Why the Fed should pay no attention to the debate about structural unemployment

My latest at The Economist’sBy Invitation.”



48 Responses to “Why the Fed should pay no attention to the debate about structural unemployment”

  1. Gravatar of Rien Huizer Rien Huizer
    28. June 2011 at 19:14

    Scott Sumner back? With fresh ideas? How about suggesting an implementation path (steps, timing, resources) for politically feasible economic policy change based on NDGP targeting?

  2. Gravatar of Jim Glass Jim Glass
    28. June 2011 at 22:28

    DeLong violates The Economist’s copyright by doing a copy and paste of your piece on his blog.

  3. Gravatar of Britmouse Britmouse
    29. June 2011 at 00:40

    I set up an RSS->twitter feed for this blog, FYI


  4. Gravatar of Morgan Warstler Morgan Warstler
    29. June 2011 at 05:16

    “For instance, if structural unemployment in American has risen closer to European levels, it may be partly due to the decision to extend unemployment insurance from 26 weeks to 99 weeks, and to increase the minimum wage by over 40% right before the recession. Does that mean that demand stimulus cannot lower unemployment? No, because the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries. For similar reasons, the real minimum wage would decline with more rapid growth in demand.”

    WHO CARES???

    Scott, ultimately you yourself say “who cares about unemployment,” once we hit target on NGDP, Sumner says unemployment IS CATEGORICALLY a liberal policy problem.

    So who cares if monetary can cover up bad fiscal / tax / wage / tort policy?

    We know it can cover it up!

    We don’t WANT TO cover it up, we want to force the changes in policy! We want to put liberal big government policy on trial, not facilitate it with printed money.

    Scott, the way you argue it, the danger is everyone saying it was CORRECT to extend unemployment to 99 weeks.

    That since we could dial it back down later, it was obviously smart for us to raise it when times were tough – and that is retarded.


    Better Sumner:

    1. There is structural unemployment.
    2. The fastest way of proving it is to target NDGP – removing the Fed from the equation.
    3. With the target being hit month by month (quarter by quarter) and a neutered Fed – we will PROVE ONE AND FOR ALL unemployment is caused by US Dem policy.

  5. Gravatar of Originations 6/29: Realtime Greek Austerity Vote Tracker | The Basis Point Originations 6/29: Realtime Greek Austerity Vote Tracker | The Basis Point
    29. June 2011 at 05:44

    […] Krugman Sits Down With HousingWire (HousingWire) -A Word On Unemployment (MarginalRevolution via TheMoneyIllusion) […]

  6. Gravatar of Tom Grey Tom Grey
    29. June 2011 at 07:45

    Scott, you say: “a nominal target, such as the price level…[NGDP better] By that criterion, monetary policy in the US, Europe, and Japan has been far too contractionary since late 2008.”

    In fact, they ARE focusing some on the price level. Which is going way up, if fuel and food are included, like they are in most voters’ budgets (even if elitist economists have excuses for not including them).

    You also note that monetary effects depend on policy, but you fail to note fiscal policy explicitly.
    In particular, my own theory is that $1 tril in tax cuts [deficits] would have had far lower unemployment than $1 tril in more gov’t wasted crony capitalist directed (mis-) investment.

    The 0% interest rate is the lower bound of normal monetary power.

    I’m sure you’ll become more popular with power-hungry politicians, and other economists who want to seem to have influence with such, by pushing for NGDP targets.
    I strongly think Fed policy would be better for such BUT also suspect that such arguments will be twisted for use in creating actual gov’t programs to reward friends of gov’t, rather than create more jobs.

    I was more convinced last year; now much less so.

    The huge problem I see is the (im)moral one of too many voters wanting benefits with other other people’s money.

  7. Gravatar of Scott Sumner Scott Sumner
    29. June 2011 at 07:56

    Rien, You said;

    “Scott Sumner back? With fresh ideas?”

    No fresh ideas, just the same old “NGDP blah blah blah, . . . target the forecast, blah, blah blah, . . . .”

    Jim, Thanks. I suppose if he quotes just part of the article there is no copyright issue (I wasn’t sure if you were joking.)

    Britmouse, Thanks. I actually don’t know much about Twitter, but it seems like your setup will drive some business to my blog–so I appreciate it.

    Morgan, I said don’t pay attention to structural unemployment, instead focus single-mindedly on NGDP, nothing else. And DeLong linked to me approvingly. What do you say about that?

