For quite some time I’ve been arguing that fiscal policy is mostly ineffective because the Fed drives the nominal economy, and the Fed acts as if they are basically content with current levels of AD. I should add that I find their attitude incomprehensible. Bernanke says the stance of monetary policy should be judged by NGDP growth and inflation, and by that metric it’s been tighter since mid-2008 than at any time since the 1930s.
Ryan Avent recently linked to a WSJ article suggesting that current Fed policy is roughly what the median FOMC voter wants:
“I am comfortable with the current stance of monetary policy,” Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a speech last week. “Doing more at this time could create too much inflation risk, and doing less could risk weakening an already slow expansion and causing an unwelcome disinflation.” Ms. Pianalto’s comments are notable because she occupies a middle ground in the Fed’s often-polarized decision-making body, the Federal Open Market Committee. Some on the committee worry a great deal about inflation and aren’t inclined to act more, while others worry more about unemployment, and her view gives a sense of where the center of the committee stands.
And my fellow economists seem to share her views. In the blogosphere you find some economists who think money’s too tight, and some who think it’s too easy. But out in the real world most economists just seem to yawn, and mumble that Bernanke seems to have gotten it about right. Anyway (so they suggest) what more could the Fed be expected to do? “Tightest monetary policy since the Great Depression?” I’d be viewed as a lunatic if I made that claim at an economics conference, even though I’d be using Bernanke’s own definition of the stance of monetary policy.
When most economists think X% growth in NGDP is about right, and the median voter on the FOMC thinks X% NGDP growth is about right, why would we expect anything other than X% NGDP growth? Why do we feel a need to search out bizarre conspiracy theories that the Fed is doing the secret bidding of the bankers? The answer is right in front of our eyes, as plain as day.
And suppose we did some more fiscal stimulus? I’d guess the Fed would then do less monetary stimulus, and we’d still get X% NGDP growth.
Ryan Avent sums things up nicely:
In other words, I seem to have been wrong about the Fed’s intentions. It has come no closer to effective policymaking at the zero lower bound, and Americans can expect growth between 2% and 3% at best while this regime persists. That is all that the Fed is prepared to engineer or allow.
That’s not to say Ryan endorses my zero fiscal multiplier argument. It’s possible the Fed is willing to allow faster than X% NGDP growth if it can be engineered with conventional monetary policy. But it’s a moot point, as there’s no chance of Congress doing significantly more. And if they did less? Logic dictates we’d still get X% NGDP growth. But as my previous post noted, logic seems to play no role at all in the Alice in Wonderland world of Fed policymaking. So it’s anyone’s guess.
PS. Paul Krugman seems to agree, at least on the question of who’s to blame:
And I blame economists, who were incoherent in our hour of need. . . .
And this is a terrible thing for those who want to think of economics as useful. This kind of situation is what we’re here for. In normal times, when things are going pretty well, the world can function reasonably well without professional economic advice. It’s in times of crisis, when practical experience suddenly proves useless and events are beyond anyone’s normal experience, that we need professors with their models to light the path forward. And when the moment came, we failed.
And here’s one of my favorite John Cochrane quotations:
Some economists tell me, “Yes, all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude. How can a scientist “believe” something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn’t put much weight on such “beliefs,” since they explicitly don’t represent expert scientific inquiry.
We economists know that it’s a bad idea to have monetary policymakers let NGDP grow at the slowest rate since Herbert Hoover was President. But when it came time for us to ask the Fed to address the problem, most of us just shrugged.