Tuesday, August 21, 2012

Catch of the Day

To Matt Yglesias, on monetary policy and the Obama Administration:
This is a Fed full of Obama appointees pursuing a disastrous policy trajectory that's creating all kinds of problems for Obama. But I've never read any repoting indicating that the Obama economic team is upset about monetary policy, I've never heard any discontent with monetary policy from administration officials on or off the recod, and Obama's allies on Capitol Hill have basically never called publicly or privately for more expansionary monetary policy. Rather than someting as simple as an error, there seems to be a totally comprehensive systematic  blunder in which Democrats simply ignore the most powerful tool for bolstering aggregate demand while Republicans call for a disastrous tight money agenda. 
Yup.

I do have a slightly different interpretation of the Fed's actions than Yglesias does...I guess where he tends to emphasize how little they've done, I would tend to put a little more stress on how they've at least avoided rushing to tighten any time there's mild good news about the economy. And so I'd overall talk more about a weak or suboptimal policy, rather than a disastrous one. But, you know, his interpretation has a lot going for it, too.

And yup -- it's bizarre. This isn't fiscal policy, where there's Congressional obstacles to action and where Keynesian deficits were are counterintuitive for a whole lot of people. If Barack Obama had appointed a Fed Board full of wild-eyed irresponsible inflation-mad economic expanders, the truth is that no one would have noticed. Except for the effects, that is. I mean, Ron Paul would be very upset, but not noticeably more upset than he is already; the same, pretty much, for the Always 1979 crowd. Now, of course, if Fed policies actually produced serious inflation, you would get some real complaints about that, but presumably it would have accompanied a lot less unhappiness about economic growth and jobs, and that's a trade-off Obama should want. Unless he and the administration generally believes that different monetary policy really wouldn't help...but there's really no sign of that, either.

As Yglesias says, the attitude seems to be one of indifference -- they're neither happy nor upset about it. Which just doesn't make any sense to me, but of course things don't always have to make sense. I sure would like to hear more about it, though.

And: great catch!

48 comments:

  1. My hunch is that Democrats are deathly scared that if they do anything to promote loose(r) monetary policy, that Republicans will accuse them of Carter-ism. And they're right: Republicans will accuse them of that. In fact they're doing it anyway. But it wouldn't actually matter at the polls unless there is real '70s level inflation. And that's not going to happen in a depressed economy where interest rates are at or near 0. So yeah Democrats should stop quaking in their boots and insist the Fed grow the economy and lower unemployment like it is legally mandated to do.

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  2. It is possible, of course, that they have no issue with what the Fed has been going. Given who the Treasury Secretary is, I wouldn't be surprised if that's the case.

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  3. This isn't fiscal policy, where there's Congressional obstacles to action and where Keynesian deficits were are counterintuitive for a whole lot of people.

    Whaaaa??? Fed governors are subject to Senate confirmation! And filibusters! Just like fiscal policy!

    If Barack Obama had appointed a Fed Board full of wild-eyed irresponsible inflation-mad economic expanders, the truth is that no one would have noticed.

    Again: whaaaa??? Are you suggesting that GOP Senators are so dim that they wouldn't notice that Obama was nominating governors who support expansive monetary policy? Or that they just wouldn't care?

    Don't get me wrong; obviously if Obama appointed governors like this and somehow got them confirmed, then the economy (and his re-election bid) would be on much stronger footing right now.

    I just don't see how the "getting confirmed" part would have been any easier for Fed governors than it has proven to be for, say, judges.

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  4. classic agency problem. Geithner approves of this policy, although it hurts the political team. However, I suspect Obama is unaware enough (the czar and the cossaks, again?) that he hasn't figured it out. Geithner has been feeding him the line that a looser policy won't help solve the structural problems. And to be honest, there is something to be said for that view. There is a reason why Ygelisas doesn't know much about economics.

    You may have linked to Jane Mayer's profile of Obama's problems with donors. I read that as a larger problem -- he isn't interested in being a politician.


