October 15, 2003
An Excellent Choice for the New York Fed President

I know Tim Geithner. I worked for two years in an office three doors down the hall from Tim Geithner. Tim Geithner is a friend of mine. Tim Geithner is no Jack Kennedy--but Jack Kennedy would have made a really lousy Federal Reserve Bank President. By contrast, Tim Geithner should do an excellent and wonderful job as President of the Federal Reserve Bank of New York. FT.com Home US: IMF policy chief to lead NY Fed | By Alan Beattie in Washington | Published: October 16 2003 0:28 | Last Updated: October 16 2003 0:28 Timothy Geithner, the head of policy at the International Monetary Fund, has been appointed president of the New York Federal Reserve. The appointment, announced on Wednesday by the New York Fed's board of governors, ends a tortuous nine-month search for a replacement for William McDonough, who announced his resignation as president in January and left in June. The president of the New York Fed, the second most senior official in the Fed system, is the central bank's representative on Wall Street and is heavily involved in financial stability issues. Mr Geithner, comparatively young for the position at 42, rose rapidly after joining the US Treasury...

Posted by DeLong at 05:07 PM

September 14, 2003
Note: Strong Views Weakly Held

In comments, A. Pressler asks: I've always wondered why inflation is such a huge bugaboo to AG and many corporate economists (other than their tendency to see things from the POV of lending institutions.) In my relatively short life, the only serious inflation problem was the supply-shock inflations created by energy costs in the 1970s.... I understand the theoretical arguments, but what is the worry when the inflation rates are still under 5% (as they were in the late '80s) or under 3% as for most of the Clinton administration? Well, the argument that inflation above 10% per year does serious harm to resource allocation and economic growth (as incentives get scrambled by an inflexible tax system, as nobody is sure what relative prices really are, and as perceptions of risk rise substantially) seems solid. And then you can argue that you need to keep inflation at 5% or below in order to eliminate the risk that a couple of bad shocks will land you in the bad zone of more than 10% annual inflation. You can also argue (and Larry Summers and I did argue back in 1992) that you want to avoid deflation and the liquidity trap--you want...

Posted by DeLong at 02:04 AM

September 05, 2003
Fear of Bad Employment Reports

This morning's employment report reduces Doug Henwood to a state of gibbering terror: Doug Henwood: This morning's U.S. employment report sucked. The survey of employers showed a loss of 93,000 jobs, when flat to slightly up was a reasonable expectation. We've now had seven consecutive months of job loss, something we've never seen outside a recession. The workweek was short and almost every industrial sector shed jobs. The survey of households showed a shrinkage in the labor force - the entire reason for the decline in unemployment from 6.2% to 6.1%. The share of the adult population working was flat, and remains at a low for this cycle. People are buying stuff, but it's not with their paychecks - it's all tax refunds and mortgage refinancing. If the job market doesn't recover soon, we're in trouble. What Doug fears is that sometime soon households will change their states of mind: they will think that the risk of losing and then being without a job, or being unable to find anything other than a crappy job, is too high; and thus that they need to cut back on their spending significantly in order to build up their buffer stocks of savings...

Posted by DeLong at 09:41 AM

August 30, 2003
Janet Yellen on Monetary Policy

Janet Yellen: "A cushion of 2 percentage points of annual inflation over and above that produced by measurement error eradicates the zero-bound interest-rate problem.... And the zero-bound interest-rate problem is much, much easier to prevent than to cure. Since the risks are asymmetric, the policy should be asymmetric as well.... Such a policy is justified even when the odds of outright deflation are quite low."...

Posted by DeLong at 09:17 PM

August 13, 2003
Laurence H. Meyer

Ah. If I were a rich trader of fixed-income securities rather than a poor academic, this is a service I would buy: Laurence H. Meyer's Monetary Policy Insights Larry Meyer is very smart, very thoughtful, and very good at making what he has to say sound fascinating: I've never seen anyone fall asleep at an LHM seminar....

Posted by DeLong at 07:09 PM

August 03, 2003
Greg Ip on the Fed's Inflation Doves

Greg Ip writes about how the example of Japan has multiplied the number of no-longer lonesome inflation doves at the Fed: WSJ.com - At the Fed, Inflation Doves Aren't Lonesome Anymore: What changed to make deflation so much scarier? In a word: Japan. Since 1999, the Bank of Japan has cut rates to zero and printed money furiously, but prices keep falling because Japan's banks can't or won't lend new money. This repudiation of textbook economics frightens central bankers around the world. Mr. McTeer says the Fed has learned from Japan's mistakes, which is why it won't "nickel and dime" its response to a stagnating, postbubble economy. Mr. Greenspan doesn't need much convincing. He may not think deflation is as fierce as its current reputation, but he doesn't want to find out for sure. "We need a much wider firebreak because we know so little about it," Mr. Greenspan says. Until Japan figures out how to beat deflation, count him as a dove, too....

Posted by DeLong at 09:16 PM

July 30, 2003
Post-Austrian = Post-Keynesian?

After tormenting Tyler Cowen, Daniel Davies decides that post-Austrian Tyler and post-Keynesian Daniel are really long-lost brothers: Crooked Timber: Dumb it up, Tyler! : ...Both Tyler and myself are quite a long way outside the mainstream of neoclassical economics. He's basically an Austrian, I'm a Post-Keynesian. And in fact, Tyler's particular brand of "New" Austrianism is very close to Post-Keynesianism indeed. Specifically, he rejects the key Austrian premise that recessions and malinvestments are always caused by gaps between the "natural" and "money" rates of interest opening up (as a result of Big Bad Government, natch), encouraging investors to make mistakes about the time-preferences of consumers and invest in production technologies with the wrong returns period. Tyler takes from rational expectations macroeconomics the idea that it doesn't make sense to assume that policy-makers can systematically fool the rest of the economy, and from modern portfolio theory and financial economics, the idea that one of the real determinants of investment is the equity risk premium (a concept I discussed here). It's a "Risk-based Business Cycle" theory in which the business cycle is driven in an Austrian manner by cycles of malinvestment and liquidation, but these cycles do not have a monetary origin....

