Where is the “honest dialogue”?
Here is Ben Bernanke in 1999, talking about the situation in Japan:
With respect to the issue of inflation targets and BOJ credibility, I do not see how credibility can be harmed by straightforward and honest dialogue of policymakers with the public. In stating an inflation target of, say, 3-4%, the BOJ would be giving the public information about its objectives, and hence the direction in which it will attempt to move the economy. (And, as I will argue, the Bank does have tools to move the economy.)” (1999)
One of the things that I find most infuriating about the current policy environment is the lack of an “honest dialogue” about the choices faced by monetary policymakers.
Go back to the 1990s and early 2000s and look at the discussion about inflation targeting, involving elite economists like Ben Bernanke. One common theme was that the inflation target should not be too high, but definitely needed to be high enough to keep economies out of the zero rate trap. As far as I know, there was widespread agreement on this point.
Now that we’ve discovered that a 2% inflation target does not keep us above the zero rate bound, especially in recessions, I’d expect exactly the sort of honest dialogue that Ben Bernanke suggested back in 1999. Instead, we have a profoundly dishonest dialogue, dodging the real questions:
1. When do you recall Bernanke, Yellen or any other central banker, telling government leaders that we faced a choice between a massive central bank balance sheet, and a higher inflation target? Or a choice between negative IOR and a higher inflation target?
2. Back in 2009-11, do you recall a Fed official telling Congress that the Fed was holding back on monetary stimulus, out of fear they might be embarrassed at some time in the future by large capital losses, even though those losses would net to zero for a consolidated Federal government balance sheet perspective, and even though the reluctance to pursue monetary stimulus further would result in a great deal of unnecessary unemployment? I don’t. I recall vague discussion of “costs and risks” associated with QE, but nothing that would give Congressmen any idea of the actual choices we faced.
3. How often did Fed officials tell Congress that we faced a choice between moving to a higher inflation target, and relying more heavily on fiscal stimulus? I don’t recall any such discussion.
There’s a price to pay for dodging these important questions. We are sleepwalking into a world where the central bank will ask for assistance from fiscal policymakers, and they won’t provide it, or at best they’ll provide too little to make a difference.
PS. Just to be clear, I am not advocating a higher inflation target, because we have better options. The problem is that we are also not going to adopt those better options, and instead will end up with something far worse.
PPS. I’m not alone; Paul Krugman was equally frustrated back in 2010.
PPPS. Speaking of honesty, I just finished volume 5 of “My Struggle”. As I’ve gotten older, I have fewer and fewer experiences of the sort of “aesthetic bliss” that was common when I was younger, especially in arts like music, painting and film. And now at age 60 I’ve stumbled upon my all time favorite novel. (The entire set, not just volume 5) I am profoundly grateful to Karl Ove Knausgaard. (BTW, my dad’s name was Karl, and his mom spoke Norwegian.)
And how come reporters keep asking him about the title? How could it be titled anything else?
PPPPS. I won’t post much over the new few weeks, due to summer vacation. I will have a few posts at Econlog, which have already been written.
Tags:
12. August 2016 at 09:33
Of course, it’s counter-productive (to stimulus) to even mention inflation. I have been amused today by renewed warnings about crowding out, this time the warnings issued with a new twist; indeed, in one instance, his twist I suggested qualified him for the Olympic gymnastics team. At some point (hopefully) warnings of crowding out will need to be heeded, but after all these years who will pay attention.
12. August 2016 at 09:39
Jeez, when Volcker brought inflation down to 5% he said it is “Miller time job done.” Now if inflation gets close to 2% the FED has a hissy fit.
The CPI averaged 3% in a little more between 1982 and 2008. A good time.
When did US economists develop the 2% orthodoxy, and why is it so sacred?
I suspect NGDPLT would be better, but a 2.5% to 3.5% inflation band target would probably work pretty well too.
Q of the day: why is it food trucks have gained the grudging acceptance, but not other types of commercial activity in trucks? Why not trucks that sell books, clothes, small consumer gadgets, or provide repairs for iPhones? Remember doughnut trucks?
12. August 2016 at 10:50
Jeez, when Volcker brought inflation down to 5% he said it is “Miller time job done.” Now if inflation gets close to 2% the FED has a hissy fit.
Both the Consumer Price Index and the GDP Deflator increased at rates of about 3.3% per annum during the 1982-91 business cycle.
12. August 2016 at 10:53
Sumner: “One of the things that I find most infuriating about the current policy environment is the lack of an “honest dialogue” about the choices faced by monetary policymakers.” – what if money is neutral? The evidence points that way. Thus there’s no honest dialogue because there are no real choices. I hate to break it to you, but there’s no “there, there”; monetarism is like Oakland, or maybe Walley World in National Lampoon’s Vacation–it doesn’t exist in real life Scott.
12. August 2016 at 10:53
@Benjamin: You’re always flogging the ‘truck businesses = good’ thing, and it’s probably a good idea to allow more of that kind of thing, but do you really think it will move the needle? Are there armies of people wanting to sell donuts and gadgets and books but they just can’t because they aren’t allowed to drive around with a truck doing that?
12. August 2016 at 10:56
Baghdad Bob (Manila Ray?) keeps on posting that money is neutral. If he posts it enough, he thinks we will start to agree.
12. August 2016 at 11:20
Art, The CPI rose at a 4% rate during that cycle.
msgkings, Except when Ray makes arguments that only make sense if money is not neutral.
12. August 2016 at 11:55
“One of the things that I find most infuriating about the current policy environment is the lack of an “honest dialogue” about the choices faced by monetary policymakers.”
…wow Scott I think the blinders are coming off…the are either low IQ idiots….or they are just a sort of high end actor who sorta believe in what they are saying…but really know the real job they are doing is to defend against intellectual attacks….talk some crap to the media….and make it all look “official” so that the men that make the real decisions can keep up the trick. They don’t have to tell us what the real game is.
12. August 2016 at 12:01
Perhaps Bernanke simply did not believe that there could be “honest debate” with institutions like Congress? Congressional approval ratings have been 20% or less more or less for a whole decade (sometimes in single digits), so basically nobody trusts them.
According to Matt Yglesias’s reading of Bernanke’s memoir (http://www.vox.com/2015/10/8/9472807/ben-bernanke-ngdp-targeting), the reasons were likely political. Bernanke did not believe, for example, that NGDP targeting could be explained to Congress.
