Yglesias on Obama’s missed opportunity

Here’s a great post by Matt Yglesias:

But as the country waits to hear the latest announcement from the Fed about how rapidly it will end its Quantitative Easing programs, we are witnessing the biggest mistake of Obama’s presidency: the systematic neglect of the Federal Reserve and of his ability to influence its course of action.

.  . .

The FOMC that makes these decisions is mostly composed of presidential appointees “” the seven members of the Federal Reserve Board of Governors. But Obama has failed to make a point of tapping proponents of monetary stimulus for these positions. Even worse, he’s left two of the slots entirely vacant “” not vacant because of GOP obstruction, but vacant because he hasn’t nominated anyone to fill them.

Obama’s neglect of Federal Reserve appointments is, in some ways, mysterious. Nobody denies that the Fed is an extremely important institution “” albeit one that operates independently from the elected branches of government. When it comes to other important independent institutions such as the federal judiciary, it’s broadly acknowledged that the presidential appointment powers are among his most important powers of office. Precisely because judges operated independently of presidential oversight, picking the right ones is vital.

The Fed is similar. Except that because the Fed has an important influence on short-term economic growth and short-term economic growth has an important influence on the president’s popularity, it’s even more important.

Except Obama doesn’t seem to see it that way. Earlier in his administration he reportedly told Council of Economic Advisors Chair Christina Romer that “monetary policy has shot its wad.” This remark was dissected for alleged sexism, but is more worth paying attention to as a reflection of monetary policy views.

The viewpoint that there is nothing the Federal Reserve can do to boost the economy when short-term interest rates are already at zero, leaving deficit spending as the only effective stimulus option, is not believed by most experts. This particular combination of views is most closely associated with a somewhat marginal group of left-wing thinkers who describe themselves as modern monetary theorists. Except it’s also something that key Obama advisor Larry Summers believes, and the fact that Obama tried to install Summers as Fed Chair indicates that Obama believes it too.

This belief in monetary impotence likely explains why Obama is so lackadaisical about filling vacancies. He believes the Fed’s role in fighting a potential crisis is crucial, but the current team helmed by Yellen and Deputy Chair Stanley Fisher is up to that job. Bolstering the left flank on the FOMC so that Yellen’s consensus-building efforts would land in a more stimulative spot isn’t on the agenda.

The current vacancies are not a new phenomenon. By April of 2010 when Obama had been in office for well over a year there were three vacancies on the Fed. One of his earlier nominees was a Republican and another “” Jeremy Stein “” is a Democrat who holds to an eccentric view that tight money is sometimes appropriate even when unemployment is high. That’s the same opinion that led to economic stagnation in Sweden, and electoral defeat for its incumbent government.

How much good could have been done if Obama had listened to Romer, Scott SumnerJoseph Gagnon, or others and placed a higher priority on appointing unemployment-fighters to the Fed? Nobody can say for sure. But the experience of the United Kingdom is illustrative. The UK government has enacted much sharper levels of fiscal austerity than anything done in the US, perhaps partly as a result the UK’s overall economic performance has been dismal. And yet largely thanks to more stimulative monetary policy, the UK has done as well or better than the United States in terms of job creation. If we had paired that kind of monetary policy with our superior fiscal policy and better luck at fossil fuel extraction, we could potentially have enjoyed significantly faster employment growth.

I don’t entirely agree with the last paragraph, but otherwise Yglesias is exactly right.

Some commenters tell me “we Keynesians agree the Fed should do more stimulus, the problem is the right wing.”  That’s half right.  The right wing is a problem, but so are the Keynesians. Keynesians overwhelming oppose additional monetary stimulus, according to polls.  I base that on the fact that only about 5% of economists favor more stimulus, and most economists are Keynesians.  Furthermore, some of the economists who do favor additional stimulus are non-Keynesians.

Update:  TravisV pointed me to an excellent Yglesias follow-up post.

I haven’t had much time to post recently, as I am quite busy now.  But a few other posts worth reading:

1.  Saturos sent me to this post by Greg Mankiw.

2.  File this under “strange but true.”  Noah Smith makes a case for civility.  (Sorry if I sound snarky.)

3.  An excellent post on politics by Ezra Klein.  He points out that most voters agree with the GOP that government is too big.  And most voters agree with the Dems that we should spend more on actual, specific real world programs.  Thus most voters agree with both parties, even where they have diametrically opposed views.

4.  Matt Yglesias says it’s easy to decide who to vote for.  Easy for him!  But what if your views are split roughly 50-50 between the parties?  And what if the parties often govern in ways that is dramatically different from what they promise?  (Bush pushed big government, Obama ignored civil rights in the War on Terror.)  And how do you know which issues will even be addressed? Will Congress act on the War on Drugs?  Will they change monetary policy?  It’s actually really hard to know who to vote for, if you are me.

