Vindication is sweet, recovery would be even sweeter

My first claim to fame (at least among my colleagues) was when I wrote an open letter to Krugman in March, and he actually responded.  Of course his response was a quick dismissal of my plea for more monetary ease.  He did so by denying my claim that he had several times acknowledged that massive unconventional QE might work.  At the time, he favored fiscal policy, partly because he thought monetary policy had run out of ammunition, and partly because he felt that central banks were too conservative to do the really unconventional things necessary, like promising to inflate. 

Here’s how I described his views in June:

At a certain level Krugman would agree with much of what I have said.  He also thinks the conservative attitude of the BOJ is a big factor limiting the effectiveness of base expansion.  But the way he interprets these facts is very different.  As I read Krugman, his attitude seems to be something like the following (which is my interpretation, not his words):

“Ah, what a pity it is that these conservative central banks aren’t willing to commit to a modest amount of inflation.  That would be the easiest way to boost AD, and the least costly.  But as they aren’t willing to adopt effective policies, we can assume that monetary policy is ineffective.  Now let’s move right along and look at fiscal policy.”

At this point Krugmandirects his moral outrage at the conservative knuckleheads in Congress who won’t accept anything bigger than a measly $800,000,000,000 stimulus package, which he thinks is woefully inadequate.

In my view Krugmanis mixing science and advocacy in a very misleading and inappropriate way.  When he evaluates central banks, he seems to take a deterministic, scientific, and clinical attitude, as if studying a colony of ants.  (I assume that for entomologists there is no “should.” The only question is how ants behave.)  Central banks are assumed to be impervious to public pressure.  On the other hand his stance toward fiscal policy is much more normative.  Now he is an advocate, he’s part of the game, passionately calling for more stimulus.  But I don’t see how this makes any sense.  If we are going to take a deterministic view of things, it seems likely that Congress is also far too conservative to implement the sort of spending that Krugman advocates.  Indeed, hasn’t that already been shown?   Couldn’t one just as reasonably say: “Since Congress clearly won’t do what it takes, we must fall back on the Fed as our only hope for the sort of stimulus that the economy needs.”

And here is how Krugman described our only hope today:

So if we’re going to have any real good news, someone has to take responsibility for creating a lot of additional jobs. And at this point, that someone almost has to be the Federal Reserve.

Krugman is very influential—imagine if he had said this in March.  Would people like DeLong have been writing posts saying that monetary policy was ineffective because rates are at zero?  I don’t think so.

I thought this was the most amusing line in Krugman’s article in today’s NYT:

But while economic analysis says that we should have a large second stimulus, the political reality is that the president “” faced with total obstruction from Republicans, while receiving only lukewarm support from some in his own party “” probably can’t get enough votes in Congress to do more than tinker at the edges of the employment problem.

The Fed, however, can do more.

Question:  In all of world history, who are the two economists most famous for denigrating the Fed’s ability to “do more” once rates hit zero?  (Hint, both names start with K.)  Who gave me this reply when I suggested that massive QE might be effective?

OK, I see that Scott Sumner has written an open letter to me. But I’m puzzled. He writes:

“I think you have acknowledged that there is some level of quantitative easing that would boost demand. If I am not mistaken you are concerned that if such a policy boosted inflation expectations sharply, the Fed would have to quickly sell off these assets, suffering massive capital losses.”

Um, you are mistaken. I’ve never said such a thing. Did you mean to address this letter to someone else?

My view, which I thought was pretty clear, is that the liquidity trap is real: no matter how much the Fed increases the monetary base, it has no effect, because it just substitutes one zero-interest asset for another.

I won’t rehash all the evidence that his misrepresented his own views.  And before Krugman fan’s write in saying; “There is no contradiction, he’s always said inflation targeting can work, he doesn’t think that merely increasing the money supply can help once rates hit zero”  you might want to check out the next paragraph in the new Krugman piece:

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

Yes, it could do a lot indeed.  Last March it would have been even more helpful.  On March 1st I asked Krugman to endorse this sort of plan.  I am glad that he has finally done so.  Now let’s consider why the Fed has refused to do more.  Here is Krugman’s explanation:

So why isn’t the Fed doing it? Part of the answer may be political: Ideological opponents of government activism tend to be as critical of the Fed’s credit expansion as they are of the Obama administration’s fiscal stimulus. And this has probably made the Fed reluctant to use its powers to their fullest extent. Meanwhile, a significant number of Fed officials, especially at the regional banks, are obsessed with the fear of 1970s-style inflation, which they see lurking just around the bend even though there’s not a hint of it in the actual data.

