Friday, March 25, 2011

Today's rant about Matthew Yglesias and Ben Bernanke is indirect.

Kevin Drum decided to quote Matthew Yglesias, so I left my usual tirade in his comments section.

Here it is

I tend to freak out when Matt Yglesias writes that stuff. He is unwilling to distinguish Greenspan and Bernanke. He assumes that all Republicans are just the same. This is definitely his methodology and it is utterly insane. Greenspan is an acolyte of Ayn Rand (part of her tiny inner circle) Bernanke is a brilliant moderate. The unquestioned assumptino that they are just the same is insane nonsense.

Much much worse, Yglesias simply assumes that a "more expansionary" monetary policy would have lead to lower unemployment. Now he is debating Paul Krugman who claims that such a policy is not feasible (it would require the ability to precommit to making inflation high when unemployment is low and there is no way anyone can convince anyone that he will do that).

In fact during the long period in which Yglesias has been criticizing Bernanke, the Fed instituted QE2. This is not a huge intervention compared to other interventions by the Fed under Bernanke, but it is a much huger expansion of high powered money than any ever under any previous chairman. It had no measurable effect on anything.

Yglesias just refuses to consider the possibility that monetary policy might be less effective when the Federal funds rate is essentially zero than when it is over 10%. He doesn't argue that there is something more which would have worked (more than $ 500,000,000,000 created by fiat as no one ever had done before Bernanke). He just assumes that he understands monetary policy better than Paul Krugman. Now I am no expert, but I can tell that Yglesias is much less an expert than I am. His belief that current Fed policy is not extremely radically expansionary by the standards of all central bankers post Rudolf Havenstein shows that.

I notice two very different assertions : That since the 70s the Fed has placed more emphasis on low inflation than low unemployment and that since 1987 the chairman of the Fed has been a Republican. Notice the difference. Just as Bernanke has been the most radical stimulator in the Fed ever, Paul Volker was the most ruthless inflation fighter. The shift from aiming for full employment to ignoring unemployment and considering only inflation occured on the day when registered Republican G. William Miller was replaced by Volker. Inflation phobia does not correlate with party affiliation among economists. Fed policy now is of different importance than Fed policy in 2008-9 (when Bernanke and Paulson saved the world economy and it was very very critical) and from normal times when the Fed isn't pedal to the metal.

I generally admire Yglesias, but on this topic he reminds me of a supply sider. They said tax cuts would cause wonderful things. They got the tax cuts and nothing wonderful happened. This didn't boether them at all. Yglesias calls for expansionary monetary policy. There was more expansion that ever under any fed chair before Bernanke. Nothing wonderful happened. Yglesias is not disturbed in the slightest.

What could possibly convince you guys ? I ask for information. I just can't see how your statements about montary policy now can possibly be influenced by evidence given your apparent indifference to the data.

Look at real interest rates. When did QE2 occur ? 500,000,000,000 in fiat money is a LOT. Total liabilities of the Fed were only 800,000,000,000 when Bernanke took over. So far he has tripled them. You conclude that he is a class enemy who only cares about inflation and doesn't care about unemployment.

End of comment over there.

Now I realize one of the reasons that the Drum/Yglesias view seems so odd to me. Economists tend to agree that monetary policy can't affect the unemployment rate averaged over a long period of time. There are new classicals who now assert that monetary policy has no effect and new Keynesians who think it can affect the spread of unemployment around its long run average. The belief that there isn't a long run unemployment inflation tradeoff is very very strong. This is what would be needed for the Drum/Yglesias hypothesis to be valid.

Also when Greenspan was Fed chairman we had very low unemployment and very rapid employment growth for a while. It was widely argued that inflation was about to increase so the Fed should tighten. Grennspan didn't tighten. He was wetter, more expansionary and better for workers than the average registered democrat macroeconomist.

The story of progressives passively accepting tight monetary policy just doesn't fit the facts. Monetary policy was perceived to be very loose by everyone who had an informed opinion on the subject (as it is currently perceived to be about as loose as it can possibly be).

Totally aside from the claims about Bernanke (which seem totally insane to me) the claims about Greenspan don't fit the facts as perceived by anyone who was paying attention at the time.

I think very very highly of both Drum and of Yglesias and I am totally befuddled.


Andy Harless said...

"QE2...had no measurable effect on anything"

Yes, because it was just coincidence that every single economic indicator turned around and started giving positive surprises instead of negative ones almost the very day QE2 was announced.