5.  Thus I won’t tell the Scots (Scottish?  Scotch?) which way to vote.  Just that if they do become independent, they should adopt a Scottish pound, and peg it to the English pound in a one for one currency board system.  Oh wait, they already have a Scottish pound note, and it’s already accepted throughout the UK.  OK, just keeping do that.

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26 Responses to “Yglesias on Obama’s missed opportunity”

  1. Gravatar of foosion foosion
    18. September 2014 at 07:11

    I agree with you and Matt.

    Obama leaving two open seats on the FOMC is a excellent illustration of a major problem with the Obama presidency.

    >>He points out that most voters agree with the GOP that government is too big. And most voters agree with the Dems that we should spend more on actual, specific real world programs.>>

    Likely because most voters don’t have any idea about govt priorities. A classic example is that voters believe the US spends a large percentage of the budget on foreign aid, while the actual percentage is tiny.

  2. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. September 2014 at 07:16

    “Just that if they do become independent, they should adopt a Scottish pound, and peg it to the English pound in a one for one currency board system.”

    The Netherlands had a soft peg with the German mark from about 1979 until the Euro was adopted. It seemed to work pretty well for them (the Dutch). The parallels between the Netherlands/Germany and the Scotland/UK situations seem pretty close.

  3. Gravatar of John Thacker John Thacker
    18. September 2014 at 07:17

    English cabbies in London get really annoyed at Scottish notes. But they generally take them (especially if you offer them a non Chip and Pin credit card as the alternative.)

    Scottish notes are not even legal tender in Scotland– in fact, neither are Bank of England notes. But the system all works.

    Voters don’t have any idea about how expensive things that they like are, and often they want to “do something” because that sounds nice, but they really don’t like the actual price tag. Just think of all the voters right now who favor action against ISIS yet don’t think it will work and don’t want to pay for it.

  4. Gravatar of John Thacker John Thacker
    18. September 2014 at 07:20

    Considering how important Matt Yglesias says he thinks monetary policy is, and how much he would agree with the statement by key Romney advisor Greg Mankiw (while disagreeing with key Obama advisor Larry Summers), it seems strange that he thinks it’s so easy to decide for whom to vote.

  5. Gravatar of M.C. M.C.
    18. September 2014 at 07:27

    > And yet largely thanks to more stimulative monetary policy, the UK has done as well or better than the United States in terms of job creation.

    I think the notion that stimulative monetary policy (“printing money”) can create really more jobs is simply too hard for most people to grasp intuitively. Especially when juxtaposed with fiscal stimulus (hiring teachers or construction workers directly). This matters when a lot of decision makers are not economic experts!

    And it’s not exactly helpful that acknowledged macro-economic/finance/monetary expert, even economic Nobel price winners, can hold opinions on the matter directly contradicting matter, with apparent no convincing way to decide “the truth”. You can’t blame the layman politician (or even economic graduate student) not knowing whether to believe Cochrane or Williamson or Krugman or Summers or Sumner has it right.

  6. Gravatar of TD TD
    18. September 2014 at 07:36

    “I base that on the fact that only about 5% of economists favor more stimulus”


  7. Gravatar of Brian Donohue Brian Donohue
    18. September 2014 at 07:36

    Scott, why does Matt give the shout out to MMT, then ticks off specific MM-types?

    2. Really liked the piece from Noah.

    3. Yes, Klein’s thing was very good.

    4. I agree it’s tricky. How do you vote for gridlock? This seems to produce the closest semblance to grown up government we get. I’m not a Hillary fan at all, but if the GOP has the House, I worry about them getting the White House too.

  8. Gravatar of TravisV TravisV
    18. September 2014 at 07:43

    Yglesias’s follow-up: http://www.vox.com/2014/9/18/6392635/obama-monetary-policy

  9. Gravatar of ssumner ssumner
    18. September 2014 at 07:45

    Foosion and Vivian, Good points.

    John, Interesting.

    M.C. You said;

    “You can’t blame the layman politician (or even economic graduate student) not knowing whether to believe Cochrane or Williamson or Krugman or Summers or Sumner has it right.”

    That’s right, and it’s why I blame the economics profession for the Great Recession.

    TD, The 5% figure was averaging the 3% and 6.6% figures in this post:


    Obviously it’s a rough estimate, but I’m certain the actual percentage is quite low.

    Brian, Well he’s critical of MMT.

  10. Gravatar of ssumner ssumner
    18. September 2014 at 07:49

    Thanks Travis, That Yglesias follow-up is also excellent–well worth reading.

