Unfortunately, the Fed reflects the views of economists.
Boston Fed President Rosengren says that the Fed pays a lot of attention to the consensus views of economists:
“We’ve done things that are quite unusual. We’re using tools that we have less experience with,” Mr. Rosengren said. “Most of the criticism has been that we’re being too accommodative. That is a concern that we have to put some weight on.”
As William Butler Yeats might say:
The best lack all conviction, while the worst
Are full of passionate intensity.
And what do most economists think?
The best cure for the economy now is time.
That’s the overwhelming opinion of leading economists in a new Associated Press survey. They say the Federal Reserve shouldn’t bother trying to stimulate the economy — and could actually do damage if it did.
The economists are lowering their forecasts for job creation and economic growth for the rest of this year, mainly because of high oil prices. A batch of bleak data over the past month has suggested that the 2-year-old economic recovery is slowing.
The economists now expect the nation to create 1.9 million jobs this year, about 200,000 fewer than when they were last surveyed eight weeks ago. They expect the unemployment rate, now 9.1 percent, to be 8.7 percent at year’s end. Before, they expected 8.4 percent.
Despite their gloomier outlook, 36 of the 38 economists surveyed oppose any further efforts by the Fed to invigorate growth.
That’s right, AD is slowing but there’s no reason to adjust policy. The economy just needs some bed rest, and it will be fine.
Yes, I’m very angry about monetary policy. But from a more dispassionate perspective it’s hard to blame the Fed. After all, shouldn’t their policies reflect the consensus view of economists, not some crackpot at Bentley?
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11. July 2011 at 15:24
Isn’t “leading economists” a euphemism for economists in the pay of corporations? Why should they care about unemployment or GDP growth? Profits have never been higher. The template for this kind of “expertise” is the guy who worked for the realtors during the bubble and probably still doesn’t admit houses were overpriced.
11. July 2011 at 15:40
From Bloomberg–
(Fed researcher) Mary Daly holds up two charts containing 33 bars that all point down. They show eight industries getting hit equally hard after the 18-month recession ended in June 2009, suggesting that much of the past two years’ high unemployment is broad-based and should dissipate as the economy improves.
Daly is among researchers throughout the Federal Reserve system — from San Francisco to Philadelphia and the board in Washington — who are scouring data, examining models and gleaning anecdotes to determine why the jobless rate has remained stuck around 9 percent or more since April 2009. Most are reaching the conclusion that any long-term, structural shifts in the labor market aren’t significant enough to keep the U.S. from returning to a pre-crisis unemployment level of 5 percent to 6 percent by about 2016.”
So, it is demand. It is not structural. We need more demand. We need to print more money.
I am angry too. Bernanke knows better; read his studies on Japan.
Sumner is no crackpot, unless Bernanke circa 1999 was, Milton Friedman was, and John Taylor was (when a GOP’er was in the White House).
11. July 2011 at 15:41
>>After all, shouldn’t their policies reflect the consensus view of economists, not some crackpot at Bentley?>>
At least there are a few other crackpots out there, including prominent voices at Princeton and Berkeley, who want the Fed to do more.
I’m waiting for the letter from 150 economists (not in the pay of the Republican party or its enablers) demanding that the Fed do the right thing.
11. July 2011 at 15:55
Increase AD! Increase AD!
Ok, let’s say we print more money and then ONLY give it to private sector SMB owners with at least 2, but not more than 500 employees.
Tea partiers all.
And we tell them they have to go spend it all buying up new toys to their hearts content. FREE MONEY for the good guys!
THAT’S about the politically viable way to get more AD – give it all to the people who are against more printing.
This way there is no moral hazard – suddenly ADVOCATING for more printing means you don’t get any.
Now we get to see if the bankers and the progressives REALLY want to see an increase in AD for the right reason.
11. July 2011 at 17:19
RobbL, It didn’t say whether they were academic or business economists. But easier money would certainly be good for the stock market.
Benjamin, I don’t know what they are looking for, NGDP has grown at 3.9% during the recovery. What did they expect?
Foosion, Yes, but they need to make much more noise. The fact that my profile is relatively high shows how pathetically weak our side has been. The Fed’s mostly getting pressure from people arguing the economy is overheating.
Morgan, Whatever.
11. July 2011 at 17:23
There must be hundreds of thousands economist in the US. The 38 economists are probably a nonrandom or biased sample. Furthermore, I suspect that many of these “economists” do not have degrees in economics.
11. July 2011 at 18:12
But the Fed, through it´s actions and communication is supposed to SHAPE expectations! It´s not doing its job.
11. July 2011 at 18:55
I read recently that Bernanke expressed regret over his criticism of the Bank of Japan in the 90s. I wonder what he means, when his perspective changed, and why.
12. July 2011 at 18:22
Richard, A, I hope you are right. But 36 out of 38 is pretty lopsided, the sample would have to be quite biased.
Keep in mind that most economists vote Democratic!
Marcus, Maybe.
Mike, Very good question.
12. July 2011 at 19:13
Good to see you blogging again.
The survey does not list the names of most of these economists, but they appear to all be business economists, not academic economists. They reflect the views of their corporate employers. So this is a very biased sample.
