Expectations-Management
Paul Krugman has spent a lot of time writing about the desirability of more expansionary fiscal policy, but yesterday he seemed to say that this is a second-best alternative to his real preference of something like a Scott Sumner approach to monetary policy:
The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.
But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).
In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.
But Krugman thinks this isn’t going to happen. He doesn’t focus on this solution because “I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.” Hence, the focus first on expansionary fiscal policy and now increasingly on direct support for employment.
But if this political analysis is correct, then aren’t the monetary authorities going to end up undermining anything that can be done on the fiscal side? You can see how fiscal policy could be effective as an adjunct to monetary efforts, but if fiscal and monetary policymakers try to work at cross-purposes, then my understanding is that monetary policy wins.
34 Responses to “Expectations-Management”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
November 14th, 2009 at 1:19 pm
1) I think the natives are getting restless.
The brainaics here were pooh-poohing the idea of buying gold a month or so — even though it had soared from 300 around 5 years ago to 1050. Since their pooh-poohing, it has gone up another 60. Not in euro terms so much, but in dollar terms.
2) IF you trash your currency enough , it doesn’t matter what the fuck you fiscal or monetary policy becomes. Seen anybody trying to pump up the value of the Zimbabwe dollar lately?
http://en.wikipedia.org/wiki/Zimbabwean_dollar#Money_supply_.282006.E2.80.932008.29
3) My buddy down in Argentina, Ferfal, self-published a book
titled “The Modern Survival Manual: Surviving the Economic Collapse” based on lessons he learned in Buenos Aires since their economic collapse in 2001. It got picked up by Amazon and sales have boomed in the past month.
Someone is getting nervous.
November 14th, 2009 at 1:21 pm
The previous easy money binges created an over built, over leveraged and over priced residential and commercial real estate sector, a bloated financial sector, and consumers drowning in debt. These structural problems aren’t going away anytime soon. Easy money was used too much in the past, and is now like an overused antibiotic that’s lost its effect.
November 14th, 2009 at 1:47 pm
Easy money was used too much in the past, and is now like an overused antibiotic that’s lost its effect.
That’s why his idea is: easy money squared this time. Easy money plus the commitment by the central bank to keep easy money even when inflation kicks in.
…next: dropping billions of hundred dollar bills off helicopters, literally.
November 14th, 2009 at 1:52 pm
Here is a Youtube documentary of Detroit
http://www.youtube.com/watch?v=aOney2b41d4
Maybe you can bring those areas back with an “economic stimulus”. Me, I think those billions in taxpayer subsidies to GM just went down the toilet.
Note the point toward the end: When 60 percent of the population is on the dole –and the other 40 percent is employed working for the city government — then the government HAS to become a voracious predator on any
businessman who is actually turning a profit.
That is the only way that the government officials can stave off the Day of Reckoning for their past incompetence. But it means any economic rebirth is smothered in the crib.
Read the old Roman histories of the Empire’s collapse — of the predatory “Tax Farmers”.
November 14th, 2009 at 1:52 pm
then aren’t the monetary authorities going to end up undermining anything that can be done on the fiscal side?
Yes, and the Austrians do have a point, reversing deflationary expectations while keeping asset values up is really really hard. I don’t think even hyperinflation would do it, since it would be assumed to be temporary. FDR couldn’t do it without WWII.
This is why it was so important not to fall into this trap, and why a generation of economists should be
taken out and shotdeeply ashamed of themselves.We are not at the social bottom yet. There may be war.
November 14th, 2009 at 1:54 pm
Did anybody ask Bernanke what happens when the bales of money become too huge and heavy for the helicopters to lift?
Oh — and what do you use to fuel and maintain the helicopters?
November 14th, 2009 at 1:55 pm
No Matt, there’s a difference between committing to an inflation policy and being believed and allowing an inflationary policy to occur. Krugman’s point is the Fed is unable to convince anyone that it would allow inflation to occur and so expectations are low. He’s assuming that the Fed isn’t trying to actually curtail inflation.
November 14th, 2009 at 2:02 pm
What Bernanke has so far avoided, but likely should have happened to reflect real conditions, is the Dow (and other indices etc) dropping to 1000 and staying there for a decade.
But that would mean the pensions and insurance companies would collapse, which would mean the Fed Gov’t would have to cover that role, which would mean Federal spending at like 60% of GDP for a decade and the Eisenhower tax schedule to pay for it.
