Sumner Continuing to Push Monetary Offset Story

     He has been a dog with a bone on it lately. He has been crowing that the economy continues to look pretty healthy despite the end of the payroll tax holiday and the sequester.

     http://diaryofarepublicanhater.blogspot.com/2013/05/market-less-impressed-by-fed-hawks-than.html

     Recently he was praising Reinhart-Rogoff-and razzing Krugman of course-that R-R get it. We should do austerity along with monetary stimulus.

     http://diaryofarepublicanhater.blogspot.com/2013/05/krugman-doesnt-worry-over-krugman.html

     Yet it certainly isn't true that the austerity has been fully offset. In any case, why not do the same exact bond-buying spree except with the Fed. Sumner's answer is that this would be outside the Fed's mandate-this would compromise their inflation fetish target.

     In other words if the fiscal authorities did fiscal stimulus this would lead the Fed to offset. So what if we had simply not done the sequester? Sumner's answer is supposed to be what-then we would have less bond-buying from the Fed? Yet, with 1.1% inflation it's not clear why the Fed would have to "offset" the simple absence of the sequester.

    Most liberals I know have long since stopped reading Sumner-Nanute, Greg, even Unlearning Econ. I continue to read him no matter how sophistical it gets. Why? Someone has to. Here he gives us the relationship between fiscal and monetary policy:

     "Here’s John Carney of CNBC:

Which is to say, the Fed would like to ease up on monetary accommodation but fears that Congress seems unlikely to implement fiscal policy that won’t restrain growth. To put it differently, if Congress were to “get its act together” and provide fiscal relief to the economy, the Fed likely would respond by tightening.

That means that the dominant narrative may have things backward. Instead of Fed policy enabling congressional bungling, it’s Congress that is enabling Fed policy. A Congress that was less divided along partisan lines and dedicated to stimulating the economy might trigger a tightening reaction by the Fed.

      http://www.themoneyillusion.com/?p=21432&cpage=1#comment-251229

      Yet for Carney-and the Fed-the sequester is not a feature but a bug; for Sumner it's a feature:

      And here Neil Irwin responds to me and several others making similar arguments:

There is good reason to think that monetary easing is doing quite a bit of the work offsetting tighter fiscal policy. The Fed’s policies, including buying $85 billion in bonds each month with newly created money, are directly aimed at housing; $40 billion of those purchases are of mortgage-backed securities, meaning the money is being funneled directly toward the sector. And sure enough, a solidifying housing market is an important part of the economy’s holding up. And a second important consequence of Fed easing is to boost the prices of other financial assets, including the stock market.

This isn’t rocket science: The Fed in September introduced a policy meant to boost housing and stock prices, and now, nine months later, housing prices and stock prices have risen quite a bit. Enough, indeed, to (so far) offset the impact of higher taxes that went into effect Jan. 1 and federal spending cuts that took effect March 1.

So far so good. The bad news, though, is that these channels through which monetary policy affects the economy tend to offer the most direct benefits to those who already have high incomes and high levels of wealth.

     "I have several problems with this.  First of all, income inequality tends to be pro-cyclical.  Stocks fall much more sharply than wages during recessions, and rise much faster during recoveries.  That’s nothing new.  Of course there is also a long term trend toward greater income inequality in America, but that has little or nothing to do with monetary policy.  If there are parts of the sequester that hurt the poor, those cuts should be re-evaluated on a cost/benefit basis, not based on whether they are perceived to promote recovery."

    "The Fed should focus on promoting a healthy macro environment.  To some extent they do, although in unusual circumstances such as 2008-09 they screw up.  It’s up to fiscal policymakers to adopt sound fiscal policies using cost/benefit calculations, not “stimulus estimates.”  In other words, let the Fed steer the car, and have Congress focus on setting the A/C controls, choosing the radio station, and adjusting the seating position."

     At this point you're no longer arguing the point of demand stabilization, but distribution. The fact is that Sumner's monetary offset theory is basically a theory of how he thinks the Fed will react to this or that act by the fiscal authorities. The Sumner Rule only has force if the Fed acts the way he believes it will act. If Marriner Eccles were running the Fed there'd be no Sumner Rule. 

      Even the Bernanke Fed, however, claims not to believe in the Sumner Rule. It seems to think the fiscal authorities do more than just set the radio station. 

      http://diaryofarepublicanhater.blogspot.com/2013/05/the-fiscal-multiplier-sumner-vs-bernanke.html