Where Obama went wrong

In the previous post comment section Jim Glass provided me with this quotation from President Obama:

“I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation. And if it starts heating up, if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”

So that’s it. The reason America is about to suffer through 8 years of high unemployment is not GOP obstructionism, but rather because our President is listening to the wrong set of progressives. We either have the monetary policy Obama wants, or we might even have a more expansionary policy than he’d prefer.

Suddenly Obama’s mystifying behavior back in 2009 doesn’t look so mysterious.

BTW, I just wasted an hour of my life looking for the Fed’s new growth forecast (from the recent meeting.) My iPad is almost worthless for searching the Internet. Does anyone know the Fed forecast of 2013 and 2014 RGDP growth?


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119 Responses to “Where Obama went wrong”

  1. Gravatar of Jeff L Jeff L
    21. August 2013 at 13:23

    The last projections came in June.
    http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf
    RGDP:
    2013: 2.3 to 2.6
    2014: 3.0 to 3.5

  2. Gravatar of marcus nunes marcus nunes
    21. August 2013 at 13:30

    Scott
    The projections take place every other meeting. The last projection is the one from the June meeting:
    http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf

  3. Gravatar of marcus nunes marcus nunes
    21. August 2013 at 13:35

    Adam Posen is against NGDP targeting, but he writes as if he favors it!
    http://thefaintofheart.wordpress.com/2013/08/21/the-fed-and-other-central-banks-wants-an-easy-time/

  4. Gravatar of marcus nunes marcus nunes
    21. August 2013 at 13:40

    Interestingly, there appears to exist a Democratic Policy Dinasty:
    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/21/this-one-photo-from-1998-includes-everybody-involved-in-the-fed-chair-decision/?wpisrc=nl_wnkpm
    So there´s not much hope for substantive change.

  5. Gravatar of Geoff Geoff
    21. August 2013 at 14:12

    Other than the delusion that the government or the Fed can “grow the economy”, what exactly did Obama say that is “wrong”?

    Is it his reference to the fact that the Fed generates bubbles? But that’s true!

  6. Gravatar of Geoff Geoff
    21. August 2013 at 14:13

    Other than the delusion that the government or the Fed can “grow the economy”, what exactly did Obama say that is “wrong” ?

    Is it his reference to the fact that the Fed generates bubbles? But that’s true!

  7. Gravatar of TravisV TravisV
    21. August 2013 at 14:33

    Where is Krugman on this? Has he said anything critical at all of Obama’s numerous recent “bubble” comments?

  8. Gravatar of Simon Simon
    21. August 2013 at 14:49

    Yes he did, when citing Carola Binder:

    http://krugman.blogs.nytimes.com/2013/07/29/fear-of-froth/?_r=0

    “So, here we are with inflation at a long-term low, many economists arguing that we need higher inflation expectations, and unemployment the overwhelming problem we face. Yet Obama appears if anything to give more emphasis to inflation-fighting than to unemployment reduction, and throws in stuff about bubbles; basically, he has a definite tight-money lean. I don’t know who it’s coming from.

    And this has, by the way, been true all along. Back in the fall of 2009 the word I got was that senior Administration officials believed that we were in a Treasury bubble”

  9. Gravatar of Morgan Warstler Morgan Warstler
    21. August 2013 at 15:16

    Here ya go:

    http://www.amazon.com/SHARKK-Keyboard-Bluetooth-Rotating-Commands/dp/B00AR0M7ZE/ref=sr_1_2?s=electronics&ie=UTF8&qid=1377126964&sr=1-2&keywords=ipad+keypad

  10. Gravatar of Geoff Geoff
    21. August 2013 at 15:38

    Given aggregate spending is increasing each year, and given unemployment remains above the “natural” rate, how does one distinguish between labor market structural imbalances restricting nominal wage growth, and “wage stickiness” abstracted from structural imbalances restricting nominal wage growth, given the historical data?

    In other words, can it be the case that it’s not wage stickiness per se that is preventing unemployment from falling to the “natural” rate, but rather structural problems that have as one consequence a sluggish nominal wage growth?

    Given how expensive schooling has become the last couple of decades, given how regulated the whole economy has become, once your average laborer goes through school, gains experience in an “unsustainable” line of work for many years, I don’t find it surprising to see a sluggish employment growth in a context of labor market rebalancing, even if aggregate spending is rising due to inflation of incomes of others who are not as affected by the structural rebalancing.

    I don’t think labor market problems are going away any time soon, and a big reason for that is how inflation has made the economy so fragile and rigid, that the time needed to rebalance could be a generation or more. Of course, monetarists will tend to believe the primary problem is insufficient inflation, but I think that’s conflating the effects with the cause, and wanting more of the cause of the effects that they see.

  11. Gravatar of Tom Brown Tom Brown
    21. August 2013 at 16:06

    Scott, you write:

    “My iPad is almost worthless for searching the Internet.”

    If Apple is smart, that should get at least a little attention! I don’t know what your readership is here, but it can’t be that tiny! Perhaps you should have let the Genius Bar (or whatever they call it) know about your blog prior to purchasing anything. That’s like wearing your “Yelp!” T-shirt when going out to dinner! 😉

  12. Gravatar of dbeach dbeach
    21. August 2013 at 16:27

    I saw that quote back when the Times ran it and was just so, so disheartened. This “bubble” idea is extremely pernicious and apparently it’s corrupted Obama’s mind.

  13. Gravatar of Bonnie Bonnie
    21. August 2013 at 16:40

    You should get a bluetooth keyboard and a stylus to help you with the ipad. I do nearly everything with my ipad mini, but would be completely helpless without at least the keyboard. Here’s the one I have; it’s neat because you can set it to remember up to three different devices so you don’t have to go through the setup each time you want to switch.

    http://www.amazon.com/Logitech-Bluetooth-Illuminated-Keyboard-Smartphones/dp/B0099SMFVQ/ref=sr_1_15?ie=UTF8&qid=1377131959&sr=8-15&keywords=logitec+bluetooth+keyboard+for+ipad

  14. Gravatar of Saturos Saturos
    21. August 2013 at 16:42

    Highlights from the Fed minutes: http://blogs.wsj.com/economics/2013/08/21/key-passages-from-fed-minutes-2/

    http://www.marketwatch.com/story/highlights-from-the-feds-release-of-fomc-minutes-2013-08-21?link=sfmw

  15. Gravatar of Jim Glass Jim Glass
    21. August 2013 at 17:11

    Follow up…
    ~~~~~

    Why Team Obama is also Team Summers

    Ezra Klein said today that the “subtext to these WH concerns with Yellen is that they didn’t see her as key part of their crisis team in 09” while “Summers was part of the team. And so there’s a lot of loyalty and trust towards Summers. Hard for Yellen to overcome those bonds.”

    That’s true, but there’s an important subtext to the subtext. After all, everyone agrees that Summers was a core member of the 2009 team in a way that Yellen wasn’t.

    The reason that the Summers/Yellen choice is viewed so differently by the White House economic team (where support for Summers is overwhelming) than by the larger world of economic policy observers (where Yellen has much more support) is that the White House economic team has a very lofty view of the White House economic team’s performance in 2009…

  16. Gravatar of benjamin cole benjamin cole
    21. August 2013 at 17:23

    Let me get this: Mommy Fed is supposed to recognize and deflate bubbles before they happen thus saving investors from themselves?

    Well no bubbles in Japan since 1992…good luck with that…

  17. Gravatar of Ben J Ben J
    21. August 2013 at 17:24

    Marcus,

    I had a twitter conversation with Adam Posen, and he said some things that revealed his confusion.

    “@AdamPosen: Real GDP isn’t a good target either for same reasons. But NGDP adds together two constructed measures and their errors. ”

    I of course agreed with him that a Real GDP target is a terrible idea, but tried to make the point that NGDP is not constructed from inflation and RGDP, but rather the other way around.

    Then I got this,

    @AdamPosen: @btjaus Please explain further. yes, we observe nominal purchases, but is nominal GDP really pure observed sum? I don’t think so

    And I explained that yes we can observe NGDP directly, etc, and he seemed to mull it over. So I’m not sure how much he has taken on board since then, but he was a little confused at the time.

