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Today's Economic History: Eric Rauchway on Roosevelt’s Money Policy, 1933-1934 (Brad DeLong's Grasping Reality...)
In other words, before Roosevelt had been in office a full year, he had articulated, with Keynes’s approval, all the elements of what would become the Bretton Woods monetary policy in 1944: currencies would be kept at stable exchange rates, but would be adjustable in keeping with the needs of economic prosperity in each country.
Morning Must-Read: Barry Eichengreen: The Fed Under Fire - Washington Center for Equitable Growth
Barry Eichengreen: The Fed Under Fire: “Fed officials… while they would prefer not to re-litigate… 2008…
…their decisions are still not well understood and that officials must do more to explain them…. Fed officials should avoid weighing in on issues that are only obliquely related to monetary policy…. Fed officials should acknowledge that at least some of the critics’ suggestions have merit. For example, eliminating commercial banks’ right to select a majority of each Reserve Bank’s board would be a useful step in the direction of greater openness and diversity. The Federal Reserve System has always been a work in progress. What the US needs now is progress in the right direction.
A Note on Communications with the Federal Reserve: Focus - Washington Center for Equitable Growth
Yet the Federal Reserve in its internal decision-making processes appears to be focusing 100% on (2), and 0% on (1), (3), (4), and (5). And that raises the question of why: Just what are the internal decision-making committee processes within the Federal Reserve that are leading to such an outcome? Ex ante, I would have expected many individual members of the FOMC to be very unhappy with such a possibly-premature tightening–what is the reason that they are not? That the Federal Reserve has failed to make its thinking clear enough to me for me to get where they are coming from seems to me to be a major failure–but whether of their communications policy or of my comprehension I am not sure…
Nighttime Must-Read: Paul Krugman: The Strange Urge to Raise Rates - Washington Center for Equitable Growth
“Monetary policy attracts crazy people like moths to a flame: goldbugs, 100-percent-reserve-banking types, amateur historians who think they know exactly what happened when Diocletian ruled Rome…
…The obsession with raising interest rates among economists who used to seem sensible…. Up to a point, Feldstein has followed the now-usual arc…. We’re talking about conservatives with vast faith in the wisdom of markets, who somehow are completely sure that markets will make terrible decisions due to low interest rates, and require paternalistic monetary policy to keep them on the strait and narrow. What really strikes me about Marty’s latest… is the muttering that there must be some sinister hidden agenda…. that central banks are operating under… a desire to help finance budget deficits. It’s very, very strange, and distressing.
I Understand Where Martin Feldstein Starts: I Do Not Understand Where He Ends Up: Focus - Washington Center for Equitable Growth
Vir illustris Martin Feldstein starts by saying: downward nominal price stickiness is such a thing that we do not have to worry about deflationary spirals in consumer prices. I agree. But I do not understand where his argument ends up:
Martin Feldstein: The Deflation Bogeyman: “The world’s major central banks are currently obsessed with… raising their national inflation rates to… 2% per year….
…But is this a real problem?… Fortunately, we have relatively little experience with deflation to test the downward-spiral theory…
Morning Must-Read: James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West: The Equilibrium Real Funds Rate: Past, Present and Future - Washington Center for Equitable Growth
The uncertainty around the equilibrium rate argues for more ‘inertial’ monetary policy than implied by standard versions of the Taylor rule… a later but steeper normalization path for the funds rate compared with the median ‘dot’ in the FOMC’s Summary of Economic Projections.
Nighttime Must-Read: Paul Krugman: Quantitative Easing and Monetary Aggregates - Washington Center for Equitable Growth
“I get especially annoyed when economists who have been wrongly predicting inflation…
…say that it’s not their fault–who could have known that banks would just sit on all those reserves? The answer is, anyone who had paid attention…
Morning Must-Read: Larry Mishel: Even Better Than a Tax Cut - Washington Center for Equitable Growth
Lawrence Mishel: Even Better Than a Tax Cut: “The challenge is to ensure that a typical worker’s wages…
…grow along with profits and productivity. There is no silver bullet, but the key is… to reverse decades of decisions that have undercut wage growth. We need to start with monetary policy…. The most important decisions… are those of the Federal Reserve Board…. Before raising rates, it is essential we achieve a robust recovery, with roughly 3.5 to 4 percent annual [nominal] wage growth…
Evening Must-Read: Jared Bernstein: A Few Quick Fed Points - Washington Center for Equitable Growth
Jared Bernstein: A Few Quick Fed Points: “1) The sharply stronger dollar…
…pushes against Fed tightening….
