Thank you for Your Service

This is what needs to be said about Ben Bernanke. Based on his academic record, he was the best possible person for the job. Most people don't realize this. A scholar of the Great Depression, with generally correct opinions, just happened to be Fed chairperson for the biggest crisis since the Great Depression. 

But under Bernanke's chairmanship, Fed policy has been tame and disappointing relative to his academic record. However, he is just one person, in an institution designed to prevent any one person from having too much power. The structure of the Fed does an good job of representing the consensus in economics, which has been too timid. Yet today we have an unprecedented Fed policy that, while not the best it could be, was fairly radical for an institution that changes slowly over time.

In a way I am reminded of Fredrick Douglas eulogizing Lincoln (I know this situation pales in comparison to Lincoln, but still):

"Viewed from the genuine abolition ground, Mr. Lincoln seemed tardy, cold, dull, and indifferent; but measuring him by the sentiment of his country, a sentiment he was bound as a statesman to consult, he was swift, zealous, radical, and determined."

Does Policy Matter?

Continuing on from my previous post, I started 2013 with a prediction that it would be a better year than 2012, but that if the Fiscal Cliff occurred it would not. A sizable portion of the Fiscal Cliff did happen, but 2013 was not much different from 2012. In September 2012, I spoke positively about the Fed starting its third round of Quantitative Easing (QE), and, at least by job growth and available GDP figures, things haven’t exactly taken off. One conclusion is that fiscal spending levels and the stance of monetary policy don’t matter. That would mean that the basic models of classical economics were 100% correct, Laissez Faire is always the optimal policy, and why have we been wasting paper on new textbooks? That’s basically the consensus that made the Great Depression worse.

The other (correct) explanation, is that fiscal and monetary policy have been canceling each other out. In the beginning of the recession we had more expansionary fiscal policy. Monetary policy, on the other hand, is looser today than it was at the start, when stimulus measures were in even greater need. Short term interest rates didn’t drop to around 0% until the end of 2008, nearly a year after the recession began. The first two rounds of QE were for fixed amounts that were too small to get their intended results (the current round is supposed to go on until policy goals are reached).

The point is that fiscal and monetary policy have essentially pulled in opposite directions, making it look somewhat like neither have mattered. But don’t you believe it.

December Jobs Report

So I took a long pause from posting here but now I’ll do more I guess. Anyway, the December Jobs Report: a terrible 74,000 jobs added. It could be an anomaly, the previous two months were above 200,000, and revised upwards in the December report. In other bad news the unemployment rate dropped from 7 to 6.7% due to people dropping out of the labor market. However, the unemployment rate has dropped significantly from when the Fed started its monetary stimulus program and is now slowing down the rate at which it buys bonds with money it creates. Maybe I’ll go into detail about that later.

At the start of 2013 I had a post called “This Year Should be Better”. Was it? The stock market had well above average returns, which if you want to assume that’s completely rational, it means there’s an expectation of increasing profits due to higher expected future growth. Annual GDP growth figures aren’t out yet (that I could find), but the year in job growth is less generous to 2013. The average monthly job growth for 2012 was 183,000; in 2013 it was 182,000.

So by that metric I was wrong, but like any clever (wannabe)economist, I laid out conditions that limited my prediction. I said that it would be a worse year if the fiscal cliff was allowed to happen. And a large part of it did in fact happen: taxes went up on January 1st, and budget cuts went into effect in March. The full force of the fiscal cliff was expected, by the CBO, to cause negative growth for the first half of 2013. Instead we had growth similar to the previous year. Part of this is due to the total fiscal contraction being smaller than what the CBO forecasted using “current policy” as a guide.

But we’ve also had expansionary monetary policy as described above. That we had a sizable fiscal contraction and essentially no slowdown in growth points to an offsetting factor that I would argue is monetary stimulus. The flipside of this is that, if we somehow had a significant fiscal stimulus, people would expect (rightly I think) that the positive effects would be offset, to some degree, by less monetary stimulus at whichever pace Fed goals are reached.