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Wednesday, February 26, 2014

Turns Out Bernanke Doesn't Believe in Monetary Offset Either

     Sumner goes after Aziz for questioning monetary offset. 

      "Here’s John Aziz replying to a Ramesh Ponnuru piece discussing monetary offset:

But Fed policy wasn’t exactly tight during the stimulus. First, by the time the stimulus was enacted, the Fed had already dropped interest rates to zero, and it kept them there. Second, the Fed engaged in quantitative easing throughout the stimulus. By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes, reaching a $2.1 trillion in June 2010. That’s hardly tightening.

     "Ben Bernanke said (in 2003) that neither interest rates nor the money supply are good indicators of the stance of monetary policy.  Instead he suggests that NGDP growth and inflation are best.  By that criterion monetary policy after 2008 was the tightest since Herbert Hoover was President.  So Aziz is wrong in saying that policy was expansionary.  But I’d cut him some slack here, as obviously most people would agree with him, not Bernanke and I.  Indeed Bernanke would no longer agree with the Bernanke of 2003."

      http://www.themoneyillusion.com/?p=26254&cpage=1#comment-320471

     In 2003 Bernanke believed we had solved the business cycle. He's not so hardheaded as Sumner not to admit now that we haven't.  As for inflation and NGDP as better targets, the trouble is that Sumner assumes that the Fed can hit any target on inflation or NGDP that it wants. If you push him here you know what he would say next right? If the Fed can't hit any target it wants how to you explain Zimbabwe. Actually I can explain Zimbabwe's hyperinflation-there was a civil war there. 

     Anyway, I delved a little deeper into Aziz's piece and came across this quote by Bernanke::

      "Here's Ben Bernanke speaking last month. He specifically calls fiscal policy excessively tight:
To this list of reasons for the slow recovery — the effects of the financial crisis, problems in the housing and mortgage markets, weaker-than-expected productivity growth, and events in Europe and elsewhere — I would add one more significant factor--namely, fiscal policy. Federal fiscal policy was expansionary in 2009 and 2010. Since that time, however, federal fiscal policy has turned quite restrictive...
     "Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be. But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth. [Business Insider] "

     http://theweek.com/article/index/256856/did-the-fed-undercut-obamas-stimulus

     I pointed out these comments to Sumner and he claimed that he already answered this in the past-though there are new comments of Bernanke. He alleges he has some unnamed Fed officials stating in 2012 that they do full monetary offset. Not surprisingly he provides no quotes or links. It's really pretty damning. Bernanke thinks that monetary and fiscal policy shouldn't work at cross purposes as Sumner claims they inevitably do. So Bernanke doesn't believe in a game of fiscal and monetary chicken on the economy as Sargent's analysis well describes Sumners MM game. 

     http://diaryofarepublicanhater.blogspot.com/2014/02/morgan-warstler-gets-mm-so-did-tom.html

     No games of 'I'm the QB you better do what I say, fiscal authority!' for Bernanke. I don't know what these 2012 Fed officials said-it's probably where they said the don't do MO and Sumner read the monetary tea leaves and 'discovered' that they do they just either can't admit it to the ignorant lay public or don't realize they do it themselves. 

44 comments:

  1. See Matthew O'Brien, How the Fed Let the World Blow Up in 2008 — High oil prices blinded the Fed to the growing danger before the crash
    http://www.theatlantic.com/business/archive/2014/02/how-the-fed-let-the-world-blow-up-in-2008/284054/

    The Fed was running an overly tight monetary stance to control perceived inflation from oil price pass-through, and it missed the crisis as a result of looking the wrong way.

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    1. Tom Hickey that sounds true to me but you do realize this is something Sumner always says? That you should 'never reason from a price change' as it might be supply or demand driven-in 2008 the oil prices spiked on supply not demand reasons but the Fed misread it as a demand issue-that demand had spiked so there was not a drop in demand and that they risked a huge inflation spike. by doing any monetary expansion.

      The point I'm trying to get at is that Sumner has an absurd belief in the power of monetary policy. He just keeps screaming 'the Fed is the QB' and fiscal policy better step back or it will be a mess!' just like Tom Sargent described this kind of policy chicken years ago. It's clearly counterproductive as Bernanke himself says.

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  2. You're completely missing the point of monetary offset. The claim is not that total offset happens in exactly every case. The claim instead, is that the Fed has the _power_ to do total offset, and a well-run Fed _should_ be hitting the targets that they are aiming for. Together, that implies complete monetary offset and a fiscal multiplier of zero.

    If the actual Fed did not in fact offset Obama's stimulus, then that means they should have been doing dramatically more monetary stimulus in the first place. It means that Bernanke and his governors were completely to blame for our Great Recession, with millions of people involuntarily unemployed for years.

    In that context, you're looking at the very guy who is most to blame for the monetary failures ... and you're surprised when he tries to deflect blame, and suggest that fiscal austerity was somewhat at fault for too-low aggregate demand?

    Don't let Bernanke off the hook. His excuses about fiscal stimulus are self-serving. The Fed had the power to provide more monetary stimulus, and clearly should have, and they are solely to blame for not having done so.

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    1. Don at this point this just sounds like confirmation bias or the No True Scotsman Defense

      The fact is that what Berannke says makes sense. Why should the optimum policy be monetary expansion with fiscal contraction? By the way, that's what we've had the last 3 years. .

