I promise I won’t be always going on about ‘why it is not 1979 any more’, because I really have milked it to death, and I know it. The Guardian changed the subheading of my piece today, doing me no favours in this regard (‘George Osborne thinks he can cut and devalue our way to recovery, but he’s confusing 2009 with 1979’).
I swear I have more than just that thought in my head. My piece – and the research that prompted it – is meant to be about the future. But the past guides the future. How far and fast can Britain changes its economy into an exporting machine? Ultimately, you need to look at our past record at achieving this. And being able to play with a rough simulation of the results is useful, I maintain.
(Not) moving on, Krugman has provoked Scott Sumner into a below-par analysis of American recessions now and then. Sumner appears to be claiming something or other about the efficacy of fiscal stimulus on the basis of how much it was operated in 1983. This seems daft: in the phraseology of Richard Koo, confusing the Yin phase with the Yang phase. Krugman may occasionally overstep the mark – as Phelps (perhaps) accuses him today, believing that all slumps can be fixed with extra demand. However, surely an economic historian like Sumner can appreciate how things are different when inflation falls from 15% to 5%, than when the recession started with inflation already falling?
I am spectacularly bad at getting my comments accepted by Sumner. Mine disappeared again this time. But Jim Glass seems to have beeen accepted and puts it pretty well:
Anyhow, the big obvious difference between the Reagan recession and today’s was that one resulted from inflation going way, way up during the Carter years, then the Fed pushing interest rates way up towards 20% to stop it, then as the economy fell the Fed dropping rates from so high to down low. It was an inflation-correction recession engineered by the Fed to break the cycle of inflationary expectations that had gotten built into everything. (Again, how things change.) My profs from the Fed went on about that endlessly. The causation and mechanism of this recession seem entirely different. From back then I have no memory at all of “stimulus” being mentioned by anybody, anyhwere. Lots of people wanted interest rates lowered — farmers marched on Washington and drove their tractors around the Fed and Capitol and all about that. People on McNeil-Lehrer (remember McNeil?) argued about interest rates all the time. Nobody mentioned stimulus.
The Economist gets it right as well:
In 1973 and 1981, the Fed was trying to wring inflation out of the system and deliberately slow the economy. It is clear that any stimulative measure would have been entirely cancelled out by central bank actions. This time around, however, the Fed was substantially easing well before the economy entered recession, and effective rates neared zero by the end of last year. This means that additional monetary easing must involve actions outside the traditional monetary toolbox, and it means that we can’t expect a rapid recovery based solely on the Fed’s taking its foot off the economy’s air hose
So nothing about how the economy operated in the early 1980s tells us anything about whether stimulus is a good idea now. There is a critical lack of demand in the economy, a lack of demand for funds, which Koo describes very well in his Japan book, and no amount of jigging around with open market operations or NGDP targets is going to suddenly change that – so long as people are balance-sheet obsessed/overwhelmed with Knightian uncertainty.
I have gained a huge amount from Sumner’s blog and the polite discussions that follow. He plays a very useful role in revealing the inconsistencies behind the Fed’s stimlatory policies (see this excellent heading, for example: ‘We don’t expect inflation, but expect to expect it soon‘). But I think he gives away the game when he writes this:
under a fiat money regime I assume that policymakers can hit any NGDP target, if necessary with a futures targeting regime.
I’m sorry, but that reminds me of the joke about an economist stuck on a desert island. He has a way off the island, he tells the others. ‘What is it?’, they ask. ‘Well, first assume a boat’, he answers.
Assuming that the policymakers can hit NGDP targets without giving more than a couple of long ago historical instances totally evades a problem that seems to have stumped the whole monetary policy making world, and nowhere have I read it adequately proven. ‘I have found the Fed to be incompetent – you see with my magic tool they can always make the trillions of discoordinated economic actions that add up to Nominal GDP sum to whatever they decree!’. A bit like being disappointed by Santa not solving world hunger.