Has monetary policy lost its power?

No, says my latest Bloomberg column.  Here is one of the opening bits:

The most striking fact about the current situation is that not one of the world’s major central banks has announced that it would like to see a higher rate of price inflation. Have you heard support for a 3% inflation rate lately from the heads of the European Central Bank, the Bank of Japan or the U.S. Federal Reserve? It is therefore no surprise that central banks don’t seem to matter much.

In essence, central banks would like to make marginal contributions to stimulating the economy, without incurring the political wrath from a higher rate of price increase. The powers they have lost are political, not economic.

On these and related questions, I am grateful to the writings of Scott Sumner over the years.  And in sum:

In fact, when it comes to macroeconomics, the current malaise is not just political but also cultural: It is a paralysis of the spirit to achieve and excel. Conventional economic theory has not been proved wrong, at least not yet. There is just a fading willingness to apply it.

Comments

The Fed produced inflation in the 1971 Nixon Shock.
It has otherwise been constrained to a legally bound, price neutral accounting system. Hence, we are looking forward to an indefinite period of mild deflation. Eventually we will have another shock and produce another spurt of inflation.

At least they learned to never again try impose price/wage controls. The 10% import surcharge not so much.

To be fair to Nixon, the "Nixon Shock" was a catastrophe, which the Fed did not or could not ameliorate.

Speaking of Nixon. Does Biden saying "I am not nuts." echo Nixon, "I am not a crook."?

He's not nuts, but he's also not a very stable genius like me.

You're right. I'm a cuck.

You woke up at 243am to say that inflation has been subdued for last 48 yrs cause of a price neutral accounting system and that future inflation will be caused by unforeseen shocks? Got it.

Not unforeseen shocks, well predicted shocks. We have monetary shock once per generation, right on schedule. Well foreseen, well planned. We have, for example, the gold bugs and other hedges set up just for the expected event. I think we might call is the Nixon/2 shock because you are I are talking about it. In 1970, we would have been sh0cked to think Nixon would default.

CPI grew at a 2.9% CAGR during the 1990s.

CPI is a particular price index. Inflation is a misused word meaning 'to get bigger'. Economists are quite fraudulent in picking a particular index then claiming things 'get bigger'.

For every unexpected price innovation, there are two parties, generally. One party calls the pricing bad, and marks a loss to recover later. The other marks it as good, marks it as a gain to be spent later. At the end of the generation, the two parties are like Japan, forcing the system to price neutrality, as in Europe.

My suggestion, drop things like CAGR, we will not compound out way out of this. Drop useless terms like, 'To get bigger'.

CAGR is simply a more accurate way of communicating average growth for compounding variables than a simple average. Given this and the rest of your word salad comment, I am not hopeful that further engagement would be productive here. Cheers.

No it didn't. The fed had little or nothing to do with it. It was entirely Nixon's devaluation.

Tamny has done a lot of work debunking the supposed powers of the FRB.

It's time for fiscal policy to take over the reins from monetary policy. We libertarians need to not be so squishy when it comes to government spending since monetary policy is not there to juice the economy but is limited to do the boring bits of managing rates of inflation and unemployment via the money supply. This leaves the door open to something like a UBI via Friedman's negative tax rates which also has the advantage of keeping central bankers from feeling irrelevant.

Tyler, you bring up the interesting point that inflation could be targeted a bit higher but did not mention Trump's contribution of targeting 3.x% unemployment where previously 5-6% was believed to be the optimal rate. Unfortunately inflation is a sensitive subject to those who remember the days of stagflation so to actively pursue inflation sounds like craziness to them. But then again inflation hawks, like deficit hawks, seem to only appear when a Democrat is in the Oval Office.

Not sure what you mean by fiscal policy taking over. We've been putting close to $1 trillion a year on the credit card for most of this century as it is.

Fed will offset any fiscal stimulus

You're not a libertarian and you don't understand how the economy works.

Friedman is not a libertarian?

Central banking and macroeconomics is not where those who want to achieve and excel go. It is the domain of bureaucrats, apparatchiks, and functionaries who enjoy the sound of their own voice and play up their own self-importance in the presence of others but in reality just punch a clock and make a pretty graph or two. No wonder America has lost trust in its institutions.

