Friday, January 30, 2009

Maybe He Should Name His Next Dog "Mellon"

Harvard economics professor Greg Mankiw spent some time as President George W. Bush's CEA chair. He's also a founding member of the New Keynesian school of macroeconomics (in my first year in grad school, I bought his two-volume New Keynesian Economics collection, co-authored with David Romer, husband of Obama CEA chair Christina Romer). And, Mankiw's blog has emerged recently as a sort of online file cabinet for stimulus opponents. 

In the course of collecting material for a textbook I'm coauthoring with Tom Smith of Emory, I ran across this Mankiw column from December 23, 2007. Given the column's timing--it was written during the month the NBER subsequently declared as the first of the current recession--it's kind of amusing that it's titled "How to Avoid Recession? Let the Fed Work". Here are some of the good quotes:
  • The Fed's control over the money supply is a powerful lever to move overall demand for goods and services. [Translation: monetary policy is where it's at.]
  • The influence of interest rates on the economy is particularly strong in housing, where buyers are rate-sensitive. Because housing woes are the source of the current slowdown, the Fed's tool kit is well suited for the task at hand. [Translation: By cutting interest rates, the Fed will stimulate housing demand, raising prices!]
  • The recession-fighting effects of monetary expansion, however, are not limited to the housing market. When lower interest rates make fixed-income investments less attractive, investors turn to the equity market and bid up stock prices. [Translation: If we let the Fed alone, its rate cuts will cause the stock market to boom!]
  • Higher stock prices, in turn, make consumers wealthier and more eager to spend. [Translation: The stock market boom will cause consumers to run out and buy, buy, buy!] 
  • They also make it easier for corporations to expand their businesses with equity financing. [Translation: The stock market boom will make it really easy for businesses to get credit!]
  • Admittedly, monetary policy can sometimes use an assist from fiscal policy. If an economic downturn is deep, if a recovery is anemic or if the Fed is running out of ammunition, Congress can help raise aggregate demand for goods and services[Translation: I might agree with DeLong & Krugman in a year if the Fed runs out of bullets.]
  • In 2003, the Fed had cut its target interest rate all the way to 1 percent, the economy was still suffering from the lingering effects of recession, and there were increasing worries about deflation. A tax cut was a good complement to monetary expansion to get the economy going again, even though it increased the budget deficit. [Translation: I like fiscal policy in the same circumstances that other guys do, provided that the word that dare not speak its name not be spoken.]
  • Today's situation is different. The Fed has plenty of room to cut rates further, if it deems such cuts necessary. At the moment, recession is only a possibility, and inflation is a bigger worry than deflation. In this environment, there is no need for a short-run fiscal stimulus. [Translation: no reason to worry, there's no recession on, and no real deflation threat.]
As we all know now, Mankiw was wrong about virtually every prediction or evaluation he mad: housing prices have not risen, the stock market has not boomed, consumer demand has not boomed, business credit has not boomed. Meanwhile, the Fed is now "out of ammunition" by Mankiw's own December 2007 description, and there's now deflation happening. 

Sure, Mankiw wasn't the only guy who made the wrong predictions, and it's easy to look back with hindsight. But some folks got it right. And Mankiw's newfound stimulus opposition is interesting. 

As the preceding post makes clear, there's plenty of switching going on by folks on all sides of the ideological aisle. But as a regular reader of Mankiw's blog, I have a difficult time figuring out both (a) what his understanding of the macroeconomy is, and, therefore, (b) how he comes to the macroeconomic policy views he does.

(In case you're wondering about the post title: see here.)

1 comment:

  1. I've been baffled by the man since I learned about his political leanings. We studied him in undergrad intermediate macro and in graduate macro as a new Keynesian, and he seemed like a good source of middle-of-the-road stuff. So when he was unveiled as a Republican I was fairly surprised. The quotes are wrong but they aren't out of line with Clinton era economic orthodoxy. Is he really opposed to the stimulus? What ammo does he think there is left?