Why we are losing (A shockingly uninformed statement by Alan Blinder)
In a recent post I argued that the opponents of having the Fed promote faster NGDP growth are full of “passionate intensity” while the supporters are strangely silent. There is no better example of this weak passivity than this shockingly uninformed statement by Alan Blinder:
Creating jobs costs money””whether it’s via tax cuts or more spending. (The Federal Reserve normally can create jobs without budgetary costs, but with interest rates already near zero it says it’s out of ammunition.)
This is what Paul Krugman would call a “lie.” (I think Blinder’s just uninformed.) Alan Blinder (who used to be vice chair of the Fed!!), seems completely ignorant of the fact that the Fed repeatedly insists it is not out of ammunition, that it has many tools that it hasn’t even used. Blinder’s statement isn’t even close to being true. Here’s Ben Bernanke in 2010:
The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.
Perhaps Blinder got confused by statements made by some of the Fed hawks, who expressed skepticism that additional stimulus would help. But these hawks are worried about more inflation. They don’t deny that the Fed can inflate, but worry that more NGDP would not raise real output, just prices. If the zero bound was a problem, they couldn’t even inflate.
The Fed has studies showing QE2 had a positive impact. Bernanke insists that there are even more powerful tools that the Fed is still reluctant to use–lower IOR, higher inflation targets, or level targeting. Or they could do a much bigger QE3.
It would be one thing if our Fed made phony claims about being unable to boost AD, as the BOJ sometimes does. But the Fed actually insists it can do much more, it simply doesn’t think the economy needs more AD.
And much of the liberal establishment covers its ears and pretends not to hear. Pathetic.
PS. By the way, not only would aggressive monetary stimulus cost nothing, it would actually have negative budget costs, as it would sharply reduce our budget deficit.
HT Marcus Nunes
Tags: QE 2
12. July 2011 at 07:12
Does anyone know what retiring the bonds acquired during QE2 would do? I’d assume that they prevent some inflation through expectations that they’ll be sold onto the markets later, but how much?
12. July 2011 at 07:42
I’m going to quibble with your PS. The accounting budget cost may turn out to be negative, but I don’t think the ex ante risk-adjusted budget cost would be negative. As Cochrane (I think rightly) points out, QE is essentially a restructuring of government debt to lower average maturity (bank reserves being indirectly a liability of the government). He argues that this is risky (because the government becomes more vulnerable to interest rate shocks), and I agree, but he also says it’s ineffective. I think it is effective in part for the very reason that it is risky. A large part of the problem is the private sector’s unwillingness to bear risk. QE amounts to having the government accept much of the private sector’s duration risk, which helps solve the problem.
12. July 2011 at 07:49
Hyena, Yes, it’s about expectations of future policy.
Andy, I have several problems with your argument.
1. Monetary stimulus doesn’t have to be QE, the most effective types aren’t.
2. Even with QE, I don’t agree with Cochrane. The effect of QE is not the effect on risk, it’s the signal about expected future monetary policy.
3. Even if points one and two are wrong, I still don’t agree. The EMH says the expected loss is zero, so the federal government need not worry about that.
4. Even if 1, 2, and 3, are all wrong, I still don’t agree. Suppose the expected loss from QE3 is positive, it’s still trivial compared to the improvement in the budget situation from dramatically boosting NGDP growth.
5. If points 1, 2, 3, and 4, are all wrong . . . then I guess you are right.
You should start blogging again.
12. July 2011 at 08:59
Word to all economics bloggers and commentators: Please shut up, and run Scott Sumner’s columns and blogs in your space.
12. July 2011 at 09:10
Yglesias is on your page: http://thinkprogress.org/yglesias/2011/07/12/266245/the-feds-not-out-of-ammunition-its-just-not-firing/
12. July 2011 at 10:04
“This is what Paul Krugman would call a “lie.””
lol!
12. July 2011 at 14:51
Benjamin, You are going to make me have an inflated ego–I need more criticism. 🙂
engineer27, Yglesias and I tend to think alike on money. I think my post came first, but perhaps I should add a link anyway.
jj, I suppose I should stop talking about Krugman, I’m probably overdoing it.
12. July 2011 at 15:03
Blinder and especially his intellectual heir Mark Zandi are bad economists, not even economists-economic entertainers. They make money selling forecasts from their bogus models because consultants and state governments need someone authoritative sounding to predict the future for them.