    The best tack for the Republicans to take is Obama as the lazy, shiftless, Negro. A president who has dinner with has family twice a week isn't working hard enough for us. But between the birthers, the neocons, and the plutocrats (not to mention the occasional Gold Bug and Tea Partier) they can't seem to come up with a coherent attack. It is amazing.


    Obama is starting to really resemble Douglas Wilder. A great footnote, but a terrible politician.

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    1. If only the Democratic Party had more "terrible politicians" like Obama!

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    2. That's exactly the point, Andrew. Obama doesn't do shit for the Democrats. He doesn't raise money for them. He doesn't help get them elected. He doesn't even motivate the base (this year)

      He (and his team) are great at selling him, but it isn't causing a generation to think he is the messiah (which is what happened with Republcians and Reagan)

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    3. A very classy move to fixate on race by comparing Obama to a relatively obscure black politician and by urging the GOP to use a derogatory racial stereotype against Obama! Well done!

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  5. I remain dubious of Yglesias's constant whining about monetary policy, on the grounds that I don't think Matt Yglesias actually knows anything about economics or how monetary policy works. Isn't there a pretty strong argument that futher monetary easing by the Fed wouldn't actually accomplish very much/anything? Isn't it possible we're in a liquidity trap where monetary policy can't actually help us? The fact that Yglesias just constantly beats the drum for the Fed to do stuff, without explaining why this would actually accomplish anything, makes me highly suspicious.

    (Basically, I've come close to reaching the point where I reflexively assume that Matt Yglesias is wrong about anything where I don't have strong pre-existing agreement with him. I find him anti-persuasive.)

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    1. There's some good pushback from some of Matt's commenters on this, that, to me at least, is rather more convincing than the same theoretical garbage Matt's been pushing for the last few years.

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    2. Do you think Paul Krugman knows anything about economics or how monetary policy works?

      Because I'm pretty sure he's on the same page as Yglesias on this issue.

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    3. Yeah, I know Krugman's more or less on the same page. And obviously Krugman knows much more about economics and monetary policy than Yglesias. I remain unconvinced. Hasn't the fed been massively increasing the money supply for several years now? It doesn't seem like it's done much good, and I'm not sure I understand why continuing more of the same is supposed to be a magic bullet for the economy. And certainly many economists are on the opposite side from Krugman, and not just right-wing ones.

      Yglesias always presents a false dichotomy, where it's taken for granted that monetary policy could save the economy, and thus elaborate conspiracy theories are needed to explain why the Fed isn't doing that.

      But what are the specific steps the Fed is supposed to take that will actually reduce unemployment?

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    4. I remain unconvinced. Hasn't the fed been massively increasing the money supply for several years now? It doesn't seem like it's done much good

      You can make exactly the same argument with respect to fiscal stimulus. Do you believe in the efficacy of fiscal stimulus?

      And certainly many economists are on the opposite side from Krugman, and not just right-wing ones

      Name some!

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    5. "Name some!"

      John Taylor, the Keynsian economist who invented the "Taylor Rule" by which the Fed sets interest rates, at least in theory... Taylor credits Greenspan's deviation from the Taylor Rule with inflating the housing bubble (Bernanke disagrees).

      Krugman is just a party actor who is rather well versed in economics. To his credit, Krugman saw the housing bubble forming, which he blamed on Greenspan’s low interest rate policies at the time. He's since pretended that no such thing happened, because it gives credence to the hard money folks who he seems to have bitter personal contempt for.

      I don't understand why the left is so convinced that job growth would accompany inflation. Historically, that hasn't always been the case. But trying to talk a lefty out of his or her belief in monetary stimulus is sometimes like trying to dissuade a conservative from believing in the magical powers of tax cuts.

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  6. I've heard this argument before, and it's incredibly thin. What do these liberals/progressives want the Fed to do? Krugman blasted the Fed earlier this spring, and his complaints came down to one (only one) additional strategy, and a questionable strategy at that.

