Why Were Some Economists Against QE Before They Were For It?

Scott Sumner, a monetary economist who has always thought the Federal Reserve has been too tight-fisted post-crisis, points out that the reasons for being against QE (which Sumner was and is for) and thinking fiscal stimulus (government spending more) is more likely to boost demand are the same now as a couple of years ago; and yet most left-leaning economists seem happy to embrace QE2 now.

Fellow economist Bryan Caplan contemplates Sumner and thinks he sees some political economy behind wanting fiscal stimulus then, and monetary now:

 I suspect that top-tier liberal economists favored fiscal stimulus because they saw a golden opportunity to push big government, not because they saw a technical problem with monetary policy.  Uncharitable I know, but I see no other way to explain their sudden change of heart.

Comments

[? (formerly $$$)]

"Post-?"

[Jeffersonian]

As an electrical engineer, I think it's important to have the proper view of Ohm's Law at all times. Which is, of course, determined entirely by who is in control of the three branches of government.

[Lint]

This made me chuckle.

[P Brooks]

Scott Sumner, a monetary economist who has always thought the Federal Reserve has been too tight-fisted post-crisis, points out that the reasons for being against QE (which Sumner was and is for) and thinking fiscal stimulus (government spending more) is more likely to boost demand are the same now as a couple of years ago; and yet most left-leaning economists seem happy to embrace QE2 now.

I think your translator is on the4 fritz.

Try again.

[R C Dean]

I suspect that top-tier liberal economists favored fiscal stimulus because they saw a golden opportunity to push big government,

There ya go. The stimulus was all about growing the baseline size of the federal government.

A premise that the so-called deficit commission has endorsed whole-heartedly, since their "cap" on the budget is more than enough to allow a new stimulus, every year, forever.

[hmm]

Can we stop calling it QE and call it what it is, monetizing debt. Just because we aren't printing and just moving digital decimal points doesn't make a difference.

[Hazel Meade]

I'm not sure that "boosting demand" is what is needed.

The real underlying problem is the loss of capital due to malinvestment in the housing market. Some of that might be recovered, but it is tied up in mortgage securities whose outcomes have yet to unravel. In the meantime, it can't be reallocated.

That is what is behind the purported stingyiness of the banks in lending money, which is supposedly putting the crimps on business lending, and hence dampening the economy.

Boosting demand isn't going to change that. We need new capital formation, and since the current policies actively discourage savings and investment, they aren't helping.

[Old Mexican]

Re: Hazel Made,

I'm not sure that "boosting demand" is what is needed.

I am sure it is NOT needed. "Boosting demand" is short for "money pit."

The real underlying problem is the loss of capital due to malinvestment in the housing market.

Not only the housing market, but you're on the right track. The Fed has been stimulating since the 90's so the effect of the dot.com boom was still being felt way into the new century. The housing boom was in effect a last-ditch effort by the Fed and the USGov to stimulate demand so there would be no Great Correction after the bursting of the dot.com bubble.

Boosting demand isn't going to change that. We need new capital formation, and since the current policies actively discourage savings and investment, they aren't helping.

Absolutely right, in fact, they're hindering this important part of the recovery, just like in the 30s and 40s (and 70s and right now...)

[Juice]

They can't raise interest rates this time. The government would most likely default. Half the revenue would be going to interest payments.

[Old Mexican]

I suspect that top-tier liberal economists favored fiscal stimulus because they saw a golden opportunity to push big government, not because they saw a technical problem with monetary policy. Uncharitable I know, but I see no other way to explain their sudden change of heart.

Did the answer "they have NO real grasp of the subject" cross your mind at any time, or you just want to be nice???

[Ebeneezer Scrooge]

This is Bryan Caplan we're talking about here.

"...No grasp of reality" should be crossing everybody's minds right about now.

[Bill Woolsey]

Quantitative easing is monetizing the debt, and the result will be an increase in expenditures on goods and services. Spending on goods and services fell about 13 percent below its trend of the Great Moderation. Prices have fallen only abuot 2 percent. That leaves real expenditures about 12 percent lower. The purpose of quantative easing should be to get money expenditures on goods and services closer to the trend of the Great Moderation. My view is--better late than never.

[Lint]

I remember when I believed in quantitative easing. Then I read about the Weimar Republic and Zimbabwe. While we're not quite as bad, monetizing the debt distorts price signals (namely the interest rate) and keeps the market outside its equilibrium (or equilibrium path). This might look good short term, but it's very destructive in the long run.

[R C Dean]

The purpose of quantative easing should be to get money expenditures on goods and services closer to the trend of the Great Moderation.

So, inflation it is, then. Since what you are calling for is having more money chasing fewer goods and services, I don't know what else to call it.

[Norm]

Actually, it's more money chasing more goods. If it works, it will cause something like 5% nominal GDP growth, with 3% coming from real GDP growth and 2% coming from inflation.

[Hazel Meade]

I suspect that top-tier liberal economists favored fiscal stimulus because they saw a golden opportunity to push big government, not because they saw a technical problem with monetary policy. Uncharitable I know, but I see no other way to explain their sudden change of heart.

Well, QE2 is being used to buy treasury bonds, which is another way of giving big government a big pot of money.

[The Government]

No, no, it's only a small pot Hazel. A little teeny itsy bitsy eeny weeny polka dot covered tiny pot.