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I hope to have a more complete reply to Jim Manzi’s assessment, but I wanted to make a couple of remarks off the cuff.
One Manzi says
Economists will sometimes make explicit claims that “the economic science says X,” and will more frequently make implicit claims for scientific knowledge by flatly asserting the known truth of some predictive assertion. This is normally a statement made around some specific policy question – we should (or should not) execute the following stimulus program; we should (or should not) raise the minimum wage right now, etc.
. . . all we have is an informed opinion of the type we might have from an expert historian rendering an opinion about something the likelihood that Libya would revert to an authoritarian government within ten years if it overthrew Gaddafi
Its important to distinguish between economics as science and economics as a policy driver. Manzi is focusing on economic statements that are made as policy drivers and saying it is only informed opinion. Yet this informed opinion is what is being offered. Economic science is a different enterprise.
Saying that we should execute the following stimulus program is much different than saying that we have an established scientific principle that stimulus has such-and-such effect. Contrary to intuition the first statement is far, far weaker. This is why “economic science says” is heard less frequently than “we should.”
Even setting aside personal values, “we should” is, by its very nature, a statement about subjective probability distributions. It is saying I believe that the distribution of possible effects in the stimulus world is – by some metric – superior or inferior to the distribution of possible effects in the non-stimulus world.
This requires only that you have some evidence – any evidence – that the stimulus is more likely than not to do things that you judge to be good or bad.
As such, saying that “we should” do something does not make an implicit claim about factual knowledge. Moreover, no one advising the government acts as if it does. Hardcore proponents of democracy assert that “we should” follow the advice of a group of people on the grounds that they have all survived to the age of 18. This is hardly a claim to any sort of scientific knowledge.
Now, I know Manzi’s complaint will be that economists come waving models and multipliers as if their recommendations were based on well established science. However, this is not how economists have traditionally offered their evidence. Economists are famous for refusing to draw firm conclusions and offering loads of caveats. As Harry Truman famously said
Give me a one-handed economist! All my economics say, ”On the one hand… on the other.
That scarcely represents overselling policy recommendations as scientific knowledge. In recent years some economists, myself included, have responded to the near relentless pressure for clear concise statements with
Our model suggests . . .
I believe you will find this statement repeated over and over again in congressional testimony. No “there is”, “there will be”, “it is a scientific fact.”
Our model suggests, gives you one interpretation. Many economists would love to stand before legislatures and give an hours long lecture on all of the evidence and competing possibilities. However, you get 20 minutes and the audience will demand that your story have a moral.
At the end of a presentation, more than once, the very first question has been this exact phrase: That’s all very interesting professor, but are you saying we should do this or not?
It’s a joke among my friends and family that I begin the answer with “Well, . . . “ Again, no false mantle of scientific certainty.
Now, lets consider economists as pundits. Aren’t they asserting models as facts. Very rarely.
Take Paul Krugman.
Conservatives will no doubt have noticed that one of Krugman’s major themes is that their point of view is stupid. One might be inclined to think that this is a rude way of saying “you do not have access to the scientific knowledge that I do”
It is not. It is a statement about what he thinks of your intelligence and ability to draw well formed conclusions.
He is not saying, I have such a deep understanding into the nature of the economy that everyone should listen to me. He is quite literally saying that the statements of conservatives convey such a shallow and imbecilic understanding of the economy that no one should consider listening to them.
He is not claiming the mantle of science, he is claiming the mantle of not being a moron.
On the opposite side of the spectrum, go back and look at the public statements of Milton Friedman. How many times did he lean on the fact that economics had established scientific knowledge that shouldn’t be questioned.
He always began with very simple facts and then drew out a small, compelling story. At worst, he would say “look at the evidence” and then proceed to offer the type of simple statistics that wouldn’t be uncommon in an Op-Ed.
Again, no implicit claim to scientific knowledge, only an implicit claim that reasonable informed people would agree with him.
