Progressive social media is echoing with the theme that everything would be well with the American economy were it not for the willful obstructionism of Ben Bernanke.
Here is a tweet from Matt Y:
"the gaps get smaller with every month Bernanke lets our human and physical capital stock decay -- that's the problem!"
and another:
"I'm not sure I understand why it's my job to "understand" the man presiding over a total disaster."
And here's the usually excellent Interfluidity telling us that our current economic woes are a deliberate choice made by our policymakers:
"We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives."
Wow.
First of all, we are not in a depression. Nor is the economy a "total disaster". We are in a disappointingly slow and painful recovery from a very deep recession.
Second, the Bernank actually helped to save our asses back in the darkest days of financial panic.
Third, these are the same folks who generally believe that wages are too low and workers don't earn enough compared to capital. Yet their solution to the low growth / high unemployment problem is for the Fed to lower wages?
Fourth, the Fed cannot automatically control the real interest rate. Do you think the Fed could set inflation or inflation expectations at 10% and simultaneously hold nominal rates at zero?
Fifth, NGDP targeting is not some magic bullet that would solve our current problems. It relies crucially on a particular path for expectations. If you think it's easy for an actor who can't easily make credible commitments to control expectations, you should read Svensson's work and ask yourself how likely it is that the Fed could ever follow Svensson's foolproof path.
I personally support having the Fed try some additional unorthodox policies in the short run. Even if there's only a .25 chance they significantly affect employment and growth, why not try? But I do not think the Fed is sitting on policies that will definitely cure our economic ills. The Fed is not close to omnipotent.
4 comments:
"But I do not think the Fed is sitting on policies that will..." This is one the best sentences I have read ever. Apply this universally... "I don't think the government is sitting on policies..." Or change it up a bit "The Democrats (Republicans) have all the solutions if only the Republicans (Democrats) would get out of the way."
the housing crisis was going on for a full 18-24 months before gdp fell off a cliff. Mortgage delinquencies were 50% higher than normal by 2008.
The *most dangerous* thing one can do is allow (nominal) gdp to decline. this precipitates a banking crisis (ala Fisher debt-deflation). ample papers have been written about the dual trigger for mortgages: its the combination of negative equity plus inability to pay that triggers default, so its no shock that failing to provide a nominal AD anchor precipitated a banking crisis.
Also, I don't really know why you think further stimulus would be *purely* inflationary with 8.1% unemployment. Suppose we close 2/3 of the output gap with 1% additional inflation and 3% real growth? Do we really care about a mere 1% inflation compared to 2% unemployment and 20 Million out of work?
Also, don't forget that a large proportion of increased aggregate demand flows to compensation, so increased AD facilitates deleveraging and reduces pressure on the housing market, which in turn further accelerates the recovery. rental markets are really hot because people are afraid to buy and uncertain about the recovery (and lending standards are still somewhat tight). Increased AD and lowered unemployment would significantly boost the housing sector and reduce delinquencies/foreclosures.
i dont think that ngdp targeting is an easier or harder than inflation targeting, not sure why you say that. The Fed puts out forecasts every quarter and seems to already be targeting about 4.5% nominal growth, give or take. The only real issue being debated inside the Fed is how quickly we could close the output gap.
The real issue on make-up growth is that some folks inside the Fed think we are close to full employment for structural reasons.
Its not really *whether* we could hit the nominal target (of, say 6%), but whether its desirable.
but I take it from your conclusion you think its desirable.
Again, i dont think ngdp targeting means inflation. a 6% ngdp target for each of the next two years (followed by a 4-4.5% target thereafter) could mean 4% real growth and 2% inflation per year. Or 3% real growth and 3% inflation. Given that Austrailia has a 2-3% inflation target band and the world has not ended, seems like not much risk.
mortgage equity withdrawl has been about 2.2% of dispisable income (mainly paydown of negative equity), so any increase in AD would be helpful.
http://www.calculatedriskblog.com/2012/05/mortgage-equity-withdrawal-update.html
"Third, these are the same folks who generally believe that wages are too low and workers don't earn enough compared to capital. Yet their solution to the low growth / high unemployment problem is for the Fed to lower wages?"
I am confused about this regularly.
I saw P-Krugga tell Elliot Spitzer on TV that a minimum wage hike would help right now because higher wages --> more aggregate demand --> more employment growth, but then in almost the same breath say that more accommodative monetary policy would be nice too because higher inflation --> *lower* (real) wages --> more demand for workers --> more employment growth. My reaction: wharrr??
Why does a minimum wage hike not --> less demand for workers --> less employment, and accommodative monetary policy --> higher inflation --> lower real wages --> less aggregate demand --> less employment?
Maybe I'm confused, but I guess that's what I'm saying here: I'm confused.
NGDP targeting is not some magic bullet that would solve our current problems. It relies crucially on a particular path for expectations.
one more more comment: I do not think that this is the crucial element.
During the downturn, a lot of employers cut staff, panicked thatr they did not know how deep the recession would be. Now, many firms are unlcear if the Fed is committed to closing the output gap.
As I see it, the crucial element is that ngdp targeting calls for the Fed to make up the growth. The Fed is unlikely to hit the path exactly (it never hits 2% PCE either), but the fact that it promises to make it up in the future (and vice versa) tempers expectations.
the way i see it, ngdp targeting promises to minimze the variance of p*y over a path. that is the essential idea, no whether the Fed hits it exactly each and every quarter.
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