Enjoy your vacation.
12. August 2016 at 12:03
Yeah you tell them Sumner. I mean, you’re all about honest dialogue such as the very real world and very possible and very beneficial choice to shut down the Fed and liberalize money production and distribution.
I mean, you have every right to criticize them for purposefully narrowing the permissible range of debate to what suits their own interests.
Lolololol
12. August 2016 at 12:16
Congressional approval ratings have been 20% or less more or less for a whole decade (sometimes in single digits), so basically nobody trusts them.
IIRC, those approval ratings tanked in the mid 1970s and never recovered.
Harry Truman related that when he arrived in Congress, he thought to himself “I can’t believe I got here”. He said after six months he thought to himself “I can’t believe they got here”. For all that, the Social Security Act had a two-digit page count, not a four-digit page count laden with special interest carve outs. A decade later, the 79th and 80th Congresses managed a rapid reduction in the dimensions of the military while industry re-directed productive capacity. Over the period running from 1946 to 1951, Congress turned in 4 balanced budgets. The McConnell / Boehner Congress can’t even kill off a decrepit dog like the Export-Import Bank.
12. August 2016 at 13:34
Scott, did you see the news reports about July retail sales that came out today? Month over month change was 0% while year over year was 2.3%. The recent producer price index report shows very little inflation. All of the articles I’ve seen about these topics stated that this will likely cause the Fed to hold off on any interest rate hikes and keep its “easy money” policies. I wonder if we’ll ever see a time where those who cover economic news or those who provide analysis to reporters reach the understanding that low interest rates are not necessarily easy money.
12. August 2016 at 14:05
New research on inflation expectations.
http://www.bloomberg.com/news/articles/2016-08-12/fed-officials-challenge-decades-of-accepted-wisdom-on-inflation
12. August 2016 at 15:00
The honest dialogue on monetary policy will be along shortly after the honest dialogue on Social Security, Medicare, Health Insurance, Occupational Licensing, Unionization, anti-Discrimination laws….
12. August 2016 at 16:21
Msgkings–yes, I think dezoning property, decriminalizing push-cart vending, and also decriminalizing any type of truck business, would push the needle quite a bit.
There was a time when if wages or opportunities were limited, people could move out west and try to make a go of it on their own on some virgin land (forgive the land theft aspect of this). Labor was scarce.
Urbanization curtailed opportunities for self-employment, and that has been magnified by the panoply of laws pretty much preventing any ordinary guy without much capital from starting up a business.
I would prefer an economy without minimum wage laws, but I would like to see that in combination with the radical Improvement of self employment opportunities, through the decriminalization of push-cart or truck vending. Dezoning land and wiping out licensing would help too.
One of The Oddities of Modern Life is the same people who lionize free-enterprise also insist on living in single-family detached housing districts which are commercial deserts by law.
If you ask an American “libertarian” about panel-wagon brothels, you have ended the conversation.
The real American Credo is that “I am for those laws, tax codes, regulations and government spending that benefit me, and I’m against those that do not. That is my bedrock principle, from which I will not waver!”
12. August 2016 at 16:52
And how come reporters keep asking him about the title? How could it be titled anything else?
Isn’t that obvious? There must be dozens of expressions for “My struggle” in Norwegian and he picked “Min kamp”.
I still don’t get what you like about the books. In comparison the very first page of Broch’s Death of Virgil alone is way better than the whole six pieces of junk by Knausgård with their thousands of pages.
Those books are so indifferent that you can’t even get really furious about them. It’s just a very big sleeping pill. They should give Knausgård a Nobel prize for finding a fail-safe cure for insomnia.
12. August 2016 at 16:59
I hope you have a great summer vacation especially since I heard that oftentimes Americans only got around 10 days per year.
12. August 2016 at 17:21
Scott,
I’m starting to think pushing NGDP targeting has been a distraction. I think the important thing to focus on is to get people who agree with you on the FOMC. That is, start getting market monetarists appointed.
That will be tough, considering that most of the “elite” economists up for consideration tend to be of the new or old Keynesian variety, if they’re even sophisticated enough to have a complete or coherent perspective on monetary policy at all. And of course, not all of the FOMC members are even elite economists.
So, it seems to me some networking is in order to get some market monetarists in the ear of people like Hillary Clinton. As incomplete as the monetary reforms have been in Japan, it was Abe who helped push for them, more than anyone else.
Since you have some readers of this blog with the financial resources to get a candidate’s attention, I suggest starting sizable donations to the Clinton campaign and getting her ear.
12. August 2016 at 17:26
Perhaps the principle problem with the market monetarist movement is that none of the market monetarist economists are politically connected, or even have the goal of becoming connected. Academics can only have so much influence.
12. August 2016 at 17:39
Gordon, Good question.
Everyone, I’m going to be charitable today and assume that most of the comments are meant as jokes.
12. August 2016 at 19:00
Scott,
I can now see you’re in the habit of personally insulting people who’ve never done likewise to you. I hope you’re proud of what you’ve become over these past several years, because you certainly seem to be.
13. August 2016 at 01:18
@Sumner: “msgkings, Except when Ray makes arguments that only make sense if money is not neutral.” – that’s not even a coherent sentence. Par for you.
Why don’t you tell us why your theory of why NGDP will monotonically increase in a one-to-one smooth, continuous fashion to either a heli drop or the Fed printing more money? Explain pls why that should follow? Nothing in nature nor economics is that linear. Do you realize your NGDPLT by its own terms can result in unstable spurts of NGDP growth? If the Fed overshoots or undershoots its target, it (and the US taxpayer) loses money. Again, the eraser on a textbook being tilted analogy: more tilt should make the eraser move more rapidly, but in fact the eraser does not move at all until such time the static friction is exceeded, then it rapidly slides off. Non-linear movement. Why should the economy behave any differently to your NGDPLT? Even if we accept money is non-neutral (which I don’t) you cannot deny that your scheme will lose the Fed lots of money when the economy (nominally) fails to grow with Fed money creation. Agree?
@Scott Freelander – “I hope you’re proud of what you’ve become over these past several years, because you certainly seem to be.” – Tyler Cowen is Sumner’s master, as Sumner agrees, and brought Sumner out of obscurity. Sumner does have his fans, mainly inflationists, such as found here in Greece who think the low-productivity but high-inflation decade of the 1980s was Greece’s golden age, because it was run by worker-friendly socialists of the PASOK party.