"a 'more expansionary' monetary not would require the ability to precommit to making inflation high when unemployment is low and there is no way anyone can convince anyone that he will do that."

Nonsense. Bernanke has already convinced many people (admittedly almost all lunatics) that he will do that. On the margin, the easier his policy now, the more near-lunatics will be convinced that he will let the inflation rate rise. There is a wide range of opinions about the likely future course of monetary policy, and there are plenty of things the Fed can do to influence the mean of that distribution. In this respect, recent Fedspeak constitutes a drastic tightening of monetary policy at a time when Yglesias and Drum rightly suggest that a drastic loosening would be in order.

"current Fed policy is...extremely radically expansionary..."

Until one agrees on a measure of policy ease, this question is completely subjective.

Certainly if you fit a regression of the federal funds rate to the core inflation rate and the unemployment rate, you will find that recent residuals have been strongly positive. Perhaps this was unavoidable because of the zero constraint, but given your contention that QE is ineffective, the amount of QE necessary to be consistent with past policy (i.e. to simulate the impact of the negative federal funds rate predicted by the regression) must be much larger than what we have actually seen. By this criterion, current Fed policy is extremely radically contractionary.

Or if you prefer to use quantities rather than interest rates as your basic criterion, we can look at money. To be properly interpreted, measures of the money stock have to be adjusted for changes in velocity. Therefore, ultimately, the only proper quantitative measures of monetary ease are measures of nominal spending. Of course all such measures plummeted in early 2009 and have not since recovered (indeed, they have diverged further from the earlier trend). So in terms of velocity-adjusted monetary aggregates, monetary policy has again been extremely radically contractionary.

If "the standards of all central bankers post Rudolf Havenstein" indicate otherwise, then there is a problem with those standards, and perhaps we need to appoint central bankers who are better at measuring the ease of monetary policy.

Andy Harless said...

"Economists tend to agree that monetary policy can't affect the unemployment rate averaged over a long period of time"

Umm...greasing the wheels effects? What are Tobin, Akerlof, etc., chopped liver? Not to mention the recent PLOG evidence from the IMF, which indicates that, as an empirical matter, large output gaps can persist for long periods of time (and person-years of unemployment thus accumulate) when inflation rates are low.

Moreover, even if we pretend that the actual long run Phillips curve is the vertical one about which they teach in Ec 10, most evidence (as well as the fact that the unemployment rate is bounded below at zero) suggests that the short run Phillips curve is convex. Over time, a monetary policy that misses the NAIRU will result in a net employment sacrifice even if the inflation rate at the end of the time period is the same as at the beginning.

Anyhow, it isn't clear that 30 years is really "a long period of time" for this purpose. The inflation rate has been trending downward that whole time -- which is to say, we have been mostly on right side of the long-run Phillips curve. I met a lot of people in 1981, and we are not all dead yet.

"Monetary currently perceived to be about as loose as it can possibly be"

And yet there are trillions upon trillions of dollars worth of debt instruments that the Fed is legally allowed to hold and that are not currently in the Fed's portfolio. How is it that those instruments are somehow invisible?

I will in any case acknowledge that Drum and Yglesias are wrong to portray progressives as passive when many have in fact participated in this class warfare actively as generals and admirals for the rentier class.

Michael Sullivan said...

You need to read more Scott Sumner if you want to understand where Yglesias is coming from.

The fed's charging on interest on excess reserves means that most of that monetary base is tied up in excess reserves instead of doing its expansionary thing. At least that's the claim I'm reading.

Debbie P. said...

I don't know. Scott Sumner seems to be in sympathy with Yglesias.


Robert said...

OK replies but not in order. I have a very high opinion of Matthew Yglesias. In contrast, I think Scott Sumner is insane.

I wrote this the same day as the rant on Drum on Yglesias

Bruce Wilder said...

Yglesias and Drum are not actually making a claim about unemployment in the putative long-run. They are instead making the claim that monetary policy affects the distribution of income, and offering the short-run effect of monetary policy, via unemployment, on the bargaining position of labor as one channel or mechanism by which monetary policy affects income distribution.

I don't know that focusing on that channel of effect, exclusively, forms a strong argument, and neither Y nor D seems concerned to make that argument coherent, by the technical standards of a professional economist familiar with concepts of long-run or general equilibrium.

