Who’s easy and who’s tight according to the WSJ

A few weeks ago I gave the Wall Street Journal a hard time over this recent quotation:

This is the real root of our current economic malaise””the conceit of Congress and the White House that more government spending, taxing and rule-making can force-feed economic expansion. Now that this great government experiment is so obviously failing, the politicians and the Wall Street Keynesians who cheered the stimulus are asking the Federal Reserve to save the day. Mr. Bernanke should tell them politely but firmly that his job is to maintain a stable price level, not to turn bad policy into wine.

Here was my reaction:

So that’s what it’s really all about.  I agree that Obama’s economic policies are highly counterproductive.  But unlike some conservatives I am not willing to unemploy millions of workers to win a policy argument.  I guess that’s the difference between hard core conservatives and pragmatic classical liberals like Friedman and I.  We should do the right thing and then put our trust in the democratic system.

Was I being unfair?  Maybe the WSJ would have made the same argument if a Republican was president.  After all, they say they favor a stable price level, and prices are still rising at 1%, and are expected to continue rising at that rate.  Do I have any right to infer they were trying to prevent Obama’s policies from looking more effective than they really are?

Fortunately, there is a very good way of showing whether they are advocating tight money for idealistic reasons, and not merely to insure the US economy is performing poorly in November.  A few weeks back I asked commenters to supply a WSJ editorial on monetary policy from back when Reagan was president.  Benjamin Cole came up with a very revealing editorial called “Who’s Easy” from December 18, 1984.  Here’s the first paragraph:

As the Federal Reserve Open Market Committee meets to chart monetary policy, real growth is equivocal and prices are rising at most slowly.  The arguments are for an easier policy, but probably the Fed thinks it’d eased already.

Sounds reasonable.  Presumably in December 1984 prices and output were rising much more slowly than the recent rates, and hence there was a need for easier money.  Just to make sure, let’s check the data:

Most recent 12 month growth rates, 2009:2 to 2010:2:

NGDP — 3.85%      RGDP — 2.98%     GDP deflator — 0.85%

Most recent 12 months growth rates as of December 1984 (1983:3 to 1984:3):

NGDP — 10.84%     RGDP — 6.87%   GDP deflator — 3.73%

Interesting that when Reagan was president the WSJ saw 4% inflation as too low, as prices that were “rising at most slowly.”  Now anything higher than 0.85% constitutes an abandonment of the Fed’s duty to maintain price stability.  If price stability is truly the goal, then why advocate greater monetary ease when inflation is almost 4%?   And if 6.87% real growth is “equivocal” then what is 2.98% growth?

I’m afraid the WSJ was wrong in 1984 (we didn’t need easier money) and they are wrong now (we do need easier money.)  I favor the same NGDP target whoever is president–a 5% growth trajectory, level targeting.  That means we need more than 5% NGDP growth for the next year or two.

Perhaps the WSJ got confused over interest rates; after all, they were much higher then than now.  Actually, in 1984 the WSJ had an almost Friedmanesque understanding that interest rates are highly misleading:

Interest rates, we should have learned these past few years, are not a reliable guide to monetary policy.

Unfortunately by 2010, when Obama was president, the WSJ seems to have forgotten what it once knew:

As for the current moment, the Fed has maintained its nearly zero interest rate target for 20 months, while expanding its balance sheet by some $2 trillion. By any definition this is historically easy monetary policy, and not without costs of its own.

The balance sheet numbers are not accurate, and even if they were they were, “historical” definitions of easy money would be meaningless once the Fed started paying interest on reserves.  I suppose they might argue that even though inflation is now low, easier money would lead to dangerous increases in inflation.  Here’s what the WSJ said in 1984:

For our part though, we have trouble understanding what’s wrong with economic growth.  What does the open market committee have against it?  In particular, growth is not inflationary; inflation is too many dollars chasing too few goods, and growth produces more goods.   When was it the committee came down from the mountain with stone tablets saying that 3% real growth is OK, but 4% will produce “bottlenecks and “overheating”?

Or “structural problems,” or “job mismatches,” I might add.  I can’t answer their question, you’ll have to ask the hawks at the Fed.

OK, so the WSJ has changed its mind on monetary policy.  Surely there is no reason to think that this reflects political bias.  It’s not like their earlier views were aimed at making Reagan’s policies look good.  Or were they?

Fed policymakers tend to discount any significant possibility of a 1985 recession, and on that assumption feel free to take another yank or two at the remnants of inflation.  But if they are wrong, the price will be high.  Indeed, a 1985 recession would probably mean not only the political failure of Reagan’s budget cuts, but an economic donnybrook with new international and banking-system problems.

Two terms jump out at me; ‘remnants’ of inflation, and the ‘political’ failure of Reagan’s budget cuts.

