His tentative policy views jumped out at me as expressing what has been rambling around, incompletely formed, in my mind.
Let me offer some multiple choice questions.
1. What should be the stance of U.S. monetary policy?
a) The Fed is out of ammunition (.0001)
b) The Fed needs to worry about hyperinflation, so it should not attempt any further expansion. (.0499)
c) The Fed should be trying to expand the money supply, and if anything, a little more inflation would be a blessing (.95)
The numbers in parentheses are my estimate of the probability that the answer is correct.
Scott Sumner and Ken Rogoff, two economists with different perspectives but who have been right more often than wrong about the current situation, both favor (c). So do I.
Answer (b) sounds like something out of the Tea-Party fringe. But it is indistinguishable from current Fed policy, which is to note that the economy is weaker than anybody would like, and therefore no policy change is required…
Answer (a) strikes me as nuttier than anything that has come out the Tea Party fringe. The Fed cannot be out of ammunition as long as it can buy stuff by printing money. Conceivably that could happen if the cost of printing money were higher than the value of the stuff that you can buy with it. But we are nowhere near that point. And it’s hard to get to that point in an era where printing money can be accomplished by moving bits on a computer network.
I’m just old enough to remember my parents stressing out badly over inflation in the 1970s (seeing your mom nearly in a panic in the grocery store over how to buy food for her family is not good for a child’s psyche), so I take inflation concerns seriously. But I am confident that the Fed is at least as concerned as I am about inflation, so a little short-term increase won’t necessarily lead to serious long-term problems. I’ll never get my Real True Austrian card from the Mises Institute for saying so, but I can live with that.
2. What should be the stance of fiscal policy in the U.S. and other countries that still enjoy the confidence of the world’s investors?
a) Tighten up fiscal policy to keep investor confidence. You are going to need it. (.60)
b) Loosen up fiscal policy to stimulate growth. (.10)
c) Stay the course. (.30)
Everyone who has an opinion on this is well dug in. Nobody is changing any minds. My weights show that I am worried about the long-term fiscal outlook. I am skeptical of the Keynesian idea that more deficit spending would be stimulative, but I am not so sure of myself as to consign the idea to the same trash heap where I would throw “The Fed is out of ammunition.”
Agreed. I’m exceptionally dubious of the value of fiscal policy, but I’ve been going over it and over it here on this blog because I’m not confident enough in my skepticism to flat out say it can’t be right. And if I was in the President’s cabinet, where the need to do something–for God’s sake do something!–is overwhelming, I don’t know that I’d have the courage to argue against fiscal policy.
But I also agree that clearly the Fed is not out of ammunition, despite the repeated bleating about the zero-bound on interest rates. So I’d like to see some more aggressive Fed action. Admittedly, though, given that the Fed has already engaged in some unusual monetary policy actions, I may be engaged in the same kind of behavior as the Keynesians I’ve criticizes, arguing that “of course my favored approach works; we just haven’t done enough of it yet.”
But this is Kling I’m citing here. If he’s right about the crisis revealing changing patterns of sustainable specialization and trade, which I suspect he is, are we both wrong in urging more monetary policy action?