  18. Gravatar of Jim Jim
    21. August 2013 at 17:43

    This sounds similar to the concerns Obama had about deficits etc. back in 2009, so as to dismiss additional fiscal stimulus, according to Ron Sunskind. See the excerpts from pages 350-360 or so…

    http://www.ronsuskind.com/confidencemen/

  19. Gravatar of Peter N Peter N
    21. August 2013 at 18:21

    “And I explained that yes we can observe NGDP directly…”

    Observe is a touch strong. Have you ever actually looked at the process of calculating NGDP?

    To begin with, you have questions about the usefulness of added value as an economic proxy, given it ignores a large part of the economy.

    Then you have questions about what is and is not considered added value and whether it is subject to methodological error (concerning cancellation of intermediates, particularly with imports and exports, for instance).

    Next you have sampling error, sample representativeness, implied income and hedonic corrections.

    NGDP also masks the way credit is transformed into investment, and it doesn’t aggregate properly.

    The best defense of GDP is how well it tracks GDI, but at this point, it’s time to call in the experts.

    NGDP growth appears to be a good target for monetary policy, but it isn’t problem free, and it isn’t “observed”.

  20. Gravatar of Geoff Geoff
    21. August 2013 at 18:27

    Benjamin Cole:

    “Let me get this: Mommy Fed is supposed to recognize and deflate bubbles before they happen thus saving investors from themselves?”

    It’s interesting how you call the Fed a “mommy” only when it controls the economy according to X = no bubbles. But when it controls the economy according to Y = no spending deflation, then what, it ceases to be a mommy?

    If the Fed should recognize and inflate spending deflation before they happen, thus saving “spenders” from themselves, why isn’t the Fed a “mommy” then?

    “Well no bubbles in Japan since 1992…good luck with that…”

    Um, there is a bubble in Japan. It’s a major reason why they haven’t grown as much has they otherwise could have grown. Zero inflation is the same thing as preventing necessary, market driven deflation that heals bad investments in a way that foreign exchange fluctuations cannot.

  21. Gravatar of Alexander Hudson Alexander Hudson
    21. August 2013 at 18:44

    I wouldn’t point to a quote like this and declare “case closed” as though it proves anything. The quote is ambiguous, especially in context. I’ve seen several people interpret it in wildly different ways. For the most part, it’s just economic boilerplate, not dissimilar to the things that Bernanke says when he’s wearing his chairman’s hat.

    Having said that, I have come around to the view that the part about bubbles does reflect, to some extent, a genuine belief. (And while I very much disagree with it, it’s worth pointing out that it’s a pretty common belief along the entirety of the political spectrum, and one that the more Austrian market monetarists seem to share.) But even granting that, I don’t think you can claim that this bubble nonsense is the main problem. The much, much, MUCH bigger problem, in my view, is that the president and his advisors (sans Romer, of course) were simply ignorant of the power of monetary policy to stimulate the economy.

    It’s also worth pointing out that, by your own admission, the Fed typically follows the consensus of economists. Is it really reasonable to expect the president, who is not an economist, to have a better understanding of the issue than the vast majority of the profession? How many economists really have a proper understanding of monetary policy at the zero bound? Precious few, I’d imagine. The president had maybe half a dozen close advisors during the early days of his administration advising him on what to do, and I’ll bet only one of them advocated more aggressive monetary policy. And that’s probably still a higher fraction than you’d have gotten if you’d surveyed the entire profession.

  22. Gravatar of MikeDC MikeDC
    21. August 2013 at 18:50

    Obama’s behavior isn’t mystifying at all. It’s a little mystifying to see someone wake up from Willful Blindness all of a sudden though.

  23. Gravatar of Full Employment Hawk Full Employment Hawk
    21. August 2013 at 19:45

    “Does anyone know the Fed forecast of 2013 and 2014 RGDP growth?”

    I don’t know what it is, but I know that it will seriously overestimate what the growth rate will be. I know this because the Fed has consitently overestimated it since the onset of the Great Recession. The Fed’s forecasting errors with respect to output as well as unemployment (underprediction) are predicatable.

  24. Gravatar of Full Employment Hawk Full Employment Hawk
    21. August 2013 at 20:04

    “This sounds similar to the concerns Obama had about deficits etc. back in 2009, so as to dismiss additional fiscal stimulus”

    The horrible truth that is beginning to dawn on progressives is that Obama is what used to be a moderate Republican before the Republican party went right wing extremist. Reducing the deficit while the economy is depressed as Obama wanted to do is a policy worthy of Herbert Hoover.

    His current pack of economic advisors are giving him horribly bad advice. Instead of having him concerned that 5 years after the bottom fell out of the economy we are still in a little depression with the unemployment rate trapped at about 7.5% and coming down at a snails pace, they have him fretting about phantom menaces like inflation and bubbles. One should not besurprised that they want to make shure that one of their own, Summers, gets the Fed chairmanship, instead of Yellen, who would be inclined to make greater use of non-conventional monetary policy to bring the unemployment rate down faster. The only economic advisor he had who understood what needed to be done to restore the economy to full employment was Christina Romer and she did not last very long.

  25. Gravatar of Full Employment Hawk Full Employment Hawk
    21. August 2013 at 20:17

    From the Suskind article: ” A few weeks into the transition, he’d discarded the team that helped him get elected in favor of “Team-B”: a set of Clinton-era advisors”

    This B team is still giving Obama very bad advice and is determined not to let Yellen take the Fed Chairmanship.

    If I could give Obama only one piece of advice, it would be to replace these people with people who understand that restoring the economy to full employment has to be the primary objective of his economic policy for the remainder of his term.

  26. Gravatar of Full Employment Hawk Full Employment Hawk
    21. August 2013 at 20:23

    “but rather because our President is listening to the wrong set of progressives.”

    These people are not really progressives. They are Eisenhower Republicans who only look progressive in comparison to the right-wing extremism that currently dominates the Republican party.

  27. Gravatar of Liberal Roman Liberal Roman
    21. August 2013 at 20:29

    This is material for a Shakespearean tragedy with Obama as a classic tragic hero. An epic fault will lead him to be remembered as an epic disappointment. We are about to get Summers and 4 years of little to no growth.

    The best case scenario I see is that Summers follows through with tapering, ends QE and recognizes the huge slow down. Because he is a “strong” personality, I don’t think he’d just sit on his hands and do nothing. It is possible that after a year or so of terrible economic performance engineered by him, he changes course and tries something different and maybe even drastic like level targeting as an example.

    But that’s all wishful thinking. What we are doing here is preparing story materials for a future Liaquet Ahamed.

  28. Gravatar of Full Employment Hawk Full Employment Hawk
    21. August 2013 at 20:43

    “that the White House economic team has a very lofty view of the White House economic team’s performance in 2009”

    At the beginning of Obama’s term, when the bottom was falling out of the economy and even the moneyed elite (Plutocracy) was in danger of losing its wealth, like during the Great Depression, Team B acted boldly and decisively to prevent a collapse of the economy, restored confidence that there would be no collapse, and got the economy growing again.

    But once the crisis was over and the Plutocracy’s wealth was safe, Team B dropped the ball on the economy. They failed to act boldly and agressively to get the economy growing fast enough to make the unemployment rate come down at an acceptable rate. In my opinion this would have involved filling the BOG with full employment hawks, taking measures to reduce, and mitigate foreclosures, and pushing for a larger stimulus (I realize you do not agree with this.)

    By failing to do this, the Democratic congressional candidates in the Fall of 2010 were forced to go into the election with the unemployment rate stuck at over 9% and with no plausible plan to offer voters for getting the unemployment rate down. In light of this the surprising thing was that not even more Democrats were defeated. If Team B has a lofty view of this perfomance they are totally and hoplessly clueless.

    One lesson Democrats facing the 2014 election should learn from this is to not let a Team B player like Summers be confirmed for Fed chairman. The Democratic Senators who understand this need to make it clear to Obama that they will vote gainst Summers.

  29. Gravatar of Peter N Peter N
    21. August 2013 at 21:17

    The audience that matters at this point is the group of moderate Republicans he’d need to win a cloture motion in the Senate – John McCain, Bob Corker (TN), Lamar Alexander (TN), Susan Collins (ME), Mark Kirk (IL) and Lisa Murkowski.

    He’s saying what he thinks they want to hear. That’s politics.

  30. Gravatar of Steve Steve
    21. August 2013 at 21:17

    Well, Obama’s A-team was just as bad. It included Volcker and Stiglitz, both of whom view monetary stimulus as harmful.