So what do you guys think?  Does political bias lead the WSJ to call for monetary policies that are good for the economy when Republicans are in office and bad for the economy when Democrats are in office?

Update:  The following information was posted by Mark Sadowski in the comment section.  I thought it worth repeating here:

The WSJ wrote this in April 2004 after ten months of an unprecedentedly low 1% fed funds rate:

“In many respects, the Fed can be more patient because the risks of waiting are lower. Back in 1994, hardly anyone at the Fed was comfortable with allowing inflation “” then 3% “” to rise; many wanted it to fall. Today, no one at the Fed wants less inflation; some want a bit more to minimize the deflation risk. Back then, hardly anyone at the Fed suspected the U.S. economy was enjoying an epochal surge in productivity that would allow faster growth and bigger wage increases without more inflation. Today, everyone sees the productivity surge; the only question is how much of it will persist.

Still, the case for keeping rates at 1% is diminishing, and markets, businesses and consumers may be surprised how quickly the Fed moves once it begins.”

http://online.wsj.com/article/0,,SB108258824265389952,00.html?mod=COLUMN

What were the 12 month growth rates, 2003:1 to 2004:1?

NGDP “” 6.51% RGDP “” 4.14% GDP deflator – 2.27%

So GDP was growing relatively fast and inflation was above the implicit target but the WSJ was ho hum about raising rates and mentioned the risk of deflation. It seems to me that what the WSJ considers loose monetary policy and high inflation depends on which party controls the White House (Bush of course was facing a tight reelection).


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40 Responses to “Who’s easy and who’s tight according to the WSJ”

  1. Gravatar of Liberal Roman Liberal Roman
    9. September 2010 at 13:28

    It is obvious that the WSJ op-ed page is biased against Democrats. That’s not even worth discussing.

    What’s more interesting (and scary/depressing for liberals and leftists like myself) to discuss is the topic of Fed bias against Democrats and liberal administrations in general.

    Here is a blog post on the topic at RortyBomb Blog:

    http://rortybomb.wordpress.com/2010/08/18/back-does-the-federal-reserve-simply-not-like-democrats/

    Here is a paper by Galbraith arguing this point:

    http://utip.gov.utexas.edu/papers/utip_42.pdf

    Excerpt:

    “Finally, there is the claim that the Federal Reserve is apolitical. We examine the hypothesis of a presidential election cycle in the term structure of interest rates. We find compelling evidence that such a cycle existed in both sub-periods. Specifically, we find that in the year before presidential elections, the term structure deviates sharply from otherwise-normal values. When a Republican administration is in office, the term structure in the pre-election year tends to be steeper, by values estimated at up to 150 basis points, and monetary policy is accordingly more permissive. When a Democratic administration is in office, the term structure tends to be flatter, by values also estimated at up to 150 basis points-and monetary policy is more restrictive. These findings are robust across model specifications and across time, though the anti-Democrat effect is smaller after 1983. Taken together, they suggest the presence of a serious partisan bias, at the heart of the Federal Reserve’s policymaking process.”

    This would be truly depressing and I can totally see it being true. It doesn’t even have to be nefarious. The ideology of conservatism has so totally won the political argument that it has permeated into all institution and their thinking.

    Hoening can be sitting there thinking: “Well, obviously this poor economic recovery is all Obama’s fault. We don’t need to do anything”

    In 4 years he’ll be thinking, “Wow, the economy is still bad despite all of the great policies Palin put in. The Fed HAS to do something.”

  2. Gravatar of Benjamin Cole Benjamin Cole
    9. September 2010 at 13:57

    Yet another trenchant post by Scott Sumner.

    Well…consider Richard W. Fisher’s (Dallas Fed Prezzy) commentary today in the WSJ op-ed gang-bang on monetary policy.

    Fisher comes within a whisker of saying, “When I have the tax and reg policies I like, not the ones Obama likes, then you can have your monetary growth.”

    Fisher then recounts the R-party line, that tax and reg policy is creating too much uncertainty, so business cannot grow. I got news for this Fisher: I ran a small business for 20 years, and still do to a limited extent. My biggest uncertainty was demand and sales. That far, far outweighed any other concerns, such as taxes and regs. And demand and sales were tied to my own abilities and overall AD.

    As with Sumner, I want the best monetary policy at all times, not just when the party I like is in power. (Since I find both parties lacking, this is easy for me to say).

    The WSJ is rather obviously calling for monetary stimulus when there is a Reagan or Bush in power, then calling for tightness when an Obama assumes office.

  3. Gravatar of scott sumner scott sumner
    9. September 2010 at 14:00

    Liberal Roman; You said;

    “It is obvious that the WSJ op-ed page is biased against Democrats. That’s not even worth discussing.”

