Pushback

Despite my enthusiasm about what today's employment report means, Josh Barro says it does not vindicate the Market Monetarist's view.  Moreover, he believes we probably should not expect our view to ever be fully vindicated for political economy reasons:

Market monetarism, as advanced by [Ramesh] Ponnuru and the economist David Beckworth, among others, holds that aggressive monetary policy is a sufficient force to smooth out business cycles.And over the last year we’ve just had a mini-experiment along these lines. Congress and the president have imposed fiscal tightening by raising taxes and allowing sequestration’s haphazard spending cuts to come into effect. And the Federal Reserve has (with occasional tentativeness) gotten more aggressive in its easing, setting a specific target for unemployment and running an open-ended program of asset purchases since the fall.

The results so far are good but not great. Job growth is steady and economic growth is modest but positive. Sequestration’s human impacts are real, but a macroeconomic drag is not yet apparent. This looks a lot better than Europe, where the central bank hasn’t been so aggressive and many economies have slid back into recession. Yet we should worry about the limits of the market monetarist approach. Monetary and fiscal policy are both constrained by political forces, not just economic ones.

The political economy critique is a fair point. I remain optimistic, though, that QE3 will evolve to some kind of conditional monthly asset purchasing program where the Fed changes the size of the asset purchases to match economic developments. And once that happens we are well on the way to a nominal GDP level target.

Mike Konczal, meanwhile, pushes back on my response to his post that the Fed needs to adjust its pressure on the gas pedal:

We don’t often get a serious shift in expectations. That’s why I’m not sure how much the “gas pedal” from David Beckworth’s response is at play. Beckworth notes that the purchases in QE3 don’t automatically react to turbulence in the economy, and hopes that the Federal Reserve will buy more if the economy gets weaker. But if the expectations of where the Fed wants to end up are the real limiting factor for a robust recovery, why would a small change in purchases matter? This is partially why Greg Ip said the FOMC statement this week was “asymmetric,” even though the Fed said it might “increase or reduce” purchases: an increase is a small move, but a reduction is a genuine retrenchment.

If the public understood that the dollar size of the Fed's asset purchases were also conditional, then Fed policy should have a more meaningful effect on expectations. We may never know, however, if Josh Barro is correct about the political economy limits of monetary  policy.