Bryan Caplan  

The Sumnerian Missionary

The Economy the American Curri... Monetary Policy: Giving and Bu...
Scott Sumner's written an impressive open letter to conservatives on quantitative easing.  The conclusion is particularly good:
I don't think conservatives realized it at the time, but I (and a few other quasi-monetarists) had the strongest argument against fiscal stimulus in late 2008 and early 2009.  We said; "Yes, stimulus is needed, but monetary stimulus is much more effective and less costly than deficit spending."  At the time, most on the left argued that monetary stimulus wouldn't work if rates were near zero.  Well rates are still near zero, and many of those same liberals are now insisting that the Fed is responsible for fixing the AD shortfall.  They've come over to our side.
My main quibble: I suspect that top-tier liberal economists favored fiscal stimulus because they saw a golden opportunity to push big government, not because they saw a technical problem with monetary policy.  Uncharitable I know, but I see no other way to explain their sudden change of heart.

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COMMENTS (19 to date)
Daniel Kuehn writes:

Bryan - could you provide your reasons for thinking that was their real reason for favoring it? It's not just uncharitable - it seems wildly unfounded.

My impression is that liberals haven't come over to Sumner's side analytically - they've come over strategically. I'm guessing the same reservations hold on monetary policy at a time like this (I'm certainly still hesitant), but given the paucity of the initial fiscal response and the absolute hopelessness of any more fiscal responses, what else is there to do but hope for monetary policy that is enough to make a difference.

I don't think liberal economists were ever against monetary policy at any point - they just suggested it was a second-best solution.

RGV writes:

Nope. They (liberal economists) didn't think that the Fed would budge until push comes to shove. And push has come to shove.

mlb writes:

Through the warped lens of aggregate demand perhaps monetary policy makes sense. But lets really think about what that really means. In order to raise aggregate demand you end up making the rich richer via the "low rates" subsidy (finance sector, asset owners, etc.) while making the poor eat the resulting inflation. All in hopes that some sliver of the new found wealth of the rich trickles down into jobs that now have lower real wages. This is "growth" that is not worth having and I believe America is finally realizing that. Any theory based on "aggregate demand" is a joke.

J Mann writes:

I assumed that the libs thought that monetary stimulus was less effective than fiscal stimulus, but that now that fiscal stimulus is off the table politically, they'll take what they can get.

Daniel Kuehn writes:

J Mann and RGV -

Precisely. I thought it was obvious that this is why liberal economists have reacted the way they have. I'm glad to see I'm not the only one that saw things this way.

Bryan - any reasons at all for thinking it's a conspiracy theory to make big government? Your assessment is looking more and more paranoid with every commenter. Do you care to elaborate on it at all?

Steve Roth writes:

>I see no other way to explain their sudden change of heart.

Krugman has explained his over and over: fiscal stimulus is politically impossible because a large group of the supposed cognoscenti think (or at least say) it won't help.

Their reasoning? If we're printing money, it's better to give it to the elite few who have the knowledge and wisdom to allocate it in everyone's best interests (yeah: right), rather than distributing it widely and letting the wisdom of the crowds do its magic.

Even the most wild-eyed, ill-considered keynesian economist knows that when inflation and interest rates are up, monetary policy *rules.* Everybody saw what happened when Volcker eased in '83. The economy (*including unemployment*) turned around *within months.* No duh.

Anti keynesians, on the other hand, seem to think that almost-zero inflation and almost-zero fed rates (especially combined with unheard-of, record-shattering, truly oceanic quantities of global liquidity) have no implications at all for the efficacy of monetary policy.

Which group has its eyes closed, hands over its ears, and is humming loudly?

Daublin writes:

Wow, I thought Bryan was making a low-controversy claim.

The political activity of the last couple of years is very easy to explain under Bryan's theory. Dems want to spend money, fiscal stimulus gives them cover to do it, so they preach the wonders of fiscal stimulus.

Here's one summary of where the money went:

Try flipping through it and asking how many of them Democrats would have wanted, anyway. It's all of them, to my reckoning.

Now try the same exercise, but imagining them as a fiscal stimulus. For example, a large chunk went into welfare programs. Welfare is many wonderful things, but it's hard to see it as inspiring extra economic activity. Rather the opposite. How about all the R&D? R&D has payoffs on a 5-10 year horizon, not the 1-2 that an economic stimulus was supposed to have. How about state aid? Does anyone think that larger states make for a super-charged economy? How about education? Again, maybe in 5-10 years, but in 1-2?

