The intellectual building blocks for yesterday's Fed move existed before Mr Sumner began blogging. It is hard to imagine them being assembled into actual policy so quickly without his efforts and their rapid spread through the economics blogosphere.
As the market monetarist community is now pointing out, the Fed's new policy is a step in the right direction, but it is a long way from what they would actually recommend implementing. And they're right. Fairly or not, however, the policy will be judged as a test of market monetarist ideas. Yesterday's market moves suggest that nominal output growth should accelerate in coming quarters. How much acceleration is likely to occur will depend on how much room the Fed is willing to give the economy to run. If the rise in inflation expectations leads the Fed to begin walking back its new language a month from now, the gain will be small.
But the expectation should be that there will be higher nominal growth. And given the broad view that demand-side weakness is the primary constraint on recovery, that nominal growth should be accompanied by faster real growth and faster employment growth. Based on my own observations of the co-movement of inflation expectations and payrolls, I'm expecting nonfarm employment to be growing at more than 200,000 jobs a month by the end of the year, with more possible depending on the Fed's touchiness.
I recognise that if nothing like that occurs, it will represent evidence that I've gotten one or several things wrong. Yesterday's move was exciting no just because it represented an intellectual victory or because it could lead to real economic improvement, but also because it holds out the possibility of new knowledge; one way or another we should learn something important. It was a victory and a test for market monetarism.
If he's right, the Dos Equis will be on Barack Obama.
I am so happy that there will be higher "nominal growth", growth in the volume of transfers of inflated dollars. And, it is reassuring that real growth "should" follow.
ReplyDeleteAnyway, we will find out about the path in real growth in the most exciting test yet of market monetarism, with the possibility of new knowledge.
"One way or another we should learn something important", that is, whether there is improvement or decline from these actions, it will be intellectually stimulating.
Do these people have any idea that they are experimenting on people's lives? Where is the morality of risking people's incomes in a blind effort to "do something" while looking at simplistic equations which predict "nominal" results but not real ones, and have not been validated by experience?
The Political Dictionary: Macroeconomics
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The study of overall statistics about income, debt, production, and employment. You would think that statistics are dull, but macroeconomics is a center of intellectual ferment. Motto: "We just don't know, but we are willing to guess". Critics say that it is history confused by mathematics, or mathematics splattered by history.
Macroeconomics is noted for the gigantic cost of the occasional government experiments carried out with fanfare in times of crisis. Experiments in good times are never advertised or acknowledged, for fear of being held responsible for yet again ruining a good thing.
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Frank J. Tipler is Professor of Mathematical Physics at Tulane University.
Macroeconomics is Astrology, Not Science
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Tipler: Our leaders are being advised by macroeconomists who haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.
Science is about prediction and precise explanation. It is not enough to construct a different explanation about each past event. Science must produce a consistent, precise explanation for all of the relevant past events.
Then, real science predicts the future and is testable according to those predictions. If a "science" cannot predict what will happen, then it is clear that it does not understand enough about what is going on, and of course it is of no practical use in arranging for a better life.
Real scientists bend over backwards to make their data, methods, and results available for review and criticism. This corrects for personal bias, and allows for quickly sorting out the truth. A true scientist tries to examine all possible explanations for his results, before believing that his new analysis is correct.
You often hear about a supposed scientist withholding data or methods. He may complain that it is beneath him to release data to people outside his field, or complain that he has no time to give information to his critics. This is an indication of a closed mind, or someone afraid that his results won't survive review. It is the mark of a pretend scientist who cannot be trusted.
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It is easy to do things at random (that happen to give you power), then claim the world is complicated and would be even worse without your actions. Anyone can say that at any time.
Where is the government's analysis and economic models for public examination? Public policy is vastly more important than the average science experiment. Public policy transfers money and changes lives. We should expect our politicians to develop sound policy and then reveal the details so that we can agree or criticise.
Let's see Bernanke's spreadsheet, detailed models, and predictions up front. Otherwise, he is merely gambling with our society based on wishful "research", not observed and predictable results.
'Do these people have any idea that they are experimenting on people's lives? Where is the morality of risking people's incomes in a blind effort to "do something" while looking at simplistic equations which predict "nominal" results but not real ones, and have not been validated by experience?'
ReplyDeleteDoing nothing is also 'risking people's incomes'. That's the lesson of the 1930s; the Fed did nothing then to stem bank failures, the money stock declined by about 1/3, incomes dropped in response.
How moral was that?
Also, citing a physicist as an expert on economics couldn't be more ridiculous.
To Patrick Sullivan,
ReplyDeleteYou propose that the lesson of the 1930's was that bank failures and a contracting money supply were the cause of the unemployment of the great depression. How do you know the source and direction of causation? Possibly bank failures, money contraction, and job losses were all the result of government intervention and bad policy, or something else.
Are bank failures and a lack of money our current problem? Are Bernanke's actions and policies the solution? How does he know? Is it a particular interpretation of equations and assumptions, or proven experience?
It seems that you are in favor of doing something, anything. Our society has many buttons and levers. Pushing and pulling them at random, or with the wrong plan, is likely to impose costs and make things worse. That is not a moral approach.
You may claim that Bernanke knows what he is doing. If so (I repeat) let's see Bernanke's spreadsheet, detailed models, and predictions up front. Otherwise, he is merely gambling with our society based on wishful "research", not observed and predictable results.
Mr Avent says that a bad outcome "will represent evidence that I've gotten one or several things wrong". So, this is a grand experiment. Where are the results of similar experiments where the outcome was good?
Tipler is a respected scientist. He describes what a rational and serious person (a scientist) must do to construct a useful model and predict the future. Your failure to see how that applies couldn't be more ridiculous.
Bernanke has not shown that he knows what the outcome will be. His past actions didn't produce the results he expected, and that is called experimental failure. Now he wants to do the same things, only with more resources.
Is Bernanke making policy according to past results or current guesses? Mr. Sullivan, are you happy with guesses not supported by past success?
Perhaps if you spent more time reading economic history and less reading physicists, you'd be better informed. I suggest you start with A Monetary History of the United States (it's the standard in the profession).
DeleteThe world progresses through trial and error, in economics as well as in other science. We just had a quarter century field experiment--between 1983-2007, inclusive--that showed what monetary policies work (only two short, mild recessions).
In contrast to the previous quarter century when we had six such, when the prevailing wisdom was, 'Money doesn't matter.'
As for Bernanke's knowledge, he's got a lot of publications you can read to find out.
Btw, Nobel prize physicist Robert Millikan spend almost half a century trying to refute Einstein's photon theory, only to finally admit he was wrong (and not Einstein) in the 1950s. Which is hardly the only example of physicists getting something wrong.