    No one says this directly, but I think these liberals/progressive want the Fed to tell the Congress to do another stimulus, and the Fed will guarantee to buy all the extra debt. It's buying a lot of the debt already, so what's a little more or a lot more?

    If this isn't what people are looking for from the Fed, I sure as hell wish they would say what it is specifically. Here's my summary of what Krugman asked for if you want to read a layman level analysis.

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    1. They want the Fed to do what Bernanke repeatedly says he could do if things got worse but he just isn't ready to do yet for reasons that we can only guess at (mine is he prefers the economy to be just weak enough to make Romney's election more likely but not so weak that he can't juice it after election day).

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    2. Yeah, pretty much that.

      It's true that economists have mixed views of what the Fed could do, and I'd say it's a fair call to say that Yglesias can sometimes act as if there's a push-button certain solution...but I really don't get the "what could they do?" question. Putting MY aside, plenty of economists have been arguing for a more active Fed, with specific policy options floated. Yes, they could be wrong, but there's no evidence I know of that the WH has had a vigorous policy debate about this, or anything like that.

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    3. What are the specific things that Bernanke repeatedly says he could do, and how will they help?

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    4. Bernanke has suggested the possibility of additional (and more broadly-based) quantitative easing.

      From what I understand (and I'm no economist) one of the main benefits of this policy is to increase inflation expectations, spurring companies to spend and invest now rather than hoard cash like they have been doin.

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    5. @Andrew, it's important to consider the downsides to that policy too. How much did QE2 actually help, and what were to bad effects of it? Should we do QE3 based on the results of QE2? I don't see evidence that QE2 was effective in lowering unemployment, so what is the point again?

      @others, again, no specifics, but putting the blame for lack of specifics on Bernanke. He doesn't have a magic wand, and we much know what his tools are. If we're hoping there's a secret formula in this bag, and he's just been waiting for the right moment... well, that is just ludicrous. Stop wishing for the magic bean or say what that magic bean is.

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    6. I don't see evidence that QE2 was effective in lowering unemployment, so what is the point again?

      What about evidence that shows private sector employment increasing? What about evidence that, while our unemployment rate is slowly heading down, other countries that have not done QE are getting worse?

      Again, I don't think it's wise to look at the state of the economy as a whole and conclude that, because it's shitty, therefore every action taken was wrong and instead we should be doing the opposite. The way I see it, if QE2 failed to spur the economy sufficiently (which is undoubtedly true) then it's just as likely that the reason for that is that it wasn't aggressive enough.

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    7. @Andrew, I'm much more careful in my analysis than you imply. I've been looking at the how the employment has been changing. Are you aware that unemployment dropped significantly during QE1 but not QE2? That should factor into your analysis. I certainly consider it. If the pattern has been: effective, then not effective; there's a good chance that another attempt will be not effective.

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  7. I've read that when Americans are surveyed they hate inflation even when their wages keep pace with it. (I think I read this in the New Yorker?) So there might be a psychological pain from inflation that the Fed and Obama are taking into account that wouldn't apply to Rational Man in the economic models.

    That is, from a happiness perspective maybe we really should keep inflation under 2% even at the cost of jobs, because everyone has price stickiness rooted in their childhood and gets angry when prices go up.

    I'm not convinced, just a thought.

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  8. Yes, one party believes it is always 1979.

    But the other party believes it is always 1958.

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    1. Yes of course, the year Michael Jackson was born.

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    2. Huh? As a (relatively) youthful Dem, not even sure what happened in 1958. But ok.

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  9. Pushing on a string. People and firms have been so burned by debt that they're uneasy about borrowing even when the money is effectively 'free.'

    Krugman knows a lot about economics - certainly more than Matt Y. But perhaps he's become a bit too comfortable with being the great unheeded prophet? After all, it is a fun gig!

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    1. People and firms have been so burned by debt that they're uneasy about borrowing even when the money is effectively 'free.'

      Right. So isn't that an argument for for the Fed to adjust its inflation target slightly upward - say 3-4% - for a few years? If people/companies are expecting slightly increased inflation, they will be spending and investing more.