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    2. Surely you don't believe that the Fed is out of ammunition to raise aggregate demand. It's trivially easy to imagine a new QE, where they promise to double bond purchases every month, until some nominal target is reached.

      So the only reasonable explanation, is that they fear some unstated and undefended side effects, from additional monetary stimulus. That's what the debate should have been about: what could possibly go wrong, if monetary stimulus was increased?

      But the vast majority of people imagined that the Fed had done all it could, so nobody ever pinned Bernanke down and forced him to defend his _choice_ not to increase monetary stimulus. And why these theoretical dangers were worth the known damage of multiyear high unemployment.

      (And BTW: fiscal contraction is not a necessary part of optimum macro policy. With monetary offset, fiscal policy is irrelevant.)

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  3. " fiscal contraction is not a necessary part of optimum macro policy"

    Then why does Sumner defend it so much?

    "So the only reasonable explanation, is that they fear some unstated and undefended side effects, from additional monetary stimulus."

    It could also believe it lacks the power to do more and that it doesn't want to demonstrate it's inadequacy before the markets.

    Anyway you say fiscal contraction isn't necessary but all Sumner does is defend it. If he stops defending it you're claim would seem a lot more credible.

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  4. While the Fed is politically dependent in setting monetary policy, the Fed has a mandate from Congress:

    FRA Section 2A: "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

    The Fed is not directed to be looking at fiscal policy but rather to be setting monetary policy independently of political influence iaw changing economic conditions in order to fulfill its mandate.

    If Sumner is claiming that the Fed may at times set monetary policy at odds with fiscal policy in order to follow its mandate, that is correct. For example, if fiscal policy is addressing UE by offsetting lagging demand, then as the economy approaches full employment and the Fed deems that inflation needs to be controlled before it heats up, the Fed might choose to tighten monetary policy by raising rates somewhat to blunt ("offset") the inflationary effect of fiscal policy so as to accommodate expansionary fiscal policy. I'm OK with using "offset" in such cases although I think that "accommodate" is a more apt choice. "Offset" implies an adversarial relationship, while "accommodate" implies working in tandem.

    If Sumner claims that monetary policy always offsets fiscal policy in the sense of acting oppositely, I believe he is wrong. For example, Bernanke was calling on Congress to loosen its fiscal stance when the Fed had shot its bazooka with no great effect other than to stabilize low LT rates through the benchmark yield curve in order to support housing prices from falling precipitously.

    The Fed also admitted that low rates and QE (taking safe assets off the table) would drive riskier assets higher than they would be otherwise. The Fed was OK with this since it expected the "wealth effect" to spill over into increased aggregate demand. That did not meet expectations, so BB encouraged Congress to loosen fiscal policy, too, since very loose monetary policy was not sufficient to address high UE and a considerable output gap along with low inflation and no rise in inflation expected.

    I would say that this is best viewed as coordinating monetary and fiscal policy rather than loose monetary policy offsetting fiscal austerity (falling deficit), which BB made clear was not his intention. It is true that Congress was (stupidly) tightening in the face of a slow recovery and chronic high UE so that loose monetary policy could be interpreted as an offset of fiscal austerity, but that's not what the BB was saying and in fact he was saying the opposite as I understood him. He was saying that the Fed has loosened about as much as it reasonably could, and Congress needed to step up by loosening fiscal, too. So I don't buy the offset argument in this case.

    Sumner's statement about inside information that the Fed always offsets fiscal policy is ridiculous In my opinion. Monetary policy is set by the BOG and FOMC and the mid-level just carries out the operations to implement policy by maintaing the target rate through OMO, or if the Fed is running QE and IOR, which sets the rate independently of quantity of reserves available in the interbank market, then then the operations staff just purchase quantities along the curve as directed by the policy makers

    So Sumner would have to be getting his info from the BOG or the FOMC, which is highly doubtful. Anyway, subsequently published minutes would show this and to my knowledge there is no record of discussions by the BOG or the FOMC — ever — about offsetting fiscal. They talk in terms of their mandate relative to data and projections.

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    1. "Fed had shot its bazooka ... the Fed has loosened about as much as it reasonably could" Please explain your justification, for why you believe that the Fed is/was unable to provide more monetary stimulus. Even I can think of an easy boost: double monthly T-bill purchases ("buy up all of planet Earth"), until inflation rises. With such a simple, obvious monetary mechanism to boost AD, why in the world would you talk about a situation where the Fed had loosened "as much as it could"? That makes no sense. There is NO barrier to the Fed loosening further.

      "Sumner's statement ... that the Fed always offsets fiscal policy" Cite, please. Sumner has NEVER made any such statement. He has stated that it is foolish to try to evaluate the effectiveness of fiscal policy, without considering the monetary policy reaction function. He has stated that the fiscal multiplier is an estimate of the central bank's incompetence. He has stated that, with a well-run central bank, the fiscal multiplier SHOULD be zero, due to monetary offset. But he has NEVER stated that the the Fed ALWAYS exactly offsets fiscal stimulus.

      "BOG or the FOMC ... talk in terms of their mandate relative to data and projections." And now perhaps you don't even understand the implications of your own words. The Fed doesn't need to consciously offset fiscal stimulus. Taking actions relative to macro data, is sufficient to CAUSE monetary offset! If the Fed is targeting a nominal aggregate like inflation (or NGDP), and if the only macro benefit to fiscal stimulus, is how it changes aggregate demand, then having the "operations staff" perform actions as directed by data, in fact results in exactly the monetary offset that Sumner is talking about. They don't need to take any special "extra" action to offset fiscal stimulus; it's a natural consequence of controlling the nominal macro economy.