The public policy statements of economists aren’t assertions of scientific knowledge. They are informed argument and economists present them as such. There is no doubt that economists use their knowledge of economic science to inform their policy arguments. Yet, in making those arguments they are not claiming scientific knowledge that they do not possess.
What you can argue is that economists think that they are smarter than everyone else. Indeed, economists across the political spectrum have made precisely that point. From Greg Mankiw
“President Summers asked me, didn’t I agree that, in general, economists are smarter than political scientists, and political scientists are smarter than sociologists?” [former dean Peter] Ellison told the Globe.
Here (via Mark Perry, posted two days ago) are GRE scores by field. Economists rank number 4. Political scientists are number 17, and sociologists are number 23.
In short, Manzi’s true point shouldn’t be that economists falsely assert scientific knowledge were there is none. It should be that we are arrogant pricks. I think many economists would agree.
Here is David Brooks’ advice about how the President can bargain with both parties to make progress towards fixing some of our long-term problems:
Most important, the president will probably have to take advantage of the following paradox: bigger is easier. If he just tinkers around the edges with modest proposals, then everybody will be on familiar ground. But if he can expand the current debate, then, suddenly, everybody is on new ground.
The general approach should be to offer the left something it really craves. Then offer the right something it really craves. Then, once you get them watering at the mouth, tell them they’re going to have to bend on the things they don’t care about in order to get the things they do.
Now I don’t agree with the things Brooks’ calls for giving the Democrats, but I can think of one thing Obama should give the Republicans and the Democrats should happily give up: get rid of the minimum wage. Wait, wait, don’t roll your eyes and close this window! Stay with me!
Economists from both sides of this debate agree that the minimum wage is less important than most people think and politicians act. Futhermore, there is widespread agreement it is a highly imperfect way to make poor people better off. The Earned Income Tax Credit is better targeted at low-income families instead of middle class teenagers, and it doesn’t have the downsides of potentially causing disemployment. So Democrats should be glad to trade this policy in for a smarter, more effective, and more efficient one, and in doing so cash in on Republican’s emotional attachment to this issue.
Yes, it would be a huge symbolic loss for Democrats. But like Brooks said, getting reform done is going to require giving and taking, so a good strategy for both sides to maximize actual real benefits is to give when the policy is symbolic, and take when the policy is most efficient and beneficial.
Ezra Klein recently advocated donating to non-profits that can affect policy rather than charities:
If you donate money to a food bank, it can provide only as much food as your money can buy. If you donate it to a nonprofit that specializes in food policy issues, it can persuade legislators to pass a new program – or reform an existing one – that can do much more than any single food bank.
Robin Hanson disagrees with Ezra, arguing that these types of think tanks and organizations will mostly spend effort on partisan issues which he argues are likely wasteful:
Assuming all parties think they seek good, partisan changes can only be good if some parties are right while others are wrong about what is good. In contrast, you can be right about a non-partisan change without others being wrong…..
Donations to change policy within the partisan subspace, however, only achieve good when they happen to be on the right side of partisan disagreements. Averaged over the disagreeing parties, such donations cannot on average achieve good unless there is a correlation between between donations, or donation effectiveness, and which sides are right. Even if you think you are right at the moment on your particular partisan policy opinions, you can’t think it good on average to encourage partisan donations, unless you think donations tend overall to go to the good or more donation-effective sides.
There are a couple of ways to look at this with respect to Ezra, his donations, and his advocating for such donations. On average, Ezra surely believes he and the organizations he donates to are on the right side of partisan disagreements. Also, being that Ezra’s reading audience probably on average agrees with him, he also probably believes they are on average on the right side. So I think Ezra could agree with Robin that if you’re writing for a random or sufficiently broad audience, advocating for donations to policy organizations would do no good, while also believing that he should make such donations and advocate for his audience to do so.