Too bad “experts” don’t fit forecasting models to market data. Then Blinder would lose much of his status.
12. July 2011 at 16:06
“Monetary stimulus doesn’t have to be QE, the most effective types aren’t”
What are the most effective types at the zero lower bound? How would one inflate, as you suggest, to ~4%, when T-bills and money are basically substitutes?
Not that I’m doubting you–I’m sure this has been answered in this space before, but I’m afraid I only recently began reading your blog.
12. July 2011 at 18:36
Blinder apparently doesn’t even read his own op-eds. He had an op-ed in the WSJ in November in which he stated the following:
“Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, “by lowering short-term interest rates,” you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money.
But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.
That sounds pretty similar to garden-variety monetary policy. Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment.”
Here is the link:
http://online.wsj.com/article/SB10001424052748704658204575611052418939656.html?mod=WSJ_hp_LEFTTopStories
12. July 2011 at 21:26
Hasn’t most of the “liberal establishment” been consistently criticizing the Fed for failing the use the tools at its disposal? If the consensus liberal view was that the Federal Reserve had done everything in its power, I don’t know why we would see the handwringing over Peter Diamond’s nomination, the calls for a higher inflation target, or the despair at Bernanke’s press conferences.
I don’t really follow Blinder that closely, but of the prominent liberals I follow (Delong, Thoma, Yglesias, etc.) I can’t think of any who have been pushing the idea that the Fed is out of ammo.
12. July 2011 at 21:52
Aidan,
Progressives are non-believers at worst. Untrustworthy at best.
Liberals support printing money because it is a tax on wealth holders, and to liberals – that is a ALWAYS a good thing.
If they felt there was no tax effect on wealth as a direct result of printing, they would be against QE.
Until progressives view (correctly) monetary policy and it’s preachers as a direct assault on the use of fiscal policy, and thereby an assault on liberals ability to matter – they are not be engaged in a meaningful way by Friedmanites.
You can’t preach QE morally without walking in the light of Uncle Milty.
12. July 2011 at 22:00
“This is what Paul Krugman would call a ‘lie.'”
Touché, Scott, touché. I guess this is a good example of a “false opinion.”
12. July 2011 at 22:00
To clarify, I meant that Blinder’s statement is a good example of a “false opinion.”
13. July 2011 at 11:00
I skip over your posts on Krugman because I’ve already written him off. But somebody needs to keep calling him on his BS, so it might as well be you.
13. July 2011 at 11:39
JPIrving, Well he’s certainly a good enough economist to avoid this sort of error.
Mark: In order of power:
1. Setting a higher target, which means committing to more expansionary policy in the future. It could be higher inflation, NGDP targeting, level targeting, etc.
2. A lower interest on reserve rate.
3. More QE
Aiden, You said;
“Hasn’t most of the “liberal establishment” been consistently criticizing the Fed for failing the use the tools at its disposal? If the consensus liberal view was that the Federal Reserve had done everything in its power, I don’t know why we would see the handwringing over Peter Diamond’s”
I was complaining all through 2009 that Obama needed to fill those Fed positions. Yes, a few liberals eventually got on board, but most complained about Diamond merely because it showed the no-nothing attitude of Shelby. If Obama was serious he would have done a recess appointment. There was no sense of urgency.
Thoma has at times argued they are out of ammunition, although he certainly thinks monetary stimulus is worth a shor. DeLong claimed they were out of ammo in a Berkeley Economic Journal article called 4 Ways Out, published in March 2009. I published a rebuttal in the same journal, and he’s been better since then. But he slipped back just recently, with another “out of ammo” article.
I agree that Yglesias’ views are very similar to mine. But he said lack of engagement on monetary policy is one of the biggest weaknesses of the progressive movement, so if you’re going to cite Yglesias . . .
Thanks Alexander.
jj, It’s a dirty job, but someone has to do it. Seriously, he’s still the most articulate spokesman for progressivism, and we often agree on monetary policy. If I had a low opinion of him I’d ignore him. But he certainly can be annoying at times.
15. July 2011 at 00:53
There is a third option.
It’s bullshit. See Harry Frankfurt, _On Bullshit_.
Once you start to notice, younsee that people produce a lot of bullshit.
Not direct lies. Corner cutting bullshit.
15. July 2011 at 10:02
Greg, Yes, people are very sloppy (except me of course.) 🙂