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    2. "double monthly T-bill purchases ("buy up all of planet Earth"), until inflation rises."

      Accomplishes nothing if buying T-bills just results in the excess reserves sitting as bank assets in reserve accounts without an increase in lending, which is dependent on demand for loans by qualified borrower, or in private deposit accounts, or being transferred into other financial assets like equities. What increases the price level is increased spending (consumption and investment) rather than just increasing the monetary base without it resulting in spending. There is no direct connection between the size of the monetary base and propensity to consume or invest.

      In other words, increasing the monetary base doesn't necessarily increase consumption nor investment, and increasing the amount of T-bills to relative to rb doesn't decrease spending power either, owing to their use in repo and as collateral. Large firms treat T-bills as cash equivalents.

      Thinking that an increase in the monetary base necessarily translates to increasing the price level is erroneous. It's money spent (consumed or invested) that affects prices in markets. The price level increases as aggregate demand outpaces the ability of the economy to meet it, or if there are shortages of vital resources like energy that result in a continuous increase in the price level through pass through.

      Increasing the monetary base may lead to expectations of inflation. These expectations can turn out to be wrong if spending doesn't increase enough to move prices. Many people shorting tsys due to QE erroneously thought that this increase in the money base would be inflationary, and they got caught short as bond prices rose, including the bond market experts at PIMCO.

      The idea that more QE will eventually have an effect that the enormous expansion of the monetary base didn't is wishful thinking with no basis.

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    3. "And now perhaps you don't even understand the implications of your own words. The Fed doesn't need to consciously offset fiscal stimulus. Taking actions relative to macro data, is sufficient to CAUSE monetary offset! If the Fed is targeting a nominal aggregate like inflation (or NGDP), and if the only macro benefit to fiscal stimulus, is how it changes aggregate demand, then having the "operations staff" perform actions as directed by data, in fact results in exactly the monetary offset that Sumner is talking about."

      The purpose of macro stimulus is to increase aggregate demand aimed at closing an output gap and putting idle resources to work, including manpower, when exports are not sufficient to offset lagging private demand due to an increase propensity to save (not consume) in a contraction. There will be no inflationary pressure from rising demand due to fiscal stimulus until the output gap is nearly closed and most idle resources have been put into use, since more product can be supplied to satisfy the demand by using previously idle or underused resources including labor. Therefore, the Fed is unlikely to tighten its stance until it sees signs of inflation, especially more normal employment levels and indications of a continuously rising price level.

      There is no inherent correlation between fiscal and monetary policy or the fiscal stance and monetary stance. That this what political independence of the cb means. It depends on the context. The Fed will follow its mandate and Congress will act politically in setting fiscal policy.

      However, the cb should in principle loosen its monetary stance during loose fiscal policy to stimulate lagging demand until there is evidence of demand leading to a continuous rise in the price level near full employment. But that would not necessarily hold in the case of stagflation, when the fiscal stance might loose to address UE, e.g., with deficits rising due to falling tax revenue owing to economic contraction and rising automatic stabilization due to high UE, while the monetary stance might be tight, with the cb raising the interest rate to address inflation.

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  5. ". Even I can think of an easy boost: double monthly T-bill purchases ("buy up all of planet Earth"), until inflation rises. With such a simple, obvious monetary mechanism to boost AD, why in the world would you talk about a situation where the Fed had loosened "as much as it could"? That makes no sense. There is NO barrier to the Fed loosening further."

    Don do you know how much of a cult member you sound like right now? It's like your part of a breed of mini Sumners. If you want the Fed to buy up planet earth why not just have the Congress tighten less at the start? I mean you do understand that buying up planet earth is a fiscal action.

    I do believe that the Fed is reluctant to do some unconventional monetary policy. Yet it has done a lot of unconventional policy-QE, and now the Evans Rule. Yet Bernanke thinks we would have been better off with less fiscal contraction. He doesn't believe the multiplier is zero.

    Call me crazy I think he knows more about monetary policy than you or even the all knowing Scott Sumner

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    1. Please try to stay on topic. "Buy up planet earth" is a reductio ad absurdum, to demonstrate that there is clearly room for more action. The real question is: is the Fed "out of ammunition", or is it still capable of additional monetary stimulus. Those of you who write things like "the Fed has loosened about as much as it reasonably could" have the burden of explain just why, exactly, it is impossible for the Fed to do additional monetary stimulus. I have yet to hear even a hint of an answer from you.

      The best I've gotten (which I suggested myself) is that the Fed is "reluctant" to do "unconventional" policy. I agree with you! But that's a political constraint, not a technical one. It means that the Fed has CHOSEN to stop with monetary stimulus, and as a result we had the economic damage of the Great Recession.

      Now that we've agreed it was a choice, and not an actual technical limitation, the obvious followup question is: can you clearly identify why the hypothetical dangers would have been, from additional monetary stimulus, that are worth the known damage of the recession?

      But we can't even get to that question, until you agree that monetary stimulus was not stopped because of any kind of technical limit. (E.g. ZLB.)

