Obama is Not Pretending that Monetary Policy Doesn’t Exist

Matt Yglesias has a new post entitled: It’s Time for Politicians to Stop Pretending Monetary Policy Doesn’t Exist

He focuses on President Obama.  But I think this is wrong.  Obama isn’t pretending anything.  President Obama does not believe that monetary policy exists at the zero bound. It’s reported that he said so privately to Christina Romer.  And he’s acted that way since day one.

The US has been at the zero bound since before he took office, and it is likely to be there for at least several more years. So I’m not surprised Obama pays no attention.  I am a bit surprised that the liberal economists surrounding him have not been able to convince him otherwise, but we can only presume that monetary policy expertise within the Democratic Party establishment has declined sharply since the days of William Jennings Bryan and FDR.

Or maybe that’s letting Obama off too lightly.  FDR knew enough to listen to George Warren, whereas Obama didn’t know enough to listen to Christy Romer.

Yglesias also reports that Obama is going to pivot to a focus on long term economic issues.  That would be a big mistake. Obama needs to focus on getting the US out of the recession that began in 2007.  A good place to start is by appointing someone like Romer to replace Bernanke, and then two other like-minded people to the other two positions likely to open soon.

Then he can start his supply-side reforms.

PS.  I just noticed that Ezra Klein thinks the White House is paying attention to my Summers bashing:

But they’re not unaware that Summers is a polarizing choice. So some of what’s happening right now, I think, is that they’re figuring out whether opposition to Summers is soft or hard. There are trial balloons going to the kind of people who will be asked to render verdicts on the choice and, in the cases where those people are skeptics of Summers, efforts to see if they can be talked down a bit.

This has had the side effect — probably anticipated, and perhaps even welcome — of mobilizing Summers’s critics. I don’t know if the blowback (see Noam Scheiber, Felix Salmon, Scott Sumner, Dave Dayen, Senator Jeff Merkley, etc) is more or less than the White House expected. But they’re getting to see it. And remember that they’re also getting positive feedback from fans of Summers, who are underrepresented in the econo-blogosphere, but very present in the ranks of economic and Wall Street heavyweights who’ve worked or fundraised at high levels in Democratic administrations.

The result is that the White House is getting to test the reaction to a Summers pick at a time when they can still choose Yellen, or even go back to the drawing board and look at Roger Ferguson or Donald Kohn or Alan Blinder or anyone else.

I don’t like those three names any more than Summers.  Some people argue that Summers is a fine macroeconomist.  That’s not the issue. In the 21st century the most important qualification for Fed chairman is the ability to understand that monetary policy must continue to steer AD at the zero bound, and supreme confidence that the Fed will do whatever it takes to get the job done. Nothing else is remotely as important. Any fool can do a Taylor Rule when rates are positive.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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