    And forgotten in this debate is Alan Krueger. In a CNBC interview he stated that wealth inequality causes bubbles.

    In Krueger’s CV, his first two papers were co-authored with Larry Summers. His later papers focus on minimum wage and labor policy.

  31. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. August 2013 at 23:03

    Everyone seems to assume that in choosing the next Fed Chair, Obama will select the person he thinks will run the most effective monetary policy. I think that assumption is wrong.

    My read on Obama is that he has two overriding goals in mind: 1) to redistribute wealth and income from the wealthy to the not-wealthy; and 2) (largely in support of 1)) to increase the size and power of the federal government. And, never mind the size of the pie, it’s the redistribution that’s the goal.

    With that in mind, who would you want as Fed Chair? Someone who believes that expansionary monetary policy can provide greater economic growth and employment while none of that growth (at least in his view) will accrue disproportionately to the lower class or will increase the power of the federal government (particularly the executive branch)? Or, someone who will say “monetary policy can’t work at the ZLB, but at the ZLB government spending certainly can.” Even if Summers wouldn’t control the Fed or the FOMC, he could certainly use that pulpit to preach this gospel. Never let a crisis go to waste. This is an opportunity to inject more fiscal stimulus (i.e., spending) that will morph into permanent programs. Even tax cuts (an oxymoron here–read transfers) would need to favor the poor because only they would fully spend.

    With this is mind, I can certainly see why Summers, not Yellen, would be your man (quite aside from the fact that Yellen is not a man).

  32. Gravatar of mnop mnop
    22. August 2013 at 01:51

    Vivian, I recommend you read “Bailout”, Neil Barofsky’s account of his time as SIGTARP under Obama. He comes to the opposite conclusion as you… and also provides a convincing explanation for why Obama would pick a pro-Wall-Street insider like Summers over Yellen.

    Here is an excerpt from Barofsky’s concluding chapter:

    In the year since I stepped down from SIGTARP, the sadly predictable consequences resulting from the government’s disparate treatment of Wall Street and Main Street have only become worse. As the banks amass even more size and power, Main Street continues to get pummeled.

  33. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. August 2013 at 02:29

    mnop,

    Just a few things:

    1. TARP was signed into law by Bush, not Obama.

    2. TARP was a Treasury Dept program and did not have anything to do with the Federal Reserve (perhaps you are thinking of Maiden Lane?).

    3. To the extent Obama has been able influence policy, he’s certainly been strongly in favor of redistributive fiscal policies and a larger more powerful federal government, particularly the Executive branch.

    4. There are many wealthy persons working on Wall Street; however, “the wealthy” and Wall Street are not synonymous.

    5. Obama is an effective electoral politician. While he’s built his successful campaigns on a mostly populist platform and message, he’ll do what he has to with respect to Wall Street to gain or retain power, but nothing more.

    6. Obama had more to say about Dodd/Frank than TARP. It could have been worse, but it was not “pro Wall Street”.

    7. Obama wants to (and effectively did) raise the tax rate on investment income. He wants to raise it more and raise the tax rate on carried interest, etc. This is not “pro-Wall Street” stuff.

    Again, having a strong and effective Federal Reserve does not play well into his overriding policy objectives. Why would he want to have that institution exercise effective policy that is largely outside his control? Having greater fiscal tools plays not only to his policy objectives but also gives him much greater political influence (even over Wall Street) in handing out goodies and/or withholding them. The influence point obviously applies to any politician.

  34. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. August 2013 at 02:52

    In trying to explain Obama’s preferences and choices as regards the Federal Reserve, I think one needs to try to put oneself in his frame of mind. That’s what I’ve tried to do.

    It remains a mystery as to why Obama did not fill those empty Fed Reserve seats for so long. This is speculative, but I can imagine the conversation with Summers might have gone somewhat like this. Summers explained to Obama how Fed Reserve policy *might* work to stimulate the economy, create jobs, etc (and then went on to say that his probably doesn’t work at the ZLB, anyway).

    One could well imagine a two-fold response to this news:

    1. “You mean some people think that the Federal Reserve can stimulate the economy, create jobs, etc. without creating new federal programs or spending any money”? Where do I and my priorities fit in? That does not sound nearly as interesting as fiscal policy. (Remember that the fiscal stimulus program design began with Obama’s spending priorities).

    2. Well, if monetary at the ZLB doesn’t work anyway, why bother with these nominees? I’ve got better things to expend my energy and political capital on than a potential fight with Congress over nominees. Fiscal is the name of the game.

  35. Gravatar of George Selgin George Selgin
    22. August 2013 at 04:29

    I’m with Greg on this. I see nothing wrong with Obama’s statement, except for his use–perfectly excusable for a non-economist, as it would be even for an economist who’s in a hurry–of the word “bubble” to refer to any unsustainable rise in asset prices, e.g., of stocks or real estate.

    As I’ve said a number of times here, the usual fundamental vs. bubble dichotomy, where the first term implies irrational speculation (which of course can’t be the Fed’s fault) and the second implies speculation based on sustainable real parameter changes (which also can’t be the Fed’s fault) leaves out a third possibility that ought not to be dismissed out of hand, which is speculation informed by interest rate movements (or a lack of interest rate movements) that are the result of such excessive monetary expansion as serves to hold or drive actual rates below their natural (Wicksell) counterparts. Such speculation, though not irrational, can lead to unsustainable asset price movements because the interest changes on which it is based are themselves unsustainable or self-reversing.

    And no, you do not need to be a hard-core Austrian to buy this. You only need to accept Wicksell’s analysis, and to believe that monetary policy can sometimes influence both long and very short rates, and to be able to calculate a present value, and to put yourself in the position of a speculator who, not being able to distinguish natural from actual (long-run) rates, trying to maximize returns.

    How important empirically are such unnaturally-low-i-based asset price movements? That’s a good question. But it is an empirical question nonetheless, and hence not one that can be answered by means of a priori reasoning, let alone by resort to mere assertion. I understand, Scott, that you think the answer is, “Not very important.” In that you share the view of many monetarists, including Milton Friedman. I respect that opinion, although I’m not convinced that it is correct. But in treating Obama’s remark as if it were irresponsible, I think you are wrong, because the remark can be understood to be merely saying that, among its other responsibilities, the Fed has that of guarding against policies that would drive interest rates below their natural levels.

    In short, while I certainly agree that overly tight money, which means policy that keeps interest rates, not “high” in an absolute sense, but above their natural levels, is a bad thing, because rather than leading at once to a new market-clearing price level, it tends to have lingering real consequences, I cannot understand why one cannot insist on this point without seeming to suggest that the concerns of those who also fear the consequences, apart from changes in the market-clearing price level, of excessively easy money, are without merit.

  36. Gravatar of ReturnFreeRisk ReturnFreeRisk
    22. August 2013 at 04:43

    “The reason America is about to suffer through 8 years of high unemployment is not GOP obstructionism, but rather because our President is listening to the wrong set of progressives.”

    NO. The reason we will suffer through 8 years of high unemp is not Obama. It is economists who do not question why we have suffered the last 8 years and not only want to continue the policies that caused it but continue them in a larger way. Good thinking.

  37. Gravatar of Benjamin Cole Benjamin Cole
    22. August 2013 at 04:46

    Geoff–

    Yes, I think the role of the Fed is a monetary policy geared to 7 percent (or so) nominal annual growth in the GDP. Fiat money, I like it. Very flexible, can assure growth when properly used.

    There may be bubbles within the above framework, as private-sector investors get excited about the prospects of one industry or another. It is hard to know what is a bubble in advance or during—indeed the EMH says it is impossible to know. I like the EMH.

    To have Fed decide in advance that a bubble is a bubble and therefore the monetary air pipe must be chocked off is to invite disaster. Monetary asphyxiation.

    Japan? Japan has had huge deflation in property and equities; we are talking 80 percent declines from 1992, with some recent minor recoveries. It has had general and mild deflation for 20 years, and their nominal GD is lower today than 20 years ago.

    In this 20 year period, China and Korea blew past Japan, and stole their lunch. Japan is becoming a defeatist, backwater nation, with a shrinking aging population, and heavily indebted (although to themselves). Compared to the USA, their per capita income has declined badly in this 20-year period, and we were hardly setting the barn on fire.

    I care little for dogmas, ideologies, gold fetishes, theomonetarism, or who cares what.