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    2. "Please try to stay on topic. "Buy up planet earth" is a reductio ad absurdum, to demonstrate that there is clearly room for more action. The real question is: is the Fed "out of ammunition", or is it still capable of additional monetary stimulus. Those of you who write things like "the Fed has loosened about as much as it reasonably could" have the burden of explain just why, exactly, it is impossible for the Fed to do additional monetary stimulus. I have yet to hear even a hint of an answer from you."

      Again, Don you're a cult member. You pick up everything from Sumner, not just his arguments but even his effections. He's always claiming that those who criticize him are off topic as well.

      What he actually wants is to have control over what the topic is. You keep trying to pigeonhole the conversation as 'those of you who disagree have to show why the Fed is out of bullets.'

      I never actually said this in so many words. All I said is that fiscal contraction is a bad idea in a recession whether the Fed is out of bullets or not. Bernanke who knows a lot more about monetary policy than you and Sumner combined agrees with me not you. When you say it's my job to prove that Sumner's silly ideas don't work rather than it's your job-as his disciple-to show that they do, we see the whole problem with Market Monetarism.

      You folks are making these tall claims so why don't you prove they work rather than the skeptics have to prove they don't.

      You fail to get that my claim was never that the Fed was out of bullets but that fiscal contraction is a bad idea. Yet Sumner attacks anyone who points that out. My problem is his giving aid and comfort to fiscal austerity.

      Again, Bernanke agrees with me. Why don't you take a little burden of the argument onto yourself and explain why you know more than him about monetary policy.

      Conventional monetary policy is 'out of bullets' as for nonconventional MP we really don't know how powerful it is as its untested. I have no trouble with trying some things I supported the Evan's Rule. However, I would have preferred the ER with less fiscal contraction least year. Sumner is claiming it was better with ER and fiscal contraction. The burden is on him and you-not me to show where Bernanke is wrong here.

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    3. Again, my point that fiscal contraction was a bad idea is not contingent on whether or not 'monetary policy is out of bullets.' Bernanke feels the same. Suppose we could do more monetary expansion. Suppose we could do it for X amount of M.E. It would still be a mistake to also do fiscal contraction as this would reduce X by a certain amount.

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  6. ""Sumner's statement ... that the Fed always offsets fiscal policy" Cite, please. Sumner has NEVER made any such statement. He has stated that it is foolish to try to evaluate the effectiveness of fiscal policy, without considering the monetary policy reaction function. He has stated that the fiscal multiplier is an estimate of the central bank's incompetence. He has stated that, with a well-run central bank, the fiscal multiplier SHOULD be zero, due to monetary offset. But he has NEVER stated that the the Fed ALWAYS exactly offsets fiscal stimulus."

    Yes he has. You evidently don't even know what Sumner says as well as I do. He has argued that there may even have been a 'negative multiplier' in 2009 which is more than total monetary offset.

    If he doesn't believe in full monetary offset in 2013 than why is he gloating about 'winning a bet'-do you know how petty he sounds to other economists when he talks like that?

    If there isn't full monetary offset than by definition there's space for fiscal policy. You understand by saying there isn't full monetary offset this means that fiscal policy does have an effect even iffor arguments sake it's less than monetary-that's Sumner's belief, I don't believe it's more powerful but I'm accepting it for arguments sake here.

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    1. I asked for a specific cite, you just again gave a "Yes he has" claim.

      "If there isn't full monetary offset than by definition there's space for fiscal policy." Not true. It just means that the actual effects of fiscal policy, are completely up to the whims of the monetary authority. The multiplier might be positive, it might be zero, it might be negative. The fiscal authorities have no control (and hardly any prediction) about what might happen if they attempt fiscal stimulus. Which means that it's a terrible tool to use, in an attempt to set policy and control the macroeconomy.

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    2. I did get specific, but you stopped when I wrote 'Yes he has' but you didn't keep reading. Read it again you might actually begin to comprehend rather than just parrot what Scott Sumner says. If you had not had a full stop there I pointed out that Sumner even claims that there was a negative fiscal multiplier in 2009. That's not just an argument for full monetary offset, but super, duper, triple duper, monetary offset.

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    3. It's not a terrible tool to use as long as the Fed is not as absurd as Sumner. Bernanke's comments give us reason to think that it isn't. When Eccles was Fed Chairman-I know Sumner doesn't talk about him so you might want to prime yourself on Wiki as to who he even is as you don't know anything but what he's said in the past-he was the Fed Chairman during the Depression and WWII-there was no monetary offset. Taht's because he wasn't abusrd like sumner. It goes both ways. You make it sound like all the power is in the Fed's hands. This is abusrd as Bernanke himself has told us.

      Sure it's possible for the Fed to sabotage fiscal policy, however, fiscal policy can just as soon sabotage the Fed. And since the GOP came in 2011 that's exactly what has happened, and Bernake's point is that this was very counterproductive.

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    4. It's not one way. Yet you and Sumner get into this childish game of policy chicken-where you declare 'the Fed is the QB, fiscal policy must kneel'.

      http://diaryofarepublicanhater.blogspot.com/2014/02/morgan-warstler-gets-mm-so-did-tom.html

      This only works of the fiscal authority submits. If they don't they will just get into an endless game of chicken. It's like turning your air conditioner as high as possible and then turning the heat on as high as possible. You want to claim that somehow the house will be the same termpareture even if you turned the air conditioner off-as the heat (like moentary policy) is all powerful and the air conditioner has no ability to affect the temperature unless the heat 'allows it to.