Posted by DeLong at 10:40 PM

July 25, 2003
Bernanke Speech on Monetary Policy in a Low Inflation Environment

Federal Reserve Governor Ben Bernanke is thinking about Federal Reserve policy in a very low inflation environment. He sees the Federal Reserve's principal weak point as a possible inability to convince private market participants that the Federal Reserve intends to keep short-term rates as low for as long as it in fact intends to. Thus there seems to be considerable convergence between Bernanke's current position and Krugman's view of the underlying causes of liquidity traps. FRB: Speech, Bernanke--An unwelcome fall in inflation?--July 23, 2003: ...Attaining price stability is an important accomplishment, one of which my predecessors on the Federal Open Market Committee (FOMC) can justifiably be proud. But this development has also forced the Federal Reserve--as well as the public--to reorient its thinking about inflation in a fundamental way. After a long period in which the desired direction for inflation was always downward, we are now in a situation in which risks to the inflation rate can be either upward, toward excessive inflation, or downward, toward too-low inflation or deflation. As many of you are aware, the Federal Reserve officially recognized this new situation in its balance-of-risks statement issued at the close of the FOMC meeting this past May 6....

Posted by DeLong at 09:21 AM

July 10, 2003
David Wessel Wonders When the Recovery Will Begin

David Wessel wonders when the real recovery will begin--when real GDP will begin to grow at the 3.5% per year pace that we think is needed to keep the unemployment rate from rising, or the 4.0% per year pace that we think is necessary if unemployment is to start to decline (and even then only slowly: by perhaps 0.2 percentage points per year). Forecasters tell him that the real recovery should begin very soon--but they said the same thing six months ago, and six months before that as well. More disturbing is the fact that it is not at all clear where any extra boost to the economy could come, should one turn out to be needed. The Federal Reserve is out of gunpowder. More aggressive fiscal policy--bigger short-run deficits--would be possible, but neither the president nor the congressional majority has shown any inclination at all to think seriously about how to try to use spending and tax policy to boost employment and growth in the next year or so. If neither monetary nor fiscal policy can be of use, the only remaining policy lever is to try to boost exports by talking the dollar down--a very difficult, hazardous, and...

Posted by DeLong at 12:21 AM

July 02, 2003
Wow! I'm Smart! Part LIX

Eleven years ago Larry Summers and I argued that the opportunity to send the short-term real interest rate strongly negative in order to boost demand during a recession was a valuable social asset, and that it might well be better to have an average inflation rate of four percent per year than one of one percent per year because of the extra power this gave to countercyclical monetary policy. Today--with the Federal Reserve effectively out of its normal recession-fighting ammunition (and about to turn to "non-standard" monetary policy)--we look pretty smart. J. Bradford DeLong and Lawrence H. Summers (1993), "Macroeconomic Policy and Long-Run Growth," Federal Reserve Bank of Kansas City Quarterly Review: ...In light of the zero inflation targets that have been set in a number of countries, periodic proposals for a zero inflation target in the United States, the very low rates of inflation now prevailing in much of the industrialized world, and the commitment of many traditionally inflationary economies to a fixed exchange rates, it seems worthwhile to ask: can austerity be overdone? At the grossest level, the answer to the question is surely "yes."... These arguments gain further weight when one considers the recent context of monetary...

Posted by DeLong at 10:00 AM

June 29, 2003
Hard to Tell What Went on...

From this newspaper story it's hard to tell what went at the BIS meeting of the central bankers. Inflation targeting. Direct support of the prices of assets other than overnight reserve deposits. But it's hard to gauge when or if there will be real changes in central bank operating procedures. Top central bankers eye slow growth, deflation - Jun. 29, 2003: BASEL, Switzerland (Reuters) - Central bankers from around the world Sunday discussed ways to prevent deflation and kick start lackluster global growth, including unorthodox policies such as buying up financial assets. At an annual meeting of the Bank for International Settlements (BIS), bankers grappled with mounting concerns that falling prices in top industrialized nations could spiral into a deflationary cycle that undermines growth. The strategies under discussion included setting specific targets for inflation rates as one way to prevent deflation from taking hold in advanced economies outside Asia. Designing monetary policy to achieve a targeted inflation rate can be helpful not only to moderate price pressures, but also to boost prices when they fall too low, some said. "Everybody was very confident about it," Gordon Richardson, former Bank of England Governor, told Reuters after the closed-door session. "It was...

Posted by DeLong at 07:18 PM

June 27, 2003
Out of Gas

Stephen Roach meditates on the gap between what the Federal Reserve wants the American economy to do--grow at 4 percent per year for a couple of years or so--and the tools at the Federal Reserve's disposal: Morgan Stanley: ...Since the equity bubble popped in early 2000, the US economy has been on an anemic 1.7% annualized growth path. That includes a mild recession in the first three quarters of 2001 and an unusually subpar recovery in the subsequent seven quarters. Significantly, the post-bubble growth pace has been well below America?s productivity-driven potential growth rate that most put in the 3.25% to 3.75% zone. The result is the emergence of a wide margin of slack between aggregate supply and demand. For a US economy that entered this post-bubble business cycle at a 2.25% inflation rate, this slack has been sufficient to push the US dangerously close to the deflation threshold; in the first five months of 2003, annualized core CPI inflation has averaged just 1.2%. Little wonder the most common complaint heard from US businesses pertains to the lack of pricing leverage. In this context, the Fed?s goal is simple -- to get the economic growth rate back above its long...