13. August 2016 at 05:55
I am wondering if helicopter money which is not disced by market monetarist followers of Freedman, would be less complicated than NGDP targeting.
Keeping your eye on the NGDP is what the Fed should do, we all agree on that. If NGDP craters while inflation continues steady, which is exactly what charts show happened in the beginning of the Great Recession, the Fed should have been watching it and should have intervened accordingly.
I have a theory. The Fed did end up saving big business. But that is because they had the good bonds. The MBSs were deemed to be crap, and so the Fed just hung the real estate industry out to dry and ended up liquidating the economy.
I wonder if the Fed would do the same if the junk bonds funding the oil patch all went bad.
13. August 2016 at 07:25
Scott
Have a good holiday. I am just finishing up my two weeks, which have been very good for the soul despite the rubbish weather here in the Scottish highlands. Hope yours is better. By the way a Kuasgaardian comic for you; http://english.bouletcorp.com/2013/10/08/our-toyota-was-fantastic/
13. August 2016 at 10:06
Typo alert. You write:
“Not that we’ve discovered that a 2% inflation target does not keep us above the zero rate bound….” But I think you mean:
“Now that we’ve discovered…”
13. August 2016 at 15:21
Well, my approach is to assume the whole point of this blog is to be a joke.
13. August 2016 at 18:36
The comment placed at 20:48 is another fraud by msgkings and should be deleted.
13. August 2016 at 19:40
Scott, Sometimes the comments here get so stupid I just can’t take it anymore.
And when did I ever give the impression of being proud of myself?
Thanks ChrisA
Thanks Jim.
Art, I deleted it.
14. August 2016 at 05:55
Scott,
I’m sorry you feel I’ve wasted your time here. I could say that, as an economist, you should understand incentives well enough to realize you’re playing an active role in shaping the comments here in ways that seem to dissatisfy you.
I would think it obvious that now 7 years since I first noticed market monetarists blogging, some progress toward building support for effective monetary policy reform have been made, but not nearly enough. It seems obvious re-evaluation of approaches is needed.
You can dismiss these comments all you want, but the reason interest groups make political donations is often to gain access to politicians at the very least, and to shape policy to the degree possible.
I think that, in retrospect, collecting donations toward building NGDP betting markets, for example, have been a waste of resources, for a number of reasons. Similarly, I think too much rhetorical focus on NGDP targeting has occurred, at the expense of much more realistic alternatives.
These and other approaches I’ve seen applied strike me as the sort of thing academics might think would work, but are always doomed to insufficiency. It’s time to stop thinking like academics and start thinking like political operators.
14. August 2016 at 07:19
@Freelander, you are right about the NGDP targeting. For one thing, the whole reason we are screwed up is that betting requires collateral. An NGDP targeting would tie up even more bonds than are already tied up. We have betting by the wealthy being multiple trillions upon trillions of dollars. All collateral does is put some skin in the game, but it won’t cover all the losses.
But collateral is what is distorting the value, and yields, of treasury bonds, corporate bonds and junk bonds, which do not reflect proper risk in their yields.
And while big business benefits from this, the nation as a whole gets a pretty lousy deal in return, even more is we listen to Paul Krugman. He wants to bless us but I showed it didn’t feel as though we were being blessed by the Nobel Prize winner: http://www.talkmarkets.com/content/bonds/paul-krugman-wants-to-bless-us-but-it-is-mostly-for-wall-street?post=103243&uid=4798
14. August 2016 at 09:07
Benjamin Cole highlights a fascinating analysis by Ed Yardeni:
https://thefaintofheart.wordpress.com/2016/08/14/ed-yardeni-ponders-stagnant-demand-and-weak-productivity
14. August 2016 at 11:10
@Scott Freelander who says: “It’s time to stop thinking like academics and start thinking like political operators.” (re Sumner). — I hate to tell you, but economists like Sumner are fine political operators. In fact, Sumner doesn’t do any original research and spends his time on this blog and elsewhere advocating political solutions. They don’t call it “political economy” for nothing. Happily, the damage he’ll do is limited since money is neutral.
14. August 2016 at 19:54
Scott, There is no way I could ever get Clinton’s ear, and in any case Presidents don’t control monetary policy, economists do. We need to change the way economists think, Presidents barely even know what monetary policy is. They think it’s control of interest rates.
Ray, You said:
“In fact, Sumner doesn’t do any original research”
You need to start being funny again, or there’s no point in me responding.
14. August 2016 at 19:57
Travis, I don’t quite see how excess capacity could lower productivity growth, if the employment rate is rising.
14. August 2016 at 20:56
@Art Deco: God damn it I’m not the one posting using your name. That may not have been you but it wasn’t me. I’m sick of this, stop dragging me into your drama. Seriously, look elsewhere.
15. August 2016 at 02:12
@sumner – I am correct, Google Scholar shows you don’t do any original research (I don’t count op-eds), save this one paper below, from 1989, 27 years ago. And it’s interesting that the one paper below finds there’s no Phillips Curve for AS shocks, which actually rebuts your NGDPLT. Put another way: if NGDPLT ‘works’ it will only be during AD shocks. But how do you know if the aftermath of the Great Recession is lack of AD or a more ‘structural’ lack AS? Your own paper says NGDPLT won’t work for AS shocks (no money illusion there). Essentially, on your own terms even assuming money is not neutral, your NGDPLT is a simple plea for ‘let’s try it and see if it works’. Hardly reassuring to a $18T economy. – RL
“Real Wages, Employment, and the Phillips Curve”, Scott Sumner and Stephen Silver, Journal of Political Economy, Vol. 97, No. 3 (Jun., 1989), pp. 706-720 – “In this study, we found that real wages were either pro-cyclical or counter-cyclical depending on the sample period chosen. Employment changes generated by aggregate supply shocks were associated with pro-cyclical real wage movements, while during years dominated by shifts in aggregate demand, real wages were highly counter-cyclical.”
15. August 2016 at 02:14
@myself- Sumner’s paper shows that during AS shocks there’s also no ‘sticky prices’, which only come into play with AD shocks.
15. August 2016 at 07:17
Scott,
Of course Clinton wouldn’t care what you think. You’re missing the whole point. It’s not about YOU getting in her ear. It’s first and foremost about beginning a formal, professional lobbying effort. No one would have the time to explain NGDPLT, especially via an NGDP futures market, to her.