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  7. ". He has stated that the fiscal multiplier is an estimate of the central bank's incompetence"

    That only makes sense if you think that the Fed always wants to do the opposite of the fiscal authorities on every action-Bernanke disagrees with this. He calls Sumner's state of affairs 'counterproductive.'

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    1. "you think that the Fed always wants to do the opposite of the fiscal authorities on every action"

      That's a very strange way to put it. Do you really not understand the model? Here's the simple idea: the Fed has a nominal target, e.g. 2% annual inflation, or 5% NGDP growth. The Fed has the power to alter the economy (interest rates, OMP) in order to hit their target. Pretty much regardless of anything else happening in the economy. This is not to say that nothing else has influence: oil shocks matter, productivity growth matters ... and fiscal policy matters. All those things affect the economy too. It's just that, the Fed runs data-driven actions: "e.g., continue OMPs until inflation = 2%".

      It's like driving a car, using the gas pedal and brake, and trying to maintain a constant speed. It's not that hills and valleys in the road have no influence on the car's speed. The point instead is that, with enough power, and using a feedback loop on the controls, you can drive the car at a constant speed regardless of the hills and valleys. You don't even have to "know" that you are offsetting a hill. All you have to observe is: my speed seems to be dropping, given the current setting on the gas pedal; therefore I should press down on the gas pedal and increase power to the engine.

      It's in the nature of a data-driven feedback control loop, that something like fiscal stimulus will necessarily be offset. It's completely implied by having a nominal target, and having the power to hit that target.

      Fiscal austerity is of course "counterproductive", in the sense that the Fed wants more aggregate demand, and austerity reduces demand, so fiscal austerity requires additional monetary stimulus in order to counteract it. All that is true.

      But there is absolutely nothing (technical) preventing the additional monetary stimulus, so the fact that austerity is "counterproductive" is completely insignificant.

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    2. It's not insignificant it's the whole point I'm making. You're having a different argument than I am. You keep trying to argue about whether the Fed is 'out of bullets' or not. My point is that fiscal austerity is counterproductive and yet Sumner keeps on defending it. No not in so many words but implicitly that's what he's doing.

      If we had less austerity last year the economy would have been better and so Sumner won no bet.

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  8. "The Fed doesn't need to consciously offset fiscal stimulus."

    Careful Don, your confirmation bias is showing. I already referenced this-the idea that 'They're doing what I'm saying they just don't know it' defense of Market Monetarism.

    If Bernanke said he offsets fiscal policy Sumner would say 'Aha I won a bet!' Bernanke says the opposite so Sumner says 'Aha I won a bet!'



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  9. It's kind of like that disturbed man who believed that when he shouted out at his television David Letterman heard and obeyed him.

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  10. "my claim was never that the Fed was out of bullets but that fiscal contraction is a bad idea" If the Fed has plenty of room for additional monetary stimulus, then what exactly is so bad about fiscal contraction? What specific problem do you think it causes?

    "Suppose we could do more monetary expansion. Suppose we could do it for X amount of M.E. It would still be a mistake to also do fiscal contraction as this would reduce X by a certain amount." It takes months for Congress to agree on a spending plan. The Fed can act essentially instantly. Congress has resource limitations (tax revenue, debt, politics). The Fed can provide essentially any amount of stimulus it wishes, for free. If fiscal contraction reduces the original stimulus X by some factor Y, so the new aggregate demand becomes X-Y, the obvious answer is monetary offset: the Fed should immediately provide (X+Y) stimulus instead, so that (X+Y)-Y returns to the same X that they originally intended. Again, the Fed "moves last", and is vastly more powerful. So why does it matter what the fiscal authorities do?

    "You want to claim that somehow the house will be the same termpareture even if you turned the air conditioner off-as the heat (like moentary policy) is all powerful and the air conditioner has no ability to affect the temperature unless the heat 'allows it to." That's essentially correct. Monetary policy is hugely faster, and essentially infinitely more powerful, than fiscal policy. They can get into a "game of chicken" all they want, and fiscal policy loses every time. Do you have any evidence that fiscal policy has the power to override the AD desires of the monetary authority? Even in theory, how do you imagine that would work?

    "My point is that fiscal austerity is counterproductive" How does it have any impact at all -- if the Fed is doing its job? Note that I agree that fiscal stimulus can put pressure on the economy. And I agree that an incompetent central bank can choose not to offset that stimulus. But the question is: IF fiscal policy does in fact affect the economy ... then why haven't you been yelling at the central bank (for incompetence) before now?

    "If we had less austerity last year the economy would have been better and so Sumner won no bet." This is totally implausible hindsight bias. Go back to the econ debates around the sequester. Look at everybody's projections, for how they thought the economy would go, with and/or without the sequester. I challenge you to find anybody (reasonable) that was predicting a better economy than we in fact ended up with, even without the sequester! No, the economic growth we got, was close to the standard projections WITHOUT the sequester, and all the (Keynesian) predictions of growth WITH the sequester, were far far worse than the actual growth we experienced.

    You have no basis for having expected a better economy without austerity, aside from your prior theoretical basis that it surely must be true. But the actual historical data doesn't at all correspond to what you would have predicted. (Nor to the predictions that people like you made on the record, at that time.)