On the other hand, I’m not convinced that equal donations to, say, the Center on Budget and Policy Priorities and the Cato institute are zero sum. I see part of the function of these organizations as pushing politicians towards empirically grounded and efficient policies and away from populist, extremist, and obviously inefficient ones. I see raising the influence of these institutions relative to populism as raising the probability for any given outcome the government tries to achieve, whether it’s more liberal or more conservative, the policy used is more efficient.
For instance, I’d venture that obviously inefficient and suboptimal policies like the minimum wage, tariffs, and the gold standard are much less popular among the median think tank, or think tank dollar, than they are among the median voter. Think tank solutions on average tend to utilize more transfers and market oriented allocation and less government mandated quotas and prices than what popular support calls for. In addition, I’d venture that futarchy and policies that seek to cut medical spending –two of Robin’s favorites– would be, on average, much more popular within the walls of a random think tank than within the walls of a random U.S. home.
In short, these places think like economists. Even if they cancel each other out along partisan lines, think tank donations push policies away from the biases of the rationally irrational voter.
One test of this idea is to ask whether people on the right would agree that we’d have better policies if the CBPP was more influential on the left. Likewise, would people on the left agree that we’d have better policies if Cato were more influential on the right? Perhaps it reflects my personal policy biases, but I happen to think the answer is yes.
In a Times article a few days ago is this interesting quote from Laurence Meyer, a former Fed governor:
It was this impending gridlock that might have pushed Mr. Bernanke to move, said Laurence H. Meyer, a former Fed governor. “Bernanke has said that fiscal stimulus, accommodated by the Fed, is the single most powerful action the government can take for lowering the unemployment rate, when short-term rates are already at zero,” Mr. Meyer said. “He has nearly pleaded with Congress for fiscal stimulus, but he can’t count on it.”
I’m taking this as a explicit, and unshrouded nod to the concept of “money financed fiscal policy”. Or, what is lovingly referred to in the press as “monetizing debt”. This is a situation where the government draws up a plan to distribute money, whether through direct transfers or increases in government consumption/investment, has the Treasury issue debt in the amount decided upon Congressionally, which the Fed then purchases with newly-coined money (and for hysterics, this money is created “out of thin air”!).
As Karl has noted, and as concurred upon by commenter Jazzbumpa, a program such as this would inevitably “work”. And by work, I mean it would raise inflation expectations such that businesses would be induced out of cash and into consumption and capital goods. This, of course, is something that the ARRA failed to do. This is true, but it is optimal policy?
I say no. I don’t think that fiscal policy need ever enter the picture. I think that the Federal Reserve should announce an explicit target to get the growth path of nominal expenditure to the previous level from the Great Moderation, and then continue to level target a stable growth path from there. In doing so, the Fed should immediately stop sterilizing its own open market operations by paying interest on excess reserves (indeed, the interest in reserves should be slightly negative, reflecting real rates). The Fed could then move down the yield curve, and buy Treasury debt that currently resides on the balance sheets of banks, businesses, and individuals; moving the price up while moving the yield down to zero. I suspect that there is enough debt out there that it would not run out of things to buy before hitting its nominal target. However, if it does, then it can move on to other assets.
The key thing here is that there are many interest rates in the economy, and not all of them are pegged at zero. My point is that far from needing to bring fiscal policy into the picture, monetary policy could go it alone. If the SRAS curve is relatively flat, which is a prediction of macro models, then the resultant inflation expectations would produce much more real output than inflation (lets ballpark and say 5% real growth, 2% inflation), up until full employment is reached — at which point, the Fed would revert to its normal level target. I do not think that Bernanke is “pleading with Congress” for fiscal policy. Why would he? If he identifies that aggregate demand is low relative to the Fed’s own target, then by all means, he should be taking steps to move aggregate demand to where the Fed is most likely to hit their target goals.
To those who say that it is unrealistic that the Fed would do this, is it any more unrealistic than hoping for money-financed fiscal policy?