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    2. I agree with Rick. A lot of people got burned so badly in 2008-9, so I doubt we can shake that money loose with inflation fears. However, signaling a change in target and seeing the reaction might do some good while doing little damage.

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    3. I should have emphasized the MIGHT do some good while doing little damage. I haven't seen any detailed discussions on that from someone who is acknowledging both benefits and risks.

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  10. A lot of people got burned so badly in 2008-9, so I doubt we can shake that money loose with inflation fears.

    Non-sequitur. The fact that people/companies got burned in 2008-09 from taking on too much debt says nothing about whether those people/companies would be more willing to spend now if they knew that holding on to their cash was a losing proposition.

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    1. Are you suggesting that people aren't more cautious after getting burned? Give me a break. It's the most logical explanation for businesses and household increasing savings immediately after the crash, and I think it still holds. If you don't, please provide some evidence instead of labeling it a non-sequitur. I bet others see the logical connection.

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  11. Maybe Obama is part of a system where rich people have disproportionate influence over politicians, and he therefore appointed a fed that caters to the interests of rich folks who don't want their bond yields damaged by inflation.

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  12. Off topic, but I wanted to share this news. The Atlantic site is being attacked, particularly a post about Steve King. All the comments are disappearing. It's also affecting TaNeishi Coates. Here is the link to the Steve King story. Watch the comments disappear.

    People are attacking the thread there. The thread is being destroyed. I think the thread isn't monitored by ahuman. Instead, if enough visitors complain about a comment, it disappears. This has happened to all comments since 12:59. Why is this happening? What people are making a concerted effort to get rid of allthe comments? I'm going to post about this elsewhere, so everyone can find you that some people are trying to censor us. Thank you.

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    1. Actually, it's happening all over the Atlantic website.

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    2. Seems to be fixed. I don't know if it was a system glitch or an attack, but it was widespread at Atlantic.

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    3. I was thinking today about former Apple superstar Ron Johnson's miserable tenure at JC Penney, whose stock dropped more than 50% from Feb to July 2012 on the heels of Johnson's profoundly misguided attempt to "retrain" the JC Penney consumer via everyday low prices (if you've been shopping in a department store for more than 5 minutes the past 5 years, you probably sense how dumb Johnson's strategy is). In the face of miserable results, Johnson has predictably doubled down, modifying his strategy somewhat but sticking with his plan to retrain the JCPenney consumer.

      I think we all know why Johnson clings to his stupidity - his equity is wrapped up in the strategy. It really doesn't matter how smart Johnson was, he's hitched his wagon to stupid, and its gonna take him wherever it takes him. Paul Krugman is certainly brighter than Ron Johnson (though Krugman's star doesn't shine as bright as Johnson's used to) - but there's a bit of Ron Johnson in Paul Krugman, it seems to me.

      Specifically, what would it take for Paul Krugman to announce "Stimulative deficit spending? Nah. Counterproductive under current circumstances." Even if he really believed that, would he say it, or like Ron Johnson, has Krugman hitched his wagon to the "Keynes or Bust" ideology, arguing for Keynes not so much anymore because he thinks its best for the country but because its best for Paul Krugman?

      That last is admittedly a bit harsh. I would have a lot more confidence in Krugman, though, if he would talk, even generally, about the circumstances in which he would recommend turning the spigot off, rather than constantly sighing about those who do not worship in his monetary policy church (are the sighs part of his brand too?)

      Without establishing parameters for his endless Keynesianism, Krugman starts to seem a bit like the central bank policy equivalent of Ron Johnson. And who's long JC Penney anymore?

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  13. Sorry for dumping that last on MP's subthread - but back to Yglesias' original: Yglesias asserts with certainty that the Obama Administration has "ignore(d) the most powerful tool for bolstering aggregate demand". Well....maybe?

