Thursday, June 2, 2011

Robert Lucas Believes in Spending Shocks

Robert Lucas has been taking some heat around the blogosphere for a lecture he gave at the University of Washington.  Scott Sumner responds:
In a recent talk, Robert Lucas argued that a decline in “spending” (i.e. NGDP) produced the severe contractions of 1929-33 and 2008-09.  He argued that the slow recoveries were caused by adverse supply-side polices.  This is not “classical” or RBC economics, it’s AS/AD.   I think he’s right about the the Great Depression and the recent contraction, but only about 30% right about the current recovery (I attribute 70% of the slow recovery to lack of NGDP growth.)  Oddly, Paul Krugman and Matt Yglesias seem to think that Lucas denies that demand shocks cause recessions–which is clearly not Lucas’s view.
Let me add to this discussion by noting that recently I met Robert Lucas at a conference.  We started talking and, among other things, he expressed his support for nominal GDP targeting because it would have given the Fed more flexibility in responding to the severe spending shocks.  That is, it would have allowed the Fed to have been more aggressive with monetary policy while still being systematic.  He was also sympathetic to my view that currently there was too much concern about inflation.  At a conference dominated by inflation hawks, I found him to be a refreshing breath of fresh air.  

PS.  We also talked about his former student Scott Sumner and Sumner's proposal for NGDP futures targeting.  He was intrigued by it and compared it to Lars Svensson's work on targeting the forecast.


  1. Not much to disagree with there - but 30%-70% - where does that come from? Is there a quantitative model that delivers that...or is just plucking numbers from a body part that can't be mentioned on this family-friendly blog? Show me the quantitative model!

  2. “it would have allowed the Fed to have been more aggressive with monetary policy..” I am baffled as to how the Fed could have been significantly more aggressive. Yet more QE? About the only effect of the INITIAL bouts of QE were to boost asset prices. More QE would have zero effect.

    The Fed could have implemented its not very effective “zero interest rate plus QE” policy earlier. My hunch is that that would have been not much more effective. In other words I’m saying that monetary policy can probably deal with mild recessions, but for serious recessions some fiscal help is needed.

  3. Ralph
    One major problem is the fact that everyone (Fed included) gave up on MP early on. Now fiscal policy has done its damage and now MP (which is still tight) is seen as "stocking the inflation fires".
    I thought Lucas presentation was mostly about the supply side...