With respect to the recovery, there are cleary two Americas. There is the economic elite for who the economy has fully recovered. Firms do not face risks of large scale bankruptcies. Quite on the contrary, profits are way up. The stock market does not appear to be in danger of a major crash, but has gone back to its normal ups and downs. Excecutive salaries and bounuses are higher than ever. For the economic elite, its MISSION ACCOMPLISHED, Its Morning in America, and if it ain’t broke, don’t fix it.
Then there is the other America, the America of ordinary working people who are hurting very badly. If the economy is rotten for this great majority of the people, since they are not affected, that is not a serious concern for the elite and their spokesmen,so they can council patience. These business economists reflect this point of view.
The problem is that economists who think that the high unemploymemt should be agressively addressed with public policy are unfortunately divided into two groups.
1. Keynesians who believe that monetary policy is, under current conditions, not effective, or at least not very much, and therefore expansionary fiscal policy is needed, like Krugman.
2. Quasi-monetarists who believe that fiscal policy is not effective, and therefore expansionary monetary policy is needed, like Scott Sumner.
So even though these two groups understand that increasing aggregate demand is badly needed, they do not speak in one voice and contradict each other.
Unfortunately there are not enough people who believe that both monetary and fiscal policy are effective under current conditions, but that, given current political situations, expansionary monetary policy is the only game in town. Like Full Employment Hawk.
13. July 2011 at 11:59
Full emplyment Hawk;
“The survey does not list the names of most of these economists, but they appear to all be business economists, not academic economists. They reflect the views of their corporate employers. So this is a very biased sample.”
I see no evidence that academic economists are much different. BTW, all you need to do is look at how stocks responded to the Bernanke’s hint of QE3 to know your point about special interests is wrong. Corporations would benefit from eaiser money.
You said;
“There is the economic elite for who the economy has fully recovered.”
No, stocks are still well below 2007 levels.
Both Krugman and I repeatedly call for easier money. How is that not speaking with one voice?
13. July 2011 at 12:00
BTW, good to have you commenting again.
13. July 2011 at 18:25
“Both Krugman and I repeatedly call for easier money. How is that not speaking with one voice?”
Krugman, in a recent comment, argued that QEII did not do very much. He supports easier money, but unenthusiastically. He is still strongly advocating expansionary demand-side fiscal policy, which is just not going to happen with our current congress.
I think the fact that growth in employment virtually stopped when QEII ended requires that view to be reexamined. The economy picked up strength when QEII was stongly anticipated and stalled when it became clear that it would end.
I think that the reason that QEII did not do more is that, due to the phasing out of the stimulus and the budget cuts at the beginning of the year, has become contractionary, and most of what QEII did was to offset (somewhat more than offset) the contractionary effect of the fiscal policy. If this view is correct, it implies that if fiscal policy had been neutral instead of contractionary, its effects on output and employment would have been significantly stronger. And it also implies that if QEII had not happened, the contractionary effects of the contractionary fiscal policy would have slowed the growth in output and employment much sooner, probably last Fall.
I hope someone who is in a position to do empirical research will follow this up.
13. July 2011 at 18:27
“due to the phasing out of the stimulus and the budget cuts at the beginning of the year, has become contractionary,”
CORRECTION: That should be “due to the phasing out of the stimulus and the budget cuts at the beginning of the year, FISCAL POLICY has become contractionary,”
14. July 2011 at 08:52
FEH, I just don’t see how fiscal policy is contractionary. The defcit is huge.
14. July 2011 at 15:05
It is not the LEVEL of the deficit, but, rather, the change in the deficit, that determines whether fiscal policy has an expansionary or contractionary effect on the current level of output. (This entire discussion assumes that the Fed does not offset the effects of the changes in the size of the deficit, of course.) The current level of the deficit is already incorporated into the current level of aggregate demand and therefore output, which would be different if the current size of the deficit were different. If the size of the deficit increases because of increases in government purchases, or cuts in taxes, this increases aggregate demand and therefore output and is therefore expansionary. If the size of the deficit decreases because of reductions in government purchases or increases in taxes, this decreases aggregate demand and therefore output, and is therefore contractionary.
Or looking at it dynamically, the current deficit is already incorporated into the level of NGDP, which would be different if the current deficit were different. An increase in the deficit due to increases in government purchases or cuts in taxes increases NGDP growth and is therefore expansionary, while a decrease in the deficit due to reductions in government purchases or increases in taxes decreases NGDP growth and is therefore contractionary.
The reductions in government purchases due to the stimulus phasing out and the cuts in government purchases passed earlier this year therefore reduced AD, or NGDP growth and had a contractionary effect on output. But this was MORE than offset by QEII until it became clear that it would not be continued, at which time its effect died out. Therefore QEII was more effective that it appears. Without it the stall in the increase in employment that is now occuring would have happened sooner, probably last Fall. Or if government spending had not been cut, QEII would have had a significantly stronger effect on output and employment than it did.
By combining Keynesian analysis of fiscal policy with Quasi-monetarist analysis of QEII, it becomes clearer that QEII has a significantly stronger effect than is generally recognized.
More generally, it is my view that combining Keynesian analysis of fiscal policy with Quasi-Monetarist analysis of monetary policy makes it possible for me to look at macroeconomic policy with two eyes, which provides me with depth perception, so that I can get a 3 dimensional picture of what is happening.
15. July 2011 at 09:56
FEH, It’s actually more complicated than either of us are claiming. It’s the change in the expected future path of deficits that should matter. What I meant is the deficit is large. And deficits are very costly in terms of future tax obligations.
31. March 2012 at 13:57
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