Millenocket, ME. has the right idea. Matthew Yglesias has apparently been to Millenocket, and finds what they are doing funny. I’ve never been there, but as the article points out, it’s a pretty dead town, with horrible weather…so it seems out of place:
Never mind that Millinocket is an hour’s drive from the nearest mall or movie theater, or that it gets an average 93 inches of snow a year. Kenneth Smith, the schools superintendent, is so certain that Chinese students will eventually arrive by the dozen — paying $27,000 a year in tuition, room and board — that he is scouting vacant properties to convert to dormitories.
There are three ways in which I’d like to analyze this development; from an economic standpoint, a human welfare standpoint, and a social standpoint. I will argue that all three a net benefits to the US and the world, and we should make a long-term policy commitment to this type development around the country (and, indeed, other countries should imitate it).
The economics of importing capital through education are fairly straightforward. The long run growth of an economy, given money neutrality, is a function of an economy’s real capital stock. Ceterus paribus, increasing the efficiency of capital increases the ability of an economy to grow in the long run. If the $27,000 spent on educating a Chinese child is more productive than any other investment, which means the real returns to a US education are higher than any other investment available to them (something that is almost surely the case), then this results in an increase in the marginal efficiency of capital. Whether these Chinese immigrants remain in the US, or return to China, the effect on world growth will for the better. Literally everyone will be better off due to the rising of the world Wicksellian equilibrium interest rate as China and other countries become more productive (and thus, richer).
The US is arguably much more efficient at education than the Chinese, so why not export education?
From a human welfare standpoint, consider this analysis from the World Bank:
This volume asks a key question: Where is the Wealth of Nations? Answering this question yields important insights into the prospects for sustainable development in countries around the world. The estimates of total wealth–including produced, natural, and human and institutional capital–suggest that human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.
Growth is essential if developing countries are to meet the Millennium Development Goals by 2015. Growth, however, will be illusory if it is based on mining soils and depleting fisheries and forests. This report provides the indicators needed to manage the total portfolio of assets upon which development depends. Armed with this information, decision makers can direct the development process toward sustainable outcomes.
This analysis looks at the levels of “intangible wealth” that is embedded within human and institutional capital. The US is found to have $418,009 in intangible wealth per capita (comprising 80% of our real capital stock). That means, simply by stepping within the borders of the United States, human productivity is enhanced by this massive stock of wealth embedded in our people and our societal institutions. By contrast, China has just $4,208 per capita (comprising 55% of the total wealth stock).
Now, despite the obvious material living standards present in the United States, access to intangible capital totaling more than 99 times the amount available in China, comprises a vast gain in human welfare for each and every person who comes to the United States to live and be educated.
Finally, from a societal standpoint, having more immigrant workers increases the real wage rate for most people in the US. Not only that, but it because of the increase in marginal productivity of the Chinese worker (assuming that a non-trivial sum of people will return to China), this will increase the wages of Chinese workers — which, in turn, will increase the demand from China for US-produced goods and services. A greater supply of future labor is very important to the future of the wealth creation (and thus, the welfare state), as is evident by Japan’s aging population.
So, let’s overcome this roadblock…
There is one hitch. Under State Department rules, foreign students can attend public high school in the United States for only a year, a system that Dr. Smith considers unfair, given that they can attend private high schools for four years.
…and make a real Pareto improvement in the lives of people around the world. Most of all, the lives of these prospective Chinese immigrants.
To end, a quote from Terry Given, an English teacher:
“I don’t want to sound flip,” Ms. Given said, “but why not? We won’t know until we get the opportunity to know them and give them the opportunity to know us. There’s something to be said for putting ourselves out there to see if we can be the prize that’s claimed.”
Update: I probably should have put “during the recession” in the title. Unfortunately it’s gone to press.