Damn right the Villager will do anything to avoid that.
They are going to try and get the workers, the bottom 95% of America to sacrifice about a third of their real wages for a generation instead. But the Neo-Classical New Keynesian fools really believe the economy runs on FIRE, and do not understand effective demand. They will fail.
And then the deluge.
November 14th, 2009 at 2:11 pm
Don Williams cannot tell the difference between (i)a well thought out short to medium term expanded inflationary target to break out of a liquidity trap and (ii)a Zimbabwe style inflationary collapse as a result of total monetary incompetence and profligacy. Don Williams‘ folk wisdom and gold-buggery are, while amusing, not helpful. Don Williams will kindly STFU and lurk moar.
November 14th, 2009 at 2:31 pm
Re Shmoe, what I CAN do is tell the difference between opening up the US Treasury to pay off Goldman Sachs gambling debts –plus billions for bonuses — instead of INVESTING the taxpayers money into REAL fucking businesses that create TANGIBLE products that create real wealth and income.
Bill Clinton was an asshole in many ways, but he at least invested in general deployment of the Internet as an engine for economic growth in the 1990s.
OBAMA –contrary to my advice in Sept 2008 — has invested in NOTHING. Except spending on a military industrial complex that already consumes more than the other military powers of the world COMBINED.
November 14th, 2009 at 2:35 pm
What creates inflation –and ultimately hyperinflation — is when you print money without producing any products to back it.
Whatever value the dollar has is due to the industry of America — and Obama seems intent on running that REAL industry into the ground just as George W Bush did.
November 14th, 2009 at 3:14 pm
1) Since Matthew seems to be lost in the same fantastical story-telling world that Glenn Beck inhabits, Let me see if I can introduce some Reality.
2) Corporations can increase profits in a short term by laying off workers — although that reduces total corporate revenue in the slightly longer term as laid off workers can’t buy shit.
3) A better picture is to look at Corporate REVENUES. So what is happening, one year into the Obama Administration?
From http://finance.yahoo.com/news/Earnings-growth-elusive-but-cbsmtop-3787446949.html?x=0&.v=1
“Revenues are on track to fall 10.2% in the September quarter for companies in the S&P 500 , says Thomson. That figure includes analysts’ estimates as well sales results from the 463 companies in the S&P 500 that have already reported.
Profits, while still declining, have improved thanks to cost-cutting and the absence of big that losses occurred a year-ago, when the collapse of Lehman Brothers marked a sudden turn for the worse in the 2008 financial crisis
Operating profits are on track to fall 13.8%, the best performance since the third quarter of 2007, and representing a shallower decline than the 25% drop anticipated Oct. 1.
NOTE!!!!>>> Excluding the rise in financials’ profits, which more than doubled from the year-ago quarter, quarterly operating profits would be on track to fall nearly 20%, says Thomson. ”
———
4) So even after running up $TRILLIONS on the taxpayers credit card — and throwing the fucking money on the fire to offset the chill hitting US Business — we are still sliding down the toilet bowl.
November 14th, 2009 at 3:14 pm
That was a bold post!
November 14th, 2009 at 3:16 pm
But Goldman Sachs seems to be doing good.
November 14th, 2009 at 3:27 pm
To Don Williams:
Your response, like all your comments to this post thus far, is missing the point of the post.
First, we are currently in a deflationary period, so inflationary policies are, in the short term, a good thing. The fact that real interest rates are as high as they are is one of the reasons that “REAL industry”, with it’s accompanying jobs and real products, is still in trouble. The policy Krugman proposes, and that MattY is commenting on, is aimed at dealing with this very problem. Whatever it is you’re blathering about, has nothing to do with it.
Outrage at Wall St. and the no-strings bailout are fully justified. However, punishing evildoers and preventing future crises through re-regulation, while being good and important things, will not end the current recession.
November 14th, 2009 at 3:27 pm
1) I know — let’s check in with Bernanke and see how those Helicopter flights are doing:
“November 11, 2009
Unemployment likely will remain high for the next several years because the economic recovery won’t be strong enough to spur robust hiring, a Federal Reserve official warns. Separate reports say job openings are at rock-bottom levels, a trend that could keep the unemployment rate high even as layoffs slow.”
http://www.npr.org/templates/story/story.php?storyId=120303722&ft=1&f=1006
2) Of course, Matthew averting his eyes from the plight of the unemployed is how he avoids joining their ranks. One of the things they teach you at Harvard.
