I do have two comments. First, I think the Fed still has some ammunition which does not require confidence fairy powder in the cartridge to be fired. I think that the Fed can drive up the price of RMBS buy buying more (on top of those it bought for $1 trillion (note I was careful not to assert that said bonds are worth $1 trillion)). I think this could have an effect on the housing market. I think it’s well worth a try (who cares what I think). So do Joe Gagnon and Paul Krugman (ohhhh that’s different).

The other is on Obama, FDR and fiscal stimulus. They are, as you note, quite different. The reason is that Obama believes in the Keynesian argument for fiscal stimulus and FDR didn’t. He spent money because he saw great need, but he always aimed for budget balance. He cut back spending and raised taxes in 1937 causing the great recession (which is greater than the current so called great recession).

The important difference between now and the FDR administration is that Congress has a completely different composition. FDR had huge gigantic majorities for 6 years. Republicans back then didn’t filibuster everything. Obama had an effective majority for a few months. And that includes Ben Nelson and Joe Lieberman.
Oddly, the only economic policymakers you mention at all are Bernanke and Obama. You don’t mention Congress.

I think it was universally agreed in early 2009 that Obama was much more Keynesian than FDR had ever been.

Since then, Obama hasn’t had anything like the power FDR had from March 1933 (when he took office) until the coalition of Republicans and Southern Democrats won a majority in 1938.

The reason the full-employment mandate doesn’t effectively manage expectations is that it has virtually no value for predicting Fed policy!

The Fed righty thinks it lacks credibility to hit an employment target and plumps for an implicit inflation target instead, effectively ignoring half its mandate. But the Fed does have the tools to hit an NGDP target. One of the biggest advantages of an NGDP target is that hitting it doesn’t require neglecting either half of the dual mandate.

Furthermore, I fear that in your remarks on QE you’re making the mistake of thinking NGDP targeting fails if it doesn’t boost real GDP. It doesn’t. As Steve Randy Waldman has argued (http://www.interfluidity.com/v2/2347.ht ml), it’s a good thing that NGDP targeting ensures recessions will be inflationary.

@mwwaters, you missed the point — if the personal saving rate is down to 4.1%, there is very little potential for further gain in that department. I don’t think anybody has argued that the 1.4% savings rate from 2005 is either desirable or sustainable, and even THAT would add just a few hundred billion to the GDP.

“Think of it this way: what if a company had revenues that were completely flat, or went up 0.01%.”

Or we could imagine a more typical scenario in which a company has revenues that are up ~5% but shareholders who are expecting 8%-12% annual growth.

“In the real world, companies do not lower wages. Instead they lay off a few people and then they have room to give some employees raises.”

Or they lay off a few people, freeze wages for the rest, and generate higher profit margins. If you’ve read any quarterly reports recently, you surely realize that is what is happening right now. Operating margins are increasing faster than top-line growth and have been for a few years now.

There are four ways to increase NGDP:
(1) Increase corporate investment, cutting into that exceptionally healthy cash flow. Of course they have enough excess capacity that they don’t need to hire right now, especially not in the US.

(2) Increase corporate hiring, cutting into those operating margins. Same objection as to #1.

(3) Import less and export more. Requires either a trade war or greater cooperation from China.

(4) Generate sufficient inflation to paper over the real GDP, resulting in falling wages for all but the favored few.

My earlier comments were in response to Ken_G who was arguing an insufficiency of consumer demand. Unfortunately that has grown as far as it can without rising wages.

It doesn’t really matter whether spending reached “new highs.” Spending, i.e. NGDP, reached new highs in 2007. Before that, it reached new highs in 2006. And in 2005. And in 2004. And so on. NGDP doesn’t need to just be at its highest level ever. If it’s not, then that risks deflation. NGDP needs to be growing to sustain full employment.

Think of it this way: what if a company had revenues that were completely flat, or went up 0.01%. If the company wanted to keep the same number of employees, it would have two options:

1. Put a salary freeze on all employees, even for employees who deserve a raise.

2. Give raises for the employees who deserve a raise and lower wages for employees who don’t.

Only giving raises to good employees would lower the company’s margins and it may lose money, so that’s not an option.

