Tuesday, May 14, 2013

The Data Have a Market Monetarist's Bias

It almost seems unfair, as if the evidence is biased toward Market Monetarist's views. First it was the better-than-expected employment report last week and now it is the forecast-beating retail sales report. These developments should not be happening, especially now with sequestration, if the fiscal multiplier were large. But they are happening and underscore the case that the monetary policy can offset the drag of fiscal austerity.

This latest evidence for the Sumner Critique--the understanding that fiscal multiplier will be effectively zero when the central bank is stabilizing aggregate demand--should not be surprising since the Fed has been offsetting structural austerity since 2010, a fact lost on many Keynesian-minded folks. This post-2010 period is one of the great macroeconomic natural experiments now unfolding, pitting U.S. monetary policy against U.S. fiscal policy.1

This multi-year natural experiment has not be lost on all observers. Jeff Spross of Think Progress takes note of it:
It hasn’t really made the front pages, but the United States recently began carrying out a massive and nearly unprecedented economic experiment, and 2013 looks to be the year when the results come in. The question is straightforward: When the economy is in a deep slump, and the government makes things worse by cutting spending, how much can monetary policy do to help? The answer could reshape the way we argue about economic policy, with profound implications for progressives’ economic priorities — and big opportunities, if they can seize them.

So far, progressives have tended to side with economists like Paul Krugman and bloggers like Mike Konczal. They argue that monetary policy is severely weakened at the zero lower bound...
But economists like David Beckworth and Scott Sumner countered that the economy’s 2.5 percent growth rate stuck around despite blows from multiple rounds of spending cuts, the European crisis, and worries about China. In fact, as Beckworth pointed out, government spending began shrinking by the start of 2010 — yet the economy just kept puttering along at 2.5 percent.

Other points in Beckworth and Sumner’s favor: Before sequestration, the latest round of across-the-board spending cuts, began, the group Macroeconomic Advisors projected growth for the first quarter below 2.5 percent if sequestration didn’t happen. Then the May 3 jobs report, which came out after Konczal’s piece, was so good it was almost shocking. Matt Yglesias and Ryan Avent, two other fans of monetary policy’s salutary effects, pointed to other data sources that suggest the Fed actually has been able to raise long-term inflation expectations. So this looks like at least a preliminary win for team monetary policy.
In my view, the most important insight from this "radical experiment" is not that monetary policy can effectively make the fiscal multiplier zero, but that it could be doing far more to shore up aggregate demand. The fact that the Fed has successfully offset structural fiscal austerity since 2010--as seen by the stable NGDP growth--suggest it could do far more. The Fed has made big strides with QE3, but has yet to unload both barrels of guns. It is time for a NGDP level target.

1  The other, great macroeconomic experiment now unfolding is Abenomics in Japan.


  1. Oh! If only Bernake looked at history...

  2. I wonder why you look to monetary policy as the only source of liquidity to increase demand. High-end income was taken at the end of 2012 because of imminent tax changes. That created a huge surge of labor liquidity that has been flowing through the economy. How can you not see it?

    Lumber prices reached bubble levels. Stocks began to shoot up. Do you attribute those to monetary policy? Did you notice that the stock market rose to a new high today on the back of "financial" stocks? What does that tell you?
    The surge, even with its own multiplier, will fade out. Financial stocks are not solid productive growth. Capacity utilization is expected to tick back down in April. I foresee the upticks to stabilize back after the income surge makes it way through.
    Monetary policy has no mechanism to increase labor income, which keeps falling. It took a tax change for labor income to increase at the end of 2012. But it is only temporary. Labor share has fallen back down.

    As for Abenomics... Here is an excerpt from a Bloomberg article 4 hours ago.
    "Let's start with the obvious: Wages, prices, retail sales and industrial production are all flat or falling."

    Show me an experiment where labor share is rising. Scott Sumner brought up Germany.

    1. "Show me an experiment where labor share is rising. Scott Sumner brought up Germany."

      Hah, Germany! You mean the country with real strong labor unions?

      The monetarists are not interested in labor share rising.... thats not their goal

  3. Great blogging.

    Oh, check first sentence "as if the evidenced", drop the "d."

    Okay, we Market Monetarists are right.

    Now, can we convince the Fed? The ECB?

    And what is next step? Should QE become long-term? Should the Fed become part of the Treasury (Krugman alludes to this, inadvertently, in recent post).

    Does anyone expect Japan to be rip-roaring in two years? Or should they continue with QE after that?

    Should we just hang it out and say we like monetizing federal debt, na-na-na-na-na?

    It may be time to utter the heresy: Yes, we need to monetize debt, and for a long time. And it will make life easier, and pay down debts and stimulate the economy.

    No, the Austrians will not like it---another reason to go ahead.

  4. Greg,
    You imply that market monetarists don't give a #*&% about the little guy. Losing economic access is not an option, not for anyone.

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