    That’s not what I was asking. Of course they favor the GOP, I knew that. But would they favor policies that unemployed millions of workers just to make a political point? That’s would be unconscionable. We all know the WSJ and Fox are biased against the Dems and the NYT is biased against the GOP. That’s a separate issue.

    I’m not impressed by the Galbraith theory. The Fed was pretty good to the Dems in 1996 and 2000, was tough on Bush in 1992 and was absolutely brutal to McCain in 2008.
    But it is very possible that right now some of the hawks are biased against the Dems—that I could believe.

  4. Gravatar of scott sumner scott sumner
    9. September 2010 at 14:04

    Benjamin, Yes, that group of 5 didn’t exactly appear “fair and balanced.”

  5. Gravatar of Anthony Anthony
    9. September 2010 at 14:06

    Given the data points that:

    – In 1984, when monetary policy was if anything too loose (10.84% NGDP growth is quite a bit above 5%, though I don’t know how far below trend 1984 was), they argued for looser policy; and

    – In 2010, when monetary policy is too tight, they argue for tighter policy

    It seems that the simpler conclusion to draw is that the WSJ is always wrong on monetary policy. It’s hard to see too much inflation (the probable result of their 1984 suggestion) as good for the economy.

    Not to mention, its been 26 years, its not like the WSJ is even the same people it was back then or that even if it were, it’d be surprising to see opinions change over nearly three decades.

  6. Gravatar of Benjamin Cole Benjamin Cole
    9. September 2010 at 14:09

    Liberal Roman: That is an amazing paper by Galbraith.

  7. Gravatar of StatsGuy StatsGuy
    9. September 2010 at 14:45

    Scott, I think you will find this interesting:

    http://www.cnn.com/2010/OPINION/09/07/frum.contract.america/index.html

    Note Frum’s background. A quote from his post:

    “(4) A commitment by GOP senators to approve to the Federal Reserve Board only appointees committed to a more expansionary monetary policy.”

    Note all conservatives are nuts… Which is probably why the American Enterprise Institute fired him. Have no doubt that if George W. was in power, this is what his advisers would be telling him – DID tell him back in 01/02.

  8. Gravatar of StatsGuy StatsGuy
    9. September 2010 at 14:46

    NOT all conservatives are nuts…

  9. Gravatar of Charles R. Williams Charles R. Williams
    9. September 2010 at 15:03

    Reagan removed roadblocks to growth. Obama erected roadblocks and plans to do even more damage. In 1984-85, the dollar was very strong and rising, one sign that monetary policy was constraining growth. It was reasonable to argue in 1984, that expansionary monetary policy would fuel growth and not inflation. It is reasonable today to argue that QE would raise prices and not real output and employment. The “natural” rate of unemployment has soared and at the micro level there is not much slack in the economy. Unemployed mortgage brokers, real estate agents and construction workers in the inland empire do not constitute slack. In addition we have a huge and out of control deficit, a weak dollar and nervous financial markets.

    We also look at monetary policy differently today than 26 years ago. Then the quantity theory was in vogue. Targeting NGDP is a fringe proposal today (although a promising approach). There is no clear consensus on how tight monetary policy is and what potential exists to improve our situation through QE. My own opinion is that the recession was not precipitated by monetary policy in 2006-2007 and so monetary policy is not the key to healing the economy in 2010. The situation in the early eighties was the opposite – a recession engineered to stop an inflationary spiral thru monetary policy, which had been successful, and a recovery in full swing by 1984 with plenty of room to continue in a balanced healthy economy.

    There is no question that the WSJ is anti-Obama. It is paranoid to think that they are proposing bad policy in order to sink his administration. Things are bad enough for all of us.

  10. Gravatar of Liberal Roman Liberal Roman
    9. September 2010 at 15:10

    @Charles Williams,

    “It is reasonable today to argue that QE would raise prices and not real output and employment. The “natural” rate of unemployment has soared…”

    What is your evidence? That is a nice talking point I’ve heard a lot lately but there is no evidence. The only way I would agree is if the Fed monetary policy was appropriate and we had 2-3% core inflation and yet still unemployment was not coming down.

    The sad thing is that you might be right but for the wrong reasons. The natural rate of unemployment probably has increased in the country but only because the Fed has kept several million people sitting on their asses the last couple of years making them permanently unemployable.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. September 2010 at 15:24

    The WSJ wrote this in April 2004 after ten months of an unprecedentedly low 1% fed funds rate:

    “In many respects, the Fed can be more patient because the risks of waiting are lower. Back in 1994, hardly anyone at the Fed was comfortable with allowing inflation — then 3% — to rise; many wanted it to fall. Today, no one at the Fed wants less inflation; some want a bit more to minimize the deflation risk. Back then, hardly anyone at the Fed suspected the U.S. economy was enjoying an epochal surge in productivity that would allow faster growth and bigger wage increases without more inflation. Today, everyone sees the productivity surge; the only question is how much of it will persist.