  8. Gravatar of Scott Sumner Scott Sumner
    29. June 2011 at 08:03

    Tom Grey, There’s not enough information for me to know where you are coming from, you mix Keynesian and conservative ideas. Should the tax cuts be met with spending cuts? If so, that’s fine with me.

    The inflation rate that should be targeted is expected inflation. And at least in the US and Japan, that’s quite low. So there is no justification for tightening. In Europe it might differ from one country to another.

    I see no (positive) link between monetary policy aimed at steady 5% NGDP growth and crony capitalism. I’m all for reducing crony capitalism, and would point out that the problem becomes much worse when NGDP is unstable. When NGDP falls there is much more pressure to bail out banks, GM, etc.

  9. Gravatar of Morgan Warstler Morgan Warstler
    29. June 2011 at 10:51

    Scott, I say to that: you are being illogical.

    And god damn it, DeKrugman linked to you because he wants to print money – but his reason for WHY he wants to print money, is because that diminishes the the pile of money the “rentiers” as he calls SMB owners and savers – because ultimately he doesn’t think money is a tool to serve them.

    Scott, THE ONLY THING that matters is what happens when we target 5% NGDP and unemployment stays at 8%.

    ONLY THEN, does what DeKrugman think of you matter.

    And we saw back a year ago when he started to sniff out that you were not good for his side – that you were saying Fiscal Stimulus (government spending) doesn’t work… that’s when the fat bearded one had to come after you.

    You are being illogical because YOU CHOSE 5% for a reason, not 4%… and if unemployment is running at 8-9%, suddenly you’ll be talking about / hearing about a 6% target.

    One more question: You have said here before that you think the dual mandate is ridiculous, so why do you use it as a justification for NDGP?

  10. Gravatar of Justin R. Justin R.
    29. June 2011 at 11:18

    “For example, the fiscal multiplier depends on how monetary policymakers respond to fiscal decisions; indeed the multiplier would be precisely zero if the central bank was successfully targeting inflation”

    Not sure I follow the reasoning of this statement – would you provide more detail? Thanks.

  11. Gravatar of Mike Sandifer Mike Sandifer
    29. June 2011 at 14:45


    As I understand it, you completely miss Scott’s point. By targeting NGDP, the Fed could have prevented the unemployment problem, obviating the need for UI extensions.

    And I may as well say, your comments come across as crazed and as if you think you’re always 100% right, even when it comes to what someone else’s position should be.

    Yeah, Krugman writes some ridiculous things at times and is getting more shrill lately, but he usually makes tremendous sense and has made many correct predictions since about 2006. I’m not saying there haven’t been a number of other economists who’ve done as well, but your perspectives are so tilted that they surrender all credibility.

    Krugman is not an economist, as you said in another comment thread? I guess his New Trade theory contributions weren’t worthy of being included in the field, eh? Where are your published papers in the field if you know so much?

    Sorry, but both Scott and Krugman have forgotten more about economics than you or I will ever know, but far. Some humility might make you start sounding sane.

  12. Gravatar of Morgan Warstler Morgan Warstler
    29. June 2011 at 15:36


    Scott COMPLETELY grants that unemployment that exists after we target NGDP at 5% is structural and the fault of bad government policy.

    Now you might believe that at a 5% level target we will have <6% unemployment, and I'm just as sure we will far more – unless we really juke the stats.

    That's the bet! That's why I like Scott. You make your bet, I make my bet, we target 5% NGDP and if you win- good news, things aren't as bad as I suspect, if I win, great news, because your wad is shot – and the problem really is Dem economic policy.

    Scott's theory also has one more big stopper for you… if when we are running over 5% at the target – and unemployment is still too high in the minds of politicians – we have to EXPECT that the Fed will still ratchet up rates.

    If we don't think they will raise rates – if they aren't essentially on auto-pilot, if we don't BELIEVE the screamers on your side will be shushed silent to let the Fed run like a computer… then we can't let Scott's plan happen… expectations matter.

    Scott can contradict these two points, but I'm virtually certain he's agreed with them many, many times in the past.


    I've never bought into Scott's pitch that the crisis was to be averted if we just kept up the target NGDP – because I don't really buy into macro as anything more than an interesting historical foot note from back when countries all got to run their own currency.