In the real world, companies do not lower wages. Instead they lay off a few people and then they have room to give some employees raises. Extrapolate that company’s revenues to the country’s revenues as a whole, then you can see how flat NGDP leads to less than full employment. In areas with less demand, like construction, wages just adjust too slowly to their new market levels.

People think of NGDP targeting as some exotic and economically technical thing, but the example above should make it easy for non-economists to relate NGDP to full employment. Talks of expectations and all that obscures the fact that NGDP is THE issue with regard to full employment and putting NGDP back to growth, through either monetary or fiscal policy, is the only way to return the economy to full employment.

1. The Fed is not credible! They could make all sorts of announcements and buy stuff until those announcements come to fruition, and it wouldn’t matter because only fiscal policy really matters.

2. The Fed will debase the currency by printing money! There will be massive inflation!

It’s particularly frustrating when these arguments are made BY THE SAME PEOPLE. These people complete misunderstand how inflation happens. It doesn’t happen just because a lot more money is printed. It happens when more money is chasing after less goods. And by chasing after less goods, I mean spending money on less goods. In other words, NGDP.

It may be true that, to various extents, inflation anywhere and everywhere is a monetary problem. But it’s a monetary problem only to the extent money is spent. Sumner et. al. are just talking about targeting spending levels vs. average price levels, but either one would be far superior to today’s Fed policy.

Unfortunately that brings us back to the most intractable of our problems — the negative demographics of an aging population. Aren’t going to find a policy solution to that one.

And yes, those dynamics make it difficult to generate inflation.

Spending has picked up recently, reaching new highs. The savings rate is still a bit higher than it was in 2005 (the epicenter of the borrow-and-spend era), but not dramatically so.

This is admittedly a fairly recent change, with annualized personal spending up $500B YOY and the dip in the savings rate most notable in 3Q11.

Still, I think you are overplaying the lack of consumer demand in the equation.

Yes, I believe it ignores the distribution. Still, from a demand perspective it doesn’t much matter how the spending is distributed. The money is being earned (even if it is a bit more concentrated) and it is being spent (even if on fewer people).

“I think it’s more like osmosis, except once it gets to the other side it stays there.”

Sufficient pressure applied to the fluid can reverse osmosis… That may be a more optimistic analogy than a sieve.

Unemployment is higher than it was in 2007, so right away, there are more people who don’t have money to spend. And among those who have remained employed, I think their income has been static, so they will not spend as much. The economy may be as large as it was 4 years ago, but it’s spread over less people.

I would be happy if money were leaking out of the economy like a sieve. I think it’s more like osmosis, except once it gets to the other side it stays there.

And while household income may have dropped a bit (less capital gains contribution than in 2007), I don’t think it has fallen off THAT much.

But corporations are taking a larger piece of the pie than ever before, and are not presently reinvesting those profits. Thus money leaks out of the active economy like a sieve.

But you’re absolutely right – a huge shortfall of demand on the corporate side. Cash is just sitting there, not even earning interest, and with the corporations idling all that cash, the value of their business in the US is declining.

Look, I know politics isn’t your beat, but surely you’ve noticed that the White House has been pushing for fiscal stimulus for a while now (much like FDR did in his day). It passed a huge stimulus bill in ’09, its tax cut compromise contained still more stimulus, it continually tries to negotiate bargains with Republicans that trade short-term stimulus for long-term deficit cuts, and in the last few months it’s started another push for a second large-scale stimulus bill. The relevant difference here is not between Obama and FDR, who both wanted to pursue aggressive fiscal solutions, but between the 72nd Congress, which also wanted to pursue aggressive fiscal solutions, and the 112th Congress, which wants nothing to do with the question.

If you’re going to accuse other bloggers of having unrealistic expectations of the wrong set of economic policymakers, you really ought to be more careful that you yourself aren’t doing the exact same thing in the political sphere.

The shortfall of demand, if any, is on the corporate side.