Thursday, March 19, 2015

Ramesh Ponnuru on the 'test' of Market Monetarism

Ramesh Ponnuru has an article in the National Review where he revisits the 'test' of Market Monetarism put forth by Paul Krugman and Mike Konczal in 2013. Here is Ramesh:

The story begins in late 2012. The Federal Reserve had begun its third round of monetary expansion following the economic crisis of 2008. Keynesian economists were sounding an alarm about the deficit-cutting measures — a combination of tax increases and spending cuts — that were scheduled to take effect at the start of 2013. Rapid deficit reduction, they warned, would harm the economy. A letter from 350 economists referred to “automatic ‘sequestration’ spending cuts everyone agrees should be stopped to prevent a double-dip recession.”
It is worth  noting that these concerns about a double-dip recession were translated into explicit forecasts about the number of jobs that would be lost. Estimates ranged from 660,000 to 1,800,000 jobs would be lost as can be seen be below:

Estimate of Sequester Impact on Employment
Promoted by
Congressional Budget Office
750,000 to 1,600,000 jobs lost
Here and here
Macroeconomic Advisers
700,000 jobs lost
Bipartisian Policy Center
1,000,000 jobs lost
1,800,000 jobs lost
Economic Policy Institute
660,000 jobs lost

Now back to Ramesh:
David Beckworth, a professor of economics now at Western Kentucky University, and I challenged this view. In an op-ed for The Atlantic’s website, we wrote that the Federal Reserve could offset any negative effect that deficit reduction might have on the economy.


In April, the liberal economics writer Mike Konczal resurrected an op-ed that Beckworth and I had written for The New Republic in 2011 making the same basic argument about the power of monetary policy, which is associated with a school of thought sometimes called “market monetarism.” He wrote: “We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments — specifically, an experiment to try and do exactly what Beckworth and Ponnuru proposed... Krugman concurred with Konczal, writing that “we are in effect getting a test of the market monetarist view right now” and “the results aren’t looking good for the monetarists.”

Read the rest to learn how the 'test' turned out.  Here is my own take on how the test turned out.


  1. I ususally agree with Konczal and Krugman but sympathize with the market monetarists. Didn't Obama and the Republicans reach a deal so the economy didn't bear the full brunt of the sequester and fiscal cliff? In his column, Krugman links to the Macroadvisers estimate of 700,000 job lost. Were their numbers based on the deal?

    Also, in that column Krugman quotes Yellen:

    "And, as Janet Yellen, the vice chairwoman of the Federal Reserve, recently emphasized, one main reason for the sluggish recovery is that government spending has been far weaker in this business cycle than in the past. We should be spending more, not less, until we’re close to full employment; the sequester is exactly what the doctor didn’t order."

    The Fed could do more, but politically they'd like help so they don't seem to be doing too much. The more they do, the more the rightwing threatens their independence with audits, etc.

  2. Are you sure the 700,000 jobs lost estimate is at all inaccurate? in 2013 the economy added around 2.4m jobs, in 2014 it added about 3m.

    The fiscal drag was still there into 2014 but mostly running off, it was highest in 2013. I think there is a strong case to be made that in the absence of the fiscal drag 2013 could have had 3m jobs added and without the residual drag in the first half of the year 2014 could have been at 3.2m (say).

    That would be consistent with roughly 700,000 jobs being lost to the sequester.

    1. That's a fair point. One could argue the job growth would have been even higher absent the sequester. I don't know for sure, though, if the forecasters had this relative loss in mind or an absolute loss. It does seem, though, that many of the folks promoting the numbers at the time made it seem like these would be absolute job losses.

      But let's say you are right and that job growth would have been higher and thus the economy would heated up faster. What would the Fed have done then? Would it have pulled back on easing even sooner?