  11. Gravatar of William William
    18. September 2014 at 07:55

    I understand that you want to take agreement where you can get it, but isn’t the idea of “combined” fiscal and monetary policy basically nonsense under the market monetarist/NGDP targeting framework?

  12. Gravatar of Saturos Saturos
    18. September 2014 at 07:59

    with the new job came a shift in Yellen’s role. The Chair does not actually have much in the way of formal powers that elevate her above the other members of the Open Market Commission. So as Chair, Yellen “has taken a much different approach, becoming a restrained consensus seeker modeled after her predecessor” rather than her previous role as an “unabashed advocate of easy money who pressed colleagues to embrace her view.”

    So did appointing Yellen as chair actually lead to tighter money, after all?

  13. Gravatar of TD TD
    18. September 2014 at 08:03

    I’m not sure I interpret those polls the same way you do. I wish there was more direct polling on policy stances on various forms of monetary policy. My guess is that you could find a fair amount of overlap between those who support the statement “the Fed is on the right track” and those who would support the statement “more QE/forward guidance/NGDP targeting would be a good thing” during the recession. For example, I believe Krugman would agree with both statements.

    I’m not sure if the poll you’re using is a great measure of specific policy preferences, but it definitely supports your arguments about the semantics of the debate.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. September 2014 at 08:16

    If they vote for independence, the monetary question will be the least of Scotland’s problems. (Canadian merchants are happy to accept American dollars.)

    Marian L. Tupy says, if the Scot child wants to run away from home, help him pack his bag of socialist MPs and wave goodbye. It might be good for him (and will certainly be good for a new, more free market England);


    The Czechoslovak federation was dissolved on January 31, 1993. In the Czech Republic, [Vaclav] Klaus introduced his far-reaching economic reforms. The Czech Republic pulled ahead and became one of the early post-communist success stories. Even better, the Czechs no longer had to feel that they were subsidizing their “younger sibling.”

    Slovakia, in contrast, suffered years of economic and political decline. [Vladimir] Meciar’s style of government became increasingly authoritarian, leading the U.S. Secretary of State Madeleine Albright refer to Slovakia as the “black hole in the heart of Europe.” The Slovak economy remained unreformed. While some of the more lucrative enterprises were sold off to Meciar’s friends (who, in turn, financed his political campaigns), most of the obsolete state-owned firms kept on losing money. By 1998, when Meciar left office, Slovakia was near bankruptcy.

    Following the change of government, Slovakia returned to a full-fledged democracy and embraced far-reaching economic reforms. The Slovaks partially privatized their pension system, introduced a flat income tax and reduced regulation. In recognition of those improvements, the World Bank’s “Doing Business in 2005″ report declared Slovakia the world’s leading reformer and ranked it among the top 20 countries with the best business conditions. By 2006, the Slovak economy was growing at 10 percent per annum and Slovakia was the world’s largest exporter of cars per capita.

    Independence forced Slovaks to realize that they had no one to blame for their misfortunes but themselves.

  15. Gravatar of ssumner ssumner
    18. September 2014 at 12:12

    William, I don’t agree on Yglesias on the fiscal side, but even there my views are closer to his than to other Keynesians. I think fiscal stimulus might work, despite monetary offset, but the presumption should be that it won’t work. AFAIK, Matt’s view is that fiscal stimulus might not work due to monetary offset, but the presumption should be that it will probably work, at least to some extent.

    Saturos, Good point, but I’d guess policy is about the same.

    TD, I see your point, but:

    1. They did give people three choices in the poll; more, the same, or less stimulus.

    2. I think the “whatever” attitude (policy is OK, but a bit more would also be OK) is actually part of the problem. People needed to loudly call for more stimulus–and the Fed just wasn’t hearing those calls. And according to Fed officials. that lack of noise weighed on their decision.

    Patrick, Excellent analogy–Slovakia is a quiet success story.

  16. Gravatar of TravisV TravisV
    18. September 2014 at 14:28

    Richard Koo points out an interesting parallel between the US and Japan. pic.twitter.com/ASWF4u7ORs

  17. Gravatar of Tom Brown Tom Brown
    18. September 2014 at 14:35

    Noah Smith’s take:

    “Matt Yglesias discusses Barack Obama’s inscrutable, odd ideas about monetary policy. I keep telling people Obama is an Austrian, and no one listens.”

  18. Gravatar of Mat. Mat.
    18. September 2014 at 14:36

    Dear Prof. Sumner,

    “Most economists are keynesians”: do you consider new keynesians and old keynesians together?

    Otherwise, just a question (you probably answered to it before, but I could not find): how could you think that monetary policy can perfectly (totally) offset fiscal policy in the short-run if wages/prices are sticky?

