Friday, December 18, 2009

Conservatives on Monetary Policy

We all know Scott Sumner advocates more aggressive Fed Policy, how about other conservative bloggers?

Tyler Cowen e-mails to point out his article in the Times from way back in the first of August (at least, this is the only Cowen Times article I could find on the Fed) -- I had asked him for a blog post on whether Fed policy has been habitually too tight. He backs the Sumner view as well. That was four months ago, of course, so it's hard to extrapolate that with whether he thinks Monetary Policy is clearly too tight right now. We'll have to wait for a blog post.

Although I essentially agree with Cowen's piece in the Times, I'll have to say I disagree w/ both about the magic of setting an "official" inflation target vs. an unofficial target of 2%, in the absence of doing more QE. And I do not think the whole idea that "expectations matter" was this revolutionary idea that nobody had thought of until conservative economists came around in the 1970s -- everyone involved in the 1929 market crash and ensuing depression likely realized that economic variables depend in a big way on what people think is going to happen in the future. Keynes' Animal Spirits are largely about big swings in these expectations. I also doubt Friedman was ignorant of the idea that expectations matter, whether he stressed them or not.

Why might earlier writers not have mentioned expectations? B/c it is obvious that expectation matter. What is less obvious is whether announcing a policy shift in the absence of doing anything is effective. To be fair, Sumner wants more QE as well, and both he and Cowen probably realize that credibility matters, even if Cowen didn't mention it in his article, because it's fairly obvious credibility matters.

Olivier Blanchard, in his textbook, argued that inflation targets, even in the absence of other policy changes, can have major real effects on the economy. He writes that because Japan initiated an inflation target (w/out ever doing much QE, with the little that was done having been quickly reversed), that now economists were bullish on the archipelago that it would beat its deflation and recession. Japan announced an inflation target in 2003. Blanchard was wrong.

Cowen also suggested I read Kling and Caplan -- at some point in the past I'd stopped reading them. Only so many hours in the day. They haven't posted "recently" on the Fed's overly tight posture the past 12 months, but I did see that Bryan Caplan believes that inflation bet Bob Murphy that inflation wouldn't go over 10% sometime in the next six years. That's a smart bet. The only way Bob Murphy wins this is if the price of oil skyrockets. Which is a possibility...

Here Kling argues for balanced budgets in a recession. Crazy.

He also points to a good paper by Hetzel.

I gave up trying to find their views on whether, right now, Fed policy is too tight or not. And so I'll ask them directly.

UPDATE: Tyler posts about why we need a formal inflation target of 2%. I still think that in the absence of more QE, announcing a 2% target formally (vs. informally) is not all that helpful.


  1. On Blanchard, I've found many textbooks from well-known academics are poorly written; though I'll admit I've never read his so I'll take your word for it. I believe this is because rather than putting a lot of effort into it, they just bring in sales because of their academic reputation. With a less well known author, the quality matters much more. So I wouldn't indict Blanchard based on the readings of his textbook, but that's just me.

    As a side note, I've always found it a bit odd that academic reputation matters in sales of elementary textbooks since just about anyone can write an elementary textbook.

    On Kling though, I don't think he was exactly arguing for balanced budgets in a recession necessarily (at least in the link you gave). His argument is still pretty stupid though.

  2. Ted-- I see your point, but if I can't indict someone for writing a shitty textbook, what can I indict them for? Blanchard's textbook is read by far more people than any of his academic papers. You are correct that he is not the only famous economist to have a mediocre textbook (and overpriced at that), but that hardly excuses him.

    Re: Kling writes: "Governments are losing money. They should be doing what private firms do when they are losing money -- cut the payroll." He's saying governments shouldn't run deficits, and when they do run deficits, they should cut their payroll -- presumably until they are balanced again. I don't see how I was unfair to the text...


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  4. TV, you misunderstood my point, mostly because I poorly explained it.

    You can idict Blanchard for a bad textbook, but I wouldn't assume that means anything about how he feels about the situation currently or Japan's situation for that matter. I'll take a subject that is much less open for debate. I know one of the most respected biochemist's out there, and his textbook is riddled with garbage and elementary biochem mistakes (and his textbook is incredibly pricy too, surprise surprise!). I know he doesn't believe these things. One of errors was in fact debunked by his own earlier research, yet it's still in his textbook. If I took his textbook to represent his beliefs, I'd think he was an idiot. My point was to not assume anything about his beliefs from a textbook, but feel free to assume it's a bad textbook.

    And on Kling, I thinks it's possible he could be one of those people who think it's brilliant to cut government spending to finance large tax cuts to fight the recession. I've heard the argument from libertarians / some conservatives quite often. I meant that could be his thinking rather than balancing the budget. He might think balancing the budget is smart, but the link left open the intreperation I described.

    I should get more than two hours of sleep before commenting so I can make sense.

  5. Ted--

    Re: blanchard -- you are probably right on the Japan bit -- I think he wrote what he wrote in his 2008 version for his original version (2004-5), and just kept it in there even as his prediction about Japan's economy proved false... But I suspect he does believe something magical will happen when central banks announce interest rate targets in the absence of doing anything to hit those targets.