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  11. "If the Fed has plenty of room for additional monetary stimulus, then what exactly is so bad about fiscal contraction? What specific problem do you think it causes?"

    Don you just keep ignoring the whole point. Why do you keep trying to ask me-why don't you ask Bernanke as he thinks it causes 'specific problems' too. You yourself admitted this above now you don't again. You said Sumner is not for fiscal austerity now you are for it yourself-after all it allegedly 'causes no specific problems.'

    One problem is that it subtracts from what the Fed is doing-and you're the one who keeps saying it has tons of room-I've seen no proof of this just you and Sumner saying it does. However, if the Fed were to increase AD by 40% say, why do we want a fiscal contraction to subtract from that by 27%? It should be obvious. I guess this is what happens when you become a Market Monetarist you believe Sumner's word games are reality.

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    1. Bernanke avoids answering the question, about the specifics of why not prefer monetary policy to fiscal policy. He has simply made claims and statements, but not supported them. At this point, I no longer believe him. I think the most likely explanation of his statements, is that he is trying to defer blame from the failures of the Fed, where he himself was in charge.

      But you believe that fiscal austerity causes problems. So I was asking you, why you believe it. Is your only justification, because Bernanke said so? A mere argument from authority? But you don't actually understand the real justifications?

      "if the Fed were to increase AD by 40% say, why do we want a fiscal contraction to subtract from that by 27%?"

      But that's a silly way for the Fed to operate. The Fed doesn't just pick a fixed number, and then keep it steady for a long time, while the Congress changes fiscal policy. What the Fed implements is a feedback-based program: "continue buying OMPs until inflation = 2%". There are LOTS of things, besides fiscal policy, that affect the economy. The whole point to steering an economy to a target, is that you ought to do "whatever it takes", to get to the target you think is optimal.

      It's completely stupid to fix the amount of intervention ahead of time, and then leave it fixed while the economy around you changes, and then not hit your target just because some unanticipated event happened in the economy. What you are describing is an incompetent central bank. A Fed that runs like your example, should get all the governors fired.

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    2. "But you believe that fiscal austerity causes problems."

      The monetary and fiscal stance should be appropriate to context. When the economy is contraction, the stance should be loose. When the economy is showing signs of overheating then the stance should be tightened. Of course, determining in advance what the context may be is generally beyond the capacity for policy makers to agree on, and even agreement may be influenced by groupthink. So often, policy makers are reacting ex post rather than being able to set the right stance and policy to support in advance.

      The Fed got the stance and policy backwards in the beginning stage of the crisis as the Fed minutes show. They were overly concerned with inflation expectations due to high oil price pass through, i.e., cost push inflation driven by cost setting by the Saudis as swing producers, that is, monopoly pricing. So the Fed was willing to contract the US economy and thereby the global economy to force the Saudis to lower their prices. That's sounds crazy to me. Better to let the higher price draw new supply to market or use substitute fuels like natural gas in my view.

      Congress was unable to agree on the looser fiscal stance that would usually be adopted in the face or chronic high UE and economic under-performance. The austerity that was adopted with not a result of policy based on economics, since even conservative economists called for loosening it. It was choice of Republicans for ideological and political reasons.

      The Fed tried to counter with ZIRP and QE to little effect. The low rates and abundant liquidity did not flow to increased spending on investment but rather to margin to purchase riskier assets on leverage and to create a carry trade in USD.

      The Fed's action in expanding its balance sheet by buying government securities also transferred to the Treasury the interest that would have been paid to non-government, some of which would likely have been spent on consumption and investment or used to deleverage by those carrying too much debt. So QE was actually disinflationary wrt to prices and wages.

      When the bias is toward saving rather than spending, then someone has to borrow rather than net save. If the private sector is net saving and so is the external sector, then only government can provide the offset to keep the economy operating at full employment. Otherwise, goods capable of being produced won't be sold, unplanned inventories will build and firms will reduce investment by cutting production. For Congress to adopt a tight stance in such circumstances, especially when the policy is at the lower bound, is irresponsible.

      A tight monetary and fiscal stance would be appropriate, however, when the economy is overheating due to demand pull inflation.

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  12. "You have no basis for having expected a better economy without austerity, aside from your prior theoretical basis that it surely must be true. But the actual historical data doesn't at all correspond to what you would have predicted. (Nor to the predictions that people like you made on the record, at that time.)"

    I have all the basis in the world It's obvious, Bernanke knows it, even you 've said it.

    "Fiscal austerity is of course "counterproductive", in the sense that the Fed wants more aggregate demand, and austerity reduces demand, so fiscal austerity requires additional monetary stimulus in order to counteract it. All that is true."

    So if austerity subtracts from AD why do it in the middle of a recession? Let me guess-Scott Sumner thinks it's right.

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    1. "So if austerity subtracts from AD why do it in the middle of a recession?"

      That's a totally separate question, from everything else we've been talking about. The main discussion is: aggregate demand matters a lot, but the Fed controls it absolutely, so fiscal policy doesn't matter at all for aggregate demand (because of the power of monetary offset) -- a least, with a well-run central bank.

      Now you've asked a completely independent question: given that the Fed can reach any AD it wants, regardless of the setting of fiscal policy, why might you want fiscal austerity? Especially, in the middle of a recession?

      We can talk about that if you want, but it has NOTHING to do with controlling aggregate demand.