"...the current malaise [...] is a paralysis of the spirit to achieve and excel." These words of yours, Prof. Cowen, remind me of something that was written 90 years back:
“Today we have involved ourselves in a colossal muddle... having blundered in the control of a delicate machine, the working of which we do not understand".
“The machine would merely have been jammed as the result of the muddle. But because we have magneto trouble, we need not assume that we shall soon be back in a rumbling wagon and that motoring is over."
“At this moment the slump is probably a little overdone for psychological reasons. A modest upward reaction, therefore, may be due at any time."
Sound familiar?

Keynes: The Great Slump of 1930. His diagnosis: inadequate investment in productive capital. His solution: the central bankers in the U.S, England, and France "should join together in a bold scheme to restore confidence to the international long-term loan market . . . ." It's investment in productive capital that relies on long-term loans (since the payoff from the investment is long-term, loan terms must be long-term) and which provides the fuel for future profits and economic growth, while short-term loans were merely funding losses by producers of consumption goods. This essay is sometimes described as Keynes before Keynesianism. No "scheme" by central bankers, no matter how "bold", can revive a "paralysis of the spirit" and induce investment in productive capital. Pushing on a string does not robust economic growth make. https://ritholtz.com/2008/12/the-great-slump-of-1930/

Keynes also alludes to the problem of deflation, namely that it compounds the problem of debt: "Thus every fall of prices increases the burden of this debt, because it increases the value of the money in which it is fixed." Today's low level of inflation, combined with the enormous amount of debt resulting from the Trump tax cut, will leave an overwhelming burden to the next generation. Sure, today's investors in bonds are making a killing (https://www.nytimes.com/2019/08/28/business/bond-market-trade-war.html) but at the expense of the next generation that will be killed by the burden.

One might consider this risk: the next generation says bullshit, and pushes the inflation button to high.

Considerthe impossibility of 2% implicit inflation annually. The then year government bond will be 4%, and our projected inerest costs go from 600 billion to 1200 billion, double. Millennials would be expected to produce 5% of their income, just to pay the interest charges on boomer debt. That is an impossibility, tried and failed everytime. We just rebounded from a 3% ten year yield a year ago, shocked us and we have been contracting ever sense. The most taxpayers can pay is 2.3%, and we will not have growth unless we accept deflationary growth.

Last night (she couldn't sleep), AOC told America Millennials are the greatest generation du jour.

Very good observations on the need to keep rates low so that interest on the national debt doesn't "kill" us.

They can't sufficiently raise tax revenues. They can't default. Can you, or anybody here, envision a solution aside from the Fed buying Treasuries or inflation?

My guess on the purpose for the past two years' Fed short-term rate increases (seven times, each one 0.25% to a target 2.50% - 5.50% prime rate; but reversed by 0.25% in July 2019) was to have "arrows in the quiver" to lower rates if an economic slow-down loomed. Now, (see Bill Dudley's comments) it seems they wanted (seven, 25 bp short term rate rises since the Trump 2017 Inauguration) to get Trump a recession.

No! The Fed is apolitical.

The combination of higher inflation and negative interest rates will do a fantastic job of skimming savers. Add a wealth tax and we'll call it a day.

I really don't see the problem. If interest rates are roo low, savers can invest elsewhere. Money, under capitalism, is a commodity.

"If interest rates are roo low, savers can invest elsewhere.

Because as we learned in 2009, investments and savings are two different things. That fact is forgotten until things go wrong.

Well, it is not clear why we shoud prop up the profits from a class of ingestments over other. Money is a commodity, as gold, wheat or corn. It gets the returns it gets.

Since the topic is government monetary policy, you're already talking about favoring one destination for money over another. Also, since we're discussing policy, strongly directing people to higher risk investments means the government will need to expand its safety net. The new normal has reduced options for consumers.

Not at all. In a free market economy, capital seeks the most profitable use it can have.

OK, I can see your mental restriction. Have a good day.

Same for you.

You don't need negative interest rates if you have higher inflation

Given that we are in an international market, does a higher rate of inflation, which will be matched by an increased supply of goods from added or new plant capacity, work to our advantage, given that the low cost producer, where new capacity might be added, is China?

