I first became radicalized about 3 years ago when I realized that my fellow economists did not see the seemingly obvious need for greater monetary stimulus. Here are a few facts:
- The number one monetary textbook tells us that monetary policy is still highly effective at boosting nominal spending at the zero bound.
- There are many prestigious academic papers discussing how the Fed can boost nominal spending at the zero bound.
- American economists were highly critical of Japan’s refusal to boost NGDP growth in the 1990s and 2000s.
- I’ve never met a right-of-center economist who worried about “liquidity traps.”
- Lots of progressives (Romer/Krugman/DeLong/Yglesias, etc) favor more Fed stimulus.
- Ben Bernanke keeps insisting that the Fed is not out of ammunition, a view he’s held from the beginning.
OK, there are some economists who worry about the Fed running out of ammunition. But rates weren’t even at zero in the fall of 2008, and there was still no pressure on the Fed to ease. None at all. And nothing’s changed in the subsequent 3 years.
Clare Zempel sent me a new survey from the National Association of Business Economists:
Given a budget of 10 points, what are the major factors holding back the recovery? You may allocate all 10 points to one factor or divide the points among them.
16.9% Uncertainty about future economic policies
13.7% Low consumer and business confidence
13.5% Financial headwinds caused by tight credit conditions and balance sheet restructuring
11.0% A tepid housing market
7.4% State and local government spending cutbacks and tax increases
7.3% Uncertainty about economic prospects in the rest of the world.
6.5% The burden of new regulations
6.3% Structural imbalances requiring the reallocation of labor and capital across sectors
6.1% Lack of progress in reducing long-term fiscal imbalances
4.9% The removal of near-term fiscal stimulus
3.1% High and rising commodity prices
1.6% Inadequate monetary stimulus.
1.2% Nothing is holding back the recovery. The economy is poised for a strong rebound.
0.4% Ongoing supply disruptions associated with the earthquake and tsunami in Japan
Just three of the 49 respondents selected “inadequate monetary stimulus” — and just one considered it to be quite important (by allotting 5/10 points to it).
So my fellow economists don’t think we need more monetary stimulus. And I have no doubt that this is why the Fed isn’t doing more. If the monetary stimulus choice was 98.4% rather than 1.6%, you can be sure the Fed would be doing all sorts of aggressive stimulus right now.
Here’s the big puzzle; do my fellow economists oppose more monetary stimulus because they don’t think it will work, or because they fear it will work? In other words, do they want more AD or not?
When I look at all the responses, I see at least a half dozen that implicitly point to AD being a problem. But in that case why wouldn’t they favor more monetary stimulus? Is it really possible that 46 out of 49 economists think the Fed is out of ammo? Or is there some sort of third possibility, which I miss because the model is completely off my radar screen? I.e. do they think monetary stimulus creates inflation and fiscal stimulus creates real growth? God only knows. All I can say is that I am part of a profession that I know nothing about. I can’t even fathom what is going on in the minds of my fellow economists.
Of course it’s very possible that this whole blog is wrong, and that we don’t have a demand shortfall. Or that we do, but a more expansionary monetary policy can’t boost nominal spending. But if I am right then there can be no doubt as to who is to blame for the current crisis (in both America and Europe.) It’s not politicians. It’s not bankers. It’s not voters. It’s macroeconomists.
PS. In my view the top 4 choices are mostly a consequence of tight money, of low NGDP.
PPS. Maybe I should look at the bright side. Four times as many point to monetary policy being the problem, as compared to the tsunami in Japan.