Posted by DeLong at 06:17 AM

June 21, 2003
Note: Before the Accord

Greg Ip writes that the Federal Reserve now thinks that it cannot effectively peg the ten-year bond rate without moving very very carefully to control expectations about its projected path for short rates: WSJ.com - Fed's Next Interest-Rate Cut May Be Smaller Than Expected: ...beyond that next rate cut, the Fed now faces a daunting challenge: How to continue to ward off potential deflation when short-term interest rates are closer to zero than they have been in 45 years. Several months ago, officials said that in such a near-zero scenario the Fed could keep rates down by buying Treasury bonds, as it did in the 1940s. Such a buying spree would raise bond prices and lower their interest yields, which move in the opposite direction. But after months of study, Fed officials have concluded that today's far-more-complex bond market would frustrate that strategy. The Fed's key rate already is at 1.25%. After next week's move, cutting it even closer to zero will pose problems. Too low a rate would imperil money-market mutual funds, for instance, because they might no longer clear enough money to cover expenses and pay a return to investors. It would leave the impression the Fed was...

Posted by DeLong at 11:14 AM

Forthcoming Federal Reserve Rate Cut

The Washington Post's John Berry puts his ear to the ground and guesses that the Federal Reserve will cut interest rates next week by 0.50 percentage points (a 60% chance) or by 0.25 percentage points (a 40% chance). That seems about right to me--but his sources are much, much better than mine. One bone to pick, however. John Berry says that economists were "surprise[d]" by the fact that "recovery has been halting and 'jobless' despite huge doses of monetary and fiscal stimulus." This economist hasn't been surprised. Simply look at the late-1990s boom and the structural sources of the acceleration in productivity growth, and a "jobless recovery" looked like a definite possibility. Rate Cut Looking Like a Sure Thing (washingtonpost.com): ...Federal Reserve officials, concerned there is still no sign of the solid pickup in U.S. economic growth needed to foreclose the possibility of deflation, appear certain to cut their target for overnight interest rates next week. There is broad agreement among investors and analysts that a rate cut is coming, but there is disagreement about whether policymakers will lower their 1.25 percent target by a quarter-percentage point or by a half-point. The latter seems to be more likely as a...

Posted by DeLong at 06:48 AM

June 09, 2003
PY Is Not Proportional to M

Edward Hugh finds the Financial Times's Simon London having lunch with Milton Friedman somewhere on the road to Damascus: BONOBO LAND: The Financial Times Simon London has had lunch with Milton Friedmann, and discovers he has changed his mind about targeting the quantity of money, which is, as Stephen Roach notes ironic at a time when Bernanke and company would have things otherwise: 'Hold on to your hats and prepare to be amazed: Milton Friedman has changed his mind. "The use of quantity of money as a target has not been a success," concedes the grand old man of conservative economics. "I'm not sure I would as of today push it as hard as I once did." Granted, this is hardly a conversion of Damascene significance. But, heck, it's a start.' To be fair to Uncle Milton, his focus on having a central bank set and hit its targets for monetary aggregates always had as much to do with building central bank credibility--demonstrating that it would keep the promises it made, and that it was serious about constraining the growth of nominal variables, and in versions like his Program for Monetary Stability the recommendation to target M was accompanied by...

Posted by DeLong at 06:49 PM

June 03, 2003
Leaning Over Backward

Alan Greenspan promises to "lean over backward" to fight deflation: WSJ.com - U.S. and Europe Indicate Rates May Be Cut Soon: The chiefs of the world's largest central banks -- Federal Reserve Chairman Alan Greenspan and his European counterpart, Wim Duisenberg -- signaled that they are contemplating interest-rate cuts soon, moves that could help stimulate sluggish economies on both sides of the Atlantic and reduce the risk of global deflation. Mr. Greenspan, speaking via satellite from Washington, emphasized the importance of keeping the U.S. from sliding into deflation while acknowledging that there is still little evidence of the economic rebound he has been expecting. Though deflation, or generally declining prices, is unlikely, he said the Fed will "lean over backwards" to prevent it and the issue will be "discussed in detail" when Fed policy makers meet June 24 and 25. The Fed chief's remarks placed more emphasis on the lack of upbeat economic data and more on the need to act pre-emptively against deflation than when he spoke to Congress two weeks ago. That suggests that the door has opened wider to a cut in the Fed's target for its key short-term interest rate, now at a 42-year low of...

Posted by DeLong at 09:01 PM

May 27, 2003
Note: Greenspan's Views as of May 2003

Greenspan's views, May 2003... Testimony of Chairman Alan Greenspan The economic outlook Before the Joint Economic Committee, U.S. Congress May 21, 2003 Mr. Chairman, I appreciate the opportunity to testify before the Joint Economic Committee. As you will recall, when I appeared here last November, I emphasized the extraordinary resilience manifested by the United States economy in recent years--the cumulative result of increased flexibility over the past quarter century. Since the middle of 2000, our economy has withstood serious blows: a significant decline in equity prices, a substantial fall in capital spending, the terrorist attacks of September 11, confidence-debilitating revelations of corporate malfeasance, and wars in Afghanistan and Iraq. Any combination of these shocks would arguably have induced a severe economic contraction two or three decades ago. Yet remarkably, over the past three years, activity has expanded, on balance--an outcome offering clear evidence of a flexible, more resilient, economic system. Once again this year, our economy has struggled to surmount new obstacles. As the tensions with Iraq increased early in 2003, uncertainties surrounding a possible war contributed to a softening in economic activity. Oil prices moved up close to $40 a barrel in February, stock prices tested their lows of...