    I like macroeconomic policies that work. If Market Monetarsim ain’t clean ideologically or theoretically, I do not care. (The French, and perhaps you, say: “Market Monetarism may work in the markets, but more importantly, does it work in theory?”)

    Tight money does not work. Japan has proved that for 20 years.

    Forget about tight money, forget about gold, forget about the Cubs winning the pennant.

  38. Gravatar of mnop mnop
    22. August 2013 at 05:22

    “1. TARP was signed into law by Bush, not Obama.”

    Well, yes, but the majority of Barofsky’s tenure as SIGTARP was under Obama. As he details in Bailout, Barofsky clashed with Geithner over a succession of anemic and ill-conceived programs supposedly intended to aid underwater homeowners.

    Barofsky’s key insight was that Geithner *wanted* the homeowner assistance programs to fail, to avoid any undue stress to the big banks – further to divert some of the programs intended to help desperate homeowners to fund the banks instead. Or in Geithner’s own words, to “foam the runway” for the banks.

    Anyway, I’ll stop the thread hijack. If you want to believe that Obama prefers Summers over Yellen to “1) to redistribute wealth and income from the wealthy to the not-wealthy; and 2) (largely in support of 1)) to increase the size and power of the federal government,” more power to you.

    It seems obvious to me that Summers is the Wall-Street-friendly, deregulation-happy choice, with a sane monetary policy as collateral damage.

  39. Gravatar of TravisV TravisV
    22. August 2013 at 05:27

    Prof. Sumner,

    Do you agree with Krugman’s point here that financial regulation is the reason why we’ve had more frequent “bubbles” since 1985?

    http://krugman.blogs.nytimes.com/2013/08/22/generation-b-for-bubble/?_r=0

    “Now, the thing you need to realize is that the whole era since around 1985 has been one of successive bubbles. There was a huge commercial real estate bubble (pdf) in the 80s, closely tied up with the S&L crisis; a bubble in capital flows to Asia in the mid 90s; the dotcom bubble; the housing bubble; and now, it seems, the BRIC bubble. There was nothing comparable in the 50s and 60s.

    So, was monetary policy excessively easy through this whole period? If so, where’s the inflation? Maybe you can argue that loose money, for a while, shows up in asset prices rather than goods prices (although I’ve never seen that argument made well). But for a whole generation?

    So what was different? The answer seems obvious: financial deregulation, including capital account liberalization. Banks were set free “” and went wild, again and again.”

  40. Gravatar of TravisV TravisV
    22. August 2013 at 05:58

    Excuse me, financial DEregulation?

  41. Gravatar of Steve Steve
    22. August 2013 at 06:10

    TravisV,

    No, Krugman is completely wrong. Krugman’s disdain for the financial sector is rooted in his jealous narcissism. Krugman’s thought process is this: some financial sector employees earn more than Princeton economics professors despite being less intelligent, ergo, they need to be regulated!

    To the extent there was an emerging market bubble — and that’s a very dubious proposition — it was caused mostly by a commodities boom that produced huge capital inflows into emerging markets. The US, Europe, China, and Japan are all large net commodity importers. Where do economists like Krugman think these commodities come from? And what do they think happens when these commodities become (temporarily) scarce?

    If you go back and look at other ex-post declared bubbles, the commonality is that there was a (temporary) scarcity of some good.

  42. Gravatar of George Selgin George Selgin
    22. August 2013 at 06:20

    I realize that in my previous comment I wrote “Greg” when I meant to write “Geoff.” Sorry Geoff (and Greg, whoever you are!).

  43. Gravatar of Tom Tom
    22. August 2013 at 06:21

    Your simply far too believing in the power of monetary expansion. Money supply is not spending.

    Obama is a big believer in Keynesian stimulus. But he believes, correctly, that fiscal spending is what matters by far most to aggregate spending levels. That’s why he has been fighting and crying and wailing all the way through the fiscal consolidation that has been underway since the Rs won the house in 2010.

    There’s no evidence that monetary expansion makes much difference amid austerity generally, or that QE3 has made much difference to US spending levels. Serious estimations would have to conclude that its impact has been minor.

    But equity prices have shot up even though the fiscal consolidation must reduce profits. Equity bubbles cause very serious damage to the middle class by diverting retirement investment into financial industry high living and temporary, on-paper capital gains that evaporate and then some when the bubble pops.

    There’s a lot that’s uncertain about the future. Personally I don’t see inflation or an escalation of short rates in the pipeline for this business cycle. We and Europe are in a situation very similar to that of Japan’s, albeit our symptoms are milder. The harsh reality is our unemployed and out-of-the-workforce able-bodied people simply aren’t globally competitive. At the end of the day the American people would rather spend a bit less at the shops than keep more of their fellow Americans employed. That situation is not going to be sustainably changed by inherently temporary fiscal or monetary stimulus. We have to learn to make the best of low real and nominal growth rates.

  44. Gravatar of George Selgin George Selgin
    22. August 2013 at 06:31

    Travis writes, “So, was monetary policy excessively easy through this whole period? If so, where’s the inflation?”

    With all due respect, to ask the question is to neglect the whole basis for preferring an NGDP (AD) growth target to an inflation-rate target, which is that the two variables do not always move together, the difference arising from fluctuations in the growth rate of AS, and that it is the fluctuation in NGDP growth that are the fundamental source of cyclical changes in real variables. If you regard stability of the inflation rate as ipso facto proof that monetary policy is neither too easy nor too tight, then presumably you should favor a strict inflation target over an NGDP growth rate target. (Perhaps you do.)

  45. Gravatar of TravisV TravisV
    22. August 2013 at 06:48

    Dr. Selgin,

    I didn’t write “So, was monetary policy excessively easy through this whole period? If so, where’s the inflation?” Paul Krugman wrote that.

    Personally, I’m inclined to think that financial deregulation opened up huge moral hazard problems and they were a bigger contributor to bubbles than monetary policy. I could be totally wrong, however. I might easily be persuaded otherwise.

  46. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. August 2013 at 08:07

    ‘Where is Krugman on this?’

    I’m sure he’s working up the economath for Obama.

  47. Gravatar of Wonks Anonymous Wonks Anonymous
    22. August 2013 at 08:30

    It’s possible we’re taking too seriously the words coming out of a politician’s mouth.

  48. Gravatar of Doug M Doug M
    22. August 2013 at 08:33

    My take on it is that Obama’s knowledge of economic theory in general and Monetary policy in particular is close to zero.

    He sees the primary role of the Fed in dealing with crises. Preventing crises if possible and as regulator. The daily activity of monetary expansion goals is secondary.

    Regarding 8 years of famine if the wrong person is appointed to the job — Professor, I think you put too much weight on the role of the Fed chairman to drive the FOMC. While the chairman does lead the discussion, there are 12 voting members and 7 non-voting members who are setting the course of policy.

    It is akin to suggesting that John Roberts runs the supreme court.

  49. Gravatar of Mike T Mike T
    22. August 2013 at 08:52

    Doug M –

    “My take on it is that Obama’s knowledge of economic theory in general and Monetary policy in particular is close to zero.”

    >> Agreed. Obama is only being fed (no pun intended) whatever his closest advisers tell him and who knows what his motivations are behind choosing those advisers.

  50. Gravatar of George Selgin George Selgin
    22. August 2013 at 08:58

    Terribly sorry, Travis: I didn’t see that the entire passage was a quote!

  51. Gravatar of Full Employment Hawk Full Employment Hawk
    22. August 2013 at 09:33

    “In trying to explain Obama’s preferences and choices as regards the Federal Reserve, I think one needs to try to put oneself in his frame of mind. That’s what I’ve tried to do.”

    You have failed to do this because you have put yourself into the frame of mind that conservatives THINK is the President’s frame of mind, and not into his ACTUAL frame of mind.

    Obama clearly wanted to bring the deficit down before the economy had returned to full employment, a very un-Keynesian thing to do, especially for a Democratic president. Concern about the deficit caused Obama not to seek a follow-up stimulus and caused his administration to switch from prioritizing stimulus in 2009 to prioritizing deficit reduction from 2010 on. In 2010 Obama repeated the conservative dogma that when households tighten their belt and firms tighten their belt, the government also needs to tighten its belt. THAT shows his actal frame of mind.

    Therefore your two-fold imagined response is the result of what conservatives think the President wants to do, rather than of what his actions have shown he wants to do.