    Still, the case for keeping rates at 1% is diminishing, and markets, businesses and consumers may be surprised how quickly the Fed moves once it begins.”

    http://online.wsj.com/article/0,,SB108258824265389952,00.html?mod=COLUMN

    What were the 12 month growth rates, 2003:1 to 2004:1?

    NGDP “” 6.40% RGDP “” 4.10% GDP deflator – 2.30%

    So GDP was growing relatively fast and inflation was above the implicit target but the WSJ was ho hum about raising rates and mentioned the risk of deflation. It seems to me that what the WSJ considers loose monetary policy and high inflation depends on which party controls the White House (Bush of course was facing a tight reelection).

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. September 2010 at 15:57

    Actually that should read:
    NGDP “” 6.51% RGDP “” 4.14% GDP deflator – 2.27%

  13. Gravatar of Benjamin Cole Benjamin Cole
    9. September 2010 at 16:03

    Charles Williams: QE would only raise prices? Promise?
    Fire it up!!!
    Real estate loans are in nominal dollars. If we can reflate real estate, we have solved many problems.
    Read up on wage stickiness while you are at it.
    Add to that that property and small businesses have to borrow money to expand (usually on real estate). Mild inflation improves their animal spirits. If you buy and fix up a property, and there is 3 percent inflation, you probably will not get your head handed to you even if some things go sideways.
    In deflation, you will get your head handed to you. No one will lend to you, or on your deflating assets.
    BTW, I agree with you on Reagan vs. Obama.
    On the other hand, George Bush jr. committed us to two wars, the total cost of which will exceed $3 trillion. I never heard Richard Fisher, or the WSJ, call for a tighter monetary policy in lieu war demands and deficit spending that could cause inflation. Those wars damaged our economy worse than anything Obama will ever do (unless Obabam actually tries to prevail in Afghanie–I may have to eat those words).
    The fact is, inflation is dead now, just like Jimmy Hoffa. The Dodger pennant hopes. My chances for landing Jennifer Lopez in bed. Dead. And that ain’t good news.
    Zero inflation is a dangerous utopian pipe dream–witness Japan. BoJ central bankers still pettifog about the need for price stability. Property values and equities are off 75 percent in 20 years. The yen is very strong, much stronger than the dollar. Tight money in Japan has been a disaster. Japan’s share of global GDP is shrinking. They have underperformed statist France in the last 20 years by every measure.
    Tight money is a disaster. Move your assets into some other counrty if we do not get some serious QE soon.

  14. Gravatar of Morgan Warstler Morgan Warstler
    9. September 2010 at 16:34

    Uhm…. who cares?

    Reagan came in an intentionally deficit spent, so did Bush.

    The point is the game was not over when in 1913, our labor and property became the thing that stands behind the currency. Not by a long shot.

    The fight to keep Democracy from killing Capitalism has not gone this well historically, not until 1980.

    Now we’ve got the EURO as living proof that 3% deficits – and no control of your own currency…. evens things up nicely with the public employees, forces people to see up close what works and what doesn’t… and raise their game, or else.

    Now we’ve got China as living proof that what matters is the incentive of profit motive, and that this voting thing well – the liberals better be careful with how invasive they think it can be.

    The point is now we finally have some competition playing by the rules the right has been demanding we stick to for 100 years – and they are real competition, the kind of competition that requires FOR SURE wildcatters and cowboys…. eggheads and theories? The jury is still out on.

    And from this 30K view, we’re gonna moan that in 1984 coming off stagflation the WSJ’s reality was different than it is now?

    If you polled the WSJ’s readership and asked them if they’d rather have Reagan or Obama be President right now, what do you imagine the results would be?

    Besides Robert Reich, who’s reading it to do opp-research, I don’t think anyone would chose Obama.

    Also, here was the best article of the day:

    http://www.forbes.com/forbes/2010/0927/politics-socialism-capitalism-private-enterprises-obama-business-problem.html

  15. Gravatar of foosion foosion
    9. September 2010 at 16:38

    >>Mr. Bernanke should tell them politely but firmly that his job is to maintain a stable price level>>

    The Fed has twin mandates, employment and price stability. The WSJ is encouraging the Fed to break the law by ignoring its mission.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. September 2010 at 17:24

    foosion,
    In my comment I almost mentioned the unemployment rate data in April 2004 but I didn’t because I felt from a NGDP targeting perspective it was unnecessary. However, since you raise the point, unemployment was 5.8% in March of 2004 at a time when the CBO esimated NAIRU to be 4.8%. Today of course unemployment is 9.6% when the CBO estimates the NRU to be 5.0%. Yet the WSJ didn’t feel it was terribly important to raise rates in 2004 but it is imperative today. Go figure.

