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James Bullard Should Act Right Now

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"James Bullard Should Act Right Now"

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I think Scott Sumner needs to master the art of the short blog post because this one really buries the lead. He pulls up a very strange remark that James Bullard apparently made to Neil Irwin:

“If the economic situation changes, policy should react,” James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. “You shouldn’t sit on your hands. . . . I think there’s plenty more we could do if we had to.

If there’s plenty more the Fed could do if it had to, then there’s plenty more the Fed could do if it wanted to. So why doesn’t it want to? Sumner:

The executive and legislative branches are literally pulling out their hair trying to think of stimulus packages that won’t blow up the deficit. And here is Bullard basically saying, “Yeah, we could do “plenty” more to boosting AD without increasing the deficit by one cent, but we don’t want to. How did the world’s greatest power get into a position where there appeared to be an easy way out of 9.5% unemployment, but we weren’t doing it solely because of an independent central bank? And don’t tell me there are other reasons why AD might not solve our problems. That’s not what I said. I said Congress and the president think more AD would solve our problems. If they could boost AD without increasing the deficit they would dso so in a heartbeat. The US isn’t refraining from additional stimulus because Obama, Reid and Pelosi are sudden converts to freshwater economics, we are refraining from boosting AD because they do not control the only policy tool that is able to do so without blowing up the deficit.

This relates to something I tried to say at the Hewlitt Foundation about the dangers of unduly narrow political advocacy (I’m afraid I’m not a very good public speaker and don’t always convey my points clearly). Nobody funds monetary policy advocacy. And yet the intersection between macroeconomic performance and the policy preferences of powerful politicians is the primary driver of federal policy. Had the Fed been doing more to boost AD, climate legislation would have better prospects. Had the Fed been doing more to boost AD, immigration reform legislation would have better prospects. Had the Fed been doing more to boost AD, the South Korea trade agreement would have better prospects. Had the Fed been doing more to boost AD, education reform would have better prospects. Basically everything the Obama administration supports would be more likely to happen if Obama had spent the past six months presiding over rapid “catch-up” growth rather than labor market stagnation. But even though lots of people are working on climate and immigration and education and all the rest, almost nobody is working on the key issue driving the whole situation.

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