high for the bad policy change
    (It is like leverage effect of junk stocks)

  35. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. November 2016 at 04:48

    CNN reports;

    ‘One week before Election Day, the race for the presidency is all tied up.

    ‘The latest Rasmussen Reports White House Watch national telephone and online survey finds Democrat Hillary Clinton and Republican Donald Trump each with 44% support among Likely U.S. Voters. Libertarian candidate Gary Johnson has five percent (5%) of the vote, while Green Party nominee Jill Stein earns two percent (2%). Another two percent (2%) like some other candidate in the race, and four percent (4%) are undecided.’

    Which happens to be what the Fair Model predicts for Hillary’s share of the two party vote; 44%. Reversion to the meanie?

    https://fairmodel.econ.yale.edu/vote2016/index2.htm

    ‘I have been asked whether I believe any of this? The coefficient estimates are based on data going back 100 years—25 elections. They show that the economy has significant effects on voting behavior, as does the duration variable. In this election the duration variable is working against the Democrats, and G and Z are quite low by historical standards, which also works against the Democrats. P is low, which is positive for the Democrats, but this is the only bright light for them. If one assumes that the empirical regularities gleaned from the past 25 elections, as reflected in the coefficient estimates, hold for this election, one would conclude that the Democrats’ chances are quite poor.

    ‘It is no secret, of course, that Donald Trump is an unusual choice for a candidate. It may be that people who would otherwise vote for the Republicans because of the sluggish economy and a desire for change will vote for the Democrats because of Donald Trump’s characteristics that they don’t like. If so, then one might say that personalities overwhelmed the economy in affecting voting behavior for this election, which means that the equation’s predictions could be way off. The econometric analysis behind this work assumes business as usual, which may not be the case this time. There is no way I can test this before the fact, and even after the fact it is only one observation.’

  36. Gravatar of B Cole B Cole
    1. November 2016 at 05:04

    After profound reflection, I think the key word Yellen used is “burden.” She thinks monetary policy is bearing a burden. Other central bankers have said they are “overburdened.”

    I wish I was making this up. But the consensus among central bankers is that they are exhausted, out of ammo and have done too much. Kuroda of the BoJ is an exception but only holding the line. Who knows what the PBoC thinks.

    This may mean recession next year.

    Remember, econo-cranks predict recessions but orthodox macroeconomists never do.

    To each his orthodoxy.

  37. Gravatar of Scott Sumner Scott Sumner
    1. November 2016 at 05:09

    Ray, Actually, our infrastructure is in good shape.

    Patrick, You are misinterpreting that study. Hillary is at 50% of the two party vote in the poll you cite.

  38. Gravatar of Ray Lopez Ray Lopez
    1. November 2016 at 05:42

    @ssumner – “Ray, Actually, our infrastructure is in good shape.” – no it’s not. Are you now an expert on infrastructure as well as beavers (inside joke to you new readers, all two of you)? I realize the site I linked to is a bit biased, run by civil engineers, but since the USA is so spread out, infrastructure is actually harder to maintain than in a compact country like Hong Kong or Singapore. Many US bridges are on the verge of failure. Metro DC is a joke, Amtrak should be closed, JFK had a three hour delay last week when I traveled there, LA roads are a mess, and even the UK finally got a third Heathrow runaway after over 50 years of trying (NIMBY politics sure, but also the point is they and we need better infrastructure). Any other questions and misconceptions? I’ll be happy to answer them.

  39. Gravatar of engineer engineer
    1. November 2016 at 08:57

    The state of infrastructure is very subjective. There are places were it definitely could be improved, but a “D+”…no I don’t think so. Parts of the infrastructure that actually have impact on productively tend to be fixed/upgraded pretty rapidly. Does the US have good passenger train service…no it is terrible. Remember the stimulus and all the talk of bullet trains in 2008 by the Democrats…when how did that work out. Everyone knowledgeable about the subject knew that it would be a lot of study and result in the same outcome…not practical (No, we can’t…to quote Obama). I would rather have a good freight centric railroad (the best in the world by far) than a good passenger one. Passenger jet travel delays have more to do with security than anything else. Where it is practical to build more runways…they are done..have you been to Dallas or Denver. You are not going to build more runways in NYC…you can only make ground operations more efficient. Move hubs out to airports that have room and go to NextGen ATM (ads-b) (which btw, the FAA/Industry is spending mega dollars on).
    BTW, I was in Germany a couple years ago…and sat in my car for about 1/2 hour every night because of the train crossing between the hotel and work…very frustrating…

    “We have no military adversaries.”…don’t you read the news, the Russians control our entire election, Trump is a secret Russian operative, and the FBI is hiding what they know from the American public…that was 2/3 of NBC’s nightly news election coverage last night.

  40. Gravatar of Student Student
    1. November 2016 at 09:14

    “Couldn’t the Fed be simply signalling by the statement that they will not engage in monetary offset if there is fiscal stimulus?”

    I agree Anand here. i think they are saying they won’t offset (at least completely, they will still have a target range for various parameters) public investments in infrastructure, human capital, and basic R&D.

    It’s quite obvious we have lagging productivity. The growth literature almost universally accepts that increases new knowledge (when codified in the form of commercialized new or reconfigured recipes) and human capital increases productivity.

    Why is it such a bad idea for the fed to coordinate monetary policy with investments in productivity?

    Also, I think when they are talking about increased spending on education, i think they are talking about higher education, retraining the existing workforce, etc. it’s not about dumping more money into LA public school.

  41. Gravatar of Student Student
    1. November 2016 at 09:34

    Haven’t all great societies in human history had some type of large scale public investment projects? It seems as though we even use those “wonders” to help define which societies were great.

