This is a piece that my favorite conservative-Morgan Warstler-is raving about. Farmer refers to himself in the third person-he is writing it with a co-author-and claims that his model demonstrates that fiscal policy isn't the answer this time. Here is a twist: he claims it was the answer in the 1930s and did end the Great Depression (GD). Not many would say FS is the answer to the GD but not the Great Recession (GR).
"Can government spending help the economy recover from a recession by boosting job creation and lowering unemployment? Or is it a waste of money? This column addresses this question and others using a unique framework. It explains why fiscal policy was effective at ending the Great Depression but it argues that a big fiscal expansion may not be the best solution this time round."
http://www.voxeu.org/article/does-fiscal-policy-matter-there-better-way-reduce-unemployment
For whatever reason, Morgan thinks Sumner would be interested in Farmer, but this has not been the case so far. Part of it may be that Farmer who castigated Krugman for stealing his work, stole Sumner's innovation-the 'Open Letter to Paul Krugman' move without attribution.
http://diaryofarepublicanhater.blogspot.com/2013/08/roger-farmer-someone-has-very-elevated.html
"You’re a the MM economist, he runs UCLA Economics.Is this guy a friend of yours and you are toying with me? You yourself have argued the Fed could / should buy whatever the hell it needed to if push comes to shove."
"Can government spending help the economy recover from a recession by boosting job creation and lowering unemployment? Or is it a waste of money? This column addresses this question and others using a unique framework. It explains why fiscal policy was effective at ending the Great Depression but it argues that a big fiscal expansion may not be the best solution this time round."
http://www.voxeu.org/article/does-fiscal-policy-matter-there-better-way-reduce-unemployment
For whatever reason, Morgan thinks Sumner would be interested in Farmer, but this has not been the case so far. Part of it may be that Farmer who castigated Krugman for stealing his work, stole Sumner's innovation-the 'Open Letter to Paul Krugman' move without attribution.
http://diaryofarepublicanhater.blogspot.com/2013/08/roger-farmer-someone-has-very-elevated.html
"You’re a the MM economist, he runs UCLA Economics.Is this guy a friend of yours and you are toying with me? You yourself have argued the Fed could / should buy whatever the hell it needed to if push comes to shove."
"I suspect that IF your prediction market could actually be the transmission mechanism itself – and IT CAN (see my approach which favors SMB owners), Farmer would be ok with it too.
Look, let’s get down to brass tacks:"
"He says Keynes described unemployment as an equilibrium. This is given equilibrium is based on animal spirits of private sector. Is this correct? The man seems to know the GT. Just read this thing and tell me what you agree / disagree with:
Sumner answers evasively:
"Morgan, Yes, I agree that Keynes assumed an unemployment equilibrium."
I don't see where Sumner and Farmer break bread-after all, Sumner believes that both the GD and GR don't need fiscal stimulus but adequate monetary easing. Krugman believes both need FS. I agree Farmer's model sounds interesting:
"we favour Farmer’s model in which recessions are caused by shocks to business and consumer confidence.2 Confidence is synonymous with the self-fulfilling beliefs of market participants and, within this framework, there is no unique natural rate of unemployment. Our model captures the intuition of David Altig of the Atlanta Fed:
"...the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?"
- Farmer’s (2009a) model codifies this idea by allowing for a continuum of steady-state equilibria, each of which is associated with its own unemployment rate. The economy's steady state can jump from one value to another.
"Alternatively, the economy can get stuck in a socially inefficient low-employment equilibrium for an indefinite time period."
- Farmer’s model does not contain a self-stabilising mechanism that restores full employment.
"In contrast, new-Keynesian models, real business cycle models, and the Gertler-Trigari and Hall versions of search models all contain price adjustment mechanisms that automatically, and unrealistically, cause the unemployment rate to converge back towards a unique “natural rate.”
I just don't see how Krugman stole it-I haven't heard him say anything about multiple equilibria or unemployment and equilbria but even if he did you'd have to show that he lifted it from Farmer-a tough task as Krugman hasn't read him.
I think one thing many people dont talk about when looking at our Great Recession is that it was likely the fiscal policy holdovers form the 30s 40s that kept us from having the GDII. Income support programs like SS and deposit protection from the FDIC are two that without a doubt kept millions of people consuming and not panicking and causing bank runs. Take those away and 2009 looks a lot different. I think a good case can be made that less fiscal, as a percentage of GDP is needed now than in 32 and that monetary policy can be more effective because less people have suffered severe income loss.