There’s a bit of truth in what Krugman is saying.  But let’s not lose sight of the fact that the Democrats recently won a big electoral victory.  They control the Presidency.  They have 60 Senate seats.  They have an overwhelming majority in the House.  They have the non-Fox, non-WSJ press.  Most leading economists are Democrats.  Sure there are a lot of loudmouths opposing more monetary stimulus.  But where were the voices on the other side back in March?  A time when the conservatives were even more discredited than today?  Last March, how many liberals even understood that monetary stimulus could play a major role in reducing joblessness?  And who is their intellectual leader on economic questions?   How can anyone be surprised that the voices of inflation hawks have drowned out the other side, when the other side never made an effort to engage the debate.  Until now.

Rather than look back in anger, I’d like to end on a positive note.  Despite my many disagreements with Krugman, I’ve always considered him to be a very persuasive writer.  It’s great seeing him write editorials like the one I have taken these excerpts from.  Here’s how the op-ed piece ends:

But there’s also, I believe, a question of priorities. The Fed sprang into action when faced with the prospect of wrecked banks; it doesn’t seem equally concerned about the prospect of wrecked lives.

And that is what we’re talking about here. The kind of sustained high unemployment envisaged in the Fed’s own forecasts is a recipe for immense human suffering “” millions of families losing their savings and their homes, millions of young Americans never getting their working lives properly started because there are no jobs available when they graduate. If we don’t get unemployment down soon, we’ll be paying the price for a generation.

So it’s time for the Fed to lose that complacency, shrug off that fatalism and start lending a hand to job creation.

I couldn’t have said it better.  And that is precisely why this is such a big deal.  We need the rhetorical skills of people like Paul Krugman (and Brad DeLong, and Matthew Yglesias, and many others who have been saying similar things recently.)

HT:  Marcus Nunes

PS.  After I wrote this I realized that I should have acknowledged Joseph Gagnon’s paper more explicitly.  It is his work not mine that is having an impact on the blogosphere.  It is Gagnon who has worked out an explicit proposal that includes a lot of data analysis.  My point is that I did call for unconventional QE and either inflation or NGDP targeting last March, and it seems to me that Krugman now thinks those policies are our best hope today.  So I take some satisfaction from that.  But I should have emphasized that it is Gagnon who is actually having a major impact on the blogosphere.  And of course our views differ in some respects—so he shouldn’t be blamed if you don’t like NGDP targeting, that’s my idea not his.

PPS.  A commenter named William pointed out that my statement that most leading economists are Democrats was a bit sloppy.  I don’t have any survey evidence in front of me, but the surveys that I have seen over the years suggest that economists vote Democratic by very wide margins, but that is different from say they “are Democrats.”

PPPS.  I just reread DeLong’s post where he endorses Gagnon for chair of the Fed.  I agree.  I noticed that at the end he suggested that QE with long term bonds isn’t really monetary policy, as it works by changing risk and maturity, not simply by changing the monetary base.  I think that’s an overly narrow definition of ‘monetary policy,’ but there is no point in quibbling.  But here is what I do claim.  If you go back through the blogosphere and look at Krugman, Delong or indeed most bloggers from six months to a year ago, there were very few echoing my argument that a highly aggressive Fed policy was our best hope.  They weren’t just saying that nothing more can be done within some narrow definition of monetary policy, there were widespread comments that the Federal Reserve System could do no more.  And thus we had to rely on fiscal policy.  So I still say something has changed.  Maybe it is just a change of tone or rhetoric, not deep theoretical beliefs.  But words matter.  And this change makes me a bit more optimistic.



46 Responses to “Vindication is sweet, recovery would be even sweeter”

  1. Gravatar of Giles Giles
    11. December 2009 at 07:31

    Great to have all these exchanges in one post.

    What do people think of the Gagnon piece? My concern about that degree of easing would be the potential disruption on asset markets, who would be continually anticipating the exit.

    I would have thought much less ought to be enough, if they commit to making it permanent.

  2. Gravatar of William William
    11. December 2009 at 07:53

    Most leading economists are Democrats.

    Do you have a source for this claim, or is this just your observation?

  3. Gravatar of JimP JimP
    11. December 2009 at 08:02

    This is all good news. And now we must bang away on this – over and over. All over the blogesphere – and with our elected representatives.We are a democracy and we do not wish the deflationary fate of Japan. This is what Bernanke is storing up for us and we will just not accept it.

    Employment recovery is absolutely central. And only the Fed do it. And they can do it. And if they do not do it then 10% unemployment will surely lead to a trade war with China, for which Martin Wolf in getting ready. And that would be an utter disaster.

  4. Gravatar of Dan Dan
    11. December 2009 at 08:05


    This poll of 500 member of the AEA in 2008 found 48% Democrats, 17% Republicans, 27% Independents, and the rest scattered elsewhere. In the same poll, Obama led McCain 66-28.

