A guest post by Benjamin Cole
There is much topography to bewail when overlooking the United States landscape of economic thought, but perhaps no sulfur pits and odiferous bogs are more lamentable than those resulting from rank politicization of the profession.
Let’s call a spade a spade: “Economics” has become politics in drag, behind dresses of calculus, skirts of econometric models and bonnets of banal stilted language.
The ongoing professional charade is to feign objectivity while obtaining “results” in studies or observations that always conform to the not-so-hidden agenda of the authors.
Thus we have a John Cochrane or a Paul Krugman executing shrill exquisite contortions in their observations about the impact of QE and monetary expansionism in 2013.
Bottom line, they say QE doesn’t work.
Since September 2012, the Fed has maintained an open-ended, result-dependent QE program, and some forward guidance. This is not yet Market Monetarism (which would include targeting of nominal GDP), but getting closer.
The results of this iteration of QE have been satisfactory if not great. Employment has been rising at nearly 200,000 a month, and the S&P 500 is up more than 25 percent.
The federal deficit has tightened considerably.
The 2013 United States track record strongly suggests sustained, open-ended and result-dependent QE works—and if anything, 2013 further suggests that an even more-aggressive growth-oriented monetary policy would be better. After all, inflation is falling below 1 percent. The Fed has erred on the tight-side.
Japan, as Marcus Nunes so effortlessly pointed out in these pages recently, is another impressive study on the merits of aggressive QE, with the relative success of Abenomics. As the rest of Abenomics has not happened, Japan’s revival can be squarely laid to QE.
So, what then explains Krugman and his easy dismissal of QE? Fiscal stimulus in the USA is rapidly shrinking, but the economy is doing better and better.
So that means QE must work, no? No. We are still in a liquidity trap, insists Krugman, as seen by a still-dull economy.
And John Cochrane? Evidently driven to distraction, he is now entertaining theories that QE is contractionary and deflationary.
Cochrane is even more puzzling than Krugman, on one level. As Cochrane’s twin professional concerns are the dangerous level of federal debt, and inflation, one might assume he is euphoric at the revelation that QE is deflationary.
So, even more QE means we can pay down the national debt while bringing us to zero percent inflation?
That would be the ultimate nirvana for Cochrane.
No matter, he stills dismisses QE.
The left-wing is clueless, and so we will dismiss them without further commentary. But the right-wing did offer hope in the not-so-recent past. As early as the 1990s, right-wing economists such as John Taylor, Milton Friedman and Alan Meltzer spoke in favor of QE, as a solution to Japan’s perma-gloom. (As did the left-leaning Krugman and middle-of-the-road Bernanke)
But in the current era of voodoonomics, right-wing economists have become zero-inflation cultists, or even gold nuts.
Did I say zero inflation? That is not the worst; FOMC board member and Philadelphia Fed President Charles Plosser has rhapsodized about deflation.
Think about it: We are still in the Great Depression if you are looking for work, there are fewer people employed today than five years ago, and inflation is at historic lows and at one-half of supposed Fed target levels.
But Plosser thinks deflation is a nice idea.
The upshot: The right-wing has decided not only to lose the battle for economic prosperity, but probably also to lose the political battle—and all to pay homage to the equivalent of a creationist theory of economic growth.
First you get to zero inflation, say the right-wingers. And then you stay there, and all else is cured (or doesn’t really matter, as zero inflation is the theocratic best result).
It is as if Japan sank into the sea 20 years ago.
What modern large industrial nation has had economic growth and deflation? How has deflation affected Japan? What happens to real estate values—and real estate loans—in sustained deflationary environments? And what happens to banks when loans go sour?
Supply Side Arguments Crushed
Market Monetarist solon Scott Sumner recently completely crushed the “supply side improvements are the only answer” argument, by pointing out industrial production has risen 25 percent or so from its recent nadir. And it is still rising. So supply can grow, you just have to have demand.
Complicating this issue: The supply side is now global, compared to mostly domestic 40 years ago. Tough to imagine the supply-side being crimped these days. And since the dollar is an international reserve currency, the United States can simply print money and import goods and services.
But getting back to the supply-side, domestically. I welcome improvements on the supply-side; every sensible economist does, and nearly all Market Monetarists do.
But, just which supply-side constraints are we willing to blast open? And when?
But the big sad ending to this post is this: If the right-wing had embraced Market Monetarism, we might have had much more-robust economic growth since 2008, and very palatable arguments for limiting social welfare programs of all types.
Give to me prosperity, and I happily will say to all, “Get a job.”
But “economics” today is not about prosperity. It is about ideology. It is about politics.