John Cochrane argues that our darned political system is just not up the challenges of the economic times. He makes some excellent points re Reinhart and Rogoff, but unfortunately he makes a profound error is his assumptions:
…fiscal stimulus is essential when conventional monetary policy is powerless…
Monetary policy is never, ever powerless. A central bank can buy every asset in existence. The real problem is that the central banks are not trying hard enough — the Fed is married to its 2% inflation target (except when they seem happy to miss low) and for all the talk of “unconventional” QE the Fed has owned much larger proportions of total debt in decades past, BOJ is finally moving in the right direction after two decades but is still below where they should be, and the ECB isn’t even at ZLB, they’ve actually been raising rates. If all three adopted NGDPLT, the global economy would recover normally again.
Two, fiscal stimulus may be impossible even when it’s essential.
Fiscal stimulus is never, ever essential. See above.
Also, in re the larger point of the column, most everyone today forgets that 2000-2007 was not generally considered “good times” until after 2008 — there were recessions across Europe and the U.S. from 2000 to 2003, and the NASDAQ crash was in March 2000. That’s why Greece (for instance) was increasing spending by 10% a year — fiscal stimulus was deemed necessary and proper then, too. The wages of fiscal stimulus is a sovereign debt crisis.
(BTW, Canada escaped the early 2000s recession entirely and continued rapid job growth, despite a very non-stimulative fiscal policy (they kept running surpluses). Guess what their monetary policy looked like?)
But (and it pains me greatly to say this) I do think the left largely has the better grasp of current circumstances, as they are at least willing to entertain the notion of looser monetary policy. People on the right need to lose their obsession with “sound money” (I’m looking at you Paul Ryan!) — this is neither the 1970s nor the Weimar Republic. Both sides should be able to live with a looser monetary policy that fosters growth and employment and doesn’t increase deficits.
Comments
14 responses to “Insufficient Unto The Day?”
Good blog. Not sure about Canada today. Central bank is so obsessed with house price inflation it is even using monetary policy to stop it, neglecting the impact on the nominal economy. Times change. Just hope Carney doesn’t bring that wrongheadedness over here.
No buy GOLD. Its the only real money! Inflation is around the corner as of 2 years ago!
@TheAJ:
You’re right! There’s been massive inflation for the last two years! (Only it was in an alternative universe.)
Nice blogging.
Sorry, this is just wrong. “Sound money” was a fantasy during the era of the gold standard, and it’s a fantasy now, but it seems unlikely the economy can “recover normally” given the structural impediments to capital investment and labor productivity that have been piled on in the last fifteen years.
Monetary policy is not the sole determinant of economic health. When Congress is determined to mis-allocate resources, that has to have an effect.
I doubt Phil Collins ever meant it that way but…regarding Government monetary policies, we all should be singing “I don’t care anymore what you say. I don’t care anymore; get outta my way.”
We could recover, if they’d just sit down and shuddup.
Neil — fair point, and Tyler’s book on the subject is persuasive. How about “recover more normally?” 🙂
It’s pretty clear money is too tight, anyway.
What part of debase is over your heads? Synonyms:
cheapen, degrade, subvert, dilute, water down, weaken, dishonor, damage, deface, destroy, ruin, spoil, downgrade, depreciate.
There. Clear it up for you?
This is what money creation has created:
(see chart) http://gonzalolira.blogspot.com/2013/01/mo-debt-mo-problems-mo-keynesian.html
And you guys want MORE?
Dave,
It’s not clear to me that money is too tight right now. The economy has been growing at a nominal 1.5% or so. I suspect that is all we can expect in a good year.
That’s what bothers me about your theory–how do you determine the correct rate of growth?
Creation of currency and government expenditure of said currency does not benefit the productive, and especially not the working class. Such actions result in misallocation of resources and suboptimal economic choices, which in return result in less economic growth. Moreover, the diversion of resources is from those who produce the wealth (businesses and workers at such) to those who consume it, government employees and welfare clients, discouraging production and encouraging consumption.
“Loose money policy” is socialeze for spending money you do not have, and is the most regressive tax policy that exists. There is no such thing as free currency; somebody pays for it.
“Sound money” was a fantasy during the era of the gold standard
Sound money was written in to our Constitution.
What does unsound money do? Eventually the bankers will own everything. Compound interest does that.
Dave,
The central problem is that asset values are too high. That is normally corrected by default and bankruptcy.
The problem is that the banks would be insolvent if that happened.
What to do? Inflate the money supply. Which will cause more bubbles. Which will require further inflation….
A death spiral.
You CAN live beyond your means if the money goes into productive capacity. If it just goes into buying stuff? You WILL get inflation.
The WHEN is indeterminate. The IF is not in doubt.
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But even investing in productivity is problematic.
Suppose in the 1920s you loaned farmers money for farm eqpt. Productivity for that farmer would rise 10% and with a loan at 5% it was serviceable.
Except all the farmers got loans and farm prices dropped. Productivity did not outstrip the fall in farm prices. Depression.
Neil — the markets are saying that money is too tight. It’s not normal for markets to be this sensitive to monetary policy. And of course being at ZLB conditions is a strong indicator future expectations for monetary policy are too tight for growth.
Historian — you’re confusing fiscal policy with monetary policy. There is no “spending” in monetary policy.
Simon — yes and no. It’s certainly possible for loose monetary policy to engender excessive NGDP growth which can lead to bubbles, but not under NGDPLT, which targets smooth NGDP growth directly. We probably could have avoided much of the last two bubbles if we’d been targeting NGDP throughout the 1990s and 2000s (with the caveat that bubbles are very hard to diagnose even ex post facto) because NGDPLT would have required tighter money during the boom times.
If we’re fiscally sound, excessive inflation should not be an issue. Unfortunately tight money policies are strangling growth globally right now, which is the biggest long-term threat to fiscal soundness.
Your farm example offers an excellent illustration of why we need NGDPLT. When real crop prices fell, that was, overall, a very good thing, because people could afford more food. But deflation is very bad for businesses — it tends to bankrupt them, and that can create a demand-side death spiral as the real value of debt increases and the attractiveness of cash increases due to increased perceived liquidity risks. That’s why since TGD the Fed always tries to maintain positive inflation, and mostly succeeded in preventing another depression. Unfortunately, they did not try hard enough in 2008 (or since) and policies such as IOR created even more tightness, so we are currently still well below a healthy NGDP trend (though not as bad as TGD, obviously).
One other really important concept to keep in mind is expectations uber alles: no matter how much QE the Fed does today, there cannot be much inflation if the target is (credibly) 2% inflation (really more like 1.5% because they don’t care as much about missing low) because what happens for the next few months is not as important as what happens for the next few decades.
In sum: fiscal soundness, smooth nominal GDP growth. That’s the path of growth, stability, and prosperity.