  5. Gravatar of malavel malavel
    11. December 2009 at 09:12

    What would a FED whose only goal was to get the republicans back in power do? Stealthily tighten the money to make the stimulus packet look like it failed and make the economy go down the drain. And then send a hit team to some unknown blogger who’s the only one who can expose them.

  6. Gravatar of marcus nunes marcus nunes
    11. December 2009 at 09:29

    From Malavel´s comment you should rush and hire some bodyguards!

  7. Gravatar of William William
    11. December 2009 at 09:42

    Interesting, thanks Dan. Still though, if 48% identify as Democrat, that means 52% identify as not-Democrat. Hence the word “most” is inaccurate.

  8. Gravatar of David Stinson David Stinson
    11. December 2009 at 09:47

    Hi Scott.

    Having followed your posts as best as I could for quite some time, I’m sympathetic (for what that’s worth) to your arguments about what the Fed should have done a year ago to avoid the NGDP contraction.

    But I’m also inclined to think that now that the perhaps previously well-oiled “expectations management” channel of monetary policy has broken down due to, among other things, loss in confidence in the Fed and b) greater uncertainty in the minds of investors and individual as to which underlying model best explains monetary policy’s impact on the economy.

    I think that consequently there is not only a much greater variance from individual to individual in the means of their individual probability distribution of forecast inflation outcomes, but also that each individual’s probability distribution exhibits much more variance around the mean than might have been the case before the breakdown.

    In other words, it is not only the overall inflationary expection that matters but the heterogeneity and perceived riskiness of those forecasts. People will be less apt to make irreversible commitments or investments – the short term and the availability of an exit strategy will be uppermost in their minds. People will “wait and see” before making irreversible commitments. From a monetary policy perspect, this means that a) the Fed may have difficulty creating commonly-held “actionable” expectations without some verification from “actuals” along the way, b) expectations will follow as much as lead economic improvement, and c) other mechanics of monetary transmission may as a result be more important than expectations formation, at least initially. In other words, in terms of our previous discussion, getting people to spend money balances on components of current GDP (as opposed to existing assets) because they believe money will be worth less in the future may be difficult.

    On top of all that, my sense is that many investors believe some degree of economic restructuring is required and that fiscal policy and qualitative (or credit) easing by Fed is perhaps obscuring the nature of, or delaying, the necessary restructuring. So when economic data ostensibly show improvements, people are cautious about the inferences they draw. People question whether tha data reflects something real and sustainable or something manufactured by stimulus that may be transitory.

    Sorry for the long intro.

    My question is, in the absence of a regime of NGDP targeting, what do you see would be the specific transmission mechanism(s) by which proposals such as Gagnon’s would have the desired effect?

  9. Gravatar of Dan Dan
    11. December 2009 at 09:57

    William, given the fact that 2/3 of economists voted for Obama, that the Dem to GOP ratio in a two party country is greater than 2:1, and the margin of error on the single poll I referenced, I’d say you’re just being picky at this point.

    In case you can’t get over it, here are more polling results showing the Dem:GOP ratio at 2.9:1 among economists.

  10. Gravatar of Dan Dan
    11. December 2009 at 10:04


    Are there other economists or groups of economists that you think are currently where Krugman was in March – publicly disagreeing with you despite the fact that their true opinion is significantly in line with yours?

    For those that don’t agree with you and also don’t fall into the Krugman category, would you identify more of them as a) forgetful of their pre-2006 agreement with the macro model you are working with (Bernanke comes to mind); b) misunderstanding your model (I hope there aren’t too many economists that just don’t get this stuff); or c) knowledgeably and legitimately disagreeing with many of your premises (Austrians, perhaps)?

  11. Gravatar of Philo Philo
    11. December 2009 at 10:06

    It’s too late for the Fed to hire a hit on Scott, now that Krugman’s on board.

    Scott will go down in history as the George Warren of our time!