Higher inflation helps you get around stickiness in the market. People respond to nominal changes even if real prices are unchanged and increase output. Unless people realize that real assets aren't changing, real wages aren't increasing, in which case you don't expand you just adjust prices. Chinese wages would not have the illusion of change so they have no reason to expand. They are being paid in inflated weaker dollars so in real terms the revenue they receive may stay the same.

The effectiveness of monetary policy can be constrained by the expected path of fiscal policy. Democrats are like to say they will soak the rich, so don't worry about increases in taxes, but those "rich" are the people who invest in the future. Monetary policy does not work in a vacuum (except in models) and markets are forward-looking. Creating inflation and the illusion of greater wealth only makes you a bigger target for the soak the rich crowd. Looking into the future you see no growth in real terms because of inflation and anti-growth fiscal policy. Given these uncertainties, growth stagnates. What the Fed gives you the Congress takes away.

The description you gave in the first paragraph sounds like stagflation of the 70's: nominal prices increase but not output because people can distinguish between nominal and real prices.

As for the second paragraph, it seems to contradict the first, after genuflecting to the importance of fiscal policy, which never seems to be important during a recession, but seems, in your mind, to be important during a period of inflation. Which, of course, is just fine, because consumers live under a money illusion.

That said, China would seem to be the beneficiary, for the reasons in the original comment.

OK you don't understand.

Keynes and most Economist talk about stickiness as a root cause of recessions. Wages and prices do not adjust to return you to full employment. (The speed with which they adjust is the basic disagreement between classical and Keynes). Monetary policy helps get around the stickiness issue but it might not always. Professor Cowen seems to think it always works.

But monetary policy is most effective in the short run. In part because one of the missions of all central banks is price stability in the long run. As Friedman or Taylor would argue having a central bank that steps on the gas and then the brakes over and over does not make for a smooth ride.

In the long-run fiscal policy has more impact. If the fiscal policy is increasingly anti-growth than the temporary stimulus of monetary policy is less effective. Real shocks on the economy matter. Wealth taxes. Green New Deal. Are all anti-growth. People respond to incentives.

So fiscal policy is important all the time to long term growth. But shocks can happen to the economy and adjustments to monetary policy have been used to help an economy get out of a sticky period when wages and prices are not adjusting so that the economy can get to full employment. And bad monetary policy can prevent the economy from operating smoothly. Like the Fed is currently too tight.

China is simple. We inflate our currency we reduce its value on world markets. China has less of an advantage as a "low" cost producer because prices adjust and wages (in US dollars) in China rise. Their goods become more expensive for us, our goods become cheaper for them.

A better way to go is to encourage greater productivity and lower costs in the US through better government policies.

Ok, Dan, to paraphrase you, you don't understand.

Stickiness in a recession is a transaction cost phenomena, where employees wait to get their job back at their previous wage rate, and where excess capacity in industries does not cause them to reduce (deflate) prices. We are not in that situation. Read Keynes, or any other macroeconomist, again, and look at where we are with current unemployment and still with capacity expanding abroad, not here (look at the corporate tax cut and no increase in investment, only stock buy backs).

If we inflate our currency, consumers have less to purchase, and, if they keep their currency at their same level as today, their currency devalues relative to the US, putting them at an even stronger advantage. All they have to do is keep their exchange rate constant in relation to ours, which I am sure they would be willing to do.

the "they" in the last sentence is China, which should be clear from the context.

OK Bill you really don't understand the basics so have a great weekend

BTW not only d you not understand basic economics you don't have a clue about basic Finance. If a firm has no good internal investments they should give the tax cut to their investors. The investors can then buy some hot startup or some company with growth potential. The economy is much better off and grows faster. That is taught before the midterm in most classes. Beyond hope

DanC, If a firm has no good internal investments, then the premise of the corporate tax cut--that they would use it to invest--was false.

Thanks for the admission.

An individual firm may not have investment opportunities but the greater economy does. The purpose of the tax was to increase investment to create jobs and grow the economy. Getting resources to firms that need it. Not the way the Democrats like to do it, rewarding political allies without regard to efficiency. It really isn't that complex.