    To me Scott's just got a super great way of getting everyone to run the Fed on Uncle Milty's computer.

    And I still haven't heard Scott ever say what keeps the target from suddenly being 6%, since unemployment is still so high.

    On DeKrugman, you might want "economics" to be about achieving less disparity, or getting more free shit for the bottom deciles, but that's far too odd a definition for me – we'll need to find a new term that's just about how markets move made up by free agents, creators, and traders.

    And when we make up that new phrase, I predict most people won't care about your "economics" anymore.

  13. Gravatar of Morgan Warstler Morgan Warstler
    29. June 2011 at 15:57


  14. Gravatar of ssumner ssumner
    29. June 2011 at 16:58

    Morgan, You asked;

    “One more question: You have said here before that you think the dual mandate is ridiculous, so why do you use it as a justification for NDGP?”

    The idea behind the dual mandate is fine, but the Fed needs a single mandate–which is why NGDP is best.

    Justin, Suppose the Fed targets inflation at 2%. If the government does fiscal stimulus it can only affect the economy by shifting AD to the right. But that would raise the rate of inflation, and the Fed would tighten policy to offset that fiscal action. In other words, if the Fed is targeting inflation, then they control AD, not the fiscal policymakers.

    Everyone, I’ll be away for a few days, so I many not respond.

  15. Gravatar of JimP JimP
    29. June 2011 at 18:33

    Very clever:


  16. Gravatar of Justin R. Justin R.
    29. June 2011 at 21:18

    Thanks Scott, makes sense.

  17. Gravatar of Britmouse Britmouse
    30. June 2011 at 03:53

    Some very interesting discussion about the nominal/real growth split in the UK if you’ll forgive my Anglophile distractions:

    Ben Broadbent, new BoE guy, got his grilling in from our politicians:


    Q31 and Q37 interesting.

    There are particular sections of the right wing press who take their cues from Simon Ward, who is arguing we are going to get too much NGDP growth (woe is us), and that a smaller QE would have given a “more favourable” real/nominal growth split:


  18. Gravatar of Morgan Warstler Morgan Warstler
    30. June 2011 at 07:50

    Scott, you wrote:

    “In my view nominal GDP targeting would be better than a pure inflation target, as it would better accommodate supply shocks, and more closely correspond to the “dual mandate” of monetary policymakers in countries such as the US.”

    Which confused me, but this:

    “The idea behind the dual mandate is fine, but the Fed needs a single mandate-which is why NGDP is best.”

    This is clearer, but it doesn’t get over the issue of 5%, not 4% or 6% – you can say there is a single target, but REALLY we know that target is just growth goal of 3% + acceptable inflation of 2%.

    Which means that if real growth is 0%, inflation is 5%.

    Which means if real growth was naturally 7%, then you’d owe us 2% deflation, right?

    How do we get that back?

    What happens if inflation runs toward 8%?

    Is that simply not possible with a 5% NGDP target?

  19. Gravatar of W. Peden W. Peden
    30. June 2011 at 12:23


    If NGDP is held around 5%, then it would take a 3% contraction in RGDP to push inflation up to 8%. That’s not impossible, but it would take a huge supply shock and those types of supply shocks tend not to last very long.

    I still think that the ideal NGDP growth rate target would be the long-term trend of output (Selgin’s proposal) which would mean that prices would be doing their job without any monetary disequilibrium from the central bank at all.

  20. Gravatar of Morgan Warstler Morgan Warstler
    30. June 2011 at 13:54


    I’m struggling with your order of things.

    Inflation goes up (and hopefully down), and with a 5% NGDP target, the Fed computer is setting rates.

    So let’s say RGDP is cruising along at 2.5% and inflation is at 2.5%…

    If there is a real spike inflation where it suddenly runs 5%, the Fed has to keep jacking up interest rates until RGDP drops to 0%, and keep it there until inflation starts to fall.

    Is this not how it is supposed to work?

  21. Gravatar of Bonnie Bonnie
    30. June 2011 at 18:38

    About Krugman: I don’t understand how anyone can be so wrong about so many things that matter to real, ordinary people (and yes, the economic suffering does have many individual faces if one chooses to look at them)and have it be brushed off with the consolation that he had some correct predictions in 2006. Even a broken clock is correct twice each day.

