I’ve recently noticed a lot of columns discussing the issue of economic stimulus. When the articles are written by journalists, they almost never include any discussion of the pros and cons of additional monetary stimulus. Here are examples by David Leonhardt, David Frum and Fareed Zakaria, but there are many more out there.
Leonhardt says we need more stimulus, and seems to think fiscal stimulus is the only option. Zakaria sees the argument for more fiscal stimulus, but also asks how we can get corporations to do more with their cash hoards. Frum is skeptical of Obama’s fiscal approach, but challenges his fellow conservatives to come up with alternatives:
But if Krugman’s direct government expenditure is not a very good policy answer, his dire economic warning remains a haunting policy question. What can we do to accelerate economic growth and job creation? For those of us on the free-market side of the debate, the question is even more haunting: What’s our countervailing idea?
Readers of this blog might be tempted to dismiss these reporters as ignorant fools. But they are highly respected reporters coming from diverse ideological perspectives. Why should they know that additional monetary policy is an option? Unless you are a professional macroeconomist, where would you get that information? I have no reason to believe that Obama knows something that these three journalists don’t know. I assume Obama is equally ignorant of the fine points of unconventional monetary stimulus. Given that Obama let several Board of Governor seats remain unoccupied for more than a year, it seems highly unlikely that he understands that monetary stimulus is our only real option today.
In commenting on the David Leonhardt piece, Tyler Cowen suggested:
I do not see why we are discussing this issue without placing monetary policy at the center of the analysis.
Yes, but how do we do it? Those of us in the blogosphere know about the possibility of unconventional measures like QE and/or higher inflation targets. And I think it is fair to say that this knowledge is pretty widespread; Krugman, DeLong, Yglesias, Tim Duy, Andy Harless, Ambrosini, James Hamilton, Ryan Avent, Nick Rowe, Bill Woolsey, David Beckworth, Josh Hendrickson, and many other bloggers have discussed these options. They certainly aren’t some sort of secret, or some oddball strategy that is only discussed at this blog. But almost no mainstream journalist or mainstream politician, of any ideology, seems to even know that additional monetary stimulus is an option.
Perhaps someone who reads this blog knows of somebody who knows somebody on the Congressional committees that will be interviewing Obama’s Fed nominees. If so, here are some questions to ask:
- Ben Bernanke has often argued that monetary policymakers don’t run out of ammunition once rates hit zero. Do you agree?
- Ben Bernanke has often argued that the depressed level of aggregate demand in Japan since 1994 could have been avoided if the Bank of Japan had tried unconventional monetary stimulus. Do you agree?
- In 2003, Ben Bernanke suggested that the Japanese should have set a higher price level target once interest rates hit zero and conventional monetary stimulus was no longer possible. Would a higher price level target policy boost aggregate demand in the US?
- Last year Janet Yellen suggested that “We should want to do more.” What does that means? Does Janet Yellen disagree with Bernanke’s view that monetary policy does not run out of ammunition once rates hit zero?
- Does it make sense to increase the budget deficit at a time when monetary stimulus could also be used to increase aggregate demand?
I generally have little interest in conspiracy theories—with monetary economics so poorly understood, who has the need for nefarious plots? Some might argue that shining a light on this issue won’t help, that the problem is inflation hawks at the Fed who already know that monetary policy is effective at the zero bound. I don’t agree, and the analogy I’d use is the Iraq War. Even if you think than Bush and Cheney were determined to attack Iraq, and simply used WMD as an excuse (and I’d rather not debate that issue in the comment section) unless there had been a widespread belief in the press and Congress that Saddam was working on WMD, the Administration wouldn’t have had enough political support to go to war. For similar reasons, without widespread ignorance about the effectiveness of monetary policy at the zero bound, the Hoenigs, Plossers, and Lackers of the world would be far less influential. The Fed is even more dependent on the whims of Congress than the Supreme Court; so you can be sure that the Fed pays a lot of attention to public opinion.
You guys might not realize this, but you and the readers of other economic blogs are members of a highly select secret society. We know how the developed world can recover more quickly, without increasing budget deficits. Let’s try to make our society less secret and less selective.
PS: There were dozens of articles just like Zakaria’s written in 1937-38. How much longer before we hear talk of a “capital strike” from those on the left?