In defense of Yglesias and Drum, income distribution effects are not the same claim as a claim about the relation of long-term unemployment to inflation. Yglesias' main point is that Fed policy, because (he claims) it directly affects income distribution, is substantive politics.

You claim that Bernanke is, in technocratic terms, "moderate" and "brilliant". In politically substantive terms, though, Bernanke is a reactionary, right-wing Republican, who is only 'moderate' in style, and who devoted his career to re-imagining Fed policy in the financial crisis of 1929-32, as a means to preserve the plutocracy and prevent the hated New Deal reforms.

You seem particularly exercised by the technical limitations of monetary policy in our present circumstances, but I think that's too narrow, and too technocratic a frame -- it misses Yglesias's implied argument and larger point that endorsing technocracy no longer serves the progressive cause.

I can imagine a Fed Chair, who went to Congress and demanded a fiscal stimulus, dominated by spending, in order to re-potentiate conventional monetary policy, and who campaigned for financial regulatory reform and even a shrinkage of the financial sector. (I cannot imagine Obama + centrist Senate choosing such a Fed Chair, but that's another problem, which Yglesias's call to wonk arms is meant to cure in the longer term.) Instead, we have a Fed Chair, who has endorsed stealing Social Security.

And, against the economists, I might add that the profession likes to avoid disputes on the relation of income distribution to macroeconomic performance a little too much, to be entirely credible.

The FOMC, as an institution, is the strongpoint of the technocratic argument for making "monetary policy" a technical, and not a substantive matter for political dispute. In support, there's a strong tradition in the discipline of economics, for a technical analysis of a highly abstract, and narrow, definition of Fed (FOMC) policy, which fits it to a well-understood theoretical model of cybernetic control.

Within that frame, and its attendant prescriptions for professional conduct and "Fed independence", I can see why an economist might defend Bernanke. But, if it just leads progressives to look the other way, as the conservatives dismantle the last of the New Deal, institutionalize a predatory financial state, and steal the hogs and the bacon, it is b.s.

Robert said...

Dear Bruce Wilder

Thanks for the interesting and thoughtful comment. I disagree with most of what you write

1. Are Drum and Yglesias are not claiming long term effects of monetary policy ? Well Yglesias is explaining a change over 32 years and that is long term. The graph which they imagine (it is in a later post by Yglesias) shows wage changes over a period which, according to standard New Keynesian macro models count as long term.

2. Bernanke is a Republican. You call him a reactionary Republican. Why did you add the adjective "reactionary". I think there are still some Republicans who are not reactionary Republicans -- I can name three or four -- Ben Bernanke, Susan Molinari, Connie Morella and, maybe Olympia Snowe.

3. Your evidence is that he doesn't like the Great Depression. You conclude that this means he doesn't like the New Deal. Quite a few progressives weren't thrilled by the Great Depression either. Re-read your argument -- I really think you claim that Bernanke's dislike of the Great Depression is proof that he is reactionary.

4. My disagreement with Matt Yglesias has a lot to do with his statements about what monetary policy could achieve now. He basically considers the claim that the US is in a liquidity trap irrelevant. I also am not entirely convinced by his claim about monetary policy and long term trends (note I explain how New Keynesians must disagree, but I am not a New Keynesian -- I think that tight money can damage the economy for decades).

I disagree with him about the policy of Volker, Greenspan and Bernanke. Volker is a Democrat, but his policy is the one which arguable caused the damage.

I absolutely disagreed with Volker's approach at the time, as I considered inflation no big problem in the 70s (notably this was well before I took my first course in economics).

Greenspan is a very very very reactionary Republican, so extreme that he might embarrass the party. But his monetary policy was wet, expansionary, Yglesias pleasing. And that compared to the proposals of say Brad DeLong. He did a terrible job at the Fed, because he refused to regulate banks (being a Randian lunatic). But on the issue discussed by Yglesias he was closer to Yglesias than, say, Brad DeLong was.

Bernanke has gone well beyond the wildest dreams of inflation doves of all previous ages. His policy has been extremely extreme. In the direction favored by Yglesias.

I think that Yglesias's history ignores the plain facts that the last Democratic Fed Chairman was a ruthless inflation hawk, the insane reactionary Greenspan was an inflation dove and Bernanke has broken all traditional norms and rules (and for all I know some laws) in his desperate effort to prevent a second great depression.

Like Yglesias, your discussion of monetary policy does not include any reference to actual instruments of monetary policy. In fact, you don't mention any evidence at all. You simply assert.