Posted by DeLong at 10:44 AM

May 24, 2003
A Question About the Zero Bound on Nominal Interest Rates

Kevin Drum asks what he describes as a "really dumb question": CalPundit: Interest Rates: Now, I know this is a really dumb question (and yes, contrary to popular wisdom, there is such a thing as a dumb question), but why is this so? Why can't the Fed have negative interest rates? Walk up to the discount window, borrow a million dollars, and next month when it comes due you only have to pay back $900,000. Banks would then have an incentive to loan out this money at a negative rate too. As long as their rate was less negative than the Feds, they'd make money on the deal... The problem comes at the second stage of your thought experiment. Yes, the Fed can loan money at negative nominal interest rates to banks. But the banks then have an incentive to simply put the cash in their vaults and keep it there. They could loan it out at negative interest rates and make money (as long as there was a spread), but they would make more money if they did not lend it out and just squirreled it away. To break this greater incentive for banks not to squirrel the cash...

Posted by DeLong at 10:46 AM

May 15, 2003
Remedial Reading

The Economist snarkily suggests that the ECB hasn't been keeping up with its reading... Economist.com: ...Deflation is particularly harmful when an economy has lots of debt, because falling prices swell the real debt burden. This can lead to a vicious circle: as heavily indebted firms are forced to reduce costs, jobs and spending are cut across the economy, pushing prices lower still. In both America and the euro area, total private-sector debt today is larger as a share of GDP than it was when deflation last haunted the world in the 1930s--though not as high as in Japan a decade ago. The biggest economic danger is that, because nominal interest rates cannot go below zero, deflation makes negative real interest rates unattainable. But then these may be needed to drag an economy out of recession. Last year a study by economists at the Fed of Japan's slide into deflation concluded that monetary policy was not too tight in the early 1990s, given the outlook at the time for growth and inflation. But those forecasts proved too optimistic, and by then it was too late to act. The lesson is that as interest rates and inflation move closer to zero, central...

Posted by DeLong at 07:53 PM

May 14, 2003
Notes: Last Macro Class: Liquidity Trap

Paul Krugman has just made me much more pessimistic about the likely success of "unconventional monetary policy" measures to fight deflation and liquidity traps. It's not that I hadn't heard the argument before--this is the third time I've read Paul's stuff on liquidity traps, after all. But when you are teaching something, you focus on it in a way that you almost never do otherwise... Thinking about the liquidity trap: Unconventional open-market operations: A second argument on monetary policy is that while conventional open-market operations are ineffective, the central bank can still gain traction by engaging in unconventional operations ? with the most obvious ones being either currency-market interventions or purchases of longer-term securities. The argument of proponents of such moves, for example Alan Meltzer, is that in reality foreign bonds and long-term domestic bonds are not perfect substitutes for short-term assets, and hence open-market operations in these assets can expand the economy by driving the currency and the long-term interest rate down.... Clearly there is something to this argument: perfect substitutability is a helpful modeling simplification, but the real world is more complicated. And in the absence of perfect substitution, these interventions will clearly have some effect. The question...

Posted by DeLong at 02:15 PM

New York Fed Presidency

John Berry reports on three people who apparently do not want to become the next President of the Federal Reserve Bank of New York. But he says nothing about who is likely to become the next President of the Federal Reserve Bank of New York: N.Y. Fed Candidates Withdraw (washingtonpost.com): The two top candidates to become president of the New York Federal Reserve Bank, Treasury Undersecretary Peter R. Fisher and Citigroup Vice Chairman Stanley Fischer, have withdrawn their names from consideration, knowledgeable sources said yesterday.... It couldn't be learned why the two men withdrew, or who is now being considered for the post. Peter G. Peterson, chairman of the New York Fed board and its search committee, couldn't be reached for comment yesterday.... Another potential candidate, Fed Vice Chairman Roger W. Ferguson Jr., has said he is not interested in the position......

Posted by DeLong at 07:13 AM

May 12, 2003
Paul Krugman's "Thinking About the Liquidity Trap"

Paul Krugman's "Thinking About the Liquidity Trap": Thinking about the liquidity trap: We live in the Age of the Central Banker - an era in which Greenspan, Duisenberg, and Hayami are household words, in which monetary policy is generally believed to be so effective that it cannot safely be left in the hands of politicians who might use it to their advantage. Through much of the world, quasi-independent central banks are now entrusted with the job of steering economies between the rocks of inflation and the whirlpool of deflation. Their judgement is often questioned, but their power is not. It is therefore ironic as well as unnerving that precisely at this moment, when we have all become sort-of monetarists, the long-scorned Keynesian challenge to monetary policy - the claim that it is ineffective at recession-fighting, because you can?t push on a string - has reemerged as a real issue. So far only Japan has actually found itself in liquidity-trap conditions, but if it has happened once it can happen again, and if it can happen here it presumably can happen elsewhere. So even if Japan does eventually emerge from its slump, the question of how it became trapped and what...

Posted by DeLong at 07:28 AM

May 08, 2003
A Primer on FedWatching

Morgan Stanley's Richard Berman provides an excellent updated version of the codebook needed to understand what the Federal Reserve is thinking: Morgan Stanley: Yesterday's FOMC statement makes it clear that deflation risks are the Fed's biggest concern, and that they mean to fight them with every tool -- conventional or not.  In my view, this statement breaks important new ground for our central bank: Officials have taken an important step toward inflation targeting.  The Fed won't likely announce a numerical target for inflation soon.  But fighting deflation risks means that short-term rates will stay low for the foreseeable future, and the Fed will hammer that message home repeatedly to ensure that inflation stabilizes or even rises somewhat. With the stroke of a pen, the Fed has thus clarified its game plan, both for near-term tactics and for medium-term strategy.  Near-term tactics leave officials in a wait-and-see mode, with the option to ease again if inflation falls substantially or downside risks to growth reemerge.  As my colleague David Greenlaw notes, our baseline view is that the Fed won't exercise that option, but it?s a close call (see his accompanying Forum piece, "Some New Code Language from the Fed").  The Fed's medium-term...