    For the very same reason that monetary policy can affect the economy, monetary offset should be partial: firms cannot adjust prices and thus would hire more labor/produce more, thus there’s a supply effect in the short run. Or am I missing something?

  19. Gravatar of benjamin cole benjamin cole
    18. September 2014 at 15:22

    It might help if the Fed was part of the US Treasury Department. Then a campaigning candidate for the presidency would be under some obligation to make their preferred monetary policies clear.
    Nixon, btw, was an unabashed monetary expansionist.

  20. Gravatar of Major.Freedom Major.Freedom
    18. September 2014 at 18:17

    Lol, the “neglect” of the most interventionist Fed in history

  21. Gravatar of Mike Sax Mike Sax
    19. September 2014 at 03:31

    ” most voters agree with the GOP that government is too big. And most voters agree with the Dems that we should spend more on actual, specific real world programs. Thus most voters agree with both parties, even where they have diametrically opposed views.”

    This fact always drives Dems like me crazy. I mean ‘small government’ here seems to just be an abstract principle-what’s the use of being for small govt. if you can’t even name one program you would cut?

    Dems always hope that at some point people will notice that but this never happens anymore than they ever realize that we don’t spend nearly as much on worldwide aid as we think we do.

    People can contradict themselves for a very long time without discomfort.

  22. Gravatar of Brian Donohue Brian Donohue
    19. September 2014 at 04:12

    @Mike Sax, rest assured Republicans also find such seeming “cognitive dissonance” among voters to be a source of frustration.

    The issue is not that Republicans can’t even name one program they would cut. It’s a much knottier problem.

    With respect to any government program, there is likely a lot of diffuse opposition, which rarely prevails over focused support. (Note- this is not true of broad-based entitlement programs like Social Security and Medicare).

    Mancur Olson and even Milton Friedman have interesting things to say about this dynamic.

  23. Gravatar of ssumner ssumner
    19. September 2014 at 05:36

    Mat, Yes, both groups are Keynesian.

    Monetary policy offsets the demand side impact of fiscal, not the supply-side impact.

    Mike, Maybe voters wake up to the fact that they should support cutting specific programs.

  24. Gravatar of MikeDC MikeDC
    19. September 2014 at 06:13

    ” most voters agree with the GOP that government is too big. And most voters agree with the Dems that we should spend more on actual, specific real world programs. Thus most voters agree with both parties, even where they have diametrically opposed views.”

    This seeming contradiction is trivial to resolve if you look at how different governing Repubicans and Democrats are from voting Republicans and Democrats.

    Think of it as a series of big pictures trades.
    * Republicans would agree to expansion of welfare if Democrats would agree to a real immigration policy and strictly limiting welfare to citizens.
    * Republicans would likely agree to a simplified carbon and consumption tax scheme if it meant abolishing and replacing the IRS and income and capital taxation scheme rather than adding these taxes on top as the Democrats would want.
    * Democrats would likely agree to significant increases in charter schooling and college tuition reformation if Republicans would agree to laws compelling the protection and unionization of the educational labor force, which is a key democratic constituency.
    * Republicans might agree to untying health insurance from employer subsidies (and making them directly subsidized) is Democrats might agree to reduce significantly regulation of the medical and pharmaceutical industries.

    With the possible exception of the education trade, I think most voters of both parties desire these sorts of trades, but none of them do much for the elected leadership of either party. So they don’t get done, and the membership of both parties complains that government is simultaneously too big but too inefficient and not responsive to real problems.

  25. Gravatar of Brian Donohue Brian Donohue
    19. September 2014 at 06:52

    @MikeDC, Politicians are loath to frame these choices as trade-offs. They much prefer the Jerry Seinfeld flying in first class attitude: “More Everything!”

    Perhaps it is only during political gridlock that politicians are forced to think in terms of trade-offs.

  26. Gravatar of MikeDC MikeDC
    20. September 2014 at 06:33

    @ Brian Donohue,
    Rather, politicians are ALWAYS thinking in terms of trade offs (regardless of what they’re selling voters).

    The problem is they face both inter-party trade offs and intra-party trade offs. To accomplish an inter party trade off, politicians must not only trust and follow their party to negotiate the trade, they must trust the other party as well.

    That’s hard to do under the best circumstances, and a risky proposition for an elected official. Because if you view their election strategy as a choice, running on a “screw the other guys” record is much safer than running on a “big picture trade off and bi-partisan compromise” record. The latter style relies on opponents to help you out, which seems unlikely.

    It seems to me the only solution to this is institutional reform (of both congress and the executive) to strengthen the incentives to cooperate.

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