    There's lots of great arguments in this thread why what Yglesias believes to be glaringly obvious may not actually be so. But here's an interesting, 30,000-foot thought experiment:

    Can anyone name a pundit/academic/intellectual, who is credibly historically agnostic on the topic of expansionary monetary policy, but nevertheless thinks such an approach is currently the slam dunk Yglesias perceives? Does such a person exist, or is everyone lined up supporting Yglesias' conclusion already a card-carrying, tithing member of the Church of Keynes?

    Off the top of my head, I can't think of anyone, aside from committed uber-Keynesians, who easily saw the obviousness of Yglesias' conclusion. I admit I don't follow it as closely as some, but you'd think an assertion as dramatic as Yglesias' would be easily supported by convinced agnostics, no?

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    1. Actually, Keynes would advocate fiscal stimulus, not monetary stimulus. Direct federal spending on goods and services automatically creates demand, while an increased money supply can be diverted into paying down debt, which is rational for the individual debtor but doesn't boost the economy. Bernanke, too, has said that it's Congress's turn to do something.

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    2. By the way, Krugman doesn't just sit around saying, "The economy didn't improve, so I guess we didn't spend enough." He mentioned specific numbers based on the magnitude of the collapse in aggregate demand, and he mentioned them in advance. In 2009 he said the stimulus that was then being bandied about was inadequate because it didn't measure up to the reduction in demand. Now I don't remember the figure taht he said was necessary, but needless to say, it was large. He went on to say that the effect of the stimulus, if passed as is, would peter out by the third quarter of 2010, which is pretty much what happened.

      What strikes me is that for three generations economists said we didn't have to worry about depressions any more because Keynes had figured out how they work. Then, when the moment came, almost everyone threw it out the window. (Let me take part of that back; Milton Friedman showed up in the middle of that period, breaking up the consensus on what to do. But he said monetary policy was the key, and today's Republicans don't seem to buy that either.)

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  14. Scott, I'll concede the point about debt-driven consumption from the government stimulating demand; at least indirectly, the Fed has done a whole heck of a lot the last few years (e.g. the QEs, the latest Operation Twist, historically accomodative rates) indirectly to achieve exactly that. One-half of the Fed's dual mandate (keeping inflation low) has gone well, though you don't have to be Ron Paul to suspect the Fed isn't primarily responsible for that outcome. The other half (low unemployment) has been a historic disaster.

    So the obvious moose on the table: given that the Fed has been unprecedentedly accomodative the past few years, and said efforts have only been halfway successful (and plausibly not responsible for said success), what in particular makes us think that even more accommodation - beyond already-historic levels - will succeed where the past few years have failed?

    As an aside, there's one other extraordinary thing about Yglesias' column: I feel a bit bad calling him out, since I generally like the guy, but his frame strikes me as so typical of the intertubes: if we accept that achievement of the dual mandate is correlated with economic growth (to which Presidential elections are correlated), then Obama and the Fed governors have aligned interests where the effects of Fed policy are concerned.

    The fact that roughly half the Fed governors believe that further accomodation would be counterproductive is most likely an indication that this is a moot point; I'm probably old-fashioned, but when a guy like Matt Yglesias says its obvious what the Governors should do, such that half of them are transparently incompetent at their job, my first thought is: what aspect of Matt Yglesias' resume makes him better able than the Fed Governors to judge such matters?

    To be clear, Yglesias might be right. The other half of the Fed more or less agrees with him. But these intertubes are funny - anyone with a platform and a public equity can say just about anything they want, with their credibility seemingly derived from the mere having of said platform.

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    1. CSH, I think this is what is really astounding about the actions of the Fed governors. From the most recent Fed statement:

      "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.

      Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

      ...

      The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate"

      So, we are far from full employment and won't be getting back there soon. Inflation may fall below the Fed's target. There are significant downside risks on the horizon (fiscal cliff?) that could worsen unemployment. If there are any risks of worsening inflation on the horizon, then they are invisible to the members of the Fed Board. They say that they have tools that they aren't using that can promote a stronger recovery, but don't consider that the conditions warrant their use. I agree with Matt Yglesias then that this must be the type of recovery that the Fed Governors are satisfied with.