The decline in investment is an aggregate number, and, again, I take your admission that the tax cut was passed on to shareholders.

Here is a recent article discussing this: https://www.newyorker.com/news/our-columnists/a-decline-in-capital-investment-reveals-the-false-promise-of-trumps-tax-bill

false
In fact, those stock buybacks have benefited the broader economy, according to Kostin.

"Much of the cash that firms repatriated in 2018 has been recycled back into the domestic economy through a combination of both buybacks and dividends. Much of this distributed cash has likely been invested in firms with superior growth prospects, retained by investors as cash savings, or has led to consumption. These uses of cash are more productive than if the company had simply left the funds abroad."

Kostin notes that that growth investment "has accelerated sharply" since tax reform passed. In 2018, S&P 500 companies increased their spending on capex and R&D by 13% to $1.1 trillion. Kostin’s team expects companies to increase their spending by 9% in 2019 to $1.3 trillion.

https://finance.yahoo.com/news/tax-cuts-fuel-stock-buyback-spike-130545937.html

Ha Ha. That will be $1.5 Trillion for the rich man.

By the way, Dan, what Kostin is saying is that if you give a shareholder money (borrowed from the Treasury) in the form of tax cuts, he will spend it. So, why take it from the Treasury, and charge future generations for your buybacks and dividends? But, I must say, at least the guy is honest: tax cuts for the owners of stocks, and with borrowed money to boot.

What happened to that investment, and that it would pay for itself?

Notice how DanC was unable to respond and just called names. The reader can read my response, and if they know anything about macro, they can understand that you do not want to inflate during a period of full employment; and that stickiness arguments are reserved for recession, as they are based on employee waiting and company unwillingness to deflate with excess capacity.

The trade war creates uncertainty that increases real interest rates. The Fed needs to respond with lower rates to reduce that uncertainty. Krugman who hates Trump thinks the Fed is following too tight a monetary policy. I think Sumner does too, but I don't read him much these days. It is about increasing liquidity during a period of uncertainty. A very different situation from a recession, with different causes. If you like then think of the trade war as a shock to the economy and using Monetary policy to stabilize the economy.

The story keeps changing.

By the way, Dan, have you seen real interest rates go up because of the trade war uncertainty? How does the Fed with lower rates "reduce" uncertainty when Trump is the cause of it? Invert some more?

Sumner says

The Fed generally tries to avoid recessions by ensuring that total spending in the economy grows fast enough to maintain full employment, without triggering high inflation. For the current U.S. economy, that means nominal GDP growth of about 4 percent per year, which allows inflation to stay near 2 percent. If there is a recession in 2020, it most likely will occur because the Fed has failed to cut interest rates quickly enough, pushing spending growth down far below 4 percent.............

In standard economic models, tariffs lead to higher consumer prices. But markets are reacting to Trump’s tariff announcements as if traders view the effect as being deflationary. In other words, the opposite is happening. That’s because investors fear the Fed won’t cut its target interest rate as quickly as the decline in the equilibrium market interest rate. They worry monetary policy will become too contractionary for the needs of the economy.

This is contorted pretzel reasoning...based on the premise that traders view inflationary activity as deflationary. Maybe they view black as white, or purple as green. Rates are coming down without the Feds help, and, in fact, are now inverted (lower on the short end and higher on the long).

Bill,

The Fed completely controls inflation/deflation. Whether something is inflationary/deflationary completely depends on the response of the Fed.

Natural rates of course change without the Fed's intervention. That's the whole point. The Fed must cut the Fed funds rate to match the decline in the natural rate, or money supply will be too tight.

"Stickiness in a recession is a transaction cost phenomena"

No it isn't. It occurs irrespective of transaction costs.

Jeez, an academic friend of mine gave a presentation on price stickiness and transaction costs at a program with the Fed Chairman. Here is a Federal Reserve report on transaction costs (also menu costs) and stickiness during a recession: https://www.minneapolisfed.org/research/economic-policy-papers/are-prices-sticky-and-does-it-matter

Anon 2, Here is an American Economic Association article on price stickiness and transaction costs during recession: https://www.aeaweb.org/research/are-sticky-prices-costly.php

By the way, the definition of "sticky" is that the price SHOULD change, but doesn't, due to changes in economic circumstances, such as recessions.