  17. Gravatar of thruth thruth
    9. September 2010 at 17:30

    Speaking of WSJ, David Wessel’s (WSJ Econ editor) account of the Fed and Treasury activities during the crisis, “In Fed We Trust” is pretty good. Well worth a read for any monetary crank (joke).

  18. Gravatar of scott sumner scott sumner
    9. September 2010 at 17:52

    Anthony, See the update I just added at the end of the post (from Mark Sadowski)

    Statsguy, Yes, I like Frum.

    You said: “Note all conservatives are nuts…”

    Freudian slip?

    Charles; You said;

    “Unemployed mortgage brokers, real estate agents and construction workers in the inland empire do not constitute slack.”

    I must have addressed this point 100 times. These job losses had almost nothing to do with the sharp rise in unemployment during 2009. Those jobs were mostly lost in 2006, 2007 and 2008.

    LBJ had far more anti-growth policies than Obama, but the economy expanding rapidly from 1963-69. I also dislike many of Obama’s policies, but that’s a completely separate issue from the business cycle. One reason for a high natural rate is the 99 week UI extension. And why do we have that? Because in 2009 NGDP fell at the fastest rate since 1938. So even that is partly due to tight money.

    Mark, Thanks, that’s very useful, as it shows the problem is also recent. I just added an update to the post with your comment.

    Morgan, Obviously you don’t care. Some of us still look for consistency and fairness in journalism.

    Foosion. Good point.

    Thanks Thruth.

  19. Gravatar of Philo Philo
    9. September 2010 at 20:07

    “I favor the same NGDP target whoever is president–a 5% growth trajectory, level targeting.” But, as I understand it, the reason you favor this is that it would be a continuation of the trend of recent years, and *you don’t want the Fed to rock the boat*. If the trend had been 3% annual growth in NGDP (and 0% inflation), you would want the Fed to continue that. So you should favor the BOJ’s continuing its policy of negative 1% (or negative one-half percent, or whatever it has been) annual inflation–or, better, positive 1% or 2% (or whatever it has been) annual NGDP growth–so as not to rock *that* boat. And in 1984 you would have favored a much higher Fed target than 5% for annual NGDP growth–not because of who was President, but because of the higher trend over the previous decade. (Previous two decades? Previous half a decade? I think you want to maintain “the trend” of NGDP growth, but I don’t know just which previous period’s trend you want to adhere to.)

  20. Gravatar of Bonnie Bonnie
    9. September 2010 at 20:11

    If the WSJ wanted the continuation of bad policy for the sake of destroying Obama/democrats, aren’t there other ways of doing it besides suggesting tight money? From the perspective on the right, there is plently of ammo to find without even needing to look very hard.

    The WSJ is just a newspaper. Obama is the POTUS (who had two or more nominations to make to the Fed when he took office and it didn’t happen until just a few months ago). One is expected to just spout, be inaccurate, or just plain wrong, and it can do so without much consequence. The other carries some expection of doing the right things and has power vested in him to do them. See the difference? Unfortunately, it seems Obama has taken up the former without doing much for the latter.

    And then there is Congress. It also has some ability to do what’s necessary but it spent so much time and political capital on health reform, it didn’t bother to deal appropriately with the economic situation other than throw money at it with barely a thought about where it would land.

    Elections do have consequences and there’s very little way of avoiding them by trying to pin it on the WSJ.

    I sincerely hope that the those with the power to do something that would help the situation don’t open up the WSJ in the morning to decide the best course of action to take regarding improving our economic situation. If they do, well I suppose we deserve everything we get.

  21. Gravatar of Pragmaticon Pragmaticon
    9. September 2010 at 20:26

    How immature am I for snickering at the title?

  22. Gravatar of Morgan Warstler Morgan Warstler
    9. September 2010 at 21:42

    “Some of us still look for consistency and fairness in journalism.”

    Oh jesus seriously? How pious is that? Who are you Al Gore?

    Dude, Drudge is consistency and fairness. 250 years of American press, he’s as perfect an example as you can find.

    Read the wires. Pull the ones that matter to you. See what the world says.

    A far better post on your end would be coming to describe WHY a WSJ in 1984, and a WSJ today are 100% the same rationality even though the prescriptions are different.

    Waving off your opposition as shallow – only makes you shallow. If you can’t faithfully describe their own position better than they can – context included – why do you demand it from others?

  23. Gravatar of Liberal Roman Liberal Roman
    9. September 2010 at 21:49

    @Morgan,

    Lol. Drudge? You really are a wingnut.