    It seems like some type of public project or national goal would be useful at this time. How successful would a negative Nancy’s message be (ala a trump) if we were sending a manned mission to Mars? Or even if we were building a fleet of self replicating robots on the moon to build a base or mine it for various things we could ship back cheaply on a space elvator or something.

    We as a nation need to do something great. We need a national goal we can celebrate as a society like we did when we landed on the moon.

    That would make america great again… without Donald Mussolini.

  42. Gravatar of engineer engineer
    1. November 2016 at 10:37

    “We as a nation need to do something great. We need a national goal we can celebrate as a society like we did when we landed on the moon.”

    go to http://www.mars-one.com/

  43. Gravatar of Student Student
    1. November 2016 at 20:56

    Engineer,

    That’s nice. Let’s invest in something like that or maybe something else like an efficient energy grid. Something, anything, that’s a romerian meta idea (pay attention to spillovers people). Don’t just sit there… Do something…

    I don’t know but just imagine if we spent the obama stimulus on something awesome like landing on Mars with actual people or some new way to travel from NY to Rochmond in 1 hour… Or solar or a power plant based on magma like in ice land.

    Anything new really…

    Let’s do this. Let’s make america great again…

  44. Gravatar of ssumner ssumner
    2. November 2016 at 04:39

    Ray, You are the only one would would believe a report put together by people with a special interest in more infrastructure. I find your childish naivete to be touching. Check out international rankings of infrastructure quality.

    Engineer, I agree. I’d add that Americans don’t want more airports. Southern California could have added a nice big one in Orange County when that base closed down a few years ago, it already had lots of massive runways. They chose not to for NIMBY reasons. It’s being turned into a park.

    Student, You asked:

    “Why is it such a bad idea for the Fed to coordinate monetary policy with investments in productivity?”

    Because it destabilizes the economy. (That’s the real bills doctrine.)

    And the last thing America needs is more higher ed. We already have far too much—many people going to college who have no business being there, and who don’t need college for the jobs they will do.

    And the private sector is doing lots of “great” things. The iPhone is much greater than a stupid manned mission to Mars.

    I agree that clean energy is a good goal, and I favor a carbon tax.

  45. Gravatar of Student Student
    2. November 2016 at 08:47

    1.) I am not necessarily talking about traditional 4 year higher ed. While I can understand your point to some degree, I simply do not buy the argument that further educating our population isn’t a good idea. Economic growth theory says it is as does human experience.

    The author of existence has sown talent as liberally among the poor as the rich. We as a society need to seek out and cultivate that talent so as to avail ourselves of those talents rather than letting them rot on the vine.

    2.) Perhaps a manned mission to mars is stupid. Maybe. Perhaps the moon mission was a huge waste of resources from which we gained less than we otherwise would have. Who knows. I tend to think not. There seem to have been huge knowledge spillovers from that investment.

    3.) The private sector does great things. Its great at transforming tacit knowledge into codified innovations. It is not so great at creating new knowledge entirely. Did the private sector build the road network in Rome? How about the aqueducts? How about the internet?

    The private sector is most often overly timid… waiting to invest until they can clearly see new technological and market opportunities. How many of those opportunities had their origins in large sums of public money that were spent directly on high risk (and high cost) public missions?

    Mission-oriented public investment put men on the moon, and later, lead to the invention and commercialization of the Internet.

    Its funny you make your case using the iphone as an example. Where did the underlying components making up the iphone come from? Think about the multi-core processor, the touch screen, the lithium ion battery, GPS, etc. Much of those technologies came from basic R&D funded using public monies.

    4.) Is not creative destruction itself destabilizing?

  46. Gravatar of Student Student
    2. November 2016 at 08:53

    There is one more thing about public missions that would be good to put out there. They yield national pride and a sense of shared success that is contagious.

    Suppose we got nothing tangible from the moon mission… That event seems to have inspired a whole generation. It likely drew in many immigrants wanting to be where the action was at. It helped demoralize the communists. That is nothing to scoff at.

    I recall you writing about being a basketball fan at some points. Basketball is littered with examples of this type of phenomenon. Players feed off of the play of their teammates. One guys big play literally spills over to other players and everyone plays better than they otherwise prolly would have.

    This is very similar to what I am trying to describe.

  47. Gravatar of ssumner ssumner
    3. November 2016 at 06:08

    Student, You said:

    “I simply do not buy the argument that further educating our population isn’t a good idea. Economic growth theory says it is as does human experience.”

    Actually neither say that. Growth theory says it’s a good idea until the point where the costs equal the benefits, at the margin. We are far far past that point.

    Public funding of research may be useful. But how much? We are probably doing too much public funding already—check out the new Cowen and Tabarrok paper on that topic, in the JEP.

    And most of the internet was created by the private sector. Roads are often built by the private sector. Hong Kong has one of the world’s best subways, and the only profitable one. It’s private. In many developing countries like India, private schools serve the poor far better than public schools. Government may be useful in some cases, but it’s not as essential as you think.

  48. Gravatar of Student Student
    3. November 2016 at 06:54

    “Actually neither say that. Growth theory says it’s a good idea until the point where the costs equal the benefits, at the margin.”

    Fair and true.

    “We are far far past that point.”

    The jury is still out here. As well, IMO, most econometric modeling in this area is less than very reliable. Spatial-temporal models (ie the regional type analysis) almost always fails to consider the off diagonal elements of the var-cov matrix (if they attempt include spatial spillover impacts at all). How many spatial durbin type applications can you point to in this area? The results from individual type analysis is all over the map.

    “We are probably doing to much public funding already”

    Again. Not so sure about that. Will check out the paper though.

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