  52. Gravatar of Full Employment Hawk Full Employment Hawk
    22. August 2013 at 09:38

    “It is akin to suggesting that John Roberts runs the supreme court.”

    The appointments of John Roberts and Samuel Alito have radically changed the Supreme Court’s decisions. Similarly the appointment of Summers instead of Yellen will give us a Fed that will not agressively use expansionary monetary policy to end this little depression.

  53. Gravatar of jknarr jknarr
    22. August 2013 at 09:43

    Barack Obama = Robert Rubin. It has always been thus. Why bother to cultivate cute little alternative fictions?

    http://www.nytimes.com/2008/11/24/business/worldbusiness/24iht-rubin.4.18116856.html?pagewanted=all&_r=0

    The difference now is that the Rubin cabal Рafter owning Goldman, the US Treasury, Citi, and countless prot̩g̩e hedge funds Рis now going to own the crown jewel: the Fed. Ugly, dynastic, and fat-out dangerous.

    http://www.bloomberg.com/news/2013-01-20/bob-rubin-s-washington-reign-reaches-20-years.html

  54. Gravatar of Full Employment Hawk Full Employment Hawk
    22. August 2013 at 10:00

    “To have Fed decide in advance that a bubble is a bubble and therefore the monetary air pipe must be chocked off is to invite disaster.”

    Creating recessions is a totally inappropriate way of stopping bubbles. It is like burning the house down to get rid of a termite investation.

    Regulation is the way to deal with bubbles, not choking the economy. And I agree with Shiller about the EMH. Bubbles can be recognized ahead of time by examining the objectives of the dominant market participants. If they are buing assets not for their intrinsic values (i.e. a chicken for its eggs, bees for their honey, a cow for her milk and a stock for its dividend,) but because they expect the price of the asset they are buying to have upward momentum, so that they can sell the asset to a greater fool who also will buy the asset because he expects the price to go up even more so he can sell it to a still greater fool, you have a bubble.

  55. Gravatar of Vivian Darkbloom Vivian Darkbloom
    22. August 2013 at 10:02

    “Obama clearly wanted to bring the deficit down before the economy had returned to full employment, a very un-Keynesian thing to do, especially for a Democratic president. Concern about the deficit caused Obama not to seek a follow-up stimulus and caused his administration to switch from prioritizing stimulus in 2009 to prioritizing deficit reduction from 2010 on.”

    Not really. Obama’s spending plans were thwarted by the loss of the House in midterm elections and not on any desire to “bring down the deficit”.

    For example:

    “The Obama administration is arguing that the sluggish economy requires a shot in the arm, and it included tens of billions of dollars of little-noticed stimulus measures in its much-noticed proposal to Congressional leaders last week. But Republicans have countered that the country cannot afford to widen the deficit further, and have balked at including the measures in any eventual deal.”

    “The president is asking for $1.6 trillion worth of new revenue over 10 years, twice as much as he has been asking for in public,” Mr. Boehner said on “Fox News Sunday.” “He has stimulus spending in here that exceeded the amount of new cuts that he was willing to consider. It was not a serious offer.”

    http://www.nytimes.com/2012/12/05/business/economy/republicans-balk-at-obamas-short-term-stimulus.html

    I think the proposed 2012 stimulus package was about $300 billion. He didn’t get it, but it was not for lack of trying.

    I suppose you are now going to tell me that he was all for the sequester, too.

  56. Gravatar of Brian Donohue Brian Donohue
    22. August 2013 at 10:27

    Vivian, Contra the fears of many, Obama has shown himself to be a pragmatic politician. Whatever his fondest hopes may be, I have no doubt he no longer entertains any real hope of enacting fiscal stimulus by shutting off the monetary tap. His $300 billion stimulus plan has a sop to the left-wing, it was DOA, and he knew it.

    Full Employment Hawk: Your unerring eye for spotting bubbles is surely the path to untold riches. You should catch up with Jeremy Grantham who, in his senility, has decided that bubble identification is the sine qua non of investing success.

  57. Gravatar of George Selgin George Selgin
    22. August 2013 at 11:00

    Full Employment Hawk, you continue to insist on the very fundamentals-bubbles dichotomy the falseness of which I’ve tried to point out above. Perhaps you could acknowledge my point, if only so as to make clear that you intend to dismiss it without argument.

    But in doing so realize that my point is one that many other economists have made, among them William White, Claudio Borio, and Axel Leijonhufvud, and that, if they are correct, for the Fed to not take steps to counter “bubbles” (by which I here mean unsustainable asset price movements connected to unnaturally low rates) is also to “invite disaster.” Indeed, according to Leijonhufvud and some of the others, this was precisely what the Fed was doing in the years leading to the recent crisis. See http://www.voxeu.org/article/subprime-crisis-wicksell-ricardo-and-inflation-targeting; http://www.voxeu.org/article/perils-inflation-targeting.

  58. Gravatar of paul paul
    22. August 2013 at 11:54

    When it comes statements on monetary policy I think Obama is especially dependent on his advisers. I somehow doubt he has any opinion about NGDP or even knows what it means. In that spirit I guess he will choose a Fed Chair who seems like he/she would be the adviser he is most comfortable with.

  59. Gravatar of Doug M Doug M
    22. August 2013 at 12:14

    Full Employment Hawk,

    And any time, a significant fraction of money invested is invested with the intention of selling it to the greater fool.

    Bubbles happen. Any theory of markets that does not accept the premise that bubbles happen is an invalid theory.

    And, bubbles are not necessarily a bad thing. Attempts to suppress volatility in the short term may prove 1) to be impossible to do 2) depress growth in the long term.

  60. Gravatar of MikeDC MikeDC
    22. August 2013 at 12:16

    the objectives of the dominant market participants. If they are buing assets not for their intrinsic values (i.e. a chicken for its eggs, bees for their honey, a cow for her milk and a stock for its dividend,) but because they expect the price of the asset they are buying to have upward momentum, so that they can sell the asset to a greater fool who also will buy the asset because he expects the price to go up even more so he can sell it to a still greater fool, you have a bubble.

    Of course, this is nonsense because a fundamental point of economics is that values are relative (and marginal), not intrinsic.

    @ George Selgin,
    “bubbles” (by which I here mean unsustainable asset price movements connected to unnaturally low rates)

    How are the asset prices connected to “unnaturally low rates”? Even if we imagine a world at a generic, natural rate of interst, would there not still be unsustainable asset prices because people would choose to invest in different portfolios of assets based on different beliefs about the world? Some people will choose wrong, and what they thought were sustainable investments turned out not to be.

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. August 2013 at 12:22

    Ben J,
    You wrote:
    “I had a twitter conversation with Adam Posen, and he said some things that revealed his confusion.

    “@AdamPosen: Real GDP isn’t a good target either for same reasons. But NGDP adds together two constructed measures and their errors. “

    I of course agreed with him that a Real GDP target is a terrible idea, but tried to make the point that NGDP is not constructed from inflation and RGDP, but rather the other way around.

    Then I got this,

    @AdamPosen: @btjaus Please explain further. yes, we observe nominal purchases, but is nominal GDP really pure observed sum? I don’t think so

    And I explained that yes we can observe NGDP directly, etc, and he seemed to mull it over. So I’m not sure how much he has taken on board since then, but he was a little confused at the time.”

    Thanks to your comment I think I may have finally solved a puzzle that has been bothering me for some time. Why have British economists such as Posen and Charles Goodhart objected to NGDPLT because of NGDP’s presumed construction as the sum of real and nominal components (slaps self on forehead), and why do the UK and the eurozone release RGDP a month before NGDP when NGDP is obviously, at least conceptually, derived from NGDP?

    After reading Posen’s twitter messages I took his complaints to heart and researched the matter. It all comes down to the fact the US uses a different system for computing the national accounts than the rest of the world. We use the National Income and Product Accounts (NIPA) system and they use the System of National Accounts (SNA).

    There are three approaches to computing GDP: 1) production, 2) expenditure and 3) income. Have you noticed that only the US produces a measure of Gross Domestic Income (GDI)? GDI is essentially GDP measured by the income approach. Japan produces a separate income approach GDP measure but they still call it GDP. To my knowledge no other country using the SNA system produces a separate income approach GDP measure. Here is why.