    I just randomly decided to go to Drudge RIGHT NOW knowing it wouldn’t take me more than a few seconds to find a horribly misleading headline. And what do you know, I found one that has a lot to do with what we are talking about today. And I quote:

    “Treasuries Tumble Following Weak 30-Year Sale… ”

    Yes, tumbled. They might be 1% off of 100 year highs. But oh yea, they just tumbled is a perfectly accurate description. No bias there. None at all.

    **Sarcasm off**

    You claiming Drudge as a credible source tells me everything I need to know about you Morgan.

  24. Gravatar of Liberal Roman Liberal Roman
    9. September 2010 at 21:54

    Hmm..1 more minute of looking at Drudge website and I find this:

    “Baptist Church to burn Qurans if pastor doesn’t…

    Obama says call it off…

    Sends ‘best wishes’ to Muslims…”

    Nothing nefarious and xenaphobic at all in those lines of headlines. Nothing at all.

  25. Gravatar of MW MW
    10. September 2010 at 06:41

    Galbraith wants to make a claim of political bias based on a sample size of 10?!

  26. Gravatar of MW MW
    10. September 2010 at 06:51

    “What is your evidence?…there is no evidence.”

    A little-known hothouse of right-wing agitprop known only as the “FRB San Francisco” has published on this and provided a variety of econometric estimates showing a higher natural rate: http://www.frbsf.org/publications/economics/letter/2009/el2009-19_update.pdf. Thank you to David Beckworth for providing that link on his blog. If anyone has estimates to the contrary, I would appreciate if they reciprocate and post links.

  27. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2010 at 07:38

    @Roman, you misunderstand. THAT’S REALITY. Scott claims to be a realist.

    Dude, the problem you face is that you don’t LIKE whats coming… and that’s keeping you from getting the best deal you can.

    The question is: since there’s not going to be more QE, and since fiscal spending is out – WHAT DO YOU DO?

    And that’s why I’m right. It’s time to rip off the band-aid, not moan for the things that are not going to happen.

  28. Gravatar of marcus nunes marcus nunes
    10. September 2010 at 07:40

    A “comedian” is the Chair of the CEA. Makes sense!
    http://www.politico.com/click/stories/0910/austan_goolsbee_takes_the_prize.html

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. September 2010 at 07:56

    MW,
    I read Justin Weidner and John C. Williams’ previous paper when David beckworth linked to it in January.

    Various estimates of the NRU are in the very link you posted. Look at Table 2. Note that the Laubach and Williams estimate is by far the worst of the seven estimates in any given quarter although Williams is the coauthor of the very paper you linked.

    To put the Laubach and Williams estimate in perspective consider the following. They estimated the natural rate of unemployment in Q2 2010 to be 8.6% whereas the two CBO estimates put it at 5.0% and 6.0%.

    But every single sector of the economy, save health & educational services, logging & mining, and the internet has lost jobs since the payroll peak, and that peak was nearly three years ago. Those sectors combined account for only 15% of total payroll employment. As a result employment growth dispersion is unusually low for a recession.

    Consequently, employers are having no difficulty filling jobs as evidenced by the fact that the job openings rate was still only 2.3% as of July, not much higher than its all time low. As a result, with plenty of surplus labor in almost every sector, unit labor costs have fallen a total of 4.3% from peak in 4Q 2008 to 2Q 2010. Nothing in the data suggests to me that there is much in the form of sectoral imbalances or structural unemployment.

    In my opinion Beckworth keeps mentioning Laubach and William’s estimates mainly to provoke debate. Those estimates of the NRU are an unusual outlier.

  30. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2010 at 08:47

    I knew Goolsbee in college. He’s got bigger goals. As such, with a newly conservative Congress, I think we might have a decent shot at a tax overhaul… a vast improvement to what we have now.

  31. Gravatar of MikeDC MikeDC
    10. September 2010 at 08:51

    A while back I asked here what folks thought the NAIRU was. I didn’t get a firm answer, but it was “higher”. If one believe the Obama policies enacted have been counterproductive, then maybe they they are approaching 7-8+ %.

    The first thing I’d note is that if this is true, it significantly reduces the scope for monetary policy.

    A second point would be that, the more uncertain we feel about what our baseline unemployment scenario is, should we not feel more uncertain about the effects of monetary expansion by the Fed? Overshooting and generating a negative, high inflation outcome seems more likely to me as we estimate baseline unemployment higher.

    ————–

    Now, I do think it’s wrong for the Fed to withhold good policy to punish a party they don’t like. However, I think it’s worth taking a devil’s advocate position. I don’t necessarily buy these arguments, but I’m trying to think them through and reject them for the right reasons:

    1. The Fed has political independence for a reason. Their judgement is trusted, and if the political branches willfully flout them and pursue policies that the Fed believes will be destructive in the long-run, wouldn’t a truly utilitarian position be for the Fed to force temporary pain to bring about long-term compliance with good policy?