    I wonder what consolation there is for all the people that he had a chance to make a real difference in their lives and chose to enable self-centered power seekers instead. If he is as smart as is claimed by some, he should have known better; the hypocrisy between his stated intentions and what he actually did is blazingly obvious. It really is a no-brainer that income disparity has only widened over the last three years with the working poor getting the brunt of the recession with no relief in sight. The cruelty that has been foisted on these people by those wearing a mask of good intentions, still insisting that yellow is red, is simply unforgivable and I see no practical use for anyone involved in it.

    I challenge anyone who is still chasing after such bankrupt musings and idle intellectualism divorced from reality to go to where they are, meet them, hear their stories, get to know them and ask them what they want out of life. What is to be found just might be quite a surprise. And just maybe if those who take my challenge can abandon notions of hedonism and acquisition at the expense of others, and figure out a way to help just one person or family that is struggling, under one’s own power, without giving them money or using government coersion, the world just might be a better place. Pay it forward, that is the only way out. At the very least, it helped me sleep better at night.

  22. Gravatar of Doc Merlin Doc Merlin
    1. July 2011 at 00:51

    Meh… I don’t care what the Fed does. This current depression won’t truly end until a new equilibrium is reached in the labor market as people and businesses moving to business friendly states begins to slow down and the demographic shifts near equilibrium. We are experiencing something similar to the massive shifts from farming states to production states that happened leading up to the Great Depression. (I see a lot of parallels between the recent recession and the recession of 1920, similar price patterns even; except this recession was handled badly in comparison.)

  23. Gravatar of Doc Merlin Doc Merlin
    1. July 2011 at 00:53

    And in other news, I agree with Morgan here. It completely defeats the purpose of your targeting if the Fed can tweak it for unemployment.

  24. Gravatar of W. Peden W. Peden
    1. July 2011 at 03:51


    If the Fed is adjusting the supply of money to match the demand for money such that NGDP growth = 5%, then yes: the Fed allows a real inflation spike (which, if NGDP is under control, can only come from supply-side factors) to run its course. It’s the role of the price mechanism to handle supply-shocks, not the Fed. It’s NGDP targeting, not RGDP targeting.

    But my preference is 3% NGDP, as Selgin suggests. I admit that a gradual transition would be necessary e.g. we’d have to move on from the idea of +inflation pay rises.

  25. Gravatar of Morgan Warstler Morgan Warstler
    1. July 2011 at 06:50


    So I get back to my question:

    Which means if real growth was naturally 7%, then Scott’d owe us 2% deflation, right?

    How do we get that back?

    What happens if inflation runs toward 8%?

    How do we get a -3% in RGDP?

    I mean what if rates go to 12% and we still don’t have a 3% loss in RGDP?


    One more question: what effect does the Government need to roll-over much debt do to our ability to raise interest rates that high?

  26. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. July 2011 at 14:35

    I hope all the Housing Cause Denialists who might be lurking enjoy this:


    We include [FCIC Chair Phil] Angelides in that club. As we also recently revealed, Angelides has been a partner in an offshore hedge fund – Canyon Value Realization Fund (Cayman), Ltd. – that shorted more than $1 billion in subprime mortgage securities before the crisis.

    All this explains the commission’s anti-bank agenda, and why it went gunning for banks from the opening gavel. That agenda included using government subpoenas – not to mention $10 million in taxpayer funding – to dig up dirt on banks – including documents and testimony that trial lawyers are now citing in their class-action lawsuits to strengthen their cases against those very same banks.

    A spokeswoman for House Oversight and Government Reform Committee chair Darrell Issa tells us that the panel is actively investigating the Angelides Commission and its fraudulent investigation. Hearings may start late this summer.

  27. Gravatar of W. Peden W. Peden
    1. July 2011 at 15:32


    To answer your questions in order-

    1. Of course. What’s the point in having a 7% natural increase in output if the Fed’s going to turn it into an unsustainable AD spike by targeting prices? 2% of supply-side deflation is a GOOD THING! Who would want to trade that back?

    2. If inflation is at 8%, that can have one of two causes: NGDP has risen above 5% and the real economy is growing OR NGDP is at 5% and the real economy is shrinking. This is when the central bank needs to suck it up; this is when NGDP targeting does its real magic. We ride through whatever supply-shock reduced real growth by 3%.

    3. If the inflation is supply-side caused and NGDP is at 5%, the Fed does what it needs to do in order to keep NGDP at 5%. If the inflation is demand-side caused, then the Fed makes up for its mistake and tightens monetary policy until NGDP is back to 8% again.

