One thing I tell people who are looking for advice about blogging is that a post should make one point. If you have two points to make, write two posts. I’m about to violate that by pivoting to a point about monetary policy, but that’s by way of saying that if you click on this link I’m about to offer to a post about Scott Sumner you’ll see that it initially is on a totally different point. But I wanted to pull this idea out:
In February I said fiscal stimulus wouldn’t work, as the Fed had some sort of nominal aggregate target in mind, and was going to simply offset the fiscal stimulus. And that is what happened. In March when things looked scary, like a Depression was possible, the Fed announced its big program of buying Treasuries and MBSs. Later in the year when things picked up a bit, and we were clearly going to avoid a depression, the Fed started furiously back-peddling. They started talking about ending the bond buying program and “exit strategies.” Ask yourself this; what does that back and forth behavior tell you? It tells me the Fed has some sort of implicit nominal target, and if the economy seems to fall short they’ll pull out all the stops and flood the economy with liquidity. That’s why the $800 billion dollar fiscal stimulus was a complete waste of money; the Fed wasn’t going to allow NGDP to fall much further than the actual 2.5% it fell. Shame on us for not figuring that out, and shame on the Fed for not explaining that to us.
I think maybe you need an academic’s confidence in his own theories to accept this as a reason to have avoided stimulus back in early 2009. As either a blogger or a policymaker, I’m more comfortable with the idea of joint fiscal and monetary measures to fight a downturn. But the most important point here is that fiscal policy can’t swim against the monetary tide. If the FOMC doesn’t want aggressive stimulus to aggregate demand to fight unemployment, then it just doesn’t happen. Voters hold elected officials responsible for macroeconomic performance, but this is mainly determined by the Fed. And the Fed has given every indication since autumn 2009 or so that it’s very comfortable with a slow recovery.
Note that the labor market revival after the 1982 recession was much more robust than what the Obama administration is forecasting:
A big part of the difference, I take it, is that all during this period in the Reagan years the Fed was pretty aggressive about loosening monetary policy. Paul Volcker decided that he’d succeeded in breaking the back of inflation and it was time to get people back to work. By contrast, today’s FOMC seems to have the mentality that they’ve broken the back of the recession and it’s time to start worrying about the possibility of inflation. The Obama administration’s not blameless in this—they reappointed Bernanke and whipped for his reconfirmation—but now that they’ve done their part, it some ways the forward-looking situation is out of their hands.