    The entire rationale for an independent Fed is to prevent the political process from favoring short-term manipulation. Obviously it’s a big (and undemocratic) leap for the Fed to actively subvert policy decisions of elected officials, but the logical basis is the same.

    2. Somewhat differently, if there’s significant disconnect between the Fed guys and the elected guys, might the Fed not worry what the elected guys would try to do if given freer money? Could the elected guys be trusted to not further spur monetary growth (via fiscal policy) beyond what the Fed would agree to do?

    On that last note, I’d point out that Clinton and Clinton seemed to get along just fine. They seemed to reach agreement on and basic coordination between their policy spheres. I don’t see anything of the sort between Bernanke and Obama.

    Sorry for the long and rambling post… these are just things that seem related and have been going through my mind lately.

  32. Gravatar of Greg Ransom Greg Ransom
    10. September 2010 at 08:57

    The WSJ doesn’t represent any principled position — they’ve been Keynesians with a “supply-side” twist for decades.

    And there’s really nothing consistent in this world view — go ask Bruce Bartlett.

    And there’s very little that is conservative about that position.

    We aren’t dealing with deep thinkers here.

    We are dealing with journalists and young guys assigned to justify old rubber stamp positions of the editorial page editor.

    You take them too seriously as “thinkers”.

  33. Gravatar of Paul J Paul J
    10. September 2010 at 16:36

    Just my 2 cents,

    I completely, agree with Greg Ransom above:

    “We are dealing with journalists and young guys assigned to justify old rubber stamp positions of the editorial page editor.

    You take them too seriously as “thinkers”.”

    It seems like in the past 4 years or so, at least in my experience, every single type of news outlet (whether it be tv, online, or print) has become more and more sensationalist. It is getting really difficult for even me, who has only a BBA in Finance and BS in Economics, to stomach watching or reading most of the main stream garbage.

    It’s pretty pathetic when a 23 year old with only a bachelor’s can spot so many incorrect facts in the news.

    Sorry for the rant, just had to get that out.

    On a side note (I apologize for doing this also, but I felt like someone had to say it), to Morgan:

    Two things:

    1. If we are gonna start the name calling. What are you James Joyce?. After re-reading your posts about 3 times, I still have no idea what you are talking about. It seems like 3 paragraphs of stream of consciousness. I don’t think you included one actual fact (except for the 3% deficit remark) in any of your posts.

    2. I realize this is a blog, but at least in my opinion the commentators in this blog are pretty highly educated. If you are going to try and debate them, I would suggest not inserting the word “dude” in every post. Hard to take you seriously.

    Again, sorry for the detouring the post, if I did at all.

    And to Scott, thanks again for all your posts and all your responses to everyone’s comments. Pretty much half of what keeps me going throughout my boring weeks.

  34. Gravatar of MikeDC MikeDC
    10. September 2010 at 16:45

    Oops,I meant it seems like Clinton and Greenspan seemed to get along fine.

    Anyway, the underlying point of my earlier commentis who cares what the various editorial boards of a newspaper say over the course of 25 years. Likely the same folks aren’t even there any more. More importantly, what do the policy makers in Congress, the executive, and the Fed think?

  35. Gravatar of scott sumner scott sumner
    10. September 2010 at 17:41

    Philo, You are putting words in my mouth. The high rates of NGDP growth during the 1970s were very damaging to capital formation. So it was wise to reduce inflation sharply in the early 1980s. By December 1984, we had had more than 3 years of roughly 4% inflation–no point in raising it back up to 1970s levels.

    Japan’s NGDP growth slowed sharply in 2008-09, which was a big mistake.

    Bonnie, I have also been very critical of Obama on this issue.

    Pragmaticon, Very. 🙂

    Morgan, Your comment is self-refuting. If I’m wasting 30 minutes going after the highly respected WSJ, what are you doing spending half your life taking on an obscure Bentley blogger who’s obsessed with NGDP?

    Marcus, The problem with Goolsbee is he doesn’t understand how much taxes affect incentives. At least Romer understood that tax cuts were more powerful stimulus than spending increases.

    Mark, I completely agree on the NRU.

    MikeDC, You said;

    “The first thing I’d note is that if this is true, it significantly reduces the scope for monetary policy.

    A second point would be that, the more uncertain we feel about what our baseline unemployment scenario is, should we not feel more uncertain about the effects of monetary expansion by the Fed? Overshooting and generating a negative, high inflation outcome seems more likely to me as we estimate baseline unemployment higher.”

    Not in my view. I’d aim for steady NGDP growth regardless of what the natural rate is. For any given natural rate, stable NGDP growth is better than the sharp slowdown we saw after August 2008.

