Tyler Cowen argues that monetary policy matters less with each passing day because
1. Resource misallocation and unemployment get “baked in” to some extent, due to hysteresis. I also would argue that some of the long-term unemployed are revealed as having been “baked in in the first place,” once the boom demand for their labor ended and their marginal products were more closely scrutinized.
2. Many nominal values end up reset, more and more as time passes and as new projects replace the old.
3. As banking and finance heal, debt overhang is less of an AD problem. The debt repayments get rechanneled into investment, rather than falling into a black hole.
4. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long. Putting aside the more general and quasi-metaphysical issues with precommitment, just look at the key players. . . .
5. The Fed already has failed to act, for whatever reasons. That makes it all the harder to achieve the credible commitment now. The market expectation has become “the Fed can/will only do so much.” . . .
So first lets address these points
On (1). Hysteresis seems to be widely misunderstood. At the very least the extent of our lack of understanding is underappreciated. First, and importantly, hysteresis goes both ways. This was an important part of Larry Ball summary of the issue.
Second, while lots of people have latched on to this erosion of skills idea, it is the one that is least compelling to me. I tend to think insider-outsider dynamics are more important as well as underinvestment in physical and social capital. However, just as a slow economy will under accumulate capital and hot economy will over-accumulate it.
(2) This is certainly true and it in large part explains why the economy is growing at, at least trend right now and perhaps slightly above. However, that is still well shy of full employment.
(3) I’ll have more on this in the coming days but this is exactly backwards. For some reason folks think of monetary policy as stimulating consumption but it works mostly through stimulating investment. Which is what one would expect given that “rate of return” is typically the key decision investment choices.
This “black hole” argument was an explanation for why monetary policy was ineffective in the first years of the crisis and hence as it recedes monetary policy should if anything be more effective.
(4) That the players are changing is even more reason to put the fear of God or at least the blogosphere into the hearts of the newcomers.
(5) I think this is largely correct, but the danger now is not simply that the Fed won’t agree to looser policy but that some are advocating tighter policy.
In the larger context there are two issues. One is our estimate of the time path of monetary effectiveness. The other is the time path of our estimate of monetary effectiveness.
To put it another way, it is one thing to look back and say wow, it would have really been a good idea to pressure Ben Bernanke back in 2009. However, if in 2009 you thought Ben was a a fire-breathing Dove and then in 2011 you find out that he is actually kind of pushover, then you want to increase the pressure. Even though the marginal benefit of change is less now, our estimate of the marginal benefit of pressing for change is greater.
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Wednesday ~ May 9th, 2012 at 10:01 pm
curtd59
Karl Smith at his best: explaining clearly how we fail to understand the counter-intuitive. Point 3 needs to be drummed in daily. With a hammer if necessary.
(Now if we could just get Karl to build coalitions rather than push spending on its own, so that we could get out of the political stalemate.)
🙂
Wednesday ~ May 9th, 2012 at 11:09 pm
Morgan Warstler
What I call the A power, are the top 35% (minus the elites) who will spend part of their earning lifetime in the 80-99%.
Historically, they have been the owners of Main Street. They run all the churches, the Kiwanis club, they own their houses, fund the policeman’s ball,buy all the guns, own all the franchises… they are more likely to have a couple different local business deals going than they are to play the stock market.
What Karl is right about, is that a new kind of “owner of main street” is coming into their own, they are a virtual information worker, but what Karl misses is that, no matter WHO these people are politically in their 20’s, by the time they are 40, they will be just as sick of carrying the bottom 65% on their backs AND they will be even more adept at controlling the flow of power.
Hint: the reason the top 35% are so powerful, if that their reality is completely reflected by the media.
Hegemony is a nasty word no one likes, “A power” is a phrase that pisses people off.
But until you get rid of the 99 vs. the 1 narrative, and a adopt A, B, and c power analysis, you are literally going to swing and miss over and over and over.
Thursday ~ May 10th, 2012 at 1:21 am
curtd59
Morgan,
I don’t really understand your use of Hegemony. You keep using it. It’s a loaded term. It means political leadership in the most common sense. But usually in this context refers to Cultural Hegemony (per marxism). But could also mean informational monopoly that determines framing (?) the way you’re using it. I can’t tell.
Thanks
Thursday ~ May 10th, 2012 at 9:15 am
Morgan Warstler
Curt, you got it right, the notion is both implied physical power but then also cultural authority over norms.
I don’t mean just “the media is liberal.” drew b. used to argue that the cultural elites (hollywood) try to control things by framing. I didn’t disagree, but I thought the proof that Fox News has so wildly served the will of the top 35% – proved the market worked, it made the media bend, and dead enders reduced to being the NYT.
Good example: George Stephanopoulos becoming WILDLY more conservative, like Tim Russel before him in order to survive on Sunday morning TV, and Christiane Amanpour tried to stick her guns like Obama – and she got drummed out.
The deciders as I see them (see also Nixon’s silent majority) are those who have both money and votes (and guns). The B power has only money. And the C power has only votes.
People with money to spend, like to see their views of the world in the products they buy, so you get people yelling at the TV show “Girls” that the the hipsters are mostly white, because the show wants to sell in red states too.
My point isn’t that hegemony doesn’t suck for people outside the normative hegemony, my point is that:
1. hegemons adopt winning memes to maintain power (see gay rights).
2. and because of the web, strong strong memes are adopted much faster than before – it is like computerized chess, there are more games played, so we quickly see the rise of NGDPLT, or soon… my GI plan.
3. but real game strategy for economics, for folks like Karl, requires actually crafting policies that are REALISTIC, and that means recognizing the relative power of his opposition.
4. because the A power, the Tea Party, the top 35%, the SMB owners of Main street, they are 100% in charge when push comes to shove.
I think they are titling at windmills, because folks like Karl, make the mental mistake, they WANT to believe, that they are on an equal footing (right vs. left), 99% vs. 1%, academics vs. businessmen, capital vs. labor.
And that’s just wrong. Capital TRUMPS labor, BUT there are two kinds of capitalists (noobs vs. rent seekers), and labor should play them against one another.
So, I think that there are a handful of policies that (non-public employee) progressives could adopt that would win the A power, and really wound the B player. My GI plan is one of those.
Thursday ~ May 10th, 2012 at 3:55 am
R Dappa
The greatest question of our day is not of how to fix the economy, but of how to differeniate between amounts of money and amounts of value. What good is investment if the ROI is only good for a few years?
Thursday ~ May 10th, 2012 at 4:28 pm
Becky Hargrove
SET KNOWLEDGE FREE: As long as knowledge is dictated and controlled by the rules of money, it will also be the slave of money, which means knowledge will never live up to the potential it actually has to create wealth in the world.
We do not yet know what knowledge is capable of achieving in the world, for it has been a long time since knowledge was allowed to proceed in free terms. But what we do know is this: when knowledge is held to the dictates of money, it does not stand a chance of remaining vital in the long run. Allow knowledge and human skill to be real measures of value on their own terms, not the belittled terms which allow people of power to think it is right to destroy whatever knowledge, resources and human beings do not serve their purpose. We do not even know what real wealth could be yet, because we have not tried it. Give the wealth of knowledge and human skill a chance for definition on their own terms, instead of allowing power mongers to sign documents amongst one another that only destroy it. The clock is ticking. We no longer have the time to make knowledge wealth happen if we do not begin this process soon.
Tuesday ~ May 7th, 2013 at 4:23 am
help.tlgit
You will discover some interesting points in time in this article but I do not know if I see all of them center to heart.
Sunday ~ December 1st, 2013 at 10:44 am
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