For my sins, I continue to go to the National Review website once a week. This time I got to the end of Larry Kudlow's second paragraph:
This past spring Maestro Alan Greenspan issued official Federal Reserve statements that deflationary declines in the prices of goods and services people buy was the nation's top economic danger. Consequently, he said his Fed might make special purchases of Treasury bonds in order to pump new money into the economy, and get bond rates lower to stimulate investment.
But last week, in congressional testimony, Maestro G changed his tune. Totally. Completely. Utterly. Suddenly he said that next year's economy would be strong, and that this revival would begin in the second half of this year. Hence, his new thinking goes, deflation is apparently not a threat and there's no need to add liquidity...
Is that really what Greenspan said? Let's go to the videotape:
Rate Cut Looking Like a Sure Thing (washingtonpost.com): Fed Chairman Alan Greenspan, who gave the first hint that he was contemplating another rate cut in testimony before a congressional committee on May 21, referred then to such a step as "taking out insurance." "We believe that because in the current environment the cost of taking out insurance against deflation is so low, that we can aggressively attack some of the underlying forces, which are essentially weak demand," Greenspan told the committee. Several other Fed officials have expressed similar views in recent weeks. By "cost" Greenspan meant the risk that another rate cut could so stimulate economic activity that it would cause inflation to become significantly worse. But in this instance, such an outcome would almost be welcome. A rate cut by the central bank next week would be the 13th since January 2001 on the eve of a recession when the rate target was 6.5 percent...
So how does Greenspan's "we can afford (through further rate cuts) to take out insurance against the possibility of deflation" get transformed, in Kudlow's mind, into a denial of the likelihood that growth next year will probably be strong? There's a distinction there--a distinction between what is most likely to happen on the one hand, and what is not very likely to happen but is worth guarding against (purchasing "insurance" against) on the other--a distinction that Kudlow doesn't seem to be able to grasp.
But why should he grasp it? The guy has no short-term memory. Peering down the page, I see:
A stronger outlook for economic growth -- from prior Fed money-creating and the newly enacted Bush tax-cut plan...
with no recognition or acknowledgement on his part that less than a month ago he was bashing the Federal Reserve for not allowing the money stock to grow fast enough:
It's Spelled M-O-N-E-Y: Overall monetary trends remain disappointing.... The monetary base... has increased over the past two months by about 5½ percent at an annual rate. But that's way down from the 11 percent... we were enjoying.... This current rate of liquidity expansion is inadequate...
*Sigh*
Posted by DeLong at July 22, 2003 08:50 AM | TrackBack
Brad, are you sure that WaPo article is referring to the same presentation Kudlow is?
Kudlow's talking about a presentation last week, ie, July.
The WaPo article is about one from mid-June.
Posted by: Jon H on July 22, 2003 10:02 PMOkay, I have a question here (please bear in mind I'm a mere undergrad student who has, at best, an intermediate undergrad understanding of economics):
If I understand correctly, the Fed rate works primarily by making loans cheaper, does it not? The primary uses of these loans are for business investing and consumer purchases of big ticket items like cars, houses, etc, is it not?
If this is the case, I don't see how one could reasonably expect the Fed to succeed in stimulating the economy. One of the major problems right now is that there is much unused capacity, so I don't see the incentive (nor the benifit) of businesses investing in more capacity and consumer demand is weak across the board so I don't see how a bubble in big-ticket items is going to solve that.
Of course, I'm probably missing something here.
Posted by: Lorenzo on July 23, 2003 06:27 AMMaybe Kudlow missed the division of the FOMC's balance of risks statement into two parts, one refering to the price outlook, the other two growth. While the FOMC did not deny the two are connected, the implication is that they can show some indepences. That has indeed been the case in recent years. Remember the inflation trend during the late 1990s? Kudlow had to ignore an awful lot to write what he wrote.
Jon H.
The Greenspan comments from May preceded a June ease of 25 bp. Those two are linked - May's statement included a shift from a neutral "balance of risks" to a new, two-part balance which noted downside price risks despite expectation for an eventual pick-up in growth. That shift in the balance foreshadowed the June ease. The June testimony, to the Congressional Joint Economic Committee, offered a fuller explanation of Fed thinking, one which made the "low-cost insurance policy" argument more completely. It was not, as far as I can tell, a change in direction. The July testimony, one of two twice-yearly monetary policy testimonies, offered little that was not already clear in June. At least I think so. Given the flood of verbiage during both appearances on the Hill, this last judgement would be easy to dispute.
Posted by: K Harris on July 23, 2003 06:56 AMLorenzo- Your analysis of why the Bush tax cuts have not given much stimulus is correct.
Re: Kudlow- Not having a short term memory helps when your job is chief cheerleader for the stock market. Ignoring reality does not hurt either. That way he can engage in mindless boosterism with a clear conscience.
Posted by: bakho on July 23, 2003 07:16 AM