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Wall Street, Main Street, and NGDP

Summary:
In 2008, the Fed tried to save Wall Street without boosting aggregate demand. They were accused of trying to rescue Wall Street while not helping Main Street. The effect was a collapse of AD, which hurt even Wall Street. Today, the Fed seems to be trying to help both Wall Street and Main Street, without boosting AD, at least not adequately. I say, “seems to” because I’m not actually sure that’s their intention. But at the moment it looks like that will be the result. In 2008, they thought that if they rescued Wall Street then aggregate demand would take care of itself. That did not turn out to be true. It might be true this time around (the situation is quite different), but we can’t be sure it’s true. The markets are certainly skeptical, predicting weak AD for years to

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In 2008, the Fed tried to save Wall Street without boosting aggregate demand. They were accused of trying to rescue Wall Street while not helping Main Street. The effect was a collapse of AD, which hurt even Wall Street.

Today, the Fed seems to be trying to help both Wall Street and Main Street, without boosting AD, at least not adequately.

I say, “seems to” because I’m not actually sure that’s their intention. But at the moment it looks like that will be the result.

In 2008, they thought that if they rescued Wall Street then aggregate demand would take care of itself. That did not turn out to be true. It might be true this time around (the situation is quite different), but we can’t be sure it’s true. The markets are certainly skeptical, predicting weak AD for years to come.

In 2008, the Fed had programs targeted at specific sectors, and tried to sterilize the effect on the broader money supply. Today, they don’t seem to be actively sterilizing the impact, but they aren’t going after the low hanging fruit that would be expected to boost NGDP growth expectations.

In my view, the Fed should set a level target for prices or (better yet) NGDP, and then do as many purchases of safe assets as needed to get growth expectations back on target for 2021 and 2022. That means I don’t favor the alphabet soup of programs targeted at specific sectors of the credit market. The Fed’s job is to print money, not encourage lending.

Of course one side effect of printing lots of money right now would be to encourage more lending. And credit is an essential part of our economy. But loans are much less likely to default when NGDP is expected to grow at a rate of 4% or more. Let banks and individuals make loans, let the Fed create money.

That doesn’t mean the Fed’s current actions are harming the economy; indeed the actions are helping, at least relative to the Fed not engaging in some of these initiatives. Rather the Fed is missing an opportunity to have a much more expansionary policy, which is also much less intrusive, less distortionary, less likely to create moral hazard.

What would I do? Set a level target and buy as many safe assets as necessary to hit the target. Ten trillion, twenty trillion, whatever. Promise to buy unsafe assets if necessary, but don’t actually buy them, as it likely won’t be necessary.

Odds and Ends:

1. The Wuhan lockdown just ended.  Nice story in the NYT, which puts a human face on Wuhan.  Things are getting better, but still a long way from normal.

2.  Interesting paper on the TB vaccination angle.  I don’t find it entirely convincing, but there’s probably at least a small beneficial effect.  And even “small” can be really important in a disaster this large.

3. I don’t entirely agree with this left wing rant:

The slow COVID-19 response from U.S. leadership seems to have been tailor made for people with salaries, with the ability to drive cars, with large houses (and their room for exercise equipment and grocery hoarding), and with private yards for their kids to play in.. .

If we cared about hourly-wage families who get around without cars and who live in small homes — people who rely more heavily on the shared things like parks, playgrounds, and transit that have reduced access now — we’d have had strict shut-downs immediately, so as not to drag this out longer.. .

How very convenient for wealthy, salaried people embedded in car-centric places, who can ride out the storm while feeling proud of their individualism.

But I’m also not sure it’s entirely wrong.

4.  Tyler Cowen notes that Peter Navarro warned of the potential impact of the coronavirus way back in late January.  I agree with Tyler that Navarro deserves credit for that warning.  But I also think it’s important to understand the precise nature of the subsequent failure.  This risk was widely understood at the time (or soon after), by almost everyone who was well informed.  I knew it might happen.  There were were numerous media articles quoting leading experts saying 50% of the world would become infected, or 60%, or 40% to 70%.  What I did not expect is that the predicted impact would actually occur.

The big failure here was not an inability to understand the risk, rather the failure to act appropriately.  If there’s a 10% chance of a disaster that will cost $10 trillion dollars, you take that risk very seriously even though you believe there’s a 90% risk probability it will not occur.  We did not do that.  I did not do that.

5.  On a more optimistic note, signs that the Trump administration might be beginning to understand that globalization makes it easier to address this crisis:

The Trump administration has reached a deal with 3M, the US manufacturer, to import 166.5m N95 respirator masks into America from abroad, easing tensions between the White House and the Minnesota-based company.

The agreement was announced by Donald Trump, US president, at his daily news briefing on the administration’s response to the coronavirus pandemic on Monday afternoon. Crucially it will allow 3M to continue selling its US-made N95 masks to Canada and Latin America, deals that had been threatened by a crackdown by the Trump administration on exports of protective medical equipment.

6.  On a more pessimistic note, you can’t very well have inspector generals if you plan to turn your country into a banana republic, can you?

President Donald Trump has removed the head of a team of U.S. auditors that will oversee the $2 trillion in federal coronavirus relief spending, his latest move against inspectors general who are supposed to serve as independent watchdogs.. .

Michael Horowitz, head of a council of federal inspectors general, chose Fine for the new role of pandemic-spending watchdog last week.

“Mr. Fine is no longer on the Pandemic Response Accountability Committee,” Dwrena Allen, a spokeswoman for the Defense Department inspector general’s office, said in a statement Tuesday.

Trump has increasingly taken action against inspectors general he considers insufficiently loyal. He tweeted criticism of another inspector general on Tuesday. Last week, he fired Michael Atkinson, the intelligence community inspector general, who informed Congress — over White House objections — of the whistle-blower’s complaint that ultimately led to Trump’s impeachment.

No need to insure the $2 trillion is spent in a non-corrupt fashion; it’s just pocket change these days.

7.  This caught my eye:

Although the Riverside County Sheriff’s Department has been given the authority to ticket or arrest potential violators of the county’s latest health order to help slow the spread of coronavirus, Sheriff Chad Bianco said it was the last thing he wanted to do.

Don’t wear masks!  You must wear masks!  How about “It’s up to you”?


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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