The benefits of a generally looser monetary policy would need to be explained to her in terms she can understand, including especially the prospects and benefits of higher and more robust economic growth. She needs to understand just how damaging another recession could be to her Presidency with the current Fed, given that I think we can expect recessions to be more severe and longer lasting than need be, with continued falling interest rates exacerbating the problem.
I’m saying gather those with money you know and suggest bundling and making super-PAC donations to begin to get the attention of Clinton and members of Congress who can make a difference. Hire a political consultant/lobbyist. Begin to explore political options. Find out who really influences her and work toward influencing them.
It’s simply wrong to say Presidents don’t control monetary policy. FDR certainly had some control over monetary policy, acknowledging that was a different Fed era under very different circumstances. More recently, history records that Arthur Burns was receptive to pressure from Nixon to loosen monetary policy to help get him re-elected. Given that the President nominates most of the FOMC members, she undoubtedly has some influence over monetary policy, if she chooses to use it. She just needs to let members know that those who don’t play ball will not be renominated. Also, if the Democrats take over both Houses of Congress(unlikely, but not impossible), it’s not impossible that Congress and the President can take action to change monetary policy, via a change in mandates, increased accountability, etc.
I assume your replies to me are sloppy, because you’re just not going to invest much thought to an idea you obviously see as dumb. But, lobbyists exist for a reason.
15. August 2016 at 08:10
The claim that economists make monetary policy is just naive. The Fed is a thoroughly political creature.
15. August 2016 at 08:58
Gary,
I have no problem with NGDPLT as an idea. The problem is, the yield curve continues to flatten and market monetarists like Scott keep banging away in ways that don’t seem likely to move the needle much more in the near future. Things are bad enough in the country now with falling future growth expectations. Imagine how bad they can get with another recession and even more mismanagement near the ZLB.
15. August 2016 at 09:01
Chuck,
Scott understands this. He’s just not putting much effort in his replies, because he thinks this is a dumb idea. If he thought it was a good idea, presumably he’d already be working in that direction. He’s no different than anyone else in that he’ll take convincing just to pay any real attention to the idea.
Also, he apparently thinks I’m a dummy, so I’m probably not the right messenger and am likely wasting my time.
15. August 2016 at 09:58
Chuck, It really isn’t. This is a common refrain from both sides of the political spectrum. In reality the federal reserve is as apolitical as it gets.
15. August 2016 at 10:44
@AH
Do you believe your own bullshit, or do you just expect others to?
15. August 2016 at 11:58
Dishonest institutions do not lead a honest dialogue.
15. August 2016 at 14:19
http://www.frbsf.org/economic-research/publications/economic-letter/2016/august/monetary-policy-and-low-r-star-natural-rate-of-interest/
Enjoy your victory lap!
15. August 2016 at 22:29
Fred, too bad John C Williams did not acknowledge all the ways we see the massive demand, and hoarding, of bonds. He didn’t say how NGDP targeting or inflation targeting would impact the collateral.
He is talking a good game, but alas, until the issues of bond hoarding are addressed, it seems like just talk.
16. August 2016 at 03:28
The Williams piece is horrible because he misunderstands the main problem;
‘Our understanding of the economy and monetary policy are underpinned by the concept of the natural interest rate—that is, the short-term real (inflation-adjusted) interest rate that balances monetary policy so that it is neither accommodative nor contractionary in terms of growth and inflation. In this Letter, I focus on the medium-term value of the natural rate—essentially what inflation-adjusted interest rates will be in an economy at full strength.’
That’s just wrong. Economists would be better served by banning discussions of monetary policy that even mention interest rates. Because they are NOT the price of money.
They’re the price of BORROWING other people’s money, not the price of BUYING other people’s money. Milton Friedman knew, and stressed, that. So did pre-Fed Chairman Bernanke.
And this;
‘One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries ….’
Is risible. Ain’t possible…for all the reasons Friedman pointed out decades ago in his famous debate with Walter Heller (another famous economist who didn’t understand that interest rates are not the price of money).
16. August 2016 at 04:05
@Sullivan
Tell that to Sumner. He uses the natural rate all the time, then tries to deny it.
16. August 2016 at 04:13
@Patrick R. Sullivan
Good post. It sounds like something ssumner would say. But then (like Chuck) I never really got why he likes to talk about the Wicksellian interest rate quite often. Maybe I understood it once but I forgot it by now. So how are you bringing both positions together again? I’m sure it’s possible, I just can’t figure it out right now.
16. August 2016 at 05:53
But, as Paul Krugman rightly says, the price of bonds is the real issue of the day, not the price of money.
http://www.talkmarkets.com/content/bonds/paul-krugman-wants-to-bless-us-but-it-is-mostly-for-wall-street?post=103243&uid=4798
16. August 2016 at 06:25
Ray, Your claim that I only published one paper is close. I published about 35 papers in academic economic journals. So you are off by only about 34. Not bad!
16. August 2016 at 06:34
Scott, I think we need to influence other economists. Hillary will take her views from elite economists, as she doesn’t understand monetary policy, and can’t be expected to understand it.
My recent answers are short as I’m on vacation.
Everyone. As Patrick says, I think in a perfect world we’d discuss the stance of monetary policy without using interest rates. But as others said, I do frequently refer to the natural rate on a sort of “When in Paris, speak French” basis. I try to explain my ideas in Keynesian. As an aside, it would be useful for Keynesians to occasionally explain their views in terms of the supply and demand for base money.
16. August 2016 at 06:44
Thanks Fred, That’s interesting, I’ll do a post after my “vacation”.
16. August 2016 at 07:17
@sumner
You regularly speak of interest rates not being low as such, but rather high relative to the “natural rate”. How is this Keynesian “lingo”? If you mean something else you should simply say it, I think you’re BS’ing here.
16. August 2016 at 10:26
I think the Fed guy Williams is saying forget monetary policy, just have the government go deeper into debt. Krugman would love this guy. I wondered why he mentioned NGDP targeting and interest rate targeting when he really wants government to spend more. Kocherlakota and Summers and Williams must fear bond shortages. We are onto them.
http://www.frbsf.org/economic-research/publications/economic-letter/2016/august/monetary-policy-and-low-r-star-natural-rate-of-interest/
16. August 2016 at 10:30
I think there are bond shortages, but, getting the government to weaken itself just so Wall Street can get rich on some bonds is not a fair deal. We should make Wall Street pay a premium by taxing them, if they want more bonds.
