In a recent post on Econlog, Scott Sumner presents questions for which there are no answers. One of the questions is this:
“Was monetary policy too expansionary during the housing boom?” The only sensible answer is “it depends.” It’s not clear what the Fed was trying to do during this period. If we knew, we could evaluate whether the policy was too loose or too tight to achieve their policy goal.
Now that unemployment has fallen to 6.6%, it’s possible to begin to make sense of the past decade. Prior to 2008, the highest unemployment rate of the 21st century occurred in June 2003, when it reached 6.3%. Let’s examine what the US economy has done over the past 10 1/2 years:
1. NGDP has grown at almost exactly 4% per year since 2003:2.
2. The PCE price index (which the Fed targets at 2%) has grown at almost exactly 2% over the past 10 1/2 years.
Because we are currently at about the same position in the business cycle as in June 2003, I think it’s fair to say that the trend rate of RGDP growth has been about 1.9% over the past 10 years. I suspect the rate is slowing, from a bit over 1.9% prior to the crash to below 1.9% since 2008, mostly due to retiring boomers, but also the immigration crackdown.
What are we to make of the 2% inflation rate? One could argue the Fed has been successful. After all, 2% is their target. But I believe that’s wrong for 3 subtle reasons.
I don’t intend to paint too broad of a picture in criticizing the post. Scott Sumner is still very much my hero. Nevertheless, the framing of the question is a bit tricky, reminding me of a sort of negative context like ‘When did you stop beating your wife,’ because the question itself is irrelevant.
It is irrelevant for many reasons, not the least of which being that the burden of proof lies with the prosecutor, and there is no such proof that ‘easy money’ leads people to behave irresponsibility or that there is a causation relationship between ‘easy money,’ a macro phenomenon, and disturbances in any single market. It is an entirely plausible and rational expectation that under the circumstances of excess supply of money versus demand many other types of investments would be stimulated across the board, and that supply side incentives are required in order for investments to become focused in any given market.
In addition, given that it isn’t mentioned which PCE price index is being discussed, core or headline, the post isn’t specific enough to come to any conclusion one way or the other. Perhaps we’re being slipped a Mickey with interchangeable yardsticks measuring price inflation? Considering headline inflation in an attempt to determine the stance of monetary policy is misleading; and in the case of the central bank doing it, it is cheating toward the side of tight under the right set of circumstances.
One of the reasons I wished to bring this up is because the difference between core and headline inflation measures is one of the most informative and compelling pieces of information market monetarists have in explaining and illustrating the hazards of inflation targeting. I see nothing to be gained in trying to speak the language of inflation nutters to make the case for NGDP targeting while removing the most powerful case for it we have. It ends up as a confused mass of troll food, and by the time the point that NGDP grew too fast (a point that I also have a quibble with) and the Fed just slammed on the brakes, causing the mayhem of 2008-09, the people who might be persuaded to our way of thinking are lost.
I certainly hope that no one minds me saying this, but the formula for explaining market monetarism to average people, and likely other economists, is the formula that persuaded me – Sumner’s early posts explaining his concept of what caused the financial crisis – straight up. No obscurity. No translating. No watering down. Give it to ‘em raw – and NO FEEDING THE TROLLS!