Monetary Stimulus Crucial

Here’s a few observations that might be loosely viewed as responses to thoughtful conservatives who are skeptical of the need for monetary stimulus:

1.  Three times

Consider the following three dramatic declines in NGDP growth:  1929-30, 1981-82, and 2008-09.

Now think about what the sticky wage model would predict in each case.  I’d say a sharp fall in RGDP.  And that’s what happened in all three cases.  Then what?  Here’s where things get interesting.  The 1929-30 NGDP decline was followed by an even bigger plunge, so that by early 1933 NGDP was at less than 1/2 of its 1929 peak.  In 1983 and 1984 NGDP soared, rising at an 11% rate in the first 6 quarters of recovery.  After mid-2009, NGDP grew below trend, roughly 4.2%/year.

Now let’s think about what kind of recovery you’d expect in each case if the sticky wage model was true.  I’d expect a further fall in RGDP after 1930.  I’d expect very rapid growth in RGDP in 1983-84, and I’d expect modest growth in RGDP in the period after mid-2009.

And that’s exactly what happened!  If you are a sticky wage skeptic, tell me what sort of RGDP path you think the sticky wage model would have predicted in each case.

2.  Don’t solve problems

We should not use monetary policy to solve problems.  I believe we should have stable NGDP growth at about 5% per year, in order to avoid creating problems.  If NGDP growth had averaged 5% over the past 4 years, and unemployment was now 11%, I would not be calling for monetary stimulus.  Indeed even if it had averaged 4% I would not be making any great effort to promote monetary stimulus (although I wouldn’t oppose a bit in that case.)  But in fact NGDP growth since 2008 has been the slowest since Herbert Hoover was President, about 2%.  I don’t want monetary policy to be used as a tool to solve problems.  I want to avoid creating them with stable policy.

3.  Now more than ever

One often hears people using a crisis, especially one where the cause is rather murky, as an excuse to press for something they’ve favored all along.  High speed rail.  Break up the big banks.  Radical liberalization of the eurozone economy.  Lower tax rates on capital.  Less restrictions on occupational entry.  I favor some of these proposals.  But that’s not the problem we face.  I’ve followed the US business cycle since LBJ was president and I don’t recall there being even a hint of evidence that 8.2% unemployment in the US is caused by regulations, taxes, lack of high speed rail, big banks, or anything else other than tight monetary policy.  In 1982 the tight money was justified because inflation was a big problem.   It wasn’t “overly” tight. That’s clearly not true today.

4.  Johnny come lately

I hear people say; “Yes, we all agree that money was too tight in 2008-09 when NGDP fell 4% peak to trough, but it’s no longer too tight.”  It’s interesting that “we all agree” because when I was running around like a chicken with its head cut off in late 2008 I don’t recall anyone agreeing with me (that tight money by the Fed was creating a disastrous fall in NGDP.)  I recall attending an economics convention in late November 2008, and there was a 5 person panel that was dismissive of the need for easier money.  And that was during the worst of the crisis, when markets clearly showed the global economy falling off a cliff.  Even if I remembered who they were it wouldn’t matter, as there’s no reason to single them out.

Progressives often say; “at least we weren’t opposing monetary stimulus.”  Yes, but silence turned out to be just as damaging.  It would be interesting for someone to go back and investigate how many op eds were written by academic economics in the second half of 2008, and early 2009, castigated the Fed for driving NGDP much lower with tight money.  Op eds in an any major publication (NYT, FT, WSJ, WaPo, The Economist, etc.)  I predict roughly zero.  The first articles I do recall reading we in 2009 and were written by:

1.  Robert Hetzel.

2.  The late Earl Thompson

3.  Tim Congdon

All somewhat conservative economists.  And of course out of the limelight were market monetarists like Beckworth, Hendrickson, etc.  I wasn’t even reading many blogs in late 2008, so I may have overlooked a few voices.

My point here is this:  If now “we all agree” money should have been much easier in late 2008, and virtually 100% of the very few people who realized that at the time were market monetarists and their fellow travelers, doesn’t that suggest our current policy views ought to be taken pretty seriously?

5.  And if that’s not enough

The US and global economies appear to be deteriorating (we’ll have better data by Friday.)  It’s likely that we need additional monetary stimulus just to keep NGDP growing at the current pathetic 4% rate.  Any good arguments for not doing at least that much?

PS.  ”Three Times” is one of the great films of this young century.  Earlier this evening I saw a Korean film called “The Day He Arrives.”  When Woody Allen sees this movie he’ll probably say to himself; “If only I could make a film like that.”  And yet his newest will draw 100 times more viewers.

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