Sunday, March 31, 2013

David Stockman wants to pee in your cornflakes

Wow. David Stockman confuses cause and effect, goes all gold-buggy, slanders Milton Friedman, and just generally comes unhinged in a massive hissy fit in today's NYT.

Let's break down a little bit of it, shall we?

Since the S&P 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually.

 This is a great analysis except that the timing is wrong and the causation is wrong. Here's the Fed's balance sheet since 1990:


As you can see, there's nothing special about 2000. There's a tiny blip, but the balance sheet stays on its path from 1900 to 2008, when it explodes.

And of course, that is/was the Fed's RESPONSE to the great recession. The terrible numbers Stockman gives for GDP growth and job growth are a direct result of the great recession. Real GDP grew strongly from 2000 to 2007, then collapsed.

A continually expanding Fed balance sheet didn't produce consistently bad economic numbers; the great recession happened and the Fed responded.

Sure, the Fed responded in an unconventional way, with asset purchases, because its policy rate was already pegged at zero. And sure, the unemployment rate hasn't fallen rapidly in response to quantitative easing. But the Fed has a dual mandate of stable prices and maximum employment, and their attempts to raise economic activity have not in the almost 4 years of unconventional policy aggravated inflation.

Here's that chart:

You can see how the Fed's unconventional policy responses have been geared to fears of deflation. Both the initial burst of asset purchases and the second rise came in response to falling inflation rates that threatened to go or stay negative.

This is probably the least shared view in America, given the Fed's many critics on both the Left and the Right, but Bernanke has actually done a very good job during this crisis and slow recovery.

Now let's consider Stockman's weird attack on Friedman:

This explosion of borrowing was the stepchild of the floating-money contraption deposited in the Nixon White House by Milton Friedman, the supposed hero of free-market economics who in fact sowed the seed for a never-ending expansion of the money supply. The Fed, which celebrates its centenary this year, fueled a roaring inflation in goods and commodities during the 1970s that was brought under control only by the iron resolve of Paul A. Volcker, its chairman from 1979 to 1987. Under his successor, the lapsed hero Alan Greenspan, the Fed dropped Friedman’s penurious rules for monetary expansion, keeping interest rates too low for too long and flooding Wall Street with freshly minted cash.

So Arthur Burns was a Friedmanite? So Paul Volcker who conquered inflation with his "iron resolve" didn't use a policy of targeting monetary aggregates a la Friedman? So the "Friedman Rule" which states that the price level should fall at the rate of time preference is fuel for the fire of "roaring inflation"?

Is Stockman trying to get a date with Naomi Klein?

I'll leave deconstructing the rest of this dreck as an exercise to the reader.

It's really been a banner week for wingnuts.

Happy Easter!


Norman said...

David Stockman apparently lives in Bizarro world, where up is down and truth is a lie.

Unknown said...

"Real GDP grew strongly from 2000 to 2007, then collapsed."

If by "strongly" you mean 2.4% per year, then, yes, GDP grew strongly from 2000 to 2007.

Compared to history, that is anemic growth. Considering that this is an era of stagnant wages, and soaring corporate profits (including the soaring profits of Wall St. banks gambling in CDOs), one is left to assume that most, if not all, of this GDP growth was limited to the nation's elite rich.

Patrick Sullivan said...

Well, it's customary to compare economic expansions from the same point in the cycle, so we need to compare the one beginning in late 2001--not '2000'--with the one that began in March 1991.

When we do that we see that they looked pretty much the same, until 2008. The best explanation for that divergence would be that the Fed was NOT expansionary enough--persistently abnormally low interest rates being a classic sign of that.

But there is something wrong with 'Wall Street' if Stockman makes millions peddling this kind of nonsensical analysis.

Plamus said...

Wow... okay, we get it, you have a raging hard-on for Friedman, and Stockman will burn in hell for trying to smear your bff - who, by the way, helped institute income tax withholding, arguably (well, I'll argue it) the biggest enabler of escalating taxes.

But... "But the Fed has a dual mandate of stable prices and maximum employment, and their attempts to raise economic activity have not in the almost 4 years of unconventional policy aggravated inflation."

By what definition (other that that of a proud macroeconomist) is roughly 2% annual inflation "price stability"? If you are gonna focus not on price stability, but on rate-of-change of prices stability, why not go one further, and go for the second derivative? No, THAT would be ridiculous, right?

Also, by the BLS ever evolving definition of inflation, we have not had much of it in the past 5 years, imputed rent and hedonic adjustments and all that jazz. So, you guarantee future performance based on past performance, is that it? Bernanke has admitted that any potential tightening will be implemented via the interest paid on excess reserves, not by shrinking the Fed's balance sheet. That's healthy in your world, and will not crowd out private lending, right?

"'You can see how the Fed's unconventional policy responses have been geared to fears of deflation." - Ah, the good ole deflation hobgoblin. Can't have it! 1860-1900 were horrible for the US economy. Nobody spent a penny then, everyone hoarded them in mason jars and under mattresses. The Great Depression trumps it all - where the average depositor in a bank lost 20% of their money. It's much better for the average stock market investor to lose 50%. Makes perfect sense.

Were YOU trying to get a date with Naomi Klein, mayhaps?