Posted by DeLong at 11:22 AM

May 01, 2003
Why Oh Why Can't We Have a Better Press Corps? Part CCXIV

Time to Bang My Head Against the Wall Once Again... Why, oh why, can't we get a better class of journalists? Those who write ABC's The Note claim to be unable to understand Alan Greenspan's nuanced--and consistent--position on fiscal policy issues. They write, "The Note has no idea what Alan Greenspan thinks about the prospects for growth and about the Bush economy, and that is after reading everything he said, and everything ABOUT what he said..." And those who write ABC's The Note are close to the cream of the crop. But it's really not hard to understand Greenspan if you are willing to accept that his positions are always nuanced and that he is almost always polite. In Greenspan's view, expressed yesterday and many times in the past. Greenspan believes that: In the long run the most important thing is to have a balanced federal budget. Having a budget not in deficit is especially important over the next decade because of the forthcoming retirement of the baby-boom generation. But it is always important. Having a budget that is not in deficit is job 1. Once that is taken care of, one can turn to other goals. In the long...

Posted by DeLong at 11:35 AM

March 13, 2003
The Economist Is Scared of Deflation Now

The Economist is scared of deflation now. They want the Federal Reserve to cut interest rates, the European Central Bank to do the same, and governments to run bigger budget deficits over the next couple of years: Economist.com: ...Some economists argue that, since the present weakness in American confidence and spending is largely due to uncertainty about the consequences of a war with Iraq, it might be better to hold fire for now and see what the economy looks like once the conflict is over.... This argument is wrong, for two reasons. First, at a time of heightened uncertainty, it is wiser to take out an insurance policy against a future deep downturn. If a rate cut proves unnecessary, the cost of reversing it would be small. On the other hand, if the American economy remains weak, valuable time will have been gained in giving it an extra boost. When the world economy is groaning with spare capacity, there is little risk that any excessive easing of policy might send prices soaring. A greater risk is of deflation, not inflation. The lesson of Japan's failure to arrest deflation after its bubble burst in the early 1990s is that, as interest...

Posted by DeLong at 08:30 PM

March 01, 2003
Greenspan's Congressional Credit Remains Very Good

John Berry writes that Alan Greenspan's credit remains at gold-standard levels in Congress: washingtonpost.com: Greenspan Remains Popular in Congress: ederal Reserve Chairman Alan Greenspan may be taking sniping fire from anonymous White House officials unhappy that he questioned the immediate need for President Bush's latest tax-cut plan, but he's still a bipartisan favorite on Capitol Hill. Sen. Charles E. Schumer (D-N.Y.) interrupted a Senate Banking Committee hearing yesterday to criticize what he called "an ongoing orchestrated whisper campaign to discredit" Greenspan after his recent testimony. A number of media reports since then have quoted unnamed White House sources as saying Greenspan, whose term as chairman will end in the middle of next year, might be dumped by Bush. A syndicated column by Robert Novak, for example, appeared Monday in the Washington Post with the headline "Goodbye, Greenspan?" and began, "It's difficult to exaggerate the irritation at the White House over Alan Greenspan's gratuitous shot at President Bush's tax cuts." Schumer said threats to dump Greenspan violated the independence of the Fed, noting that Greenspan had supported the concept of a major tax cut that Bush proposed two years ago. Sen. Wayne Allard (R-Colo.) said he thought administration officials "were pleased...

Posted by DeLong at 05:45 PM

September 14, 2002
Greenspan 5, DeLong 2

"You know me," said one senior Federal Reserve policymaker of the 1990s, "and on the inflation-unemployment tradeoff I'm dovey-dovey. I'm not prone to undercount the distributional and productivity benefits from low unemployment. I'm not prone to overweight the costs of moderate inflation. Yet there I was, in the Chairman's [Greenspan's] office, beggin him to raise interest rates. The NAIRU [the unemployment rate at which inflation is steady] couldn't have fallen that far. Potential growth couldn't be that fast. But he would say, 'It doesn't feel like an economy in which inflationary pressures are building'. And he was right. Whenever we monetary economics types get together, sooner or later the topic of conversation turns to Alan Greenspan. "He's not a God," somebody will say. We will agree that he's not a God. "He has a hard time giving a coherent explanation of why he holds his views," someone else will say. We will agree. Often, after a Greenspan explanation, our only reaction will be, "Huh?" "But why is his judgment so good? Why is he so right so often?" someone else will say. And we will have no answer. He knows things about how to analyze the modern business cycle that...

Posted by DeLong at 01:45 PM

September 12, 2002

"Decoherence" is a word from modern physics. It refers to a situation in which a superposition quantum wave function breaks into separate and mutually exclusive components: either A or B, but not both. Alan Greenspan has been trying to maintain a superposition on fiscal policy, but today it broke down, and became decoherent. He tried to argue both that (a) the Bush tax cut was a good idea, and (b) the Congress really, really needs to strengthen its controls because the country really, really needs a substantial budget surplus. It doesn't work. The position simply doesn't cohere: Greenspan Backs Budget Control and the Tax Cuts: ...The message of the Fed chairman's prepared testimony was that a breakdown of budget discipline over both taxes and spending would lead to higher interest rates and slower economic growth in the long run. Yet in the question-and-answer session, Mr. Greenspan seemed to align himself philosophically with Republicans — and anger Democrats — over how to address the nation's fiscal troubles. In response to some questions, Mr. Greenspan said the specifics of dealing with the situation were up to Congress, and he urged the House and Senate to extend budget rules, adopted a decade ago...