  12. Gravatar of marcus nunes marcus nunes
    11. December 2009 at 10:07

    The Japan Paradigm: Up until the early 1970´s, japanese inflation averaged about 4.5%, a little above the average for the OECD countries. Following the first oil shock, inflation (CPI) climbed over 20% in 1974.At this moment Japan begins its “inflation obsession”, in no small part aided by the worst labor manifestation since the 1940´s. Japan was probably the first country to adopt an (unofficial) inflation target and by the end of the 70s inflation was below 5%. Monetary policy in Japan has been influenced by exchange rate policy. The US “mandated” that the yen could not depreciate (between 1980 and early 85 the DM for example depreciated over 70% relative to the dollar while the yen was essentially constant). But when the dollar depreciated 70% relative to the DM between early 1985 and early 1988, the yen also appreciated by an equivalent amount. So monetary policy has normally been “tight” in Japan. After the BoJ gained independence in 1998, the “target” became stable prices (zero inflation). Curiously, after 1995, the appreciating yen trend dissapeared. This is the moment that China´s surplus with the US became greater than Japan´s. The QE implemented between 2001 and 2006 was to stop the CPI deflation. Once prices stabilized again QE was removed. No wonder the ongoing crisis was hard on Japan, which experienced strong deflation. Meanwhile, different from Japan China bravely resists US and international calls for yuan appreciation. Like any obsession, an inflation obsession may be bad for a country´s health. It seems the “sickness” is spreading, a possible reason for Krugman to have changed discourse.

  13. Gravatar of David Pearson David Pearson
    11. December 2009 at 10:15


    You make too much out of your disagreement with Krugman. He has always said that an inflation target would be helpful, and his comment on a liquidity trap had to do with merely creating reserves without raising inflation expectations. In fact, its ironic, but Krugman actually believes we need a HIGHER inflation target than your 2% to change expectations. I think this is where you and Krugman fundamentally disagree: you believe there is a monetary free lunch, and that the Fed can hit a 2% target, raise RGDP, and have no impact on long-term expectations. I think if you ask Krugman (and here I am putting words in his mouth), he would say there is a trade-off involved: the Fed would have to un-anchor expectations, and it should to reduce unemployment. He’s not the only one that thinks this. James Hamilton has also published something along similar lines.

  14. Gravatar of JimP JimP
    11. December 2009 at 10:17


    The George Warren of our time.

    But then, there are worse things.

    And where is the Roosevelt of our time. He seems to have gotten lost.

  15. Gravatar of David Pearson David Pearson
    11. December 2009 at 10:19

    BTW, I also think its somewhat amusing that you spend so much time focusing on Krugman for his “inconsistencies” surrounding inflation targeting, and say very little about Bernanke’s current stance. In a speech just a few days ago, he told us that his plan to achieve his employment/inflation target involved: 1) stabilizing the financial system; 2) looking for an exit to stimulus. Is this the same man that penned the 2003 BOJ speech on QE? How is it that he could have changed his mind so dramatically? And why isn’t Scott Sumner arguing that Bernanke, rather than Krugman, is intellectually sloppy? Krugman is influential? What about the Chairman of the Fed?

  16. Gravatar of William William
    11. December 2009 at 10:24

    …given the fact that 2/3 of economists voted for Obama… I don’t think this says much about the economists as much as it says about the candidates – McCain’s quote that he didn’t really understand economics was repeated ad nauseum, as well as the fact that everything collapsed under a Republican president.

    …that the Dem to GOP ratio in a two party country is greater than 2:1… Again though is a false dichotomy – for many (most?) economic issues L(l)ibertarians and Republicans can be lumped together. Imposing a two-party perspective on the data immediately invalidates 35% of the economists in the poll. I don’t consider that sort of analysis valid.

    In case you can’t get over it, here are more polling results showing the Dem:GOP ratio at 2.9:1 among economists. Hmm, did you forget to paste the link or am I just not seeing it?

  17. Gravatar of JimP JimP
    11. December 2009 at 10:38


    A good question. Bernanke does indeed know – he must know – that what he is doing is wrong and crazy. Why is he doing this? I keep asking. Why?

    As I have linked to before – there is this paper from Mike Woodford at the NY Fed.

    Conventional and and Unconventional Monetary Policy.

    Woodford is a friend of and co-author with Bernanke. Bernanke surely knows about this paper. And the paper clearly shows that, in a fully worked out New Keynesian framework, with all the mathematical boxes checked, price level targeting is “much much” (Woodford’s own words) better than inflation rate targeting in a situation like we are in now. And Woodford is Mr. academic expert on this stuff.

    Why is Bernanke not acting on this?

  18. Gravatar of marcus nunes marcus nunes
    11. December 2009 at 10:44

    By way (with comments) of Mark Thoma, Dani Rodrick makes some qualifications on Yuan appreciation. The inconsistency is that one calls for more expansive MP in the US and a more restrictive MP in China!

  19. Gravatar of JimP JimP
    11. December 2009 at 11:01

    Hurrah for DeLong

    begin quote
    And this is the puzzle. Yes, uncertainty is enormous. And any one policy might not work. But that any one individul policy initiative might not work is not an argument for not trying anything–unless you are happy if things develop according to the current-policy forecast and we see an unemployment rate between 9% and 11% for the next year and a half at least.