Looking where the money went, I find it very difficult to see it as a fiscal stimulus. I thought everyone did, but according to the comments, I guess not.

I encourage people who take the recession seriously, as something they wished the U.S. feds would work on, to look over what was actually done and see what you think. Don't just look at the dollar figure and think, spending=stimulus. Look where the money went.

Daniel Kuehn writes:

Daublin -
I don't think it's that controversial to assume that liberal politicians will make their best use of a fiscal stimulus bill as it's passing through Congress. And honestly, if we're going to spend a lot of money shouldn't we spend it on things we want?

But that's very different from what Bryan claimed. Bryan wasn't talking about politicians. Politicians will act like politicians - this shouldn't surprise anyone. But I think you and he are being obtuse if you think that's why liberal economists support stimulus.

Daniel Kuehn writes:
I encourage people who take the recession seriously, as something they wished the U.S. feds would work on, to look over what was actually done and see what you think. Don't just look at the dollar figure and think, spending=stimulus. Look where the money went.

Daublin - you write as if you've never read a Keynesian critique of the stimulus package. There was substantial criticism of the composition of it. There was a lot of criticism that it was essentially filling in holes in state budgets, which should not have been it's purpose. There were all kinds of critiques along these lines that you seem to completely miss. The perspective has usually been "not great, but better than nothing". And as far as I can tell, that's precisely how liberal economists are responding to QE2 too.

Daniel Kuehn writes:

html FAIL.

Why didn't that show up in my obligatory preview?

[I fixed it. Sorry for the trouble. You accidentally had one html code nested inside another. How a browser handles that is erratic and depends in part on what precedes it on the page.--Econlib Ed.]

Alex J. writes:

Bryan is not saying that liberal economists conspired together. He's saying that they all wanted government growth individually, because they are liberals. This was pretty obvious at the time with DeLong's brusk dismissal of Kevin Murphy's objections to fiscal stimulus.

Steve Roth writes:

Daublin, what Daniel Kuehn said.

After reading your post my thinking was, "does this guy never read *anything*? He just thinks that whatever he hears on talk radio is uncontroversially true (or true at all)?"

Flak Jacket writes:

I can't find anything to disagree with in Scott's post, but it has little chance of penetrating the conservative echo chamber. It violates The Golden Rule of Conservatism in the Age of Obama: if liberals want it, conservatives mustn't. Period.

Whether it's a health care mandate, tax increases built into Bush-era legislation, a treaty on nuclear armaments reduction, or QE2, if liberals want it, conservatives must reject it at any cost. It doesn't matter how hypocritical conservatives have to be, or how reasonable their former stances were at the time. If Obama adopts it, it's doomed. Scott's post is doomed, even if it is reasonable. It's sad, but that's how this new generation of conservatives operates.

Lord writes:

And the reason for conservative opposition to QE2 is Republicans want Obama to fail, right?

ThomasL writes:


Did you really just complain that Daubin knew what was really in the bill, and understood why it would never work the way it was being sold to the public by its authors and political supporters, and use _that_ as evidence of him being ill- or uninformed?

Matthew writes:

Maybe someone can explain to me why higher food prices, higher gas prices, higher equity prices (until they crash and burn from margin compression that is) is overall a good thing for the economy and for the average joe who is struggling to pay his bills, fill his tank with gas, and put food on the table.

Chris Koresko writes:

@Lord: I think the reason many conservatives don't like QE2 is the instinctive sense that the economy has a natural tendency to right itself. The guys in charge of economic policy have access to powerful tools and the willingness to use them, but conservatives are deeply skeptical that they understand what to do with them.

Imagine Bernanke et al. as a bunch of ambitious twelve-year-olds at the controls of a 747 ("to make it go up you pull the wheel back!"), and you get the picture. The natural thing to want becomes getting those guys out of the cockpit so they can't do any more harm.

Lord writes:

No one should buy that argument. The money and the Fed is always involved, whether they are doing too much or too little. The modern economy has no such tendency because it cannot exist independently of money. No, conservatives want to win elections and have no qualms about creating a depression to do it. This isn't the first time.

Hyena writes:

It couldn't have just been that people made an analogy to the Great Depression, which was dominated by works projects?

In any case, this doesn't explain why the largest items in the stimulus proposal were tax breaks, not projects.

I don't think conservatives were howling for monetary stimulus; if I recall correctly, they were busy warning how inflation is bad, m'kay.

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