By the way, Dan, if you look at Germany, with its balanced budget, they now have negative interest rates--making savers pay for their fiscal policy.

"Conventional economic theory has not been proved wrong"

{cough} NAIRU {cough}

The libertarian dream always was "hands off, and things will be fine." A country without policy arrives at happiness by the invisible hand. That's the thinking, the "theory," leading to a do-nothing congress, and a total reliance on monetary policy. Now is monetary policy called in doubt (the president saying that the fed "cannot “mentally” keep up ") and "politics" is blamed.

Funny, eh? It might actually be a crisis of belief.

God help us if conservatives ever took responsibility for policy, including all levers. Tyler drops this line:

Central banks still have more power to influence the economy than almost any other institution in public life.

"almost" any, because you've put the congress expressly off the table.

Fed doesn't have the option of "hands-off". "Hands-off" would be getting rid of the Fed.

Fed will offset any fiscal stimulus from Congress, but of course Congress can affect the supply side and long-term growth, which the Fed can't.

Actually, now that I think about it, consider what this means for America as a democracy.

By making the Fed the master of the economy, over Congress, we've elevated the appointed over the elected.

Crazy.

Hi mouse!

Funny how the left has no problem elevating the appointed over the elected when the appointed are activist judges unmoored from the Constitution.

Does that really have any legs post Kavanaugh? The right crowed because they wanted and got an expressly political Supreme Court Justice.

Your opinion: unmoored. Furthermore, judges are confirmed by the Senate, not appointed without confirmation. Read the Constitution.

By the way, the unmooring you should be concerned about, but probably are not, are the cases beginning with Loving v. Virginia, and Griswold v. Connecticut (birth control pill prohibition) which recognized the rights of privacy.

You probably want to have a judge get into bed with you, as the underpinning of the Roe decision is based on the development and recognition of these limits on governmental action.

No mouse, I prefer a constructionist - the law means what it meant when it was written and adopted (ratified).

If you don't like the law, there is a mechanism for changing it.

The opposite of that view, very much loved by the left, is to allow judges feelings about the law guide their decisions. RBG is a perfect example. This "living Constitution" idea is nuts and can lead to wild swings in the accepted meaning of the law. It may even work for the idealouges for awhile, until the other side replaces the court. It doesn't scale and it won't work.

I will happily take the risk a constructionist interpretation will not my way - at least rulings are bounded. The living Constitution point of view can produce wild swings in court rulings, and is thus destabilizing. You could get anything. So yes, the living Constitution adherents are unmoored from the Constitution.

Ed, The Justices who decided Loving and Griswold drew on constitutional precedent and interpretation. You should read those opinions and you would understand. Here is a summary of Loving: https://en.wikipedia.org/wiki/Loving_v._Virginia and here is one of Griswold: https://en.wikipedia.org/wiki/Griswold_v._Connecticut

I trust that you are a reasonable person and just need to look behind the rhetoric thrown at you and read the decisions for yourself. You will understand why these were not difficult constitutional decisions and why they underpin other rights to privacy. Enjoy.

The Fed's only job is not to cause a recession by restricting the money supply. They are in no way "masters of the economy".

This is exactly what the libertarian right asked for:

Which brings me back to my original point: The current obstacles to effective monetary policy are mainly political, not economic or instrumental. Arguably the same is true for fiscal policy. Voters may oppose more spending because they fear higher taxes in the future, or they disagree about how the money should be spent in the present.

They asked for constraints on spending? If so, they're not getting it, at all.

Here is a chart of federal outlays and revenues as a fraction of GDP from 1968 with "actual" current through sometime in 2017.

Coincidentally, the "actual" is pretty close to the line "average outlays 1968 to 2017"

This might be a glass half-full moment. Or a "what did 'constraints' mean to you?" moment.

I will admit I did not expect that. Why then is everyone saying Trump is the worst spender ever, if he's just average?

I think so. We hear about the deficit being large, but that's more tax cut related.

In 1968 we had 550,000 troops in Vietnam and were a year away from landing on the moon.