    Thus if I were in the administration I would be trying everything:

    pushing the Fed to buy lots of long-term private bonds by selling some more of its stock of Treasuries…
    pushing the Fed to engage in additional quantitative easing with still more of its current stock of Treasuries…
    pushing the Fed to set an explicit inflation rate target–and to set its GDP deflator inflation target at 3% per year…
    pushing the Fed to declare that if the price level falls below its target it will push to catch it up to where it had hoped to see it…
    more aid to the states to keep them from turning even more into fifty little Herbert Hoovers…
    more infrastructure spending…
    bringing forward in time spending on health care access…
    bringing forward in time spending on controlling global warming…
    tax-increase triggers should the deficit be too large in 2015 and beyond to calm fears that America’s fiscal policy will be unbalanced in the long run…
    more banking recapitalization…
    more taking on of private-sector tail risk by the government…
    the full (albeit temporary) nationaization of mortgage finance…
    And then reinforce whatever seems to be working.
    end quote

    Indeed – get the heck going !!!

    Have some press conferences and talk !

    Get going!

  20. Gravatar of marcus nunes marcus nunes
    11. December 2009 at 11:15

    No more doubt: DeLong is Krugman´s “echo”!

  21. Gravatar of ssumner ssumner
    11. December 2009 at 11:15

    I’ll have to take these comments later, because I am working on another important post. But a few quick points. I added two postscripts, one of wich addressed William’s concerns. Regarding David Pearson’s two comments, which raise important questions:

    David, You must have missed this strong criticism of Bernanke that cited his 2003 paper, from just a few weeks ago:

    If Bernanke announced he was adopting my views, the post would have been 10 times as enthusiastic. I am trying to influence Bernanke by influencing the conversation among economists. I assume I have zero chance of influencing him directly.

    Yes, Krugman has always supported inflation targeting. But Gagnon isn’t proposing inflation targeting, he is proposing QE. And when I proposed the same thing back in March, Krugman said it wouldn’t work. I also criticized him for assuming a second fiscal stimulus is more politically feasible than monetary stimulus. I said monetary stimulus is our best hope. Now he says the same. I don’t claim to have a better understanding of abstract theory than Krugman, or to have changed his mind on any basic question, but I do think I have good instincts on what real world policies are more feasible and effective. And I think his recent piece definitely moves much closer to my position. And I’ll bet most people who have followed me and him all year would acknowledge the shift.

    I’ll take the other comments later.

  22. Gravatar of Dan Dan
    11. December 2009 at 11:31

    “I don’t think this says much about the economists as much as it says about the candidates”

    That’s a good point.

    “Imposing a two-party perspective on the data immediately invalidates 35% of the economists in the poll. I don’t consider that sort of analysis valid.”

    The poll gives us a number for Libertarians: 3%. It also gives us a number for Independents: 27%. I don’t think there is a serious case to be made that less than 3% out of the 27% of economists that self-identify as Independents are reliable Democratic votes. But even if it was the case that there was a true third party among economists, I don’t see that it would take away from the larger point Scott was making.

    “Hmm, did you forget to paste the link or am I just not seeing it?”

    Whoops, sorry:

  23. Gravatar of StatsGuy StatsGuy
    11. December 2009 at 11:37

    I’m quite certain Mr. Gagnon is aware of your views… Others have seen the connection too, but he has the advantage of having worked at the Fed, and now at the Petersen Institute.

    But, just so you get a sense of how vicious and loud the other side is, read the comment thread to Gagnon’s post here:

    And this was an invited post on a _friendly_ blog.

  24. Gravatar of JimP JimP
    11. December 2009 at 12:01

    Or listen to the other side on the Kudlow show. They are economic moralists. They hate all they see – and think we are getting exactly what we deserve.

  25. Gravatar of Phil P Phil P
    11. December 2009 at 12:17

    Scott, I was just wondering what you think of the UK’s QE policy, and whether it will provide a fair test of your theories. Thanks.

  26. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. December 2009 at 12:27

    I was overjoyed by Krugman’s column. He finally came to his senses.

    I’ve been reading Krugman for years and you, Scott, for just a few weeks. I too perceive this as a major shift in emphasis by Krugman. He’s skirted around such issues on his blog but in my memory this is the first time he’s addressed them specificly in a column.

    Fiscal policy is clearly second best not just for economic reasons, but for political reasons as well. I think this fact finally dawned on Krugman. It’s probably much easier for economists to wrestle the FOMC to the ground with unrelenting logic than it is for them to pointlessly argue with politicians (who are essentialy economically illiterate and rendered myopic by their overwhelming need to get reelected).

    I read several econ blogs and I sense a consensus steadily growing among economists in this direction. I think that you rightly deserve much of the credit.

  27. Gravatar of Bill Woolsey Bill Woolsey
    11. December 2009 at 13:21

    DeLong says it is not really monetary policy? OK, we can use all the rhetorical support we can get. Still…where is it that they learn that monetary policy _means_ open market operations with T-bills?