Evening Must-Read: Simon Wren-Lewis: Greece: A Simple Macroeconomic Guide - Washington Center for Equitable Growth
What is one supposed to do when confronted by arguments that seem to me–and to everybody else who has been right about the evolution of the North Atlantic economy since 2008–so unprofessional as this piece in Vox? Simon Wren-Lewis begins the needed labor of Hercules here:
Simon Wren-Lewis: Greece: A Simple Macroeconomic gGuide: “In 2010 periphery Eurozone countries…
Morning Must-Read: Robert Litan: What 'Audit the Fed' Really Means-and Threatens - Washington Center for Equitable Growth
Robert Litan: What ‘Audit the Fed’ Really Means–and Threatens: “Words matter…. Think of the success tax reformers…
…had when they called the inheritance tax the ‘death tax.’ Or how opponents of the president’s health-care law gathered political strength… calling a medical reimbursements panel the ‘death panel.’ And so it is with Washington’s latest craze, the movement spearheaded by Sen. Rand Paul to ‘audit the Fed,’ an effort launched by the senator’s father, Ron Paul…. The Fed’s financial statements have long been audited by professionals, but Sen. Paul’s bill is not about that… [it’s about the] Government Accountability Office… giv[ing] Congress annual reports on monetary policy functions….
The economists employed by the GAO are no match for the economists at the Fed. It is not within their domain of expertise…. It’s fine for Congress to regularly ask the Fed… to report…. But why create… a ‘shadow Fed’ elsewhere within the government?… If backers of the ‘audit the Fed’ movement want to get rid of the agency, they should say so, and let that debate begin. If it does, central banks will win…. If ending the Fed is not the objective… economic evidence makes clear that truly independent central banks keep inflation lower…
Evening Must-Read: Claudia Sahm: Is Resistance Futile? - Washington Center for Equitable Growth
Claudia Sahm: Is Resistance Futile?: “Krugman…. ‘So if Larry [Summers] were at the Fed…
would he be saying what he is, or would he have been assimilated by the FedBorg?…
This got me wondering: In the past 7+ years have I, as a staff economist, been ‘assimilated by the FedBorg?’… What are some Fed-specific signs that I have changed as an economist?: Fedspeak: My economic writing tends to be more factual and less forceful now…. The staff view: As an economist, I uttered the words: ‘we think xyz’ much, much less before joining the Fed…. The Fed: More than once I have thought how wonderful it would be if monetary policy in the real world were like in Woodford’s textbook…. I am constantly amazed at the array of inputs to and outputs from the policy work at the Fed. And I am pretty sure that most academic economists could learn something from reflecting more on this…. So it seems to me the good part of assimilating is learning new things, the bad part of assimilating is forgetting what you knew…
Nighttime Must-Read: Lawrence Summers: Only Raise Rates when Whites of Inflation’s Eyes are Visible - Washington Center for Equitable Growth
Mark Thoma sends us to: Lawrence Summers: Only Raise Rates when Whites of Inflation’s Eyes are Visible
I cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent. Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy…. Available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent…. In such circumstances efforts to reduce demand and growth require a compelling justification. Yet the idea that below normal unemployment will necessarily lead to accelerating inflation as suggested by the so called Phillips curve is very uncertain…. [Moreover,] if inflation were to accelerate a bit this would be a good thing…. A plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash…. The US has never been more intertwined with the global economy…
Afternoon Must-Read: Simon Wren-Lewis: The Divine Coincidence - Washington Center for Equitable Growth
Simon Wren-Lewis: The Divine Coincidence: “The Divine Coincidence is the idea that by controlling inflation…
…we also bring the output gap to zero, so we do not need separate targets for both…. Imagine a parallel universe where the monetary authority targeted the output gap, and not inflation…. In this parallel universe they too had a Great Recession, and (being parallel and all) their recovery was of a very similar shape to ours. How would the output gap-targeting monetary authority in this parallel universe perceive its performance? The story would be one of complete failure. After six years of trying, the output gap had still not been closed. A huge amount of resources had been wasted as a result…. I do not think, in our inflation targeting world, the monetary authorities have this view…. They believe performance over the last six years has not been too bad…. Over the last six years, the Divine Coincidence has been distinctly unholy…. I suspect in thirty years students will look back on this period with the same disbelief that we look back on the 1930s. How could they have allowed the recession to continue for so long, they will ask, when they had the tools to do much better? Part of the answer will be inflation targeting.
Morning Must-Read: Simon Wren-Lewis: Asymmetries and Uncertainties - Washington Center for Equitable Growth
Simon Wren-Lewis: Asymmetries and Uncertainties: “One way to put this point is to go back to the basic rationalisation…
…behind flexible inflation targeting. It is OK to have a target based on inflation alone, with no mention of the output gap, because you cannot in the long run keep inflation at target without also keeping the output gap at zero. This is sometimes called the divine coincidence. However if, at low inflation rates, inflation becomes a noisy, weak and asymmetric indicator of the output gap, then focusing on inflation is going to perform badly. In these circumstances it could be many years before it becomes clear that we have been continually running the economy under capacity, and needlessly wasting resources. Unfortunately even when that point of realisation arrives, for obvious reasons monetary policymakers are going to be reluctant to acknowledge the mistake.
