You React to an Underreaction by Doing More

Ryan Avent offers a more substantive response to the realization of how wildly overoptimistic the Fed’s projections were two years ago:

At the time the Obama administration was putting together its stimulus package, the nation’s top economic forecasters were predicting that things would be much better than they turned out to be. Perhaps more important, it should be abundantly clear that Fed policy from the summer of 2008 through early 2009 was far too tight. The Fed was attacking a downturn far less severe than the one actually afflicting the American economy. This is troubling.

Forecasts go wrong. Everyone knows that. But the Fed did forecast a downturn. And it saw monetary expansion as the correct response to that downturn. And the Obama administration and Congress saw a downturn, and they saw fiscal expansion as the correct response to that downturn. But the downturn turned out to be much more severe than they projected. So logically the response should be to shift to much more aggressive monetary and fiscal expansion. If you think you’re going to need to plant some basil in your garden, you bring a spade. If it turns out you’re actually supposed to plant a giant tree, then you go back and get a shovel.

But in this case an excessive reluctance to admit that the initial policy response was based on mistaken analysis of the extent of the problem seems to be hampering discussion and distorting the contours of public debate.