Because Goldman Sachs wasn’t the only one who got bailed out by Bernanke and Geither. Harvard’s endowment could really have taken it in the shorts. Why may explain why Harvard and other univerisities with huge endowments were throwing as much money into Obama’s campaign as Goldman Sachs.
November 14th, 2009 at 3:35 pm
What are we to glean from MattY sudden new boldness?
November 14th, 2009 at 3:41 pm
Re Shmoe at 15: “First, we are currently in a deflationary period, so inflationary policies are, in the short term, a good thing. The fact that real interest rates are as high as they are is one of the reasons that “REAL industry”, with it’s accompanying jobs and real products, is still in trouble. The policy Krugman proposes, and that MattY is commenting on, is aimed at dealing with this very problem.”
—————
There is a difference between deflation and a contracting economy — although they are obviously related. Deflation is a monetary effect — a contraction is when investors don’t see any PROFITABLE opportunities to invest in.
And inflation may not REDUCE real interest rates — it may raise them for a while as investors preempt with an inflation premium.
And while inflation does prod investors to pull the money out of the mattress (i.e low yield Treasuries), they don’t necessarily invest in the US economy. They may invest in CHina, in Gold, in the Euro or in depressed farmland.
You don’t encourage investment and economic expansion by adding the uncertainty of higher inflation — ask Jimmy Carter.
Matthew is saying fiscal policy is subordinate to monetary policy. I’m saying monetary policy is subordinate in turn to industrial policy.
Economists put out a bunch of bullshit mumbo jumbo because they don’t have to actually earn a profit.
(Well, they do — it is earning grants by promoting bullshit that someone with money finds useful.)
November 14th, 2009 at 3:45 pm
And whY does everyone just speak of fiscal policy and monetary policy? What about TAX policy? The kind that has encouraged our Plutocrats to close US factories and move capital to China.
How about encouraging America’s billionaires to invest in jobs in America instead of China — by ass-raping them if they don’t?
November 14th, 2009 at 3:55 pm
One of the best investments is in advanced education.
But why the fuck should some bright, 18 year old invest $200,000 -and bust his ass for 4 years – getting a degree in Engineering or Physics if the Obama Economy is going to drop him into a job selling cellphones at Radio Shack on graduation?
November 14th, 2009 at 4:11 pm
If there was nothing off the shores of America then perhaps this stuff about fostering domestic inflation of goods, services and wages by fiscal means might make sense. However since we are dealing with the entire globe there are about a million ‘on the other hands’ that render the entire thing a silly economic thought experiment.
Fiscal policy isn’t going to bring general inflation to the US economy because there isn’t enough possible money to significantly impact global demand. Global GDP is around $60 trillion so if we boost deficit spending from the near $2 trillion currently to $4 trillion that would increase global demand for everything (all things being equal, that terrible economic qualifier, made necessary by the fact that the money has to be borrowed and thus may be stealing demand from some other place) 3%. A 3% global increase of demand for stuff and services, not assets, isn’t going to cause general inflation.
Besides the fact that any dozen people who think about macro economics would have a dozen different definitions, theoretical or functional, of inflation.
MY’s thinking I presume is founded upon the idea that there is some policy solution that will eliminate or significantly mitigate the income and asset deflation affecting the majority of Americans. Some calculus, some combination of fiscal and monetary means to make things as they were. If I may be so bold let me suggest that what was normal over the last 10, 20, or 30 years contained an ever growing amount of market distortion, dysfunction, mal adustment, and malinvestment that lead to the partial collapse of that order. Using the ideas and tools that got us here is not going to fix things.
November 14th, 2009 at 4:15 pm
Don Williams:
I don’t recall anyone here calling for an end to fiscal expansion, or against job creation and retention measures. Monetary expansion and a weaker dollar will stimulate more production in the US and exports out, not less.
But I have to hand it to you, you’ve actually managed to make a tenuous connection between your ravings and the subject at hand. Now, if only it made sense. Monetary policy is subordinate to Ben Bernanke, that’s it, for better or worse. By the way, this is not a ’70s style recession.
Furthermore, all that “bullshit mumbo jumbo” helped end the Great Depression. And the cherry on top is this: when it comes to economics, I’ll take the advice of an economist, even a bad economist, over the that of the village lunatic any day. Lurk moar!
