Jeffrey Sachs: Welcome To the Hard-Money Paleo-Liberal Club
As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.
Matt Yglesias’s response:
There was, obviously, a huge boom in the price of land in the United States of America during this period. But was there really an extraordinary boom in housebuilding?
At the height of the “boom” we were adding units about as quickly as we were adding them in the late 1970s, when the total population was smaller and China’s “opening up” was just a glimmer of an idea of a possibility. If the Federal Reserve was trying to engineer a homebuilding boom it didn’t really work.
Hmmm. So, after the dot-com bust and the subsequent recession, instead of looking for ways to increase the long-term growth rate of the economy (whether by making the tax code or the regulations more efficient, or through an increase in public investments in physical infrastructure and human capital), the Bush Administration and Greenspan Fed relied on easier money – monetary easing by the Fed and an increase in housing lending – to provide stimulus.
And not only did we not get a sustainable recovery across the board, according to Yglesias we didn’t even get (in aggregate) massive overinvestment in the housing sector (though we certainly did get ludicrous overinvestment in certain areas, like California’s Inland Empire and southern Florida). Instead, what we mostly got was a speculative bubble.
So the solution to our current recession must be Yglesias’s preferred policy of increased monetary stimulus. Because that’ll definitely lead to a sustained increase in aggregate demand, rather than another speculative bubble.
And Yglesias, if I understand him correctly, has argued that since the late-1980s monetary policy has been too tight, the evidence being that unemployment has remained stubbornly higher for longer after recessions and that we’ve had only one period of sustained wage growth (the late 1990s). So maybe the problem with the economy in the 1990s and 2000s was insufficiently large speculative bubbles.
Meanwhile, count Jeffrey Sachs as another liberal skeptic, along with Joseph Stiglitz, of the reigning liberal economic paradigm.
Noah,
Everything about me suggests I should not only be a skeptic of the “reigning liberal economic paradigm” but a harsh, reactionary critic. My problem is that I started reading Scott Sumner and soon became convinced this guy knew what he was talking about:
http://www.themoneyillusion.com/?p=10791
— Fake Herzog · Sep 19, 02:05 PM · #
You can’t respond to an argument that you are yelling “Fire!” in Noah’s flood with the observation that drought happens.
It seems to me we have arguments along too axes. One is whether the US should make more public investments in infrastructure and education. It probably should, but there are many forces in the American political system that make those investments unusually ineffective. That debate is more-or-less constant.
The other is whether we should have more or less demand. That depends entirely on the moment. Concluding that the USG should boost demand now does not imply it should have done so in 2006.
— Pithlord · Sep 19, 04:26 PM · #
Pithlord:
Well, I’m going to keep citing left-wing critics of the notion that the Fed can reliably engineer a recovery in demand. That’s what Stiglitz and Sachs are saying: not that we don’t need more demand, but that a monetary expansion – or a fiscal expansion that is unrelated to any effort to achieve long-term growth – won’t reliably deliver it. In other words, that this isn’t a good way to fight the flood.
You might get more inflation but lower real growth such that nominal GDP doesn’t rise the way you want it to. That’s arguably what you got in the 1970s.
You might get more speculation – asset inflation – without getting an adequate increase in genuine wealth-generating activity or employment. That’s arguably what you got in the 2000s.
I’m not talking in abstractions; I’m talking from cases. My interpretation of these events may be wrong, but at least respond to it for what it is; don’t just dismiss it.
And if our response to the ongoing employment recession doesn’t deliver significantly higher employment and significantly higher nominal growth, we’ll still have to deal with the rise in inflation and/or debt, and we’ll be in worse shape than we are now.
There are a variety of ways in which the equation “monetary expansion —-> increased demand” could go wrong. I’m making those arguments. They may be wrong, but saying “you’re yelling fire in a flood” isn’t a counter-argument; it’s a slogan.
And, by the way, there are lots of ways fighting a flood could go wrong. It would, for example, be really weird to fight a flood by starting a fire.
Right?
— Noah Millman · Sep 19, 04:52 PM · #
More evidence we need monetary policy to target NGDP:
http://thefaintofheart.wordpress.com/2011/09/18/john-taylor-defends-a-troublesome-target/
Nunes is a Sumner protege whose blog also defends monetary policy.
— Fake Herzog · Sep 19, 07:52 PM · #
As you wish, but perhaps you should choose better examples. After all, your example of the Fed failing to generate an increase in housing demand is a situation where the Fed generated an increase in real estate demand.
— Chet · Sep 19, 08:26 PM · #
As Matt Yglesias tries to move from commentator to Original Thinker, he keeps digging himself into a weirder and weirder place. For example, “At the height of the “boom” we were adding units about as quickly as we were adding them in the late 1970s … If the Federal Reserve was trying to engineer a homebuilding boom it didn’t really work.”
In 1978, the first baby boomers were 32, so of course there was a huge demand for homes. In 2007, 32-year-olds were born in 1975, at the bottom of the Baby Bust. The smart thing would have been for investors to realize in the last decade that rising population was mostly driven by Hispanics, and there wasn’t much evidence at all that they could generate the wealth to pay off these huge mortgage debts they were taking on. But that is Crimethink, so almost nobody thunk it.
— Steve Sailer · Sep 20, 02:36 AM · #