      I don't think it's productive to get into it, but that secondary discussion would be about improving the supply-side of the economy (rather than the demand-side, which is what the Fed controls). I.e., the deadweight losses from taxes, the disincentive effects from government interference in the economy, etc. None of this is specific to recessions, but it's the general arguments that conservatives (or libertarians) make, about controlling the size of government, spending within your means, etc.

      In the abstract, if fiscal policy doesn't matter for controlling demand, then you probably want to settle on a long-term budget structure of balanced budgets, with deficits dropping to near zero, and expenditures balanced by tax receipts.

      But again, this argument is completely independent of the different argument, over whether fiscal policy is a useful tool in combating depressed aggregate demand.

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  13. ' How does it have any impact at all -- if the Fed is doing its job? Note that I agree that fiscal stimulus can put pressure on the economy. And I agree that an incompetent central bank can choose not to offset that stimulus. But the question is: IF fiscal policy does in fact affect the economy ... then why haven't you been yelling at the central bank (for incompetence) before now?"

    What good would me yelling at the CB do? Besides I have all you Market Monetarists to do that. I'm yelling about the GOP Congress and the fact that Sumner is trying to justify their austerity with all this tall talk of monetary offset which no one but the MMers believe. Certainly not people who actually work at the Fed.

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  14. "That's a totally separate question, from everything else we've been talking about."

    Don, you're unbelievable. You keep telling me I'm off topic-who says you get to pick the topic. This is the question I'm talking about and it's not separate.

    " The main discussion is: aggregate demand matters a lot, but the Fed controls it absolutely, so fiscal policy doesn't matter at all for aggregate demand (because of the power of monetary offset) -- a least, with a well-run central bank."

    The idea that it controls it 'absolutely' is an absurd claim that no one believes but a few cult members called Market Monetarists. You yourself had conceded that fiscal austerity subtracts from AD so how can it claim to control it absolutely?

    "Now you've asked a completely independent question: given that the Fed can reach any AD it wants, regardless of the setting of fiscal policy, why might you want fiscal austerity? Especially, in the middle of a recession?"

    We haven't agreed that it can reacn any AD it wants regardless of the setting of fiscal policy. It's a baseless idea that doesn't become true because you keep chanting it.


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    1. "fiscal austerity subtracts from AD so how can [the Fed] claim to control it absolutely?"

      Ocean currents and winds push a cruise ship, but we still blame the captain if he doesn't return to his intended port. Hills on a road make a car go faster, but you don't get out of a speeding ticket by complaining that the road happened to be going downhill.

      Other things have pressure and influence, sure. That doesn't excuse the driver, with sufficient power, from having absolute control of the destination where they end up. The port a ship lands in, the speed of a car, or the level of NGDP in the economy ... the driver of each can choose any target they want to hit, and has the power to hit that target regardless of the external conditions.

      "We haven't agreed that it can reacn any AD it wants regardless of the setting of fiscal policy."

      It's fine to not be convinced about this. But then this is the only question you should be exploring. It's silly to ask about fiscal austerity, if you're not yet on the same page about the power of monetary policy. EVERYTHING else in MM, depends on this understanding. If Krugman was right about the ZLB, then he would also be right about fiscal stimulus / austerity.

      So you shouldn't get distracted by all the fiscal questions. Just try to resolve this one, very simple, focused disagreement. MMs have claimed that the Fed allowed NGDP to be too low after 2007, and should have raised it. Some people think that the Fed doesn't have the power to raise NGDP. Are you one of those people? What, exactly, do you think prevents the Fed from debasing the currency? Do you agree that hyperinflation is possible? If we can have the current nominal level, and we can have hyperinflation, then what, exactly, prevents the Fed from targeting some level of nominal spending in between?

      Really, all your other questions are irrelevant, if you think the Fed is somehow unable to raise the level of nominal spending. Of course you would disagree with everything else MMs say! None of it makes any sense, without the Fed's infinite nominal power.

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  15. "I don't think it's productive to get into it, but that secondary discussion would be about improving the supply-side of the economy (rather than the demand-side, which is what the Fed controls). I.e., the deadweight losses from taxes, the disincentive effects from government interference in the economy, etc. None of this is specific to recessions, but it's the general arguments that conservatives (or libertarians) make, about controlling the size of government, spending within your means, etc."

    I hope your listening to this too Tom Brown, it's exactly my point. I love how Don doesn't think it matters but, yeah, if you believe that the Fed controls AD absolutely regardless of the fiscal stance then all we have left for fiscal policy are conservative fiscal policies-cutting taxes for the rich, cutting social programs for the poor, less bank regulation-because of course the subprime mess had nothing to do with the recession.

    Tom you have argued that it's possible to be a liberal Market MOnetarist. It sure doesn't sound so listening to Don.

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    1. It's easy to be a liberal Market Monetarist. I don't know how else to say it: fiscal policy is IRRELEVANT to controlling aggregate demand. That doesn't mean that MM requires fiscal austerity. It means that your arguments for or against austerity, have nothing to do with whether we're in a demand-side recession.

      If your politics suggests that you want larger government, large deficits, whatever ... then by all means, go ahead. The only single thing I don't want you to use in your fiscal debate, is the Keynesian claim that we need large fiscal deficits today, in order to boost aggregate demand. MMs want you to throw away that claim.

      But if you have other reasons for preferring larger government (during any economy, not just a recession), then by all means state your case.