Posted by DeLong at 09:21 PM

More People Worry About Deflation

The Economist steps up to the "let's worry about deflation" plate. I agree with them. The Federal Reserve, however, does not seem to: the Federal Reserve appears to believe that the NAIRU--the unemployment rate at which inflation is constant--is somewhere near 5.5 percent (rather than the 4.5 to 5.5 percent I would estimate), and that the rate of growth of potential output--which is the rate at which real GDP has to grow to keep the unemployment rate constant--is only a shade above 2 percent per year (rather than the 3.5 percent per year that I would estimate). Economist.com: ...As a result, there is a risk that, before the end of 2003, the rich world's three biggest economies—America's, Japan's and Germany's—could all have negative inflation rates. A sharp jump in oil prices as a result of America invading Iraq could, of course, push up headline inflation. But the longer-term impact of higher oil prices would be deflationary, not inflationary. Higher oil prices operate like a tax that depresses growth, so their medium-term impact would be to heighten the deflation risk. DeAnne Julius, a former member of the Bank of England's monetary policy committee, argued in a recent speech that there is...

Posted by DeLong at 04:45 PM

September 09, 2002
Stephen Roach on "The Great Failure of Central Banking"

I don't agree with Stephen Roach that the Federal Reserve should have made interest rates higher and tried to make unemployment higher in the late 1990s in order to diminish investment spending and collapse the stock market bubble. In my view, the time to deal with any problems created by the bubble's collapse is when the bubble collapses--not before. Relative to a lower-stock prices, lower-investment, one-percentage-point-of-unemployment-higher bubble-popping path for the U.S. economy in the late 1990s, the actual path that we took gave us an extra $1 trillion of real production. You can complain about how that $1 trillion was distributed. You can regret that a large chunk of it--$200 billion?--was spent on investments that have much lower social value looking forward than their social cost. You can fear the damaging consequences of banruptcy and fraud on the economy. But you have to argue that these drawbacks from the fallout are quantitatively very large for the cost-benefit analysis to go Stephen Roach's way. Nevertheless, he makes his case more strongly than anybody else does: Morgan Stanley: ... Yet out of this glorious disinflation a new inflation was borne -- asset inflation. And central bankers didn’t have a clue how to...

Posted by DeLong at 09:58 AM

September 06, 2002
Think Analytically!

Think Analytically! I remember one day during the first Clinton Administration when Joe Stiglitz came into the room to chair a meeting, looked around, noticed that--so far--only economists had shown up, and announced that nobody who did not have a Ph.D. in economics would be allowed to speak at the meeting. (Do I need to point out that that Joe was making a joke?) He was. All of us got it. All of us cheered and applauded. We did so not because we Clinton-era economists all agreed on all the issues--anybody with half an ear to the ground would know that we did not. We did so because we had found that it was possible to make intellectual and policy progress in discussions with economists because we had all been trained to think analytically: to break the issue down into background assumptions about the world, beliefs about the principal causal mechanisms, and claims about the likely effects of different policies on those chains of cause-and-effect. When we disagreed--as we often did--we could quickly ascertain where and why, and then agree on how to go hunting for pieces of information that would help resolve the disagreement. This was in striking contrast...

Posted by DeLong at 05:58 PM

The Economist Joins the Pile on Alan Greenspan

This week's "Economics Focus" in the Economist joins the pack piling on to Alan Greenspan for not deflating America's stock market bubble earlier: Economist.com: ...There may be no painless way to deflate bubbles. Yet the correct test is not whether a bubble can be deflated without some loss of output. Rather, it is whether the early pricking of a bubble causes less pain than letting it grow only to burst later. The longer a bubble is allowed to inflate, the more it encourages the build-up of other imbalances, such as too much borrowing and investment, which have the power to turn a mild downturn into something nastier. If the Fed had let some air out of the bubble earlier, America's economy might now be better placed for future growth... Admittedly, for the Fed to justify an increase in interest rates when inflation was low would have been hard—but not impossible. It could, for instance, have argued that raising rates and so containing financial imbalances would avoid future economic instability and hence a large undershoot in future inflation. Central bankers do not have a political mandate to respond to asset prices. Even so, Mr Greenspan could still have done more to...

Posted by DeLong at 03:10 PM

September 03, 2002
In the Shadow of the Grand Tetons

Richard Berner from Morgan Stanley gives his take on the conversation at last weekend's Federal Reserve Jackson Hole symposium (sponsored by the Federal Reserve Bank of Kansas City). From my perspective, the strangest and most worrisome thing about his report of the conversation is the "European" belief that interest rates have to stay high to promote the "liquidation" of potentially bankrupt enterprises. This is not a strong current of thought in America (save, perhaps, for the pages of the New Republic): ...Few U.S. monetary policymakers fret that low interest rates will forestall corporate downsizing, because they believe that U.S. financial markets are appropriately denying capital to those sectors where gluts are biggest, or giving it to new management who will clean house. On the contrary, some officials worry that Corporate America is hesitant to hire. So while they are guardedly optimistic, they seemed more open-minded about the need for additional stimulus than recent press commentary had suggested. All agreed that the U.S. economy's resilience in the face of financial shocks was comforting, but no guarantee that it would persist.... With oil prices meaningfully higher than we forecast, I share their concern that fourth-quarter growth could zigzag back toward 2%. Such...