    You said;

    “1. The Fed has political independence for a reason. Their judgement is trusted, and if the political branches willfully flout them and pursue policies that the Fed believes will be destructive in the long-run, wouldn’t a truly utilitarian position be for the Fed to force temporary pain to bring about long-term compliance with good policy?”

    I don’t trust their judgment, not after the excuses they have been providing. They seem to think structural problems are some sort of excuse for tight money. But I know of no model where you want to run below target inflation rates at high unemployment, just because of structural problems. If they have a model–let’s see it. Are we simply to trust them? After they screwed up policy in late 2008?

    Greg, You said;

    “You take them too seriously as “thinkers”.”

    Well lots of Fed people seem to be making similar arguments. Am I taking the Fed too seriously? I see the WSJ as the mouthpiece of conservative economics in the press.

    Paul J, Thanks. And I get equally frustrated with the press.

  36. Gravatar of Philo Philo
    10. September 2010 at 18:44

    “By December 1984, we had had more than 3 years of roughly 4% inflation–no point in raising it back up to 1970s levels.” What, if anything, was the point in lowering it below 4%?

    Indeed, was there any point, three-plus years earlier, in lowering it to 4%? *Initially* double-digit inflation was harmful to the economy (though I’m not sure what you mean by “capital formation”–is that investment?), but that was because it was unexpected. Once it came to be expected, the Fed should not have tampered with it, should it? Or do you favor opportunistic disinflation during prosperity, rejecting it only during a recession?

  37. Gravatar of Morgan Warstler Morgan Warstler
    10. September 2010 at 19:44

    Scott, “don’t sell yourself short judge… you’re a tremendous slouch.”

    @Paul, dude just call me James Joyce. The WSJ is biased, what more do you want me to say? The point is there’s a completely RATIONAL mind behind their thinking… and they are easily the best newspaper in the world.

    Look, if Scott can argue that the Fed would make monetary policy based on whether or not there was fiscal stimulus, the WSJ is certainly going to judge Fed monetary policy based on whether or not there is a tax cutter in the White House.

    In fact, my winning argument with Scott’s idea is that even if we are 100% sure it will work… we AS FREE MARKET GUYS, have an obligation to have the same reality based biases as the Fed and the WSJ.

    Use the political momentum during the recession to extract as many give-backs from the unions as we can get, keep taxes from being raised, to try and roll back Obamacare, and then IF we are losing our head of steam, pull the Sumner rip-cord.

    Hell, it might not even be time to pull the ripcord until/if a Republican wins the White House, and there’s no more political appetite for austerity, and all the above hasn’t gotten the economy moving.

    There’s no such thing as neutral… this is a 100 year fight over who makes the rules, and on anybody’s score card the right is doing better than the left since Reagan. Before that, we lost for a long, long time, and we shouldn’t be so willy-nilly about the strategies that got us here.

  38. Gravatar of johnleemk johnleemk
    10. September 2010 at 23:21

    MikeDC,

    There are actually other arrangements which can give a central bank independence while holding it accountable for its actions. In Australia and New Zealand, the Finance Minister and governor of the central bank sign a document agreeing on a target inflation rate. Both parties have to agree to the target, and once it’s official, the central bank can be held accountable if it does not hit the target. The target is AFAIK not revised regularly; I think Australia has targeted 2 to 3% inflation annually since 1993.

  39. Gravatar of Nick Rowe Nick Rowe
    11. September 2010 at 06:28

    Scott: I just realised that you and me are both posting on a closely-related topic. It’s rules vs discretion for monetary policy. Henry Simons. If you don’t have an announced target, who’s to say if monetary policy is too tight or too loose? So you can get all sorts of political bias, both in what the WSJ says the Fed should do, and what the Fed actually does (though I’m not sure if Jamie Galbraith’s methodology of looking at interest rates can tell us that, because interest rates aren’t monetary policy, and they can get affected by fiscal policy).

    Sorry to say this, but in this particular case, the US looks just…corrupt? Third world? That’s far too extreme of course. But I can’t figure out an accurate way of saying what I’m trying to say.

  40. Gravatar of ssumner ssumner
    11. September 2010 at 08:26

    Philo, High inflation hurts investment even if expected, so I favor reducing it during prosperity. Very high inflation must be reduced, even if a recession occurs.

    Nick, No need to be defensive about criticizing the US, we do have a monetary policy apparatus that is much inferior to that of the other anglophone countries (Ireland excepted.)

    The US is just too big, it becomes more and more obvious to me everyday. However, my proposal for 50 independent states did contemplate a common currency, so perhaps that needs re-thinking as well.

    By the way, I really liked the post on rules, and linked to it in one of my two new posts.

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