Not in Kansas [City] Anymore
Must-see panel of econbloggers on recovery and the long-term
Scott Sumner, Tyler Cowen, Brad deLong, Karl Smith -- four of the Internet's best bloggers on economics -- sat on a panel discussion at the Economics Bloggers Forum in Kansas City, hosted by the Kauffman Foundation. The topic was how to ensure recovery in the short run and strong growth in the long run, with questions from Brink Lindsey and the audience.
It's something you definitely should watch, if you have an hour to spare. A few thoughts and comments:
(1) Scott Sumner is clearly waging the right war -- convincing the majority of economists, rather than the Fed, that we need to target nominal GDP, not inflation -- and I got the sense he's winning. All three of the other panelists endorsed the idea, from the leftmost participant, deLong, to his counterpart, I suppose, on the Right, Cowen. A year or two ago, I don't know if this would have been possible. But given that the Fed has only recently adopted an PCE inflation target, I find myself doubting the idea that they would switch to a different target variable so quickly -- what I could see happening is an explicit statement of the Fed's monetary policy reaction function, which I now see is closely linked with my idea of an "H-value" identifying the Fed's willingness to trade off between inflation and unemployment in the short run. In effect, this would transform the inflation target into an effective NGDP or variant NGDP target. It would take much, because I read the Fed as trying to imply such a target:
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. [my emphasis](2) Tyler Cowen and Brad deLong both seemed more worried about the long term than I expected, and in ways that weren't what you'd guess. (Hint: Cowen didn't bring up his Great Stagnation.) Cowen in particular was concerned about how the financial crisis revealed structural issues in that market like an apparent change in the risk premium and a global shortage of safe assets. Both of these impinge on long-run growth because they reduce the efficiency of financial markets in allocating capital to investment.
(3) Brad deLong articulated at around three-quarters through the video a view of the 2008 recession that I think is gaining traction: It's not structural issues. It's aggregate demand, stupid. I've pointed out before that proper monetary policy allowed the market to complete major structural change in the composition of investment from 2006 until 2008, and deLong adds the absorption of real oil shocks in 2007 and turmoil in financial markets in early 2008. It was only in September 2008, when nominal spending fell off the cliff, that the stock market collapsed, financial markets froze, and that all of these structural issues came to a head. I think the "story" of structural factors undoing us is in some ways an appealing one to tell because it has an intellectual flavor, but frankly, it is simpler than that. Anyone who believes that structural factors had a delayed impact, I think, has a considerable burden in answering the following questions:
Why did it take two years for recession to arrive if the housing bust was so bad?Nobody is denying that structural issues can exacerbate a recession, or perhaps (the evidence is mixed on this point) slow a recovery. But I don't see a cogent argument for them being anything but contributory causes -- they are not "necessary and sufficient" for the recession.
Why did it take a year and a half for recession to arrive if real shocks were so strong?
Why did it take several months for recession to arrive if financial market turmoil was so damaging?
How did the economy go on chugging along, despite these structural issues, for so long, only for them to matter suddenly?
Note: To clarify any misunderstanding in the title, I didn't actually go. (I had school.) I watched the tape. The title refers to a famous line from "The Wizard of Oz."