Posted by DeLong at 12:39 PM

August 30, 2002
Greenspan Defends His Policy Toward the Late Stock Market Bubble

There is a principal about asset market bubbles: a policymaking authority like the Federal Reserve can never be sure enough that an asset market rise is a bubble in order for it to take steps to pop it. Why? Because if the Federal Reserve can be sure it is a bubble, the "smart money" in the stock market can be sure that it is a bubble too--and if the smart money is sure that it is a bubble, the smart money will already have gone short the market on a large scale, and so popped the bubble by itself. Therefore the only bubbles that can flourish and grow are those that people are not sure are asset market bubbles. Here the Associated Press reports on Alan Greenspan's defense of Federal Reserve policy in the late 1990s. The only point on which I think Greenspan is weak is his claim that he knew that raising margin requirements would do no good, hence did not raise them. It's not clear to me that they wouldn't have had a beneficial effect--although probably a very small one. Greenspan Defends Decisions of Policy Makers in Late 1990s: ...In addition to defending the Fed's decision not...

Posted by DeLong at 12:36 PM

August 28, 2002
Defending the Economy by Attacking Asset Prices?

I have always been of the school that central banks should watch asset price bubbles with alarm, but should not raise interest rates in order to try to prick them. My guiding principal has thus been: "Sufficient unto the day is the evil thereof." I suppose I have been most affected by the memory of the Great Depression, where the Fed's desire to restrain asset prices generated interest rate increases that played a role (how big a role is still in dispute) in starting the snowball that became the avalanche of the Great Depression. Here Samuel Brittan cautiously, judiciously makes the case for a more aggressive policy toward asset price bubbles. I'm unconvinced, but it is certainly worth thinking about. Samuel Brittan: Taking asset prices seriously: ...a regime of inflation targets alone has now come under criticism for a different reason. The fear now is not that real output has been neglected but that asset prices have been. There is a vigorous if rarefied debate about whether asset prices as well as consumer price inflation should be specifically targeted. The riposte of central bankers is that asset prices are in fact taken into account insofar as they are expected to...

Posted by DeLong at 09:17 PM

August 24, 2002
Louis Uchitelle of the New York Times Also Worries About Deflation

Louis Uchitelle writes about the danger of deflation--and wonders why more people aren't worrying about it. I think the answer is that people are worrying about it. However, it's not yet a crisis, or even a clear and present danger. But it does seem to me that it could become a clear and present danger in a year, if things do not break favorably. Cost-Cutting Can Start a Ruinous Circle: ...Why isn't that danger uppermost in everyone's mind? Why are forecasters like James Glassman, a senior economist at J. P. Morgan Chase, so optimistic? In a nutshell, they expect an infusion of demand from somewhere that will reverse the cost-cutting and persuade companies to expand investment, production and hiring. Their main hopes are more tax cuts, more growth in federal spending and more interest rate cuts by the Federal Reserve. They also count on people to finance consumption by continuing to extract equity from their homes, which are still rising in value. Mainly, though, it is stimulus from Washington that for Mr. Glassman will save the day. "If Washington cannot get us moving toward full employment within a year," he said, "then there will be more federal stimulus. We have...

Posted by DeLong at 09:28 PM

August 21, 2002
America's Date with Deflation?

America's Date with Deflation? Two years ago, at the peak of the late-1990s boom, the American economy was slightly overheated. As the unemployment rate fell to four percent and below, inflation began to creep upward, rising by between a quarter and half a percentage point each year. By late 2000 it was very clear that America's GDP was one to two percentage points above potential output--above that level at which aggregate demand balanced aggregate supply, at least in the sense that there was neither upward nor downward pressure on inflation. Today things are very different. Today, in the summer of 2002, America's level of real GDP is running some two percentage points higher than it was in the summer of 2000. However, underneath is the extremely strong underlying productivity growth trend driven by the very real technological revolutions in data processing and data communications. These technological revolutions have boosted potential output by perhaps seven percent over the past two years. Thus today America's real GDP is not one to two percent above but three to four percent below potential output. How do we know this? Simply look at the unemployment rate: today America is producing two percent more than it...

Posted by DeLong at 01:22 AM

August 19, 2002
Strange News From the Federal Reserve

At current levels of unemployment, there is downward pressure on the rate of inflation. Unless the unemployment rate falls sometime in the next two years, it is more likely than not that the U.S. will be in deflation--and in that case the Federal Reserve's ability to stimulate the economy will be very small. I would have thought that a desire to stay far away from the edge of deflation would have provoked more interest rate reductions by now. It continues to puzzle me... washingtonpost.com: Bonds: Federal Reserve policymakers made no change in their target for overnight interest rates when they met last week, and the wording of their statement indicated they won't cut rates unless it seems clear the pace of economic growth is not going to pick up again. Nevertheless, the minutes of the previous policymaking session in late June, which were released last week, showed that the sudden slowing in growth caught the officials by surprise. Strong retail sales figures for July, particularly for motor vehicles, got the current quarter off to a solid statistical start, and initial claims for unemployment benefits so far have remained below the 400,000 mark, suggesting that payrolls are continuing to expand, albeit...

Posted by DeLong at 01:19 PM

August 15, 2002
The Course of the Recession

Last month's revisions to the NIPA produced a three-quarter decline in real GDP in 2001, instead of the preliminary one-quarter decline. Nevertheless, real GDP declined by only 0.6 percent before beginning its bounce-back in the fourth quarter of 2001. But the most interesting series remains the unemployment rate, still trending upward as real GDP grows less rapidly than productivity plus the trend increase in the labor force, and thus the proportion of America's potential workers left idle continues to grow. Charts from the Wall Street Journal....

