Friday, August 19, 2016

The Krugginator on Summers on John Williams on inflation targeting


Larry Summers - John Williams on the low r*. Quote:

Williams rightly if rather tentatively draws the conclusions that a chronically very low neutral rate has important policy implications. He stresses the desirability of raising r* by pursuing structural policies to raise growth and affirms the importance of fiscal policy. I yield to no one in my enthusiasm for improved education and educational opportunity but I do not think it is plausible that it will change the neutral rate appreciably in the next decade given that the vast majority of the 2030 labor force will be unaffected.

If Williams is overenthusiastic on education, he is under enthusiastic on fiscal stimulus. He fails to emphasize the supply side benefits of infrastructure investment that likely enable debt financed infrastructure investments to pay for themselves as suggested by DeLong and Summers and the IMF. Nor does he note at current interest rates an increase in pay as you go social security could provide households with higher safe returns than private investments. More generous Social Security would likely reduce the saving rate, thereby raising the neutral interest rate with no change in budget deficits. Nor does Williams address the possibility of tax measures such as incremental investment credits or expansions in the EITC financed by tax increases on those with a high propensity to save. The case for fiscal policy changes in the current low r*’environment seems to me overwhelming and much can be accomplished without any increase in deficits.

Won't happen because political economy. And as K-dog points out, economic orthodoxy in general also should take the blame:


The Krugginator - slow learners. Quote:

Yet as Larry says, the paper is still weak and tentative even on monetary policy, to an extent that’s hard to understand:

I am disappointed therefore that Williams is so tentative in his recommendations on monetary policy. I do understand the pressures on those in office to adhere to norms of prudence in what they say. But it has been years since the Fed and the markets have been aligned on the future path of rates or since the Fed’s forecasts of future rates have been even close to right.

Furthermore, there’s basically no break with orthodoxy on fiscal policy, despite the evident importance of the liquidity trap, evidence that multipliers are fairly large, and basically zero real borrowing costs.

Yet Williams is at the cutting edge of policy rethinking at the Fed. And in general mainstream thinking about macroeconomic policy has changed remarkably little, remarkably slowly.

You might say that it is always thus. But, you know, it isn’t.

I fairly often find myself comparing the intellectual response to the financial crisis and its aftermath with the response to the emergence of stagflation in the 1970s. I say the 70s, but really stagflation emerged as an issue in 1974, after the first oil shock, and pretty much ended with the Volcker double-dip recession of 1979-82 – a recession whose end implication was that monetary policy continued to work in a fairly Keynesian way. So it was well under a decade of experience; yet it utterly transformed how everyone talked about macroeconomics.

Then came the 2008 crisis. As I’ve written many times, events since that crisis have played out pretty much the way someone who knew their Hicksian IS-LM would have predicted – but that should have been shocking to the many people, both in policy circles and in the economics profession, who dismissed that kind of economics as worthless, proved false, whatever. And the sheer persistence both of depressed economies and of low inflation/interest rates should by now have led to a big rethinking. Depression economics redux has now gone on as long as stagflation did.

Yet rethinking has been glacial at best. People who warned about the coming inflation in 2009 are warning about the coming inflation in 2016. Orthodox fears of budget deficits still dominate a lot of discourse. And the Fed still clings to an inflation target originally devised in the belief that the kind of thing that has happened to our economy would never happen.

I’m not entirely sure why learning has been so slow this time. Part of it, I suspect, is that the anti-Keynesian backlash of the 1970s had a lot of political power, and behind the scenes a lot of money, behind it – which influenced even academics, whether they realized it or not. And these days that same power and money is deployed against any rethinking.

Whatever the explanation, however, it’s taking a painfully long time for serious policy discussion to arrive at a point that should have been obvious years ago.

Not hard to understand. You've got Krugman, Summers, Stiglitz, and a dozen other leading lights of the economics profession advocating a simple solution to the problem of prolonged economic depression; but all of undergraduate economics seems to be teaching the exact opposite, and most politicians apparently hewing to the kill-all-government line of Murray Rothbard and Ayn Rand.

What do you expect the economic result to be?


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