Chevelle, at Models and Agents, explains why the previous round of “quantitative easing” performed by the Fed did not have a [sufficient] expansionary effect:
By that metric, the Fed’s past LSAPs have probably fallen short. Clearly, measuring the counterfactual is impossible, but there are reasons to believe that the impact on aggregate demand was small. Why? First, because the reduction in mortgage rates boosted refinancings only by people who could refinance—i.e. people with jobs and some positive equity in their home. Not exactly the most cash-strapped ones who would have spent the extra cash.
Second, the portfolio-balance effect of the LSAPs on the prices of assets like corporate bonds or equities is at best weak, if not counterproductive. The reason (which I explained in detail here) has to do with the fact that US Treasuries and MBS are not “similar in nature” to corporate debt and equities. Unlike the latter, Treasuries/MBS have more of a “safe haven” nature—so that removing them from investors’ portfolios create demand for more “safe” assets, rather than boosting the prices of equities, high yield bonds, etc.
Luckily, one Benjamin S. Bernanke explained how to perform private asset purchases that would, in fact, have an expansionary effect:
If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
If you see that guy around, tell him to talk to the Federal Reserve. I remember hearing a podcast with Scott Sumner a while back where he floated the idea of the Fed buying bonds off of the public (i.e. You and I), and paying for them with cash. Lets get to it!
That is the title of today’s Wall Street Journal Symposium [Gated]. And the overwhelming answer from preeminent monetary economists? Nothing.
Not that they didn’t answer the question. Most of the panelists’ answers amount to the Fed remaining passive. Here is John Talyor:
To establish Fed policy going forward, the best place to start is to consider what has worked in the past. During the two decades before the recent financial crisis, the Fed employed a reasonably rule-based strategy for adjusting the money supply and the interest rate. The interest rate rose by predictable amounts when inflation increased, and it fell by predictable amounts during recessions.
Fairly predictable. John Taylor has made this point numerous times, and is a very hard rules-based guy. I’m a rules-based guy as well…but I don’t see the inherent virtue in the Taylor rule, however defined. Essentially Taylor seems to want the Fed to stabilize NGDP growth around a Taylor rule at the current (reduced) output level, which puts us permanently behind the previous trend rate of output. As far as I can tell, he doesn’t care to make up the slack…which of course means elevated unemployment for an extended period of time.
Richard Fisher, who is a predictable hawk, lived up to expectations as well:
One might assume that with more than $1 trillion in excess bank reserves and significant amounts of cash held by businesses, the gas tank of those who have the capacity to hire is reasonably full. One might also conclude that the Fed, having cut the cost of interbank overnight lending to near zero and used quantitative easing to coax the entire yield curve downward, has driven the cost of gas to virtually nil for businesses that are creditworthy. And yet businesses still aren’t hiring.
This is a mind-bogglingly insane statement. When suffering an immediate deficiency of aggregate demand, supply-side factors are second order. Yes, we should streamline regulatory hurdles…but that has nothing to do with why firms aren’t hiring. Fisher must have missed a lot of economics, and apparently doesn’t understand that demand for safe assets (which in developed countries equates to cash) drives most recessions (especially during a time where there is a lack of supply of safe [private] assets), and that the Fed decided to pay banks to hoard cash…and so they did. I’m having a hard time figuring out how Fisher landed his current position.
On to the most depressing, Frederic Mishkin:
Purchasing long-term Treasurys might suggest that the Fed is accommodating the fiscal authorities by monetizing the debt—thereby weakening the government’s incentives to come to grips with our long-term fiscal problems. In addition, major holdings of long-term securities expose the Fed’s balance sheet to potentially large losses if interest rates rise.
Such losses would result in severe criticism of the Fed and a weakening of its independence. Both the weakening of its independence and the perception that the Fed is willing to monetize the debt could lead to increased expectations for inflation sometime in the future. That would make it much harder for the Fed to contain inflation and promote a healthy economy.
