I greatly admire Bill Woolsey. I could only wish to know as much about macro as he; and I admire his style of writing, going through his logic one step at a time. He has contributed more to my education than he could ever know.
On my last post regarding my challenge to David Romer, he left this set of questions for me in the comments section:
Why is it that periodic modest changes in the target for the federal funds rate are not closing the output gap and deviations from target? It is the economy’s fault–finance is not working right! The notion that we should instead shift to an entirely different framework for monetary policy is not on the table. Isn’t it the job of the macroeconomist to figure out a way to help the Fed do what it is comfortable doing?
As for the question about the FF rate, my answer might be rather crude, but I would say that the short-term rate peg is effective for fine-tuning during normal times when rates are positive. The extent to which we are currently at the ZLB, however, is unknowable. But this point seems to not be related to what I said about exposing the problems with inflation targeting so it can be debated in public – a debate about which came first, the chicken or the egg. Did tight money cause the foreclosure crisis, or merely exasperate problems in the financial system? My position is that the AS/AD model holds a big piece of the puzzle.
The point of my post was more about how we got here, including the experience of the ZLB, however. It was about spurring debate about what is needed to get out of it by painting the entire picture in an intellectually honest way.
For some background on my position, as an amateur historian, my interests in the Great Depression were broader than just the economics of it. I’ve studied the social history of the time period and was horrified by what I found to the point that I had to discontinue my studies. Average people were reduced from self-sufficiency to subsisting on dandelions plucked from their yards. Families were ripped apart and orphanages filled up because parents couldn’t feed their children. People lost everything they worked for all their lives.
I now completely understand why we aren’t taught about it in the education system. It isn’t something we want to talk about, much less remember. But is it something we should never forget as one huge reason to never, ever let it happen again.
Complacency is a huge evil. The powers that be feel they have everything under control, and can branch out with experiments as if we are all white lab mice. Well, we aren’t lab mice. And I hate to answer a question with a question, but it seems appropriate here. Is what happened to NGDP and the associated effects consistent with the law? Was it fair to all of those people who work day in and day out for all they have to have it mysteriously swallowed up due to lack of foresight and careful consideration regarding a topic as serious as explicit inflation targeting? Are government officials allowed to deviate from the law, especially when it contributes to mass economic devastation?
What is to be done regarding monetary mistakes? When is it time to admit the ideas in current practice were short-sighted, at best; when there is only one dollar left in existence for all to share or some time sooner?
Bernanke, Mishkin, Goodfirend and their cohorts were wrong and plenty of people are still suffering for their mistakes in measurable and immeasurable ways. It is arrogance that brought us to this place, and only humility will get us out.