16. August 2016 at 12:01
Gary,
What do you mean by bond shortages? Clearly, one can interpret the state of the markets as wanting more stimulus, including fiscal, but fiscal doesn’t work due to monetary offset, and since monetary stimulus doesn’t increase the debt, why not just use monetary stimulus?
Also, I would trust Congress and the White House even less than the Fed when it comes to developing effective stimulus programs, even absent monetary offset.
16. August 2016 at 14:20
Did you read the article, Freelander? I call you Freelander because there are two Scotts. Please read it. As Krugman said, shortages of treasuries is the hot button issue in macroeconomics today.
It is so hot button that about 10 people talk about it. But it should be a hot button. On that I agree with Krugman. And I agree with you, Freelander, that monetary stimulus is better than fiscal. I am all for real, non sterilized helicopter money.
But bonds as collateral are a form of gold. They are something our government has, that we should get more for in return. That is the essence of the article, with the Krugman quotes. You should read those quotes carefully and you will see that he is convinced there is a bond shortage. The decline of interest rates to near zero could indicate that. Summers and Kocherlakota also say there is a shortage of bonds. Blackrock says there is a shortage of bonds.
I think other collateral should be used than sovereign bonds. But, I don’t see that happening. I think Wall Street should be taxed to offset the fiscal spending or Wall Street should do something for America in order to get the extra bonds it needs for the betting market.
http://www.talkmarkets.com/content/bonds/paul-krugman-wants-to-bless-us-but-it-is-mostly-for-wall-street?post=103243&uid=4798
16. August 2016 at 20:31
@sumner – as I said, I don’t include op-eds and ‘observations’ as econ R&D. Besides the one cite, I found only these three cites as your serious econ papers:
Privatizing the Mint, Scott Sumner, Journal of Money, Credit and Banking, Vol. 25, No. 1 (Feb., 1993), pp. 13-29 [sounds interesting, but unfortunately out of print]
The Impact of Futures Price Targeting on the Precision and Credibility of Monetary Policy, Scott Sumner, Journal of Money, Credit and Banking, Vol. 27, No. 1 (Feb., 1995), pp. 89-106 [ah, like a prequel to today’s Sumner, who has morphed into a monster! lol. Also not available except in unreadable ‘thumbnail’ fashion]
Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly ‘Open Market’, Scott Sumner, The B.E. Journal of Macroeconomics, Volume 6, Issue 1 (Oct 2006)
(Not available online. Abstract: “More importantly, I show that policy future markets can address some of the key weaknesses of orthodox macroeconomic theory and policy, particularly the lack of consensus over structural models. Under this sort of policy regime, open market operations would reflect the views of not merely 12 individuals, but rather the consensus opinion of all those who choose to engage in open market operations. Even an issue as basic as the optimal monetary instrument would no longer be determined by the monetary authority, instead, each individual participant in the policymaking process would choose their own policy indicator. I will also show that a universal FOMC can improve the effectiveness of monetary policy even if the average level of decision-making skills on the expanded FOMC is inferior to the average skill level of the current 12 members.”)
[Nice, and only a small step away from Major Freedom’s proposal that money be completely left to not just 12 individuals but entire society. Free banking Dr. Sumner? Go back to your “Privatizing the Mint” roots. Remember, if money is neutral, there’s no harm.
BTW, your view about inflation being good is echoed by a lot of common people here in Greece, where I am at the moment. They feel (the ones without much money in the bank) that prices are too high, and a return to the inflationary drachma would free up the seemingly seized up Greek economy. Indeed it sounds tempting. Your thoughts? But not while on vacation…unless you’re bored. Enjoy your holidays.
16. August 2016 at 20:35
@myself- I, re-reading the last cite again I see that it’s not just 12 people but the entire futures market that’s the ‘expanded FOMC’, my mistake. How this would be different from ‘fighting the Fed’ is not clear. I need to read the paper, but it seems the Fed is not doing any betting against the market but following the market. Thus, money is indeed neutral in this third Sumner cite (or so it seems). Too bad these papers are not free but gated.
Enjoy your holiday.
17. August 2016 at 03:51
‘I do frequently refer to the natural rate on a sort of “When in Paris, speak French” basis. I try to explain my ideas in Keynesian.’
I understand why you do it, but you should fight the temptation. When you’re trying to teach someone a new language you don’t let them lapse into their native tongue. You make them speak the language you want them to learn.
And, at the best, interestrateese is a sloppy mental habit, while for most it’s evidence of intellectual confusion.
17. August 2016 at 05:40
Freelander, a co-contributor to Talkmarkets sums it up best:
“Private demand for the bonds, however, has sky-rocketed. Demand is so high that the U.S. can afford to pay historically low interest rates. The 10-year U.S. Treasury hit a record low of 1.34% earlier this year, before bouncing back to about 1.58%, currently.”
http://www.talkmarkets.com/content/financial/global-central-banks-unload-us-debt-at-unprecedented-pace?post=103625&uid=4798
17. August 2016 at 08:38
Gary,
Yes, I read the article and I understand the impression, but I wouldn’t take it too literally. I am very convinced that the Fed would offset fiscal stimulus.
17. August 2016 at 10:53
Well then S Freelander, the stimulus won’t do main street a bit of good if the Fed offsets. The central bankers are a bunch of cowards, except for Draghi, maybe. He has the TLTRO program but it is small scale heli money.
17. August 2016 at 16:56
Gary,
My concern with Scott and the other market monetarists I read is that, while they’ve obviously had some success in raising the profile of their perspectives, I think it’s wasteful to focus so much on differences between them and others who favor more monetary stimulus, for example. A competent FOMC that wanted to get the economy to real GDP potential could certainly do so with the current regime in place. Our focus should be on pressuring them to stimulate and holding them accountable. Perhaps then we can push for more specific reforms in the future.
I’m increasingly convinced, for example, that promoting NGDPLT is a distraction. I am thus even more convinced that promoting the use of NGDP futures markets is a worse distraction, being even less directly related to the central point that the economy needs more stimulus. I think people like Scott are making what they see as the perfect the enemy of the good.
Scott acknowledges that central banks are risk-averse, for example, but yet is not only pushing for a targeting regime change, but setting up a subsidized futures market? It seems these goals are ridiculous on their face, in the short-run. They may be perfectly worth pursuing over the long-run, but in the long-run, “…”.