      But that's independent of Market Monetarism. MM as a macro theory is completely neutral about fiscal policy. It by no means requires fiscal austerity.

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    2. When you say fiscal policy is irrelevant what you are really saying is that distribution of wealth is irrelevant. If our GDP rose to 20 trillion next year but only 10 guys got the income, you think that would be no different than if 100 million got the income. The only thing that matters is the NGDP number not who and how many get it is essentially what you are arguing.

      You also think the fed can simply target that number just by buying up the earth if necessary.

      So how does the fed make someone sell?

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    3. @Greg: "When you say fiscal policy is irrelevant what you are really saying is that distribution of wealth is irrelevant."

      Why did you pull my quote out of context, and then totally change my meaning? I wrote exactly what I meant, in the original sentence: "fiscal policy is IRRELEVANT to controlling aggregate demand".

      There is lots, lots more to the macro economy, than just aggregate demand. And there is lots more to a happy society, than just the economy. Those are all completely separate, independent topics for discussion. Market Monetarism has nothing to say about distribution of wealth. That's a perfectly fine topic to discuss, but it's irrelevant to questions of stabilizing aggregate demand.

      The ONLY point, is that fiscal policy should not be used as a tool for stabilizing aggregate demand. But of course fiscal policy should be used as a tool for other purposes, such as redistribution of wealth!

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    4. "There is lots, lots more to the macro economy, than just aggregate demand. And there is lots more to a happy society, than just the economy. Those are all completely separate, independent topics for discussion. Market Monetarism has nothing to say about distribution of wealth. That's a perfectly fine topic to discuss, but it's irrelevant to questions of stabilizing aggregate demand."

      Fair enough, you make some valid points, although I disagree that distribution of wealth doesnt affect aggregate demand. Having 8 out of 10 people being able to afford cars as opposed to 1of 10 would be a better environment for aggregate demand for cars, and other things

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  16. "Do you have any evidence that fiscal policy has the power to override the AD desires of the monetary authority? Even in theory, how do you imagine that would work?"

    Only in your totally indoctrinated worldview is this hard to imagine. Fiscal policy has a major impact on AD. It's not the only thing that affects it but neither is monetary policy. You say I shouldn't argue from authority which I wasn't I was just using this to make a point. It's actually you who argues from authority-Sumner's authority. You repeat his arguments word for word.

    Still if you have Sumner saying fiscal policy doesn't matter and Bernanke saying it does well all things being equal there is less reason to believe what Sumner's saying. Yet you believe him word for word. Why?

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    1. "You say I shouldn't argue from authority which I wasn't I was just using this to make a point. It's actually you who argues from authority-Sumner's authority. You repeat his arguments word for word."

      Amusing. I wonder if you know what "argument from authority" really means. You're the only one who has actually used it. You have said, "I believe that X is true, because Bernanke said X." I have never claimed an economic argument was true, just because Sumner said it. Even if I repeat his arguments word for word -- that just means that I was a student paying attention, and I've learned. (For sure, Sumner gets all the credit.) But they are my arguments now, and I'll defend them myself. I don't appear to Sumner. (I only credit him.)

      "Still if you have Sumner saying fiscal policy doesn't matter and Bernanke saying it does well all things being equal there is less reason to believe what Sumner's saying."

      Do you really not understand the Argument from Authority fallacy? http://en.wikipedia.org/wiki/Argument_from_authority You're doing it right here! You're judging the truth of a claim, based on the credentials of the people making the claims.

      "Yet you believe him word for word. Why?"

      Well, obviously, because I've evaluated the quality of the content of their arguments, which I've managed to separate from their authoritative credentials.

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  17. MM is just the great White Hope of frustrated conservatives who think that Sumner will prove to be their night in shining armor-ok Republicans are in trouble nationally now but if people buy into MM we may get Republican fiscal policies through the MM backdoor.

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  18. "Amusing. I wonder if you know what "argument from authority" really means. You're the only one who has actually used it. You have said, "I believe that X is true, because Bernanke said X." I have never claimed an economic argument was true, just because Sumner said it."

    I didn't say I believe it because Berannke said it, rather I believe it and its interesting that Bernanke also believes it. This suggests that I'm probably on the right track and you cultists aren't. I don't need you to admit that you're a Sumner cultist I just have to listen to what you and the other MMers say-it's eerie, I admit it is kind of amusing listening to you too.

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  19. "Well, obviously, because I've evaluated the quality of the content of their arguments, which I've managed to separate from their authoritative credentials."

    No I don't think so. You're a cult member. A lot of his followers are just frustrated conservatives' or 'libertarians' which as far as I'm concerned is the same thing-and they see Sumner as their Great White Hope

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  20. Here is the MMT position regarding interest rates, monetary policy, and fiscal policy from Bill Mitchell.

    "MMT considers that the aggregate demand impact of interest rate changes are unclear and may not even be negative (for a rise) or positive (for a fall) depending on rather complex distributional factors. For example, remember that rising interest rates represent both a cost and a benefit depending on which side of the equation you are on. Interest rate changes also influence aggregate demand – if at all – in an indirect fashion whereas government spending injects spending immediately into the economy.

    "This is the reason why MMT proponents do not give priority to monetary policy over fiscal policy."

    http://modernmoney.wordpress.com/2014/03/02/interest-rate-changes-under-mmt/

    This is the fundamental disagreement between MM and MMT.

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