  28. Gravatar of David Pearson David Pearson
    11. December 2009 at 13:33


    I couldn’t find a criticism of Bernanke’s current stance in the link that you provided. There is something about policy immediately post Lehman, but that is history and a matter of academic debate. Today’s Fed stance, on the other hand, is a matter of policy debate. As I wrote, in a recent major speech, Bernanke effectively laid his cards on the table: his policies have and will be directed at “fixing” the banking transmission channel, and not at stimulating Aggregate Demand. In the speech, he makes the following points:

    1) the reduction in FF rates constituted “an easing of monetary policy”.
    2) the Fed’s credit easing asset purchases have, “have helped banks make room on their balance sheets for new credit to households and businesses”

    All along, Bernanke has been telling you that this is a “Credit Easing” policy aimed at the banking system, and not a “QE” policy aimed at AD. Krugman, for his part, believes that this policy mistake will lead to a “double dip” in 2010. This renewed recession, in turn, could easily land us in deflation. What do you think? Is the Fed making a policy mistake today (as opposed to last year — now ancient history)? What are the consequences of this mistake going forward?

  29. Gravatar of Scott Sumner Scott Sumner
    11. December 2009 at 14:23

    Giles, Recently I have put more weight on an explicit NGDP (or price level) target path. But the Fed doesn’t seem to want to do that. It has done a bit of QE already (althought not what it seemed.) So more QE would help, even if it isn’t the optimal policy.

    JimP, Agreed. Who said “the sleep of reason produces nightmares?” I’d add that the sleep of sound economic principles produces economic policy nightmares like protectionism.

    David Stinson, Your comments points to the need for an explicit aggregate target. Without that explicit target, there will be greater variance to forecasts. If we can’t have that, QE can still boost demand in several ways:

    1. It might raise NGDP expectations, even if the variance isn’t reduced. That boosts current velocity.
    2. It may lower long term interest rates.
    3. It may produce an excess cash balance effect. An extra $2 trillion is a lot of base money. It may be more than banks and people want to hold.

    But a price level or NGDP target would be better.

    Dan, You asked;

    “Are there other economists or groups of economists that you think are currently where Krugman was in March – publicly disagreeing with you despite the fact that their true opinion is significantly in line with yours?”

    I’m not famous enough for other economists to publicly agree or disagree with me very often. Even Mankiw, who cited my EMH posts several times doesn’t comment on my views on monetary policy. But I do recall Mankiw advocating a 3% inflation target, level targeting, which in my view would get the job done. I think it is fair to say that Mankiw and most other well-known economists have not been very aggressive in criticizing Fed policy for being too tight. But I also think many would be receptive to the sort of policy Mankiw suggested a few months back. I think there are a lot of open minds out there, and if we don’t get lower unemployment soon, then other economists will be more vociferous in calling for additional mionetary stimulus.

    You asked;

    “For those that don’t agree with you and also don’t fall into the Krugman category, would you identify more of them as a) forgetful of their pre-2006 agreement with the macro model you are working with (Bernanke comes to mind); b) misunderstanding your model (I hope there aren’t too many economists that just don’t get this stuff); or c) knowledgeably and legitimately disagreeing with many of your premises (Austrians, perhaps)?”

    I think slight differences on a few issues have proved to be more important than I expected. I have lots of posts that discuss this. The tendency to misidentify demand shocks as real shocks, until many years later. The confusion over indicators of the stance of monetary policy. Confusion over liquidity traps, etc.

    Thanks Philo. Warren is a hero of mine.

    Marcus, I agree with your summary of Japan. The new government is pressuring the BOJ to do something about deflation, because it threatens their (big spending) plans for the economy. If they succeed, Japan may repeat the US (1930s) and Argentina (2002) experience of bad (anti-business) governments succeeding in promoting growth because they followed deflationary governments.

    David, In my previous reply I forgot to address this very important point:

    “I think this is where you and Krugman fundamentally disagree: you believe there is a monetary free lunch, and that the Fed can hit a 2% target, raise RGDP, and have no impact on long-term expectations.”

    It is Krugman who is wrong here, and indeed inconsistent with his own views on SRAS. He says that the SRAS is very flat right now. That is probably right. But it means that a 8% NGDP growth target would probably produce about 2% inflation and 6% real growth. I’m not saying it would be exactly that breakdown. But I think it would be pretty close. And Krugman also thinks this, or at least claims to. So all the Fed need do is inject enough money to get 8% expected NGDP grwoth, and we’d get the real growth Krugman wants, without much inflation. He doesn’t seem to understand that his view of monetary policy conflicts with his often stated comments on the flat SRAS. If you think in terms of NGDP, not inflation, you don’t fall into that trap.