We’d be much better off, for example, with a higher inflation target. If we get that, then maybe we can push for level targeting. We can take this in a more step-wise fashion, with each step the Fed takes thus requiring less courage and being less controversial.
Scott does make good points about higher inflation being politically unpopular, which is why the Fed should establish a clear, but implicit target. Perhaps they can also talk about stimulating the economy until interest rates are sustainably at some level in the past.
To gain credibility, initially, I would like to see a half-point rate cut, followed by another half-point cut, if need be. That would make it pretty clear to markets that the Fed is at least initially serious about providing significantly more stimulus.
17. August 2016 at 17:03
Also, I’d like to say that, given that Scott thinks convincing economists is the best way to get to better monetary policy, how about having as many economists as possible sign an open letter to the FOMC calling for more monetary stimulus?
People who might sign on, in addition to the market monetarists, could be Krugman, Rogoff, Summers, the Romers, Mankiw, Woodford, etc. There are pretty big names on the side of at least trying more monetary stimulus, and I think unity on this issue is more important than each camp making its points of difference.
17. August 2016 at 17:08
While I’m streaming thoughts here, an idea for making more monetary stimulus acceptable to the more conservative FOMC members might be to have a structural reform agenda, but that’s probably asking too much of Washington, to say the least. It would be great though to have the White House on the side of more stimulus and willing to in essence cut a deal with the FOMC that makes the latter feel better about increasing stimulus.
17. August 2016 at 20:00
But while Summers and others talk about monetary stimulus, they really just want more bonds. Like girls wanting to have more fun, central bankers want more bonds created. They know only the government can do that, that they cannot create more bonds.
The bonds are gold. Summers and many the others you cited, are likely NK guys who just want more bonds.
They talk infrastructure, but they want more bonds. They may just be owned by Wall Street, IMO. That is My Opinion Only.
There is no other reason, S Freelander, for those guys to act the way they do. Kocherlakota was even honest about it when he wrote an article: The World Needs More US Government Debt. https://www.bloomberg.com/view/articles/2016-04-27/the-world-needs-more-u-s-government-debt-narayana-kocherlakot
What I don’t get is why Sumner is so quiet about this issue. There is something going on there that doesn’t add up.
17. August 2016 at 21:14
Gary,
The Fed is already overly timid about inflation and has said future decisions on rate hikes will be “data dependent”. So, what good does it due to issue more debt, if it will push the data such that rate hikes become more likely? Why wouldn’t the Fed just choke off the inflation that’d otherwise occur?
18. August 2016 at 04:06
This may be of interest:
https://www.bloomberg.com/view/articles/2016-08-18/a-physics-lesson-for-central-bankers
18. August 2016 at 05:04
Now for some honest dialogue on medicine;
http://blogs.wsj.com/cfo/2016/08/16/fed-survey-obamacare-causing-companies-to-cut-jobs/
————–quote————-
Many companies are cutting jobs in response to rising health care costs spurred by the Affordable Care Act, according to a new survey by the Federal Reserve Bank of New York.
Roughly one-fifth of service sector and manufacturing company executives said they are reducing the number of workers in response to provisions in the healthcare law, according to the Empire State Manufacturing Survey and the Business Leaders Survey.
————-endquote———–
Who’d a thunk it!
18. August 2016 at 06:02
S Freelander, I didn’t say the Fed would issue this debt. Kocherlakota, Summers and Krugman. The Fed are New Monetarists and don’t much do anything. They want government to issue debt to create more bonds. And of course, government got burned before, in the Great Recession, and is wary.
I just believe the government could do deficit spending if it charged a premium on the bonds, like surcharge, or in return a transaction tax on Wall Street. Something must give if the government is going to sell its gold on the cheap.
18. August 2016 at 13:27
Gary, the Fed doesn’t issue debt. I’m saying that since the Fed is anxious to raise rates, an increase in inflation/real GDP growth could cause them to want to raise rates, thus choking off any benefit of fiscal stimulus.
I’m not sure why you’re focusing on a “bond shortage”. We’re just talking about fiscal stimulus.
18. August 2016 at 17:56
S Freelander, the motive for fiscal stimulus is bond shortage. That is the only real motive.
You must talk about them together or you can’t understand what is going on. I don’t think you get it.
18. August 2016 at 19:03
Scoot Sumner and anyone else:
I think the Bank of Japan has to go to the helicopters.
BOJ cornered as Japanese banks seen running out of bonds to sell
BY SHIGEKI NOZAWA
The nation’s biggest banks are running out of room to sell their government bond holdings, pushing the central bank closer to the limits of its record monetary easing. Japan Post Bank Co. and the nation’s three so-called mega-banks have almost halved their sovereign bond …
The BoJ is becoming the largest shareholder in Japan too….
18. August 2016 at 19:13
Side note on economists and the FOMC. Scott Sumner says the economics profession needs to come around to Market Monetarism, before the FOMC does.
I wonder about this. For example, let us say there are economists of the stripes X, Y, and Z.
But only economists of stripe X are ever appointed to the FOMC, Then, it is economics or politics that determines FOMC decisions?
Who whispers in Hillary’s ear on who to select for the FOMC? Has the economics profession really become obsessed with microscopic inflation rates in the past 20 years, or a subset of economists who are political retainers?
Then remember also there are rotating voting members from the regional banks on the FOMC. Richard Fisher, formerly of Dallas comes to mind. I do not think Fisher cared what anybody anywhere thought, he only thought money should be tighter, always and everywhere. It was a politico-economic faith.
18. August 2016 at 20:24
Benjamin,
It’s good to see someone else realize that that there’re political channels to consider when trying to influence monetary policy. The main message we need to get into the head of the next President is that it’s important to do everything possible to loosen monetary policy enough to get us back to RGDP potential.
18. August 2016 at 20:26
Gary,
No, I get it, but don’t understand why monetary policy requires the purchase of government bonds. There are other assets to buy.
19. August 2016 at 05:14
Isn’t helicopter money a form of fiscal policy?
19. August 2016 at 05:59
NO, you don’t get it Scott Freelander. Chuck says helicopter money is not a form of fiscal policy but it isn’t. No bonds go to the Fed in exchange for real helicopter money.
There is a fiscal benefit to helicopter money, but Lonergan says real helicopter money is simply an increase in base money, non sterilized, given to the people equally and one time.