    (Your writing style is infectious.)

    This is why the Fed’s mandate is so stupid: the central bank can target inflation + unemployment or it can stabilise AD, but it cannot do both.

  28. Gravatar of Jim Glass Jim Glass
    1. July 2011 at 17:22

    This may not be entirely on topic, but one doesn’t often see a discarded ATM receipt showing $99,864,731.94 held in a savings account.

    Perhaps this is a sign of recession-related liquidity preference, increased demand for safe cash balances? Though it does seem to exceed the FDIC insurance limit.

  29. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. July 2011 at 23:31

    When cyclical unemployment goes away, structural unemployment is exposed. Which is a good reason for monetary authorities to not worry about structural unemployment until it is exposed, as that makes it more likely that policy will shift to reduce structural unemployment.

  30. Gravatar of Doc Merlin Doc Merlin
    2. July 2011 at 16:56

    “One more question: what effect does the Government need to roll-over much debt do to our ability to raise interest rates that high?”

    Low interest rates aren’t an issue now that the fed can pay interest on reserves. Paying interests expands the money supply held with the fed, and the fed can then use that money to buy more treasuries to keep the interest down on government debt.

  31. Gravatar of Mike Sandifer Mike Sandifer
    3. July 2011 at 12:50


    I wonder what you think of this:


    Dean Baker likes the Ron Paul’s idea(irony here) about having the Fed just destroy its government bonds, which can take pressure off politicians in the debt limit negotiations.

    First, I think this is great. I want to scare the Fed into action and something like this might work, if the idea catches fire. But, I don’t actually want the Fed to destroy those bonds, because I suspect we then really would have a problem with high inflation.

    Maybe the Fed would react with more QE, or, dare we dream, maybe even a higher inflation target or NGDP targeting.

  32. Gravatar of Jim Glass Jim Glass
    3. July 2011 at 20:36

    Dean Baker goes on and on about how if US bonds held by the US govt via the Social Security trust fund aren’t honored in full it will be a default that ruins the credit rating of the USA.

    Now he says that if US bonds held by the US govt via the Federal Reserve are cancelled, it will a great thing. Let’s do it!

    I’ve always found him entertaining. 🙂

  33. Gravatar of Doc Merlin Doc Merlin
    3. July 2011 at 23:23

    @Lorenzo from Oz

    The trough of the recession was 2 years ago… this suggests to me that the unemployment problems we have are now structural, and can’t be made to go away with just monetary policy. Also, look at the employment numbers. They tell a more interesting number than the unemployment numbers.

  34. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. July 2011 at 20:28

    Doc Merlin: employment numbers are often more interesting than unemployment figures on their own 🙂 As for whether unemployment is cyclical or structural, I am not interested in elapsed time, but interaction with general economic growth. If there is prolonged, strong economic growth and unemployment rates don’t improve, then that is evidence of structural unemployment. In the absence of such growth, one has not gone through the cyclical unemployment yet, one simply has a very slow recovery.

  35. Gravatar of marcus nunes marcus nunes
    5. July 2011 at 04:35

    This is Marvin Goodfriend reviving his inflation scare series of a couple of decades ago!They´ll never learn that IT can be hazardous to the economy´s health!

  36. Gravatar of StatsGuy StatsGuy
    5. July 2011 at 08:07

    In all these silly discussions of rate targeting, I find it odd that so many models are not disaggregating the source of rate increases – notably, inflation risk, default risk, and demand for money (or real rate or whatever). Primarily, default risk. This is particularly odd because the markets are way ahead of the academics, specifically in using CDS as a measure of perceived default risk (to the degree it’s not manipulated). Notably, I find myself in awe of the conceit that raising rates when a country is fundamentally insolvent does anything when a significant portion of an interest rate is default risk (as per Greece, for example).

  37. Gravatar of Morgan Warstler Morgan Warstler
    5. July 2011 at 08:21

    Unemployment is OBVIOUSLY structural. It is illogical to say it isn’t.

    If we ended minimum wage and required that all recipients of social aid any type be required to have their work hours auctioned off online to the private sector – to recover as much of the aid as possible – there would be no unemployment BY DEFINITION.

    When someone who is able to work, has their labor for sale for $1, that person will be put to work.