    In practice the production and expenditure approach GDP measures are equal. However there are differences between the income and the other two measures of GDP. In the US we release NGDP and RGDP at the same time because both are derived purely from the expenditure and production approach. GDI takes a month longer to produce, evidently because of greater delays in collecting income data. Note also that there is no separate GDI implicit price deflator.

    However, SNA is very different (page 21):

    http://www.bea.gov/scb/pdf/2004/12December/1204_NIPA&SNA.pdf

    “In addition, the sum of gross value added across the sectors of the economy in the SNA-based estimates does not equal GDP, because the statistical discrepancy is added to the sum of value added across sectors to arrive at GDP. The NIPAs have two measures for the value of final goods and services produced in the economy””an income-side measure and an expenditure-side measure””and the difference between these two measures is reported as the statistical discrepancy, a concept that does not arise in the SNA.”

    In short what they call “NGDP” is really equal to NGDP (i.e. nominal expenditures/nominal gross value added) *plus* the statistical discrepancy between NGDP and NGDI. Since they, like the US, produce income data a month later than expenditure and production data, it takes them a month longer to produce NGDP than RGDP.

    Of course this begs the question, where does their GDP implicit price deflator, which also comes out a month later, come from? Evidently it is the quotient of NGDI and RGDP. (Yikes!)

    Needless to say I am sure things are slightly more complicated than I have portrayed here, and that they vary by individual nation. But on the whole, as far as the sausage making process of constructing national accounts goes, I find the NIPA system a little more transparent and somewhat less stomach turning than SNA.

    But no wonder British economists distrust the concept of NGDP. The way they do it who wouldn’t?

    P.S. I believe that SNA actually originated in the UK.

  62. Gravatar of Edward Edward
    22. August 2013 at 12:27

    George Selgin,
    “In short, while I certainly agree that overly tight money, which means policy that keeps interest rates, not “high” in an absolute sense, but above their natural levels, is a bad thing, because rather than leading at once to a new market-clearing price level, it tends to have lingering real consequences, I cannot understand why one cannot insist on this point without seeming to suggest that the concerns of those who also fear the consequences, apart from changes in the market-clearing price level, of excessively easy money, are without merit.”

    Because that is not the problem we are facing right now. I understand your concerns, and while I and many of the people on this blog would not place you in the same category as austrian and “austerian” (both fiscal and monetary) sadists, you are giving aid and comfort to them by spreading fears about “bubbles.” We have a horrific jobs crisis. THAT is the problem we face Professor Selgin, not “bubbles”

    And Professor, would you give me a clear way to “calculate” the Wicksellian equilibrium interest rate? I attack both Keynesians and Austrians for this. The natural rate of interest is about the most useless concept you can possibly imagine. Is it calculated using NGDP? Savings versus consumption ratios? Saving and Investment?
    Or is it “Unobservable”

  63. Gravatar of Edward Edward
    22. August 2013 at 12:30

    Guys, this might be a stupid question,

    But how exactly does NGDI differ from NGDP? I know NGDI has wages and NGDP excludes them, but what exactly about it makes it a better indicator.

    Also, Scott, do you have trend growth over the Great Moderation for NGDI, as opposed to the 5% for NGDP?

  64. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. August 2013 at 12:48

    Edward,

    GDI consists of:
    1.Wages, salaries, and supplementary labor income
    2.Corporate profits
    3.Interest and miscellaneous investment income
    4.Income from unincorporated businesses
    5.Indirect taxes minus subsidies
    6.Depreciation

    It’s simply income instead of expenditures/product. Theoretically GDI=GDP but in practice there is a statistical discrepancy.

  65. Gravatar of TravisV TravisV
    22. August 2013 at 13:04

    OK, I’ve just thought of an important way in which elite Republicans > elite Democrats.

    Elite Republicans’ favored economists to lead the Federal Reserve are Ben Bernanke and Greg Mankiw.

    Elite Democrats’ favored economist to lead the Federal Reserve is……..Larry Summers????????

  66. Gravatar of TravisV TravisV
    22. August 2013 at 13:18

    Brad DeLong:

    http://delong.typepad.com/sdj/2013/08/and-i-do-not-understand-the-federal-reserves-current-thinking-at-all.html

    “I would expect an FOMC to announce that the slow pace of real economic growth requires an acceleration of asset purchases, not a tapering.

    Yet those two positions, which seem to me the reasonable, sound, sensible, technocratic positions, appear to have no votes on the FOMC.

    Why not? What are they thinking?”

  67. Gravatar of W. Peden W. Peden
    22. August 2013 at 13:21

    TravisV,

    I’d add that Republicans tend to oppose Yellen’s appointment for bad reasons, whereas Democrats tend to support it for irrelevant reasons e.g. her gender and Larry Summers making sexist remarks.

    (That last point is a BIT relevant, insofar as anyone in a position of authority should avoid sexism because working well with women is so important, especially in today’s world where there are female members of the Federal Reserve Board. Presidents should also avoid vulgar and alienating phrases like “shooting its load”.)

  68. Gravatar of Jim Jim
    22. August 2013 at 13:50

    Instead of NGDP targeting, why not median wage growth targeting?

    Something no proponent of NGDP targeting has ever been able to address is, what happens when NGDP growth is below-target due to low wages. Do you continue monetary expansion, risking inflation in commodities (impacting low-wage workers moreso than professionals), until NGDP increases?

    That’s why I am adamantly opposed to NGDP targeting. It will hurt low-wage workers and the middle-class far more than the very affluent.

    Let’s target real median wage growth instead.

  69. Gravatar of TravisV TravisV
    22. August 2013 at 14:01

    Prof. Sumner,

    You should buy this new book on Singapore’s healthcare system.

    It’s free!

    http://theincidentaleconomist.com/wordpress/the-health-system-that-is-singapores

  70. Gravatar of Brian Donohue Brian Donohue
    22. August 2013 at 14:04

    W. Peden,

    Please help me spot the sexism to which you refer:

    “It does appear that on many, many different human attributes — height, weight, propensity for criminality, overall IQ, mathematical ability, scientific ability — there is relatively clear evidence that whatever the difference in means — which can be debated — there is a difference in the standard deviation, and variability of a male and a female population. And that is true with respect to attributes that are and are not plausibly, culturally determined. If one supposes, as I think is reasonable, that if one is talking about physicists at a top 25 research university, one is not talking about people who are two standard deviations above the mean. And perhaps it’s not even talking about somebody who is three standard deviations above the mean. But it’s talking about people who are three and a half, four standard deviations above the mean in the one in 5,000, one in 10,000 class. Even small differences in the standard deviation will translate into very large differences in the available pool substantially out.”

    Is this about men being more prone to criminality than women? Is that a sexist observation?

  71. Gravatar of W. Peden W. Peden
    22. August 2013 at 14:33

    Brian Donohue,

    Actually, I never said that Summers had made sexist remarks; only that there are people who object to his becoming Fed chairman on the basis of their belief that he did.

  72. Gravatar of Steve Steve
    22. August 2013 at 16:21

    W Peden,

    I suspect a good many who oppose Summers for sexism actually oppose him for more substantive reasons but find sexism an easier sell, politically.

  73. Gravatar of Steve Steve
    22. August 2013 at 16:27

    The same can be said about Yellen opponents. No one opposes Yellen because she is “too meticulous and too prepared.” They oppose Yellen because she is not a White House insider, but that is an unbecoming reason, politically.

  74. Gravatar of Dan Dan
    22. August 2013 at 16:29

    Scott,

    You frequently point out that the Fed erred in 2008 by tightening when it should have been loosening. Yet from the start of 2008 until the Lehman bankruptcy, the retail price of gas climbed 30%, exceeding $4 a gallon in late summer.

    If the Fed had pursued a loose monetary policy what would have happened to the price of gasoline? How would this pricing have impacted the economy? How would it have impacted the politicians?

    You seem so certain of yourself that the benefits of an expansive monetary policy will exceed the harms. Is this because you don’t think there is any harm? Or do you claim the moral authority to judge those who are harmed to be of less concern than those who benefit?

  75. Gravatar of Geoff Geoff
    22. August 2013 at 17:15

    Dan:

    It’s called collateral damage.

    We’re supposed to not care about those who are harmed by inflation that outpaces their incomes.