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    2. Oh, and the last paragraph of Bernanke's essay "Japanese Monetary Policy: A Case of Self-Induced Paralysis?" seems instructive:

      "Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn't more happening? To this outsider, at least, Japanese monetary policy seems to be suffering from a self-induced paralysis. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn't absolutely guaranteed to work. Perhaps it's time for some Rooseveltian resolve in Japan."

      Substitute "Japan" and "Japanese" with "United States" and "American," and "decade" with "four years."

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    3. YMMV - as always - and I'm just an anonymous dude ranting on the internet - but FWIW, I don't read the Fed's last statement to mean that they're satisfied with the recovery; rather, that they're not convinced that further 'experimentation' satisfies their collective cost-benefit analysis at this point. That view doesn't seem unreasonable, does it? The experimentation so far hasn't been so hot, has it? Also, the bit about "prepared to employ these tools as appropriate" is pretty much FOMC boilerplate, meaning when they have consensus, they'll act, which seems a bit like the FOMC reiterating the exceedingly obvious. Lack of such consensus doesn't inherently mean either side is wrong.

      I love the Bernanke quote in your second post, though. Especially the notion of Japan having "Rooseveltian" resolve, which really triggered a huge insight for me.

      We debate the heck out of the Great Society, 6 ways to the weekend and all day Sunday, and always in some variation of our ideological perspective. I never thought of the New Deal in a FOMC light, but at least narrowly in the 1930s, the New Deal was one of the all-time great FOMC-type government actions. Why? Cause it stimulated the heck out of consumption by putting a bunch of money in the hands of starving people, and doing so (at least back then) at relatively little cost.

      So good on you Roosevelt. Japan circa 2012 is an interesting comparison to the New Deal since the Japanese society is currently a) very old and b) very non-diverse. If Bernanke meant "Rooseveltian resolve" in the generic sense of new solutions to vexing problems; sure, but if Bernanke meant the particular things FDR did in the 1930s, well, it would seem that train long ago left its Japanese station.

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    4. And one other insight: it strikes me that the New Deal "worked" (while 21st century experimentation fails) for basically the same reason, at the other end of the socioeconomic spectrum, that Kennedy's tax cut for the rich was stimulative, while Bush's failed.

      Because the success of these things is a function of their marginal impact. Doubling the takehome pay of rich folks (Kennedy) has a huge trickle-down effect in the economy; increasing it by a few percent (Bush) makes little discernible difference.

      Similarly, transitioning old people from starving to having a little bit of money (the New Deal) makes a huge relative difference - subjectively comparable to the huge relative difference from Kennedy's tax cut. By contrast, transitioning from having a bit of money to a bit more (21st century experimentation) has little marginal effect.

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    5. @CSH - You responded to yourself before I could respond.

      I suspect that good old Keynesian fiscal stimulus would still work; it is a nonstarter purely at the political level.

      But monetary stimulus depends on the financial markets, which are still in paranoid mode. Look at the way Euro-hysteria keeps tanking US markets.

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  15. CSH, I think you're still confusing fiscal and monetary. Quantitative Easing and Operation Twist relate to monetary policy; they are not Keynesian. QE2 had the effect of putting more money into the hands of banks, but instead of lending it out, the banks spent it buying Treasury bonds. That wasn't stimulative of anything. Keynes would advocate creating demand through direct government hiring, spending, and buying, but that requires an act of Congress and Congress won't do it. Hence, we tread water. (Ironically, one of the people hired by the government in the 1930s was the unemployed economist Milton Friedman, who thought it was a fine idea at the time but changed his mind later. But enought about that.)

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    1. Your point about the difference between fiscal and monetary stimulus is well-taken; fwiw I threw in the 'indirectly' bit above in light of that difference. Your further point about the possibilities of direct government investment is also well-taken...who knows.

      To our topic, though: its not clear how superior Fed governors would have helped Congress behave better.

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    2. Fair enough.

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