Posted by DeLong at 04:22 PM

August 12, 2002
Monetary Policy in Flux

Well, this is a shock: Morgan Stanley's Richard Berner and David Greenlaw not only expect growth for 2002 to be markedly slower than I (and they) thought only a month ago, but they expect that the Federal Reserve has altered its view as well, and is about to cut interest rates by half a percentage point. Clearly their visualization of what is going on inside the Fed's FOMC is very different from mine... Morgan Stanley We now believe the Federal Reserve will ease monetary policy at its meeting next week by 50 basis points to insure that emerging economic weakness doesn't turn into a double-dip recession. The call is a tough one for a Fed that only three weeks ago expressed new confidence in a solid 3% second-half growth rate. It's a big change for us, as well. Growing signs of weakness over the past month had increased downside economic risks; but the tipping point was new signs of consumer pullback in July. We'll concede that Fed officials may still want further evidence before moving. If we are wrong and the Fed does not change rates next Tuesday, we expect officials to ease by the September 24 FOMC meeting. While...

Posted by DeLong at 04:00 PM

June 28, 2002
Planning for the Forthcoming Greenspan Succession

For more than two decades, an astonishingly large proportion of American economic policy has been in the hands of two long-tenured market-philosopher princes, Paul Volcker and Alan Greenspan. Now it appears to be time to begin thinking about the post-Greenspan succession. And the Bush administration appears to be following its standards operating procedures: to be somewhat weird. For what possible reason could someone like Bob Rubin be an "unacceptable" candidate? WSJ.com - Major Business News ...There are no clear Republican choices. Lawrence Lindsey, head of the White House National Economic Council and a former Fed governor, and John Taylor, Treasury undersecretary for international affairs and a monetary scholar, get frequent mention, but neither appears to have the necessary stature. Two often-named Democrats, former Clinton Treasury secretaries Robert Rubin and Lawrence Summers, are unacceptable to the Bush White House. While officials insist publicly that there isn't any reason to plan now for a post-Greenspan world, administration economic advisers and private economists have been consulted about the process, about candidates and about characteristics a Fed chief should have. Although Mr. Greenspan appears to be in good health, he is the oldest chairman in the Fed's history. The previous record was set by...

Posted by DeLong at 02:10 PM

June 20, 2002
The Federal Reserve Says Its Keeping Its Foot on the Gas

At the moment short-term real interest rates are negative: the 1.75% per year interest rate that the Federal Reserve has set on overnight federal funds is less than the rate at which consumer prices are rising. This is a very stimulative posture--it tells businesses that they should undertake investments that (in the short term at least) promise any profits at all, no matter how low. Now the Federal Reserve is telling us that there are no interest rate hikes on offer for the next few months. The Federal Reserve does not have confidence that the recovery is strong and steady enough to risk disrupting it by raising interest rates and making the incentive to invest less. The Federal Reserve does not fear rising inflation enough to want to raise interest rates to put downward pressure on price increases. | washingtonpost.com: Fed May Not Raise Rates At Least Until September | John Berry | June 20, 2002 | The Federal Reserve now appears unlikely to raise interest rates until the fall, at the earliest, because inflation remains extremely low and the U.S. economy is not growing fast enough to create many new jobs. At the beginning of the year, some investors...

Posted by DeLong at 09:10 PM

The Economist's Fears for the Strength of the U.S. Recovery

It is a strange business cycle conjuncture that the U.S. is in now. Stock prices appear overvalued, and likely to fall--an extremely unusual thing to happen at the start of the recovery. Business investment seems likely to weaken further. Yet productivity growth appears extraordinarily strong. The most likely forecast thus seems to involve (a) relatively slow growth--less than the growth rate of potential output (which is about 3.5% per year, or perhaps a touch more), coupled with (b) rising unemployment for the rest of this year at least. The Economist's gloomy take: Economist.com: ...there are good reasons for the markets' current angst. Doubts about the pace of economic recovery lie behind much of it. Wall Street is still, by any historical measure, extremely highly valued.... In so far as they ever made sense, such valuations assumed a speedy return to the extraordinarily high profit claims of the late 1990s. That assumption seems increasingly far-fetched. Mr O'Neill may not have noticed any " substantive information" recently, but others have. In particular, they fret about signals that the American consumer may be running out of steam. May's retail sales fell by an unexpectedly large 0.9%. With no evidence of a rebound in...

Posted by DeLong at 11:32 AM

May 23, 2002
Strong American Relative Growth

During the 1990s, U.S. economic growth by far outstripped that of the other major industrial economies.

Posted by DeLong at 02:27 PM

October 26, 2001
A Link to One of My "Interesting Graphs"

Interest Rate Cuts in 2001 The 4.5 percentage-point reduction in the target Federal Funds rate by the Federal Reserve over the past year is an astonishingly large shift in monetary policy. Yet it is not clear it will be enough to avoid a deep recession. And there is not that much more room left for further monetary expansion....

Posted by DeLong at 09:56 PM

November 30, 1999
America's Historical Experience with Low Inflation

America's Historical Experience with Low Inflation J. Bradford DeLong | U.C. Berkeley and NBER | November 30, 1999 Abstract The inflation of the 1970's was a marked deviation from America's typical peacetime historical pattern as a hard-money country. We should expect America to continue to be a hard-money--low inflation--country in the future, at least in peacetime. The low rate of future inflation that we thus forecast changes the balance of macroeconomic risks and opportunities. The risk of debt-deflation-mediated recessions is somewhat higher because a low trend rate of goods-and-services price index inflation somewhat increases the chances of deflation. But it does not raise such risks as much as one might think. The failure of the Fisher effect to hold empirically means that a low inflation era will in all likelihood be a high real interest rate era. But such high real interest rates do not appear to significantly discourage investment or growth....

Posted by DeLong at 03:01 PM