Bernanke can’t solve our problems
Many thanks to Joe Weisenthal for throwing some much-needed cold water on the NGDP fandom which is currently sweeping the blogosphere.
I’m a fan of NGDP myself; I was one of the 37% of econobloggers who voted for it in the Kauffman survey this quarter. But the fact is that switching to NGDP targeting would be a decidedly marginal move: the Fed is, simply, out of credible ammunition right now. And so Ben Bernanke is being rather sensible when he says that if you want to create jobs, then fiscal policy is going to be a lot more effective than monetary policy.
If you want a good introduction to NGDP, Christy Romer helpfully provided one in the NYT last week. But at heart, the argument seems to go a bit like this:
- The Fed should say that it expects the economy to grow more.
- Then everybody else will expect the economy to grow more.
- Then the economy will grow more!
Ramesh Ponnuru and David Beckworth actually say this, pretty explicitly, when they talk of how “the mere announcement that the Fed will buy assets until nominal spending hits a target, for example, could raise expectations for nominal-spending growth”.
But what’s missing here is the actual mechanism by which the Fed will change expectations about the state of the economy. In the latest issue of the Milken Review, which is stupidly behind a registration wall, Clark Johnson has a 10-page article (idiotically enormous 46MB PDF alert) complaining about how the Fed isn’t doing enough to jumpstart growth. It’s full of stuff like this:
Monetary policy works best by guiding expectations of growth and prices, rather than by just reacting to events by adjusting short-term interest rates… Instead of assuring the market that growth will be restored, the Fed has set interest-rate targets or promised to undertake specific volumes of open-market operations over defined periods. Much more could be done to create the expectation that the liquidity needed to sustain high rates of growth would be provided.
Johnson quotes Lars Svensson, deputy governor of Swedish Riksbank, admiringly:
It is now generally acknowledged that monetary policy works mainly through the private-sector expectations of future interest rates and future inflation that central-bank actions and statements give rise to. Those expectations matter much more than the current interest rate. That is, monetary policy is “the management of expectations.”
Well, OK, it’s hard to oppose managing expectations so that everybody believes that we’re going to have strong growth going forwards. But the Fed already has a full-employment mandate, and it’s clearly failed at that. Simply announcing that you’re working towards some stated end can be a good idea — but only if you can credibly meet that end. And it’s far from clear that the kind of things that Romer and Johnson are talking about — extensions of QE, basically, in one form or another — would suffice to get nominal growth back to where Romer would like to see it.
QE’s been good at goosing markets; it’s been less good at goosing the economy as a whole. And yet the likes of Ryan Avent are seriously disappointed that Bernanke hasn’t done, um, “something”.
Here, then, is Joe:
The biggest problem facing the economy is that the private sector is in too much debt. Americans are trapped in their homes, where they owe huge mortgages, and are generally paying off the big credit boom from the last few decades…
If you can accept that this needs to come down, it seems ludicrous to think that the answer to the debt crisis is: cheaper loans! People don’t want (and can’t utilize) cheaper loans: What people need is more income to pay off this debt.
And there’s a place that more income can come from, and that’s government spending…
The real impediment to wage inflation isn’t that the Fed hasn’t set a big enough number, it’s that we have massive unemployment and excess capacity creating slack in the labor market. Get rid of that slack by putting people to work doing anything, and you start to get the wage firmness (inflation) you desire.
And beyond that, it’s just intuitive. If you take the average person, ask them what will cause them to spend more money: A policy announcement from Bernanke, or the promise of a well-paying job for years to come. The answer is obvious.
Sadly, there’s zero chance of the kind of fiscal stimulus which can actually put millions of unemployed Americans to work. Obama, it turns out, is no FDR. And without strong backing from the White House, the Fed simply doesn’t have the credibility needed to make everybody believe that we’re emerging into a halcyon world of strong growth and high employment. Because, frankly, we’re not. No matter what Bernanke does.