Lately, I've been noticing that the United States economy seems to have a sense of irony. Maybe it's just me, but right after Republicans enact contractionary fiscal policy, economists and economic forecasters lower their predictions for GDP growth in the first quarter. Surely they were in the middle of formulating these numbers a few days ago. Didn't anyone think to say, "Hey, you know it looks like the economy is slowing down again, right? Maybe we should boost spending temporarily, while working in some medium-term cuts for good measure? As far as we can tell, it doesn't even look like the bond vigilantes will mind!"
But I forgot! There have been economists yelling this. For months. From the rooftops of the blogosphere. On the left, we've got Paul Krugman, Brad DeLong, and Christina Romer calling for basically anything - QE2 (and now 3, I suppose), fiscal policy (as if that was going to happen - unless you consider the Bush tax cut extensions fiscal policy), or even just leaving interest rates low, which is a feat in itself due to all the inflation hawks (who can't tell the difference between headline and core inflation) in office today. On the right, there's Scott Sumner and Tyler Cowen advocating for stronger monetary policy, aiming for higher nominal GDP and inflation, respectively, with essentially the same means to each end.
With such strong support from both sides of the aisle, it's bizarre that Republicans are pushing sop hard against seemingly anything. And on that note, from Scott Sumner:
"Lars Svensson showed that monetary policymakers need to equate the policy goal with the policy target. If the captain of a ship hopes to reach New York, but expects (given wind and currents) to end up in Norfolk, then he needs to adjust the steering. If the Fed hopes for 5% NGDP, but expects a decline in NGDP (as was the case in late 2008) then they need to radically adjust monetary policy until their internal forecast unit expects NGDP to grow at the desired rate.
Rumours of QE2 in the fall of 2010 boosted all sorts of asset prices, and depreciated the dollar, in direct contradiction to the late 2008 and early 2009 predictions of the "liquidity trap” Keynesians. The programme should have been done 2 years earlier and in much larger amounts. And it should have been combined with a switch to level targeting (of prices or NGDP) and a lower interest rate on bank reserves. The Fed should have done whatever it took to ensure on-target NGDP growth expectations. I.e. they should have done what Bernanke recommended that the Japanese do in 2003."
And a response to the article, by Ryan Avent:
"This is why it's a problem to be obsessively cutting short-term government spending. And this is why it's a problem when regional Fed presidents start recommending that the Fed end QE2 early. Real output growth may have clocked in at 1.5% in the first quarter, and Dallas Fed President Richard Fisher is going around giving speeches about how the American economy is overstimulated. I'd hate to see what Mr Fisher considers to be an appropriately-stimulated economy."
Think I might as well quote myself on this one. What should we be doing? I'll let me from a few days ago explain:
"The fact that interest rates on short term U.S. Treasuries have fallen all the way to the zero lower bound shows that the market considers them safe assets. So what should the government do? Increase short term stimulus. Bring spending from the future into the present, finance it by issuing new debt, and don't stop until the market no longer demonstrates significant demand for safe assets."
But I forgot! There have been economists yelling this. For months. From the rooftops of the blogosphere. On the left, we've got Paul Krugman, Brad DeLong, and Christina Romer calling for basically anything - QE2 (and now 3, I suppose), fiscal policy (as if that was going to happen - unless you consider the Bush tax cut extensions fiscal policy), or even just leaving interest rates low, which is a feat in itself due to all the inflation hawks (who can't tell the difference between headline and core inflation) in office today. On the right, there's Scott Sumner and Tyler Cowen advocating for stronger monetary policy, aiming for higher nominal GDP and inflation, respectively, with essentially the same means to each end.
With such strong support from both sides of the aisle, it's bizarre that Republicans are pushing sop hard against seemingly anything. And on that note, from Scott Sumner:
"Lars Svensson showed that monetary policymakers need to equate the policy goal with the policy target. If the captain of a ship hopes to reach New York, but expects (given wind and currents) to end up in Norfolk, then he needs to adjust the steering. If the Fed hopes for 5% NGDP, but expects a decline in NGDP (as was the case in late 2008) then they need to radically adjust monetary policy until their internal forecast unit expects NGDP to grow at the desired rate.
Rumours of QE2 in the fall of 2010 boosted all sorts of asset prices, and depreciated the dollar, in direct contradiction to the late 2008 and early 2009 predictions of the "liquidity trap” Keynesians. The programme should have been done 2 years earlier and in much larger amounts. And it should have been combined with a switch to level targeting (of prices or NGDP) and a lower interest rate on bank reserves. The Fed should have done whatever it took to ensure on-target NGDP growth expectations. I.e. they should have done what Bernanke recommended that the Japanese do in 2003."
And a response to the article, by Ryan Avent:
"This is why it's a problem to be obsessively cutting short-term government spending. And this is why it's a problem when regional Fed presidents start recommending that the Fed end QE2 early. Real output growth may have clocked in at 1.5% in the first quarter, and Dallas Fed President Richard Fisher is going around giving speeches about how the American economy is overstimulated. I'd hate to see what Mr Fisher considers to be an appropriately-stimulated economy."
Think I might as well quote myself on this one. What should we be doing? I'll let me from a few days ago explain:
"The fact that interest rates on short term U.S. Treasuries have fallen all the way to the zero lower bound shows that the market considers them safe assets. So what should the government do? Increase short term stimulus. Bring spending from the future into the present, finance it by issuing new debt, and don't stop until the market no longer demonstrates significant demand for safe assets."