ReplyDeleteMonetary policy can help with mild to moderate income loss, it doesnt help with severe income loss nor can it replace lost income. Fiscal policy is the only lever to actually give an income to someone who previously had none. Monetary policy can help that income go a little further but you must first have income for monetary policy to help.
Its monetary policies inability to raise incomes that makes it a less effective tool to fight unemployment as I see it. It can help keep GDP form tanking but does not raise employment.
Yes Greg no doubt it's the automatic transfers you mentioned-that were formed in the GD-that mitigaated the GR.
ReplyDeleteI appreciate your thoughts on the difference between monetary and fiscal policy: monetary policy cannot raise incomes.
If you could in anyway elaborate or add further to it that would be appreciated as that's always something I'm trying to really wrap my head around: the difference between monetary and fiscal policy.
This is something Ive been talking about more lately ever since I saw a post by Scott Fullwiler where he talked about fiscal policy being policy that changes levels of current incomes (redistribution) while monetary policy leaves incomes the same but allows one to get more spending out of current incomes via interest rate adjustments. Think about when you refinance your mortgage you hold the same debt level and the same income level you just change terms and have less of your income servicing that debt. Of course all of us who have done that know that we end up paying more over the long run if we pay out the terms. Monetary policy is a little bit of a scam in that regard. You just get put on the hook longer. But mortgages are the best example because as Mike Sankowski at MR has pointed out monetary policys primary channel of affect is via real estate.
ReplyDeleteNow there certainly are secondary affects of monetary policy which affect incomes, like interest paid on Treasuries and such, but the people who rely on Treasuries for incomes are a small portion of the wealthy population and some seniors via SS or other pensions.
This "two sides of the interest rate coin" of monetary policy also leads to some conundrums at times. You hear many people talking about monetary policy punishing savers by driving down rates on safe investments (trying to get you to have concern for grandma, when its really Bill Gross and Pimco they want to benefit!) yet usually its these same people whining about the slack real estate market which is the primary target of monetary policy. So low mortgage rates and Treasury yields kind of pull oppositely on certain sectors of the economy, putting many monetarists in a pickle. This is part of the reason I believe that Mosler says to keep the short term rate at zero, permanently. Low returns for parking your money in Treasuries, but safe, and less volatile mortgage rates.
Now Im sure many, like Sumner, would dispute this differentiation of monetary and fiscal. He has his own unique definition that conveniently paints everything negative as a fiscal affect and everything positive as a monetary affect. However I do think a large % of economists would not find anything wrong with the formulation I used.
Thanks Greg. I think maybe what Sumner would dispute is the 'two sides of the interest rate coin'-he's always on about how interest rates are a bad guage and they aren't the real mechanism but just an 'epiphenomenon'
ReplyDeleteWell I partially agree with Sumner (fucking hate to admit THAT!!). Interest rates are a bad gauge....... but of what? Sumner says they are a bad gauge of whether money is tight or loose, which is somewhat true, but I think he draws the wrong causation from it. The reason you cant decide if money is tight or loose is that what you are looking for is increased lending. Increasing lending supposedly means loose money and decreased means tight money. When incomes are falling one will always see a fall in borrowing because one can NEVER borrow past what their income services. If I earn 3000$/month I cannot pay 3001$ in a mortgage.
DeleteIf everyone is maxed out, using monetary policy for refinancing doesnt really add to GDP. You are still paying off the consumption from the past you are just getting better terms. What we want to see is NEW output, not just refinancing of old output. Most of our recent housing market activity is just reshuffling the already existing stock, not producing more stock. So I think they are a bad gauge of how much new production one will get.
The epiphenomenon statement sounds like he is saying that interest rates dont drive anything but somehow arise as a result of other real factors...... which is really pure BS.
Interest rates are set..... by the Fed.... at whatever level they want. Not the rates on 30 year bonds mind you (although Cullen Roche has talked about how they could put the 30 yr rate almost exactly where they wanted if they ...... went Chuck Norris) but the FFR or IOR. And these short term rates are the ...... fulcrum...... for longer term rates. You raise the short term rates longer rates will follow, lower them..... same thing