    Thanks marcus, I’ll look at that.

    JimP, I added one more postscript on DeLong.

  30. Gravatar of Scott Sumner Scott Sumner
    11. December 2009 at 14:38

    Statsguy, I know he was aware of my views, as we corresponded by email a few weeks back. He sent me his paper and noted that while our views are not always the same on all points, we share an interest in more monetary stimulus. Indeed I corresponded with him just today to make sure it was OK to make that point in the postscript. (I don’t quote emails unless the person says its ok.)

    Yes, the panic over inflation is crazy. In the 1930s there was the same thing, I think Hawtrey called it “crying fire, fire in the midst of Noah’s Flood” or something to that effect.

    Phil, I am not an expert on their policies, but would point to two differences with the US.

    1. It is easier for the UK to raise NGDP, as they can depreciate their currency with less complaints. (Although they still get some from the EU.)
    2. Even if they get faster NGDP growth, it will have less effect on RGDP in than in the US, as they are a smaller, more open economy, and hence more reliant on world AD. World AD also affects us, but we are more reliant the domestic AD.

    I am not an expert on the UK. Do they pay interest on reserves? Also note that Brown’s policies are bad from a supply-side perspective.

    In general, I believe monetary stimulus will work immediately (on asset prices and expectations), or not at all.) If the pound is too strong, or TIPS spreads are too small, then the policy has failed and a more aggresive stimulus is needed.

    My theory would be refuted if we got rapid growth in NGDP, but it was mostly inflation. Until NGDP growth expectations rise sharply, I’d just say we haven’t done enough, not that my theory is wrong.

    Mark, Since you are a long time Krugman reader, your perspective is very welcome.

    Bill, I agree. I was going to be more sarcastic, but I’m in a good mood today.

  31. Gravatar of JimP JimP
    11. December 2009 at 14:39


    Your new post has comments moderated. You have to accept them before they are posted. Do you really wish to do that?

  32. Gravatar of Scott Sumner Scott Sumner
    11. December 2009 at 14:44

    David Pearson, You said;

    “I couldn’t find a criticism of Bernanke’s current stance in the link that you provided.”

    You are a tough guy to please. You don’t consider this to be critical?

    “Who does that sound like? Perhaps someone at the Congressional hearings could ask Bernanke why if these policies would have been good for Japan in 2003, they would not have been equally good for America in 2008-09.”

    I certainly consider it critical.

  33. Gravatar of Scott Sumner Scott Sumner
    11. December 2009 at 14:46

    JimP, Sorry. I’ll look into it next week. I don’t want to do that. I guess it’s something the tech people installed to try to prevent bugs. I’ll try to approve them often this weekend.

  34. Gravatar of Lurker Lurker
    11. December 2009 at 17:37

    This article (pdf) from Econ Journal Watch concludes:

    After making the rough adjustments, when all the qualifications are in, including the results of surveys by others, we have the following plain facts: the AEA is a predominately Democratic organization. Those responsible for the journals are especially Democratic, and they run the journals in a manner that tends to reflect that particular ideology.

  35. Gravatar of ssumner ssumner
    12. December 2009 at 06:43

    Thanks Lurker.

  36. Gravatar of Doc Merlin Doc Merlin
    12. December 2009 at 17:49

    “But a price level or NGDP target would be better.”
    Completely agreed Scott. However, I am still of the notion that the fed’s short term power is impotent and the long term power tends to be somewhat blind. We need free market alternatives to centralized planning. I also am not convinced it would have helped during 2008.

    The fed acted as if it was doing NGDP targeting this time around. The first half of 2008 it looks as if NGDP was set to grow 5%. Notice the jump in MZM and in AMB that occurs very soon after NGDP starts falling.

    I agree that paying interests on reserves was stupid, and would account for the huge jump in AMB, but MZM, and M2 jumped as well, in larger absolute amounts. If paying interests on reserves had decreased the money multiplier so much that it caused a drop in the money supply, as you and others seem to suggest, M2 wouldn’t have risen so much along with AMB. Because of this, I have become un-convinced that NGDP targeting would have helped between 2008 and 2009.

    As a side note: Comparing MZM to M2 may be useful for predicting Recalculation-ary/inflationary_crashes like the first half of 2008.

  37. Gravatar of ssumner ssumner
    12. December 2009 at 20:06

    Doc Merlin, I don’t follow. M2 did increase in 2008, but nowhere near as much as the base, which doubled. The money multiplier unquestionably fell sharply.