    This is the real reason why the Fed’s “dual mandate” is so friggin dumb – it is just meant to use minimum wage to lever up inflation.

  38. Gravatar of Scott Sumner Scott Sumner
    5. July 2011 at 11:48

    JimP, I don’t know quite what to make of that. It seems to me it would increase Greece’s budget deficit, as the government would accept bonds at a higher price than the private sector.

    Britmouse, Very interesting interview–way more interesting than anything you’d ever see in our Congress. I may do a post.

    Morgan, See replies from W. Peden,

    Bonnie, Interestingly, Krugman has a recent post where he claims to have been right about almost everything.

    Doc Merlin, I don’t follow the argument. Commodity prices were very weak in 1921, but have been relatively strong in this recession.

    You said;

    “And in other news, I agree with Morgan here. It completely defeats the purpose of your targeting if the Fed can tweak it for unemployment.”

    Neither you nor Morgan seems to understand that I don’t want them to tweak it for unemployment.

    Patrick, Thanks for that info.

    Jim Glass, I wish that had been my bank account.

    Lorenzo, I’d go even further–monetary policymakers should never worry about unemployment.

    Mike, Lots of people have sent me that Dean Baker piece. It’s an odd proposal, as it would force the Fed to work through reserve requirments, which is a clumsy policy tool. And it would be a massive tax increase on banks as soon as interest rates rose. So it will never happen.

    I’m not sure why you think the Fed would respond to threats from Ron Paul with more QE. Might not the exact opposite be more likely?

    Doc Merlin, In this recession the employment numbers and unemployment numbers are telling a similar story. If anything, the unemployment numbers look better.

    Marcus, I agree.

    Statsguy, I’m not sure what you mean by “rate targeting.”

    Morgan, I agree that we need to replace the minimum wage and welfare with some sort of wage subsidy program.

  39. Gravatar of Morgan Warstler Morgan Warstler
    5. July 2011 at 12:01

    “Neither you nor Morgan seems to understand that I don’t want them to tweak it for unemployment.”

    Scott, I know you don’t WANT them to tweak it, the point is… how do you ensure we EXPECT they won’t tweak it.

    Remember, I support you plan because I want to prove unemployment is structural. Sandifer hopes that with a 5% target – unemployment will go down.

    My question is: WHAT IF it doesn’t? What if at 5% target, unemployment stays at 8.5% – how can we be sure that you Scott Sumner, won’t come back and say, “well really the target should be 5.5%”

    I’m the pain caucus, and too me there is no danger of pain being avoided with a full 5% level target – when there is pain, what keeps the rules from changing?

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. July 2011 at 20:19

    Scott: yes, that was the implication of my comment (or would have been, if I had phrased it better). My cynical view is that allowing central bankers to worry about unemployment gives them more scope to not worry about [insert primary goal here]: that is, it makes them less accountable, not more.

  41. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. July 2011 at 20:39

    Morgan: as someone who worked in an around labour market policy from about 1983 to 1995 and have kept up an interest, let me assure you that the empirical data is quite clear: there is cyclical unemployment. Even in Hong Kong, for example. For a start, for non-mysterious reasons, wages are sticky downwards (yes, regulation and large public sectors worsen the effect: they do not create it).

    It is clearly true that policy largely makes labour markets function less well than they otherwise would: regulation tends to protect incumbents, and the labour market has more voting incumbents than any other market, rivalled only by the housing market (don’t get me started …). But, even so, in Australia one can chart unemployment by economic cycle and see the clear ups and downs: from 1973 to 1996 each cycle was higher than the previous, showing that the labour market was structurally deteriorating, but the cycles were still clear.

  42. Gravatar of Mike Sandifer Mike Sandifer
    5. July 2011 at 20:44


    You replied: “I’m not sure why you think the Fed would respond to threats from Ron Paul with more QE. Might not the exact opposite be more likely?”

    Well, obviously I have no idea, but my thinking is the Fed might decide the risks are justified and use more monetary stimulus to boost the economy to try to take the wind out of the sails of the kooks who want to do crazy things in the context of a bad economy, including threaten Fed independence. Maybe risking higher inflation would be worthwhile in that case, and it would reduce the real value of the national debt anyway.

    Yes, it would also have the kooks on their backs over high inflation fears, but if the economy improves enough, the kooks may lose support.