And spending stayed roughly flat as % of GDP? That’s insane.

Did you even look at the chart? 1968 was not a high point.

I for one am shocked to hear that voters might disagree about how to spend public funds. I wonder if they disagree about whether to spend them at all!!!

Very good column Tyler. Before talking about 3%, maybe the Fed should at least hit it's 2% PCE stated target, which it has chronically undershot over the past decade, which, among other things, provides a nice kick to debtors (you know, people with mortgages, student loans, etc.) to enrich creditors (bankers, bond holders).

The whole "we can't produce inflation" thing is stunning. Throughout history, governments have been better or worse at various aspects of governing, but generating inflation has never been a problem, even for the most incompetent.

Yudkowsky demonstrates a better understanding of monetary policy than 90% of economists here:

https://www.lesswrong.com/posts/tAThqgpJwSueqhvKM/frequently-asked-questions-for-central-banks-undershooting

What specifically are you suggesting the central banks due to achieve a higher rate of inflation? I assume it is to increase the money supply. But in the preface to the latest edition of Blanchard's Macroeconomics he writes: "The traditional treatment of monetary policy assumed that the central bank chose the money supply and then let the interest rate adjust. In fact, modern central banks choose the interest rate and then let the money supply adjust." Current interests rates have little room to go down. Presumably you disagree with this line of analysis or do I not understand? Please educate me.

The Fed conducts open market operations to ensure the chosen interest rate is met, But of course they can do QE where they buy assets with printed money. As Sumner points out, the Fed can simply continue buying assets until it either owns all assets int he world or it achieves its inflation target. It's a win either way, right- if they fail it's the biggest win of all.

I don't claim economics expertise, but I am reminded of the "trillion dollar coin." Let's say the Warren administration did issue such a coin, and use it to pay off all student debt. I assume that would be "bad," but in what way exactly? Would it be "too" inflationary because "the forgiven" would be suddenly free to buy "stuff" instead? Is a trillion too much? How much is right?

The trillion-dollar coin,
Case 1, just printing money would mean greater inflation which is just a tax on the general population with it's the greatest negative impact on people with fixed incomes.

Case 2 you issue debt that would just need to be paid by taxpayers to bondholders. The general ability to buy "stuff" would be reduced. The wealth of the country is not increased you just adjust the burden. Plus what happens of foreigners buy the debt.

In both cases, you encourage people to spend huge sums of money on useless degrees and then pass the cost to others. Bad idea

I was just thinking of past forgiveness, but yeah, paying for anything called 4 year college is a perverse incentive

The middle ground, which would be nice to reach, would be increased federal funding for degrees associated with Tyler's form of "progress."

If you can't pay your student loans then you made a bad investment. Encouraging more people to make bad investments is not a good idea. Forcing other people to make bad investments to give you a questionable degree is not an improvement. Too many people go to college. Those who go to college and don't finish are the worst off. Look at AOC 4 years of college ( a formally respected one) and she is only qualified to be a barista or a Congressperson. The more money the government puts into the system the more the system finds a way to spend money. Warren is an idiot.

Did you miss the whole "Tyler's progress" angle?

https://marginalrevolution.com/marginalrevolution/2019/07/we-need-a-new-science-of-progress.html

I don't like the idea that we can never know what kinds of education lead to that kind of progress.

And yes, as I say, that is a middle ground between Democrats who would fund everything and Republicans who would defund with equal vigor. #alaska

If I throw a billion dollars at a large group of researchers will one come up with a good idea? Maybe. Is that the best use of limited resources? Probably not. Is it possible that multidisciplinary research will come up with some good ideas? Sure, why not? But again is that the best use for limited resources?

But clearly, the inability of many students to generate a positive return on their education investment is clear evidence that a large part of the population is misinvesting their resources. They are wasting time and money in college or they are transferring any potential gains to the university. Perhaps you can convince these students that they are actually helping society by transferring money to these elites and in the long run society will benefit but in the meantime, they are going to have a lower standard of living. Seems a bit inefficient but if you can sell it to enough people, which society has, there we are

.. he said on the good old ARPANET.

yes without students studying acting it would have never happened. right? right?