November 14th, 2009 at 4:48 pm
Don Williams: “One of the best investments is in advanced education.”
This is like offering a drowning man swimming lesson. Or, better yet, telling a drowning man to buy gold. It is, once again unrelated to the subject at hand. You seem not to be aware of a concept called time. Lurk moar!
November 14th, 2009 at 5:43 pm
There are no green shoots, Matt. Instead what we have is a grotesque black forest spreading out across the land, consuming everything.
We are powerless to stop this process. The nation will to have to plunge deeper into darkness, much deeper than we’ve ever gone, before we take action.
Perhaps in a few years conditions will be right for us to take up the challenge, perform as a cohesive nation-state and attempt, with effort that strains us to breaking point, to cut the forest down, destroy its roots, and begin anew.
I think Krugman has made a powerful admission; the delicate instruments beloved by the economist must soon and ineluctably give way -to the axe.
November 14th, 2009 at 6:12 pm
Re Shmoe at 22: “Furthermore, all that “bullshit mumbo jumbo” helped end the Great Depression. ”
Horseshit to the 10th power. The stupidfuck economists and their advice to the FED bought on the First Great Depression (google Roaring Twenties) and it is bringing on the Second Great Depression.
What ended the First Great Depression was the rest of the Industrial World cutting off its own dick: Germany. France. Japan. Great Britain. Russia. All a pile of ashes. Leaving us with a monopoly –and nothing encourages investment like monopoly.
Economists are dumbfucks who pretend that their mythology can cover up the fact that they don’t know jackshit about 70 percent of what is really going on.
That is how High Poobah Alan Greenspan could assure the Joint Economic Committee of Congress in 2005 that the worst of the real estate problems was behind us –while Goldman Sachs was selling our pension funds AAA rated securities based on mortgage payments to be made by a bunch of fucking meth addicts in Florida with no known source of income.
Shmoe must be one of the last dumbshits in America that will still defend the Economics profession at this late date. Not even the moronic Economists are stupid enough to do that.
November 14th, 2009 at 6:19 pm
Re Shmoe at 23: “This is like offering a drowning man swimming lesson. ”
More like a quick and dirty drownproofing lesson –which is simple, works, and is a lot fucking better than swimming.
Whereas Shmoe prefers to tie a lead anchor labelled TARP around the poor fucker’s neck.
How is dumping $2 Trillion in debt onto poor people — and then pissing the money away in mal-consumption — supposed to help them?
We need to take a page from the fucking Commies in China and send our goddammed intelligensia to Reeducation Camps. Let the motherfuckers dig in the fucking fields on 10 hour work days until they learn what honest men have to do to ensure we eat.
November 14th, 2009 at 6:34 pm
I see, all economists are the same to you. Instead of actually analyzing and weighing the various, conflicting ideas that they present, you simply decide that they must all be evil witch-doctors. Then, dutiful peasant that you are, you run for the pitchfork and torches. You have a lazy and fevered mind.
Krugman is a Neo-Keynesian, Keynesian economics helped end the Great Depression; and certainly didn’t cause it. It also oversaw the greatest economic expansion in history, known as post-fucking-war America! If you don’t know the difference between the Keynesians and the Classicists you really shouldn’t be talking about Macro- with the authority that you have been. Come back when you learn a little history. In the mean time, why don’t you make yourself useful, and go troll McMegan’s blog? Otherwise, lurk moar!
November 14th, 2009 at 6:59 pm
kafka
I’d say the main reason the finical industry got “overleveraged” and got into this mess was because of deregulation.
Deregulators removed capital requirements, oversight/regulations on accounting rules, derivatives pricing rules, restrictions on using real estate as an endless line of consumer credit, regulations that prevented “to big to fail institutions” from being created, and regulations that prevented banks from packaging loans and selling them off in huge numbers.
These regulations were installed after the Great Depression to prevent these things from happening; it is a shame that Conservatives ignored that and made us go through it all again.
Also the other main reason consumers are burdened with such a large amounts of debt is because real median wages haven’t grown in 30 years, partly due to Republican economic policy.
November 14th, 2009 at 7:37 pm
Don williams
The same things that caused this recession were causes of the Great Depression. The FED didn’t cause it, they just didn’t do anything to stop it; unlike the current recession were they did. The Great Depression (for America) ended in 1934-1935. How ww2 managed to end a recession that ended 7 years prior is beyond me.