    My thinking is that this is a very dangerous time for the Fed right now and it may be a tremendous mistake for them to just sit there doing nothing more. What if the Republicans win the White House and Senate next year?

    But, maybe the real issue with some on the FOMC is not only a fear of inflation that’s too high, but also skepticism about the effectiveness of additional easing.

    Maybe these are just dumb thoughts on my part.

  43. Gravatar of Mike Sandifer Mike Sandifer
    5. July 2011 at 20:50

    I should point out, that when I mean the Fed being scared by the pressure to cancel the US debt they hold, I mean what if Obama and even Democratic Congressional leaders started to pressure them? I’m not saying I have any reason to believe this will happen, but we do have some leaders of one party saying we might be better off defaulting on our debt than raising taxes, so there’s not nearly as much that’s inconceivable to me as in the recent past.

    What I’d really like to see is Obama and the Democrats join the kooks and start getting a bill through Congress to radically change or end the Fed, with Democrats arguing they aren’t helping us much anyway. I’d want the Democrats bluffing, of course and then hopefully the Fed would boost inflation in the interest of self-preservation. Of course, a sane Congress might pass a bill to require them to target NGDP or something like that.

  44. Gravatar of Morgan Warstler Morgan Warstler
    6. July 2011 at 06:11

    Lorenzo, look dude, your assumptions are wrong.

    In a truly laissez faire system run by computers, there is always a wage at which someone will work – before they starve, and there is always a job for them to do.

    If they are choosing not to work for the $$$ being offered them, they are not unemployed they are choosing to not work.

    Now can the economy get so mucked up by government, that you have a bunch of hobos wandering around in the 1930’s unable to find a job? Sure.

    But that’s got nothing to do with whether WITH PEOPLE’S NEEDS TAKEN CARE OF…. we can still auction their time off for $1.


    Lorenzo, the only question you need to ask yourself is: if you neighbor loses his job, and the government starts giving him checks – if you suddenly have the opportunity to bid $40 for 40 hours of his work (next week).

    Can you Lorenzo, think of stuff he can do, that makes him worth $40 to you? And if your other neighbor bids $60, do you up it to $65?

    Using a computer to auction off human time (so there is no unemployment) is no more complicated than using a computer to target 5% NGDP.

  45. Gravatar of ssumner ssumner
    6. July 2011 at 11:23

    Morgan, Initiially I wanted something like a brief period of 8% growth, to catch up for the shortfall. But I’m actually moving in the other direction over time, and now I’d be satisfied with even 5% growth, if it was sustained over several years. But we aren’t even getting that.

    Lorenzo, I agree about labor markets, indeed Hong Kong has one of the best “Phillips Curve” relationships.

    Mike, The Boston Fed president recently indicated that outside pressure from inflation hawks was one factor behind the decision to avoid further QE.

    Many scenarios are possible, but to me the bottom line is that there was too little pressure on the Fed to ease–especially in 2008-09.

  46. Gravatar of Doc Merlin Doc Merlin
    6. July 2011 at 13:19

    “Doc Merlin, I don’t follow the argument. Commodity prices were very weak in 1921, but have been relatively strong in this recession.”

    In the 1919 recession, they were very very strong and immediately crashed when the recession started, just like this recession (this effect was very very strong at this start of this recession, notable is oil going from 140 to 40 dollars a barrel, but wheat, corn, beef, industrial metals etc also experienced this) In this recession the same thing happend. /Then/ the two forms of stimulus started driving up commodity prices, which is what I was saying was the major difference between the 1919 and today. In 1920 input prices were allowed to adjust downward which put productive capital back to work, in 2009 input prices were forced back up which prevented recovery.

  47. Gravatar of Scott Sumner Scott Sumner
    7. July 2011 at 08:41

    Doc Merlin, Commodity prices are not primarily determined by the Fed, they are correlated with world GDP. The world economy was weaker in the early 1920s then it is today.

    And I don’t follow your argument. If the Fed could boost commodity prices, it would be through easy money. But money hasn’t been easy. And if it had been, then it certainly wouldn’t have slowed the recovery–unless you want to claim that easy money reduces GDP.

  48. Gravatar of Jeff Jeff
    8. July 2011 at 04:05


    Mosler’s plan essentially amounts to Greece issuing new debt that is senior to the existing debt. Holders of the existing debt should and would oppose it. It’s just another of the MMT crowd’s something for nothing ideas.

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