  76. Gravatar of George Selgin George Selgin
    22. August 2013 at 17:29

    Edward, the quote Scott criticizes from Obama does not have him saying that money is too loose “right now.” It is a general statement about the Fed’s responsibilities. My remarks are apropos of the discussion of the merits of the quote. They say nothing about “right now.” Perhaps you think that general policy stands can be formulated solely by reference by what is required “right now,” but I don’t.

    As for the natural rate, (1) whether it is observable or not has no bearing on the question whether the Fed should, in principle, be concerned about the danger of excessively easy monetary policy leading to unsustainable asset price booms even when it doesn’t lead to a higher rate of CPI inflation; (2) the whole idea of targeting NGDP or some measure of nominal spending is precisely that it can be shown in theory to be better than inflation targeting at avoiding departures of actual i from (unobservable) i(n).

    In general, its a mistake to confuse “unobservable” with “safe to ignore.”

  77. Gravatar of marcus nunes marcus nunes
    22. August 2013 at 19:30

    Mark
    The different National Accounting Systems was a good explanation. Adam Posen is American and should know the distinction (given that he spent some time at the BoE!)

    Edward, this post ‘compares’ NGDP and NGDI during the Great Moderation & Great Recession:
    http://thefaintofheart.wordpress.com/2013/01/31/ngdp-ngdi-two-sides-of-the-ledger-and-playing-catch-up/

  78. Gravatar of Saturos Saturos
    22. August 2013 at 19:38

    Oh no, we’re down from number 4: http://www.onalyticaindexes.com/2013/07/31/top-200-influential-economic-blogs-aug-2013-2/

  79. Gravatar of Saturos Saturos
    22. August 2013 at 19:41

    Interesting remarks by Paul Krugman:

    …the reason I read Haberler back when was because I wanted to see if there were “lost” insights in macro comparable to the ones that had been temporarily suppressed in geography and development. I couldn’t find any; pre-Keynesian macro was just a mess).

  80. Gravatar of Saturos Saturos
    22. August 2013 at 19:42

    Whoops, that’s from http://krugman.blogs.nytimes.com/2013/08/22/more-economath/?_r=0

  81. Gravatar of TravisV TravisV
    22. August 2013 at 23:44

    Prof. Sumner,

    Now you have to comment on Krugman’s deregulation –> bubbles theory. He just wrote an entire column on the subject.

    http://www.nytimes.com/2013/08/23/opinion/krugman-this-age-of-bubbles.html?_r=0

    “the other obvious culprit is financial deregulation “” not just in the United States but around the world, and including the removal of most controls on the international movement of capital. Banks gone wild were at the heart of the commercial real estate bubble of the 1980s and the housing bubble that burst in 2007. Cross-border flows of hot money were at the heart of the Asian crisis of 1997-98 and the crisis now erupting in emerging markets “” and were central to the ongoing crisis in Europe, too.

    In short, the main lesson of this age of bubbles “” a lesson that India, Brazil, and others are learning once again “” is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis.”

  82. Gravatar of Scott Sumner Scott Sumner
    23. August 2013 at 00:20

    Everyone, I read all the comments, and thanks for the useful suggestions. Just have time for a few.

    Alexander. I would not be outraged if an Austrian economist expressed those views. They don’t favor fiscal stimulus. I am outraged that we have a President who wants to floor the accelerator and at the same time keep his foot on the brake. Won’t that waste gas? That’s what bothers me about Obama.

    Liberal, I suspect Summers won’t change policy dramatically in the short run. But whatever he does change, it will be for the worse.

    George, Yes, but see my reply to Alexander.

    Travis, No, I don’t agree with Krugman. I think moral hazard caused by bad regulation led to some of the bubbles, but not all. (not the dot come bubble.) More regulation would not have helped, because the regulators were encouraging the bad banking policies. More regulation would have meant even more encouragement to do sub-prime loans. The regulators favored reckless banking; why give the regulators more power? The Feds are still subsidizing sub-prime loans. So more regulation is not the answer.

  83. Gravatar of Scott Sumner Scott Sumner
    23. August 2013 at 00:44

    Tom, You must be new to this blog. You will find all of your claims refuted in previous posts.

    Doug and Paul, Obama may be in over his head, as you say, but he’s still the President and will be blamed if he screws up. Ignorance is no defence in that position.

    Mark, Thanks for that interesting info. I still think it’s odd they calculate RGDP w/o NGDP. No wonder the British RGDP data is so lousy.

    Edward. I believe they would be almost identical.

    Jim, I’m fine with wage targeting, but it won’t affect real wages.

    Dan, You asked:

    “Or do you claim the moral authority to judge those who are harmed to be of less concern than those who benefit?”

    Anyone with any public policy views at all claims the moral authority to expound those views. I’m a utilitarian.

    As for gas prices, they would have been higher with a prosperous US as compared to one with millions of extra jobless.

    Travis, It’s absurd to claim that India’s problems are due to “deregulation.” Please tell me that Krugman didn’t say that. India’s problems are 99.9% supply-side and 0.1% bad monetary policy. The supply-side problems are 99.9% too much regulation. The country is grossly over-regulated.

  84. Gravatar of ThomasH ThomasH
    23. August 2013 at 03:39

    The President may not have expressed the principle that Scott wanted to hear, but a Fed Chairman that that was a little more interested in growing the economy (even if it required raising the growth rate of NGDP) would be very welcome right now. Whether either Yellen or Summers is so inclined is another matter.

  85. Gravatar of TravisV TravisV
    23. August 2013 at 05:07

    Prof. Sumner,

    Do you support higher capital requirements for our banks? Should they be even higher for our TBTF banks?

    Do you really want us to emulate Canada’s financial system? Or do you want us to do nothing more than limit the scope of our government deposit insurance?

  86. Gravatar of Steve Steve
    23. August 2013 at 05:32

    Scott and TravisV,

    The NYTimes published a column “The Age of Denial” along with Krugman’s column “The Age of Bubbles” today.

    I suggest “The Age of Hyperbole” for the next column. It’s all just yellow journalism, NY Times style.

  87. Gravatar of TravisV TravisV
    23. August 2013 at 06:18

    Glad to see this:

    “Robert Hall Urges Fed Not to Tighten Too Soon”

    http://blogs.wsj.com/economics/2013/08/23/economist-urges-fed-not-to-tighten-too-soon/?mod=WSJBlog

  88. Gravatar of TravisV TravisV
    23. August 2013 at 06:23

    Yikes!

    Market Monetarists, Are You Suuuure that higher interest rates mean the U.S. economy is strengthening?

    “New Home Sales decline sharply to 394,000 Annual Rate in July”

    http://www.calculatedriskblog.com/2013/08/new-home-sales-decline-sharply-to.html

  89. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. August 2013 at 07:15

    ‘India’s problems are 99.9% supply-side and 0.1% bad monetary policy. The supply-side problems are 99.9% too much regulation. The country is grossly over-regulated.’

    And India’s improvement of the past quarter century is due to drastic loosening of those regulations (the ‘License Raj’); very ably defended by Jagdish Bhagwati this week at Russ Roberts’ Econtalk;

    http://www.econtalk.org/archives/2013/08/bhagwati_on_ind.html

    Fun way to spend an hour for econonerds.

  90. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. August 2013 at 09:01

    Robert Hall’s paper is now available;

    http://www.kansascityfed.org/publicat/sympos/2013/2013Hall.pdf

    Conclusion;

    ‘The central danger in the next two years is that the Fed will yield to the intensifying pressure to raise interest rates and contract its portfolio well before the economy is back to normal. The worst step the Fed could take would be to raise the interest rate it pays on reserves. The analysis of this paper focusing on the zero lower bound applies equally to a reserve rate above zero. Every percentage point increase in the reserve rate drives the real interest rate up and contracts the economy by the principles discussed here.’

  91. Gravatar of marcus nunes marcus nunes
    23. August 2013 at 09:56

    Travis, Patrick
    I thought Robert Hall´s Conference Openning paper was pretty poor. The closing of his abstract reminded me of the character Chance the Gardner, played by Peter Sellers in “Being There”:
    http://thefaintofheart.wordpress.com/2013/08/23/jackson-hole-conference-off-to-a-bad-start/

  92. Gravatar of TravisV TravisV
    23. August 2013 at 11:03

    Prof. Sumner and Marcus,

    Apropos of Marcus’s post above, doesn’t it seem like the Fed is now implicitly targeting NGDP growth of 4%?