I do treat it as a joke, but it is serious. The single most important technogical advance of the last 50 (possibly 100) years was developed, nay perfected, as a Department of Defense research project.

And yet a certain sort of person takes to the Internet to say "what has government research ever done for me!"

Ironic. But instructive.

For anyone interested "where wizards stay up late" is available as a free pdf. Search it.

https://fred.stlouisfed.org/graph/?id=A191RI1A225NBEA,A191RI1Q225SBEA,

The implicit price deflator is your best bet. It is as accurate as we revise our pricing index. How often do we reprice our index? Well, we will be repricing the Texas S/L bailout of 35 years ago, for the fourth time, and it is beginning to look like a loss. We reprice back to ten or twenty years, after some discovery that is contemporary.

So, inflation is a completely useless word, economists out to dump the concept. It is, with the absolute certainty of American history, the Millennials have no intention of rolling over the Texas S/L debt a fifth, sixth and seventh time, they will write off that much debt and move on.

There used to be a name for this secstag effect, the force of interest. Increasing interest charges get paid, until they don't. As the payments increase, deflation occurs via crowding out. Eventually someone in the new generation wonders what all the interest payments are for, and the Fed loses potency. The Fed cannot explain to AOC that a quarter of that interest due is from some Alzheimer's president getting conned a long time before they were born. AOC will force a repricing, the Boomers did, the Greatest generation did, the gold era did, the Greenback era did, the first and second bank of the usa did,. the new states did. No generation in America has abdicated its right to coin, and AOC will be exercising that right soon.

Tyler,

Could you comment on Palley's idea of a backward-bending "IS" curve?

It seems a path to the type of multiple-equilibrium models that Krugman likes, although Palley doesn't go there.

It seems that a rise in expected inflation is a way to shift the IS curve to the right, in a chart with the nominal interest rate on the vertical axis.

Maybe higher inflation passes a cost-benefit test. Maybe not. But I don't want to see any discussion of the issue without some acknowledgement of the costs of inflation. Economists often seem to have a lower estimate of the cost of inflation than the public. They often seem to have a lower estimate of the cost of unemployment also. Maybe economists still have a weak grasp of the true size of inefficiencies.

There is also a time-inconsistency issue. We finally have low (2%) inflation. Took a long time to get here. But now we are tempted: wouldn't it be better for GDP to have a just a bit more inflation?

So we have more inflation. Five years down the road, some economist says, couldn't we have a bit more GDP with a just a little more inflation?

The wheels of this bus keep going around and around. Finally, we are stuck with high inflation. Then we pay a high price to reduce inflation. There may be a lower bound on interest rates, but there is no upper bound.

I have seen this movie before, and I don't like how it ends.

If we had 2% inflation that would be one thing. We do not, and the Fed has been missing their forecasts for a decade continuously. That's bad.

They aren't measuring inflation right. The price of housing and healthcare has steadily been marching upwards. These aren't small expenses we are talking here. Healthcare comes out of every paycheck and housing is the number one big ticket item for most.

I disagree, but that's actually irrelevant. Their target is in measured inflation, so if they want to be taken seriously they should hit that target, which they undeniably could do. If their target metric is not a good metric they should change it, and not just act like they are incapable of hitting the target they set.

What power do interest rates have when they are negative, and your country, Germany, with its ten year old balanced budget rule, is heading into a recession.

Perhaps the actual private sector is shifting with most innovation and economic progress being in improving sustainability which requires more value creation per unit resources input. My i-phone is also a level, and a hundred other things.

In today's society, you can't build anything without permission but you can make existing things better.

This results in a quality increasing private sector with zero or little inflation as costs continue to decrease combined with a government sector and parasitic sector using government power (health and legal sectors) driving inflation via expansion. These parasitic sectors are fairly independent of interest rate changes. They just pass on interest rates as tax increases or service decreases.

"On these and related questions, I am grateful to the writings of Scott Sumner over the years" - TC. Indeed, the column looked almost like it was written by S. Sumner.

1. Another answer to a question few people would ever ask.

2. Has someone notified the moderator that the unemployment rate is below 4%?

3. Mightn't we discuss the prudence of the relentless escalation of public sector borrowing?

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