Expanding the Fed’s balance sheet through large-scale asset purchases can be necessary in extraordinary circumstances, such as during the depths of the recent financial crisis. But in relatively normal times, the costs of using this tool are sufficiently high that it should not be used lightly.
9.5% unemployment, falling CPI and inflation expectations, and exploding national debt due to the political anxiety to “do something” is now ‘normal times’? This amounts to saying that the Fed has the tools, but shouldn’t use them unless we’re in the Great Depression. The Fed’s job is to keep us out of financial panics like the Great Depression, not make its job significantly harder by passively waiting until the depths of the abyss, and then acting. I don’t agree with that at all.
I don’t really know anything about Robert McKinnon, but he is worried about international currency flows, asset bubbles in China, and thinks that the Fed should mediate interbank lending to stabilize the yield curve at “normal interest rates”. I’m fairly confident that China can sterilize any dollar inflows that happen upon its shores…so I don’t see this as a problem that needs to be addressed by anyone but Chinese policymakers, and I happen to think that the Fed should be much more aggressive than stabilizing yield curves AAAAAND raising interest rates now is, of course, insane punditry. Apparently so does the Vincent Reinhart believes the Fed should be more aggressive as well:
As a consequence, the Fed has to be both aggressive and nimble. The Fed should promise to purchase government and mortgage-related securities between its regularly scheduled meetings as long as activity is forecast to be subpar and inflation is low or headed down. Purchases of, say, $100 billion every six-to-eight weeks would add up to a number worthy of shock and awe for those with a somber economic outlook.
All-in-all a very depressing symposium. They should have interviewed Scott Sumner, Bill Woolsey, David Beckworth, Nick Rowe, and Paul Krugman. Then, perhaps, the world could be saved.
Update: Beckworth seems to have beaten me to the punch, linking to Mark Thoma, who did as well…a
My argument is no, this isn’t just another bad experience. Its a failure of our most basic institutions and is leading to pure loss.
Indeed, I think that the wrong way to think about the problem of recessions is that there is a fundamental problem with market economies, or that recessions (no matter how deep) represent a market failure. To me, this recession (both the depth and length) is fairly clearly a monetary failure…and if you catch me on a bad day (or a good day, depending on your disposition I suppose), I’d even go as far as to claim that the type of money system we use makes our economies prone to the types of failures we have recently experienced. In fact, financial crises are not rare. The World Bank has identified 96 banking crises (large enough to cause economy-wie problems) and 176 monetary failures since the dismantling of the Bretton Woods in 1971.
Even before the termination of gold convertibility, massive crashes were remarkably common the world over. From the Holland tulip mania to the Great Crash of 1929, these crashes have happened with frightening regularity. Being as these types of economic issues span countries, time periods, regulatory regimes, and degrees of economic development; I think that it is safe to say we should begin turning a inquiring eye toward the one system that permeates all of these societies throughout time and location.
That, of course, is the type of money we use, the characteristics of which have been replicated by nearly every society since the relinquishment of barter, and the dawn of what we would consider “modern money”. This recession is, of course, no different. An increase in the demand to hold safe assets (of which the medium of exchange is generally the safest, at least in developed economies) causes a disconnect between workers and factories. People and machines sit idle. Productive capacity dwindles, along with hours worked. Price and wage stickiness facilitates a real downward adjustment to market clearing rates to cause grinding deflation (or disinflation, which under a regime of positive trend inflation is similarly problematic).
Is there a bug inherent in the money system that is used the world over that causes these disconnects? I think that analyzing the dynamics of the flow of biomass through natural ecosystems can provide useful insights into how the money we use causes the economy (or sectors of the economy) to become brittle (too brittle to sustain?) and prone to failure.
Caprio and Klingebiel, 1996
There has been a lot of chatter around the blogosphere about Narayana Kocherlakota’s speech in Michigan last week, and seeing as I am trying to catch up on news, I think that is a good a place as any to start. First, here is the whole speech, so that you can read it if you would like.