I am talking about the creation of bonds in fiscal spending. That is different. That is what Summers, Krugman and Kocherlakota want. They want more bonds created for Wall Street, which would come from deficit government spending. That is totally different than real helicopter money. Kocherlakota misdefines helicopter money and thinks it entails government spending. The Fed and the government are separate. One is public and one is private.
Check out Lewis VS the USA, 1982 if you think the Fed is part of the government. It isn’t.
19. August 2016 at 05:59
Sorry should read: Chuck says helicopter money IS a form of fiscal policy, but it isn’t.
19. August 2016 at 09:09
Gary,
Okay, you’re right. I must not understand your point.
19. August 2016 at 16:49
Scott, you are thinking that the Fed would buy the bonds. The Fed doesn’t buy bonds direct from the treasury now. The Fed buys bonds from the primary dealers who initially buy the bonds.
1. With deficit spending, bonds would be issued by the treasury. Then bonds would be bought by dealers as usual, but the Fed would not buy any of the extra bonds. That is the goal of Sumner, Krugman and Kocherlakota.
2. Helicopter money would not provide extra bonds, but would provide a boost to the economy. It is totally different than NK deficit spending.
I was pointing out that deficit spending puts the US in debt, but the government gets little in return, while Wall Street gets the new gold!
19. August 2016 at 18:15
So, Summers, not Sumner, sorry, and Kockerlakota, and Krugman would say the extra bonds generated by deficit spending would be all bought up by Wall Street: banks and counterparties and insurance companies, etc.
19. August 2016 at 23:14
@Scott Freelander
“but don’t understand why monetary policy requires the purchase of government bonds. There are other assets to buy.”
John Taylor ( Taylor rule) teaches his students at Stanford that monetary policy goals could be achieved through buying and selling Ketchup.
20. August 2016 at 06:24
@Benjamin Helicopter money is considered “dirty money” in Japan. It is against the law. QE and sterilized actions involving the BOJ are legal.
So, the BOJ is just talk, IMO.
@S Freelander I hope you come back and read my posts. There are three actions, 1 fiscal and two monetary, and of course other monetary actions are available.
1. Fiscal. It involves deficit spending by the government. It creates new bonds for sale to the public. The Krugmans and friends want that deficit spending because they believe there is a shortage of bonds.
2. QE. We know what that is, an exchange of bonds for stimulus. Or some central banks buy assets in exchange for stimulus.
3. Helicopter money. Real helicopter money involves no central bank purchases of anything. It issues new base money for the people, in a one off effort.
Here is John Llewellyn’s take on helicopter money compared to QE:
1. Issuing bonds to pay for government expenditure is an essentially sterilised operation: borrow form Peter to lend to Paul.
2. Helicopter money is a one-off event (in principle). An expenditure gets financed by the central bank, and then that exercise stops.
3. However, if the private sector responds to that stimulus, then a number of things – GDP, the money supply, employment etc. – are permanently higher. Which in present circumstances many, perhaps most, would see as a good thing.
So, Freelander, the people really behind helicopter money object that it is called a fiscal policy. It is a monetary policy.
20. August 2016 at 23:39
OT: further evidence there’s no such thing as sticky wages for many workers. The two pillars of monetarism are sticky prices / wages and money illusion. Now one of those pillars are gone. Monetarists sit on a one-legged stool.
http://marginalrevolution.com/marginalrevolution/2016/08/are-sticky-nominal-wages-the-most-overrated-idea-in-economics.html
Via Adam Ozimek, here is one recent (still unfinished) paper, by Kurmann, McEntarfer, and Spletzer:
Using administrative worker‐firm linked data for the United States, we examine the extent and consequences of nominal wage and earnings rigidities for U.S. firms. We find less evidence of downward wage rigidity in the administrative data
21. August 2016 at 05:15
OT: Scott, you’re gonna love watching the Trumpista heads explode when they notice this.
21. August 2016 at 05:48
But Ray, some people in Las Vegas experienced massive downward wage decline as late as in 2013-2014. Guys in semi skilled jobs in factories were making over 20 dollars per hour and were cut to less than 15.
That was pretty sticky considering the Great Recession started in 2008.
21. August 2016 at 14:22
Gary Anderson:
“That was pretty sticky considering the Great Recession started in 2008.”
You mean when people are given free money, it takes longer for them to be willing to take a pay cut?
21. August 2016 at 16:02
I have no idea what you are talking about Major. I am talking about semi skilled people making a good wage, and then years after the Great Recession suddenly not making a good wage.
How could you misunderstand plain language, Major?
22. August 2016 at 07:05
You mean the workers who never lost their jobs? That the demand for labor was initially higher to sustain the higher wage rates, but then the demand for labor fell thus leading to a fall in wage rates?
And this is evidence of sticky wages how?
What about competition?
What about causal factors since 2009?
Talk about forcing the square sticky wages peg into every shaped hole.
22. August 2016 at 07:22
It took a long time for the wages to drop, Major. A very, very long time. Since the jobs were in manufacturing, it is purely a function of the Great Recession. These folks made components for gaming machines. Many Millennials and others have forsaken gaming machines because of the impact of the Great Recession. The impact of the Great Recession is still being felt in retail, housing, and gaming.
22. August 2016 at 11:02
@Gary Anderson – ‘base not case’ as the saying goes, meaning, don’t look at one isolated example (case) but look at the entire baseline (base).
The paper I cited found that when times get tough, firms don’t cut wages but cut hours instead. However, this is a form of NON-sticky wages if you think about it (the worker is taking a pay cut). Sumner, eat your heart out.
22. August 2016 at 12:42
Ray,
No, you’re way off, as usual. Cutting hours means cutting production, which means an unnecessary drop in GDP. If wages fell in line with other prices, there would be no need to cut hours or jobs, and hence GDP wouldn’t take a hit. You don’t understand the first thing about sticky wages, or anything in economics, apparently.
22. August 2016 at 12:44
Gary,
Major doesn’t pay attention to other perspectives, as you can see. It’s a total waste of time communicating with him.
22. August 2016 at 12:49
Gary,
It seems to me there can be problems with supposed “one-off” helicopter drops. For one, if it’s considered a one-off, I wonder if it would be as effective as necessary. Then, there may need to be more than one “one-off”, or credibility in the effectiveness of monetary policy could be further eroded.