    Isn’t 4% growth about what the market expects from here? So if market expectations ever fall below 4% growth, then that’s harming the recovery, right? Things will be getting worse, not healing on their own, as Robert Hall suggests?

  93. Gravatar of TravisV TravisV
    23. August 2013 at 11:06

    Prof. Sumner,

    Second question (unrelated): you’ve previously said that, had the Fed targeted 5% NGDP growth in 2008 and 2009, then inflation (presumably the GDP deflator) would have reached about as high as 4%. What maximum numbers do you think headline CPI growth and core inflation would have hit?

  94. Gravatar of marcus nunes marcus nunes
    23. August 2013 at 11:37

    Travis
    The Fed isn´t targeting 4% (or any other number) growth. Bernanke is an IT die-hard! Check this out:
    http://thefaintofheart.wordpress.com/2013/08/23/business-cycle-symmetries-asymmetries/

  95. Gravatar of Bill Ellis Bill Ellis
    23. August 2013 at 12:28

    Putting all the blame on Obama over looks the far bigger problem.

    The politics of our government, and the whole western world are dominated by people like Obama, who have yet to be convinced that key economic ‘truths” they’ve held for their entire lives are in fact situational truths.

  96. Gravatar of Bill Ellis Bill Ellis
    23. August 2013 at 12:33

    I guess We were doomed.
    It is not like McCain or Romney would have “listened to the right progressives ” either.
    And since the “right” Conservatives are totally in the wilderness politically… well we were doomed.

  97. Gravatar of jknarr jknarr
    23. August 2013 at 12:38

    Scott, was reading Hall’s ZLB piece, and looking at the Woodford section — http://www.kansascityfed.org/publicat/sympos/2013/2013Hall.pdf

    Hall dismisses NGDP targeting with a reference to:

    http://www.nber.org/papers/w4439

    But in the 1993 piece, they consider NGDP targets (level targeting) “a reasonably good rule” that can “achieve a considerably more appealing combination of output and price stability”.

    They complain that RGDP continues to be volatile, but this is not much of an objection — monetary policy can durably kill RGDP on the lower bound, but cannot do much to durably increase it on the upper bound, no?.

    If that paper is now the Fed’s objection to NGDP targeting, perhaps we can address (and likely knock down) its objections clearly.

  98. Gravatar of jknarr jknarr
    23. August 2013 at 12:55

    And I see that they are discussing an exit from near-zero rates. Do they understand how much base money needs to disappear for that to happen?!

    http://research.stlouisfed.org/fred2/graph/?g=lK3

  99. Gravatar of ssumner ssumner
    23. August 2013 at 22:45

    Travis, First best policy is to get rid of moral hazard and do NGDPLT. I don’t know enough to recommend a second best–perhaps higher capital req.

    I don’t think higher rates reflect faster growth expectations. I don’t know what they reflect.

    Patrick, Yes, deregulation helped India, but they need to do much more.

    jknarr, Thanks, I’ll take a look when I return.

  100. Gravatar of benjamin cole benjamin cole
    24. August 2013 at 04:44

    I have nothing to add here. I just wanted to be the 100th commenter.

  101. Gravatar of TravisV TravisV
    24. August 2013 at 04:55

    Prof. Sumner,

    Apologies for repeating myself but….

    You’ve previously said that, had the Fed targeted 5% NGDP growth in 2008 and 2009, then inflation (presumably the GDP deflator) would have reached about as high as 4%. What maximum numbers do you think headline CPI growth and core inflation would have hit?

  102. Gravatar of TravisV TravisV
    24. August 2013 at 09:08

    Interesting graphic:

    “Summers vs. Yellen Scorecard: Who’s Supporting Whom?”

    http://www.ritholtz.com/blog/2013/08/summers-vs-yellen-scorecard-whos-supporting-whom

  103. Gravatar of Alexei Sadeski Alexei Sadeski
    24. August 2013 at 16:51

    The wrong set of progressives?

    Haven’t yet found a good set of progressives worth listening to…

  104. Gravatar of Bill Ellis Bill Ellis
    24. August 2013 at 20:04

    “If you’re committed to keeping the government small, your best bet is to opportunistically align with rent-seeking elements and try to ensure that when public money is spent it’s spent wastefully.”…Matt Yglesias

    It’s true. All because libertarians have faith in a world they envision, A world where free markets rule, so power can’t corrupt. They have faith a world that has never been. Faith enough to cast all who benefit from government on their own. The word for that is Zealotry.
    The libertarians are evangelicals, the GOP their willing converts.

    http://www.slate.com/blogs/moneybox/2013/08/22/gop_won_t_like_obama_on_higher_education.html#article_comment_box

  105. Gravatar of Scott Sumner Scott Sumner
    25. August 2013 at 00:22

    Travis, I really don’t know, perhaps 6 percent. Obviously it doesn’t matter because inflation doesn’t matter.

    Bill, That’s a pretty silly quotation. Libertarians are constantly suggesting ways to make government more efficient. If you don’t believe me then check out the Reason Foundation.

  106. Gravatar of TravisV TravisV
    25. August 2013 at 05:42

    Bad Krugman:

    He praises a dubious column by Matthew C. Klein, which claims that interest on reserves doesn’t matter.

    http://krugman.blogs.nytimes.com/2013/08/24/commercial-banks-as-creators-of-money/?_r=0

  107. Gravatar of TravisV TravisV
    25. August 2013 at 05:44

    Good Krugman:

    He critiques Bob Hall’s paper here and he sounds very Sumnerian:

    http://krugman.blogs.nytimes.com/2013/08/25/unnatural-models-of-the-labor-market-wonkish

    Krugman even uses the term “money illusion”!!!!!

  108. Gravatar of TravisV TravisV
    25. August 2013 at 11:39

    Milton Friedman:

    “both of them, I would say, added to our understanding of business cycles. Only I don’t think there are business cycles.”

    http://www.hoover.org/publications/hoover-digest/article/6459

    That is a remarkable statement. Why isn’t Friedman’s disbelief in business cycles highlighted more often by Market Monetarists?

  109. Gravatar of Negation of Ideology Negation of Ideology
    25. August 2013 at 11:47

    Kudlow says Geithner is in the running for Fed chair:

    http://www.nationalreview.com/article/356649/geithner-rescue-larry-kudlow

    Scott, since you were able to influence the debate on Summers for Fed chair, why not come out full force fpr the only true market monetarist candidate, Christina Romer?

  110. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. August 2013 at 12:27

    Travis,
    You wrote:
    “Why isn’t Friedman’s disbelief in business cycles highlighted more often by Market Monetarists?”

    Friedman believed that business cycles are largely a monetary phenomenon, “a dance of the dollar” as Irving Fisher once described it in the title of an article. Why do you find that statement to be so revelatory?

  111. Gravatar of TravisV TravisV
    25. August 2013 at 14:03

    Mark Sadowski,

    That comment from Friedman violates the intuition of the vast majority of people and the vast majority of economists. Kinda like his easy-money advocacy for Japan.

    Prof. Sumner wrote this post arguing that there is no such thing as a business cycle:

    https://www.themoneyillusion.com/?p=20114

    If he had cited that quote from Friedman, his argument would have been that much more persuasive.

  112. Gravatar of Geoff Geoff
    25. August 2013 at 14:24

    “People talk about the wisdom of the free market – of the invisible hand – but there’s no free market in money today. Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimise the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing…” – Howard Marks, founder Oaktree Capital Management.

  113. Gravatar of Geoff Geoff
    25. August 2013 at 14:26

    http://i.imgur.com/3nAuPl0.gif

  114. Gravatar of ssumner ssumner
    28. August 2013 at 12:54

    Thanks Travis.

    Negation, I have endorsed Romer.

  115. Gravatar of TravisV TravisV
    28. August 2013 at 17:24

    Are there any other cases out there where Milton Friedman said something to the effect of “there is no such thing as business cycles”?

  116. Gravatar of Geoff Geoff
    28. August 2013 at 17:55

    “Are there any other cases out there where Milton Friedman said something to the effect of “there is no such thing as business cycles”?”

    If you mean business cycles NOT cuased by the Federal Reserve System, then probably no:

    https://www.youtube.com/watch?v=DUDaev3gKW8#t=0m14s

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    […] there’s such a thing as booms, or at least of booms caused by easy money, to the point of taking exception to a recent statement by President Obama to the effect that, among its other responsibilities, the Fed should guard against […]

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