The big focus, especially among left-leaning commentators, has of course been Kocherlakota’s comments on the unemployment situation. The only troubling thing to me about a monetary policymaking body discussing unemployment is the fact that it is happening at all. I don’t believe that there is anything “special” that monetary policy can do to alleviate unemployment — even in a booming economy. The capacity of monetary policy to act is to keep nominal GDP growing at a constant rate, year over year, and to tighten a little when it overshoots and loosen a little when it undershoots — such that the trend path of NGDP is a constant upward slope. I’m not an expert on the welfare-maximizing trend rate of NGDP…but people who are much smarter than me on average advocate 5% NGDP growth.
In any case, in the speech, Kocherlakota breaks down how Fed meetings operate, and then breaks down his “forecast speech” that he gave to the FOMC. Along those lines, he has three points: GDP (real), inflation, and unemployment. On those three points, he has this to say:
Typically, real GDP per person grows between 1.5 and 2 percent per year. If the economy had actually grown at that rate over the past two and a half years, we would have between 7 and 8.2 percent more output per person than we do right now. My forecast is such that we will not make up that 7-8.2 percent lost output anytime soon.
The Fed’s price stability mandate is generally interpreted as maintaining an inflation rate of 2 percent, and 1 percent inflation is often considered to be too low relative to this stricture. I expect it to remain at about this level during the rest of this year. However, our Minneapolis forecasting model predicts that it will rise back into the more desirable 1.5-2 percent range in 2011.
Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers. […] Given the structural problems in the labor market, I do not expect unemployment to decline rapidly. My own prediction is that unemployment will remain above 8 percent into 2012.
5yr TIPS spread is at 1.43, 10yr @ 1.55.
Now, not making up the lost employment is partially a function of his previous point about per capita GDP remaining under trend for an extended period of time. This is the cyclical component of unemployment. Cyclical unemployment is created due to the relationship of the economy to the cycle of time. As such, the level of cyclical unemployment correlates well with the business cycle, seasonal factors, etc. I believe that most of the unemployment we are currently experiencing is of cyclical nature.
I think the error in Kocherlakota’s thinking stems from this quote:
Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
This is wildly baffling. Not only does Kocherlakota make the forecast above — i.e. we will not be hitting any of our targets (nominal or otherwise) any time soon — he also states that he believes that money has been easy. That implies that monetary policy has zero effect on the economy, any time. He also identifies that low rates for an extended period of time are a sign of monetary failure, but does so in a future-orientation. While it is true that low rates can (and do) accompany* a deflationary “trap”, the policy prescription that follows is not to raise short-term rates regardless of the composition of employment. The proper policy response in that situation is to set a positive nominal target, level targeting and commit to move heaven and earth to hit that target.
That, rather than his statements about unemployment, is what I view as Kocherlakota’s underlying problem.
*H/T to Andy Harless in the comments. Also, read his post about Kocherlakota’s statements.
It is a common and poor framing of the question to ask whether uncertainty is causing our current economic woes. Just as the path of GDP is more volatile and difficult to forecast than in stable growth years, the path of individual firm sales is similarly more volatile and uncertain. More uncertainty will make households and businesses save more and invest and spend less. There is nothing controversial here. The debate is about the cause of uncertainty, and here I see a troubling correlation between what people think the current villain is and what their non-recession bugaboos are. The narratives struggling to tie the current economic woes to long-run stagnating wages, an undereducated workforce, and anything Democrats do strike me as a tenuous stretch and reflect our tendency to need a compelling narrative when easy explanations do not present themselves.
I think a good test for yourself is to ask “what problems do you think are important today that you didn’t think were important in 2004, and what policies would you favor now that you would have opposed then?”. My answer is that low house prices are a problem today where I would previously said low prices are just transfers from sellers to buyers, and I would favor policies that prop them up when I would previously have opposed them. What are yours?