On the other hand, there’s the risk that if the “one-off” is highly effective, markets will expect more of them in the future, hence leading to higher than desirable inflation. Or. if the “one-off” is deemed highly effective, perhaps the Fed would be less shy about using them in the future, which is great for credible stimulus, but not so great for reigning in the money supply later, if needed.
22. August 2016 at 12:53
That being said though, perhaps a helicopter experiment could be conducted with some precision. That is, I see no reason why a simple calculation couldn’t be made to determine how much helicopter money would be required in a one-off stimulus to get the economy back to RGDP. Then, we can interpret the any difference between expected and actual effects of the policy in terms of expectations/credibility, etc., ceteris paribus.
This would be interesting, but probably unethical in that we have safer, more established means to stimulate the economy that will work just fine if applied with determination.
22. August 2016 at 14:10
Scott F, if you look at Lonergan’s plan, it is a one off but lasting between 12 and 18 months, until the Fed’s target is reached.
It is not fiscal policy, and no bonds are exchanged back to the Fed and it is a permanent increase in the money supply but an act that lasts no longer than 12-18 months.
22. August 2016 at 14:56
Gary,
But why a helicopter drop instead of the current regime, which should work with sufficient determination?
22. August 2016 at 17:56
LOL @Scott Freelander acting like he owns the blog in Sumner’s absence.
23. August 2016 at 00:23
@Scott Freeloader who sez: “Cutting hours means cutting production, which means an unnecessary drop in GDP. If wages fell in line with other prices, there would be no need to cut hours or jobs, and hence GDP wouldn’t take a hit. ” – LOL!
Do you even know what the debate is about? You’re clueless. It’s NOT about “cutting production” which results in a “drop in GDP”. It’s about sticky wages. We’re assuming there’s a recession, so GDP by definition will drop. The issue is whether wages stay fixed or also adjust to the recession (so that the economy can rebound faster, since GDP = P*Q, and with lower P will come higher Q). The paper found indeed wages are flexible, unlike what Sumner and the monetarists think, since hours (e.g., overtime) are cut. From the firm’s standpoint, there’s a cut in wages, hence they have more money to do other things like invest, retool, and so on. Remember the economy is factors such as land, labor, capital. Labor is total workers summed, not individuals. The total is what matters–a pay cut in the form of fewer hours overtime paid by a firm means more money to invest in other things. It’s that simple, but you probably still won’t get it. I’m not commenting on this issue anymore in this thread. I will dual wits with an unarmed man, and not even a one-armed economist.
23. August 2016 at 05:02
Ray,
To quote you from just above:
“The paper I cited found that when times get tough, firms don’t cut wages but cut hours instead. However, this is a form of NON-sticky wages if you think about it (the worker is taking a pay cut). Sumner, eat your heart out.”
That is the statement to which I replied. You’re obviously embarrassed at your obvious mistake, or just trolling. Either way, it is best that you move on.
23. August 2016 at 05:03
Chuck,
I doubt many people would confuse me for an economist.
23. August 2016 at 10:39
We are moving from a world in which money is created in the private banking system to a world in which money is created by central banks.
That’s what we should be debating. Is this a good thing or not?
Would it be a good thing for companies or governments to go to the central bank to ask that bank to either give them money outright or else exchange their financial assets for deposits, which is what is beginning to happen in Japan.
23. August 2016 at 16:36
Charlie, I make the case that Japanese new efforts are not helicopter money. It is considered dirty money and is still illegal in Japan. Bill Gross says there will be debt forgiveness. But BOJ could be just talk: http://www.talkmarkets.com/content/global-markets/are-perpetual-bonds-helicopter-money-the-new-japanese-plan?post=100254
23. August 2016 at 17:58
@charlie Jameson
Odd that ostensible “libertarians” like Sumner have no problem whatsoever with central banks dominating more and more economic activity.
25. August 2016 at 08:12
Chuck, You said:
“Tell that to Sumner. He uses the natural rate all the time, then tries to deny it.”
That’s a lie. I’ve never denied using the natural rate in explanations. I’ve said the natural rate is not a useful concept.
Ray, You said:
“@sumner – as I said, I don’t include op-eds and ‘observations’ as econ R&D. Besides the one cite, I found only these three cites as your serious econ papers:”
You are merely demonstrating your incompetence. I’ve published about 35 academic papers, including 6 in the Journal of Money, Credit and Banking.
But thanks for increasing the number from one to three. Try for a bigger number in your next comment.
And read my earlier posts on why micro wage flexibility has no bearing on macro wage stickiness.
25. August 2016 at 09:48
@sumner
You’re denying it now. You always say that when you invoke the natural rate you’re just speaking New Keynesian lingo. But now you say you’re using an un-useful concept to make explanations. Which suggests that the thing you’re trying to explain is not very useful if you have to rely on flawed concepts to elucidate it.
So I’ll repeat an earlier query to you: simply explain what you mean in clear terms. Shouldn’t be too hard, no?
25. August 2016 at 14:20
@Scott Sumner I asked this of Prof Williamson:
The reserves, then, are sterilized, Prof. So, why can’t they be loaned out, or at least a small portion of them? Isn’t the money supply for main street, for the real economy, not the casino derivative economy, being destroyed.
His answer was this:
Thinking of banks as “loaning out reserves” is an unfortunate relic which you can still find in money and banking textbooks. It doesn’t make any sense.
Scott, that answer was fairly cryptic to me. Why didn’t he just answer my question?
25. August 2016 at 15:42
Uhh, because, Gary, banks in fact don’t lend out reserves. There’s really nothing “cryptic” about it.
25. August 2016 at 18:32
Technically you are correct, Chuck. They could lend out up to 10 times the value of those reserves by creating loans. So, why couldn’t they lend out the reserves themselves if they are given to the banks in exchange for collateral? Is there a rule that they cannot be loaned out?
26. August 2016 at 09:45
So, anyway, Prof Williamson said this in response to my question whether there is a rule against banks lending out actual cash in the form of excess reserves. He said:
“Banks issue liabilities and acquire assets.”
So, then, excess reserves are, according to the Fed, if Prof Williamson has it correct, assets that are not to be loaned out. Cullen Roche would say there is no need to lend them out.
So, banks are the black hole where stimulus goes to die. So why the need to pay IOR? One Fed researcher said it is because the banks could lend out 10 times the value of the excess reserves. He said that would be massively inflationary.
So, what are the market monetarist responses? I would like to know.