1) The dollar isn’t in any type of free fall. In fact for the past year it’s overall been on the rise.
http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd.en.html
America should be “trashing” it’s currency, it has been apparent since 2000 that the world is not going to let the dollar keep being the world currency. We should make use of our special position while we still have it.
2) Don’t tell us what the government “will do”, and “has to do”; I have little faith in your ability to play God.
3) A part of the reason the economy is doing bad is because there is a lack of demand. The economy is 65% capacity. A large swath of the economy is current idle because there is no reason to produce something when no one has the money to buy it. To my knowledge one of the best ways to do this is to flood the market with consumer vouchers. And have the government finice infrastructure projects(things that need to be build).
4) You say Obama has invested in nothing; how’d you miss the whole stimulus discussion? Also contrary to what you say Obama’s budget proposal asked for a 0% increase in military spending.
5) We’re in deflation, printing money is what should be done. The only way for the production of goods to increase is for demand to skyrocket and soak up all the excess idle capital.
6) No one should complain much about the current economic environment, the first year of this recession was worse then the great depression, indicators were worse then the great depression; we should all be glad the economy didn’t implode into the 30’s. Yes it could be better, but I so far like the results better then the last results.
7) I asked Jimmy Carter and he told me how economic growth under him was equal to that under Reagan even as Carter had to deal with a oil shock that was completely out of his control, and even as Carter did borrow trillions.
Expectations of high inflation can be good in that companies will want to ramp up production because the price of the goods they produce is going to increase.
November 14th, 2009 at 7:53 pm
Tokafka:
Everything you say is true, and fixing the broken system is very important for our long term health. But, the solutions to current situation, particularly real output and employment, will probably seem counter-intuitive when thinking about long term stability.
This proposal is a near-term solution, that is not to say that we can’t re-regulate finance, start to enforce labor laws again, and rebuild our social safety net at the same time. Heck, we could even institute a carbon tax/tariff. We could do it all, and it would probably work, too.
Yep, we could do it…if we wanted to. Unfortunately, our political system is not built for proactivity; it’s mostly designed to ensure that people like Don Williams don’t get their hands on high explosives. You just have to take the good with the bad, I guess.
November 14th, 2009 at 9:58 pm
Re Shmoe at 30: “Unfortunately, our political system is not built for proactivity; it’s mostly designed to ensure that people like Don Williams don’t get their hands on high explosives. ”
Ah, YET ANOTHER Thing it has failed at. hee hee
http://onlinebooks.110mb.com/tm%2031-210/31-210-contents.htm
Re the differences in Economists, I really admired how Democratic Economist Larry SUmmers stood up to that crazy scheme that Republican Economist Phil Graham had in 1998 to deregulate the financial industry.
Oh, wait..
November 14th, 2009 at 10:17 pm
Oh, sweet Jesus-rollerblading-Christ, he’s armed! Isn’t it passed “lights out” time there at the squirrel farm; come to think of it, I’m rather surprised they let you the use the internet at all. So, Donnie, back to your room for another evening of reading Gun n’ Ammo while masturbating in your own feces.
November 14th, 2009 at 11:31 pm
Ah, Shmoe, you don’t understand.
The above document comes to you courtesy of the US Army. Something they ginned up during the Cold War to train terror..er, Freedom Fighters.
I can’t imagine why they would put it on the Internet — well, except to see who comes to read it and to record the IP addresses of same. In which case, you are now in about 3 or 4 “special” databases.
Let me know how that works out the next time you take an airline flight.
From what I hear, those big , burly TSA guys with the yellow KitchAid gloves get bored and lonely and are always looking to make new friends.
November 15th, 2009 at 3:51 pm
“But if this political analysis is correct, then aren’t the monetary authorities going to end up undermining anything that can be done on the fiscal side?”
No. For the monetary authority to undermine fiscal policy, it would have to raise safe short term interest rates above roughly zero. Raising interest rates during a recession would be an extreme act. The Fed certainly isn’t going to do that.
It is very possible (as in almost certain) that monetary policy will remain stuck at very low interest rates now and no credible commitment to causing inflation when the economy is out of the liquidity trap. At the zero bound, monetary policy isn’t a continuous variable.
I mean note no evidence of the Fed leaning against the stimulus.