  38. Gravatar of Doc Merlin Doc Merlin
    13. December 2009 at 01:11

    Yes, you are correct, seems I misread the plots. (I feel sheepish). The higher aggregates rose ~20% less in absolute terms than the AMB rose. It seems I misread the graphs. Anyway, the obvious mistake on the relative jumps in AMB and M2, aside, my first point still works.

    I don’t think the fed can effectively keep NGDP up. They bought lots and lots and lots of short term t-bills, and mortgage debt. It got so crazy that the mortgage backed security buying program was buying mortgages from originators at significant /face value/ markup as of January. They now own the housing market. In 2009 they bought more than the entire 2009 mortgage market. If thats isn’t helicopter drop money I don’t know what is. Yet they couldn’t keep NGDP up.

    On a note: Re: “recovery would be even sweeter”, the fed has already called bottom on this recession, lets see how it plays out.
    One other note: One big change that happened recently that may have huge ramifications was the US government nationalized subsidized student loans. Another is that the government+fed now own close to a majority of housing mortgages in the US.

    For the 2009 MBS sales calculations to the fed:

  39. Gravatar of Doc Merlin Doc Merlin
    13. December 2009 at 01:12

    Oh, I should add, over very long periods of time, I can see them being able to effect NGDP. But within a few quarters I don’t see them being able to have much effect on NGDP.

  40. Gravatar of Bill Woolsey Bill Woolsey
    13. December 2009 at 04:55


    It can be a bit confusing reading Sumner on these matters. He believes (with good reason) that the monetary base is key. The problem is that the demand for the base increased a lot. Equivalently, base velocity fell a lot. The various Ms, M1, M2, and MZM, are unimportant really.

    However, many economists pay attention to the Ms. Sumner knows this. And so, sometimes, he takes that into account. The money multiplier fell and M2 velocity fell. From that perspective base money rose more than enough to offset the decrease in the multiplier, but not enough to offset the decrease in velocity.

    It is really two ways to saying the same thing.

  41. Gravatar of Bill Woolsey Bill Woolsey
    13. December 2009 at 05:03

    Ready for my paranoid conspiracy theory?

    Monetary policy “can’t work,” which is made true by defining monetary policy to mean open market operations in T-bills (using interest rate targets,) because the alternative is to expand government spending enough to help build Swedatopia.

    Now that the Democrats in control of Congress and the White House are unwilling to make any more progress towards a larger, more redistributionist public sector, we are left with the prospect of high unemployment through the midterm elections if not all the way until 2012. Perhaps the reactionary Republicans will return? Looking at this Tea Party business, they might even end up with a mandate to roll back the progress made! And so, suddenly, monetary policy can work.

    An obvious contradiction? No, because it isn’t really monetary policy. Purchasing something other than T-bills and impacting the risk and term maturity structure directly is banking policy.(?)

  42. Gravatar of Janice Turner: more evidence for the miserabilists? « Freethinking Economist Janice Turner: more evidence for the miserabilists? « Freethinking Economist
    13. December 2009 at 06:24

    […] Scott Sumner is vindicated. His approach seems to be adopted by Paul Krugman without much attribution. […]

  43. Gravatar of Scott Sumner Scott Sumner
    13. December 2009 at 08:23

    Doc Merlin. You need to look at some of my earlier posts on the Fed’s decision to pay interest on reserves. It definitely was not a helicopter drop, that term applies to zero interest money. In addition, they kept saying the reserve injections were temporary. For a helicopter drop they would have had to be permanent. The Fed can definitely increase NGDP by targeting the price of NGDP futures contracts, there is no doubt about it. And if I am wrong? So what, the US would own the entire world–is that so bad?

    Bill, Not only do I agree with your conspiracy theory, but about a month ago I had a post where I said the Democrats would be outraged if only they knew the Fed could boost AD, and that the Fed’s inaction was going to cost them the 2010 midterms. And a few weeks after that I started to see lots of liberal commentators talk about the need for a more expansionary Fed. Now I very much doubt Krugman even reads my posts. But I do think that what I suggested has been independently discovered by lots of other people, and it is becoming a widespread view among liberals. After all, we are all looking at the same picture, including the same political picture, so it’s not surprising that lots of people are reaching similar conclusions. Still, I feel a bit of vindication that I was telling Krugman this in March, and he in only now coming around to the view that monetary policy is our only hope.

  44. Gravatar of John Smith John Smith
    14. December 2009 at 01:00

    I guess you are talking about printing money. What a great idea why has nobody else thought about printing money and just hand it out to everyone. If it was only that easy. There are no easy fixes to this problem.

  45. Gravatar of Scott Sumner Scott Sumner
    14. December 2009 at 06:53

    John. No, that’s not what I am talking about.

  46. Gravatar of Doc Merlin Doc Merlin
    18. December 2009 at 08:24

    Thanks Bill.

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