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Wednesday, February 16, 2011

Cheap Shots That Miss

Scott Sumner tries do denounce a recent post of mine, but fails:

Cheap shot #2:

I notice that Krugman defends his “no stimulus” argument with a graph showing government expenditures.  I guess that’s OK, as in earlier posts he suggested that tax cuts weren’t very effective stimulus.  On the other hand, Mark Thoma recently made the following claim:

It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast. It would be just as easy to point to the recent tax cuts that Congress (surprisingly) put into place and give those credit for recent employment gains.

Keynesians like to act like there is some sort of rigorously scientific model behind their calls for the government to waste hundreds of billions of dollars.  Now we find that two of the top Keynesian commentators don’t even agree on whether tax cuts count as stimulus.  If they don’t, Thoma’s point is flat out wrong.  If they do, Krugman’s post is completely inaccurate.

[BTW, Thoma is doubly wrong about monetary lags.  He confuses peak effect, often estimated at 6 to 18 months, with some effect, which occurs almost immediately after major monetary shocks.  He also fails to mention that the effects should begin when the policy was expected (September/October 2010), not when it was announced (November.)  And finally he ignores the fact that we know from TIPS market responses to rumors of QE2 that the policy does raise inflation expectations.]

It's annoying to have to respond to such a mischaracterization of the evidence, and of what I actually said.

1. First, I didn't confuse peak effects with some effect. Sumner needs to look again at the empirical evidence. There is at least a one quarter lag before policy takes effects (and the delay is particularly long for inflation). You can find estimates saying anything, but there's a good reason Woodford et. al. spent so much time trying to build a policy delay into their models. [Update: I should have given a reference. See Woodford's book Interest and Prices, page 175 where he says "...there is a substantial real effect of the shock. ... Furthermore, the effect occurs with a substantial delay; there is essentially no effect on output until the second quarter following the policy shock" Or, perhaps better, see the section in Chapter 5 called "Delayed Effects of Monetary Policy."]

2. On the timing, no date is actually mentioned in my post, but I relied upon John Taylor's rejection of the earlier dates (i.e. those in August, though Sumner doesn't cite those). Again, I didn't cite a date, but even the earliest of dates Sumner cites, September/October, which is what I had in mind, only leave around 3 to 4 months before the January data. Again, to see real effects in January would be remarkably fast given what the empirical evidence says about the lags in the effects of policy (and even without a delay, the impact would be small at this point since the peak effect is 6-18 months, and most evidence points toward the long end of this distruibution).

3. Sumner twisted my words on tax cuts. I didn't say they were effective, I said that if one made the QE2 argument (which I was denouncing), one could just as easily make the tax cut argument. But I wasn't actually saying the tax cuts had this impact (I also said fiscal policy could be given credit, but I guess Sumner ignored that because it didn't fit the gotcha he wanted for Krugman.)

4. I have made the inflation expectations argument many times, and highlighted it again in a post last night echoing Jim Hamilton. So this has been anything but ignored. If Sumner wants to defend QE2, Hamilton's relatively pessimistic take ought to throw cold water on that notion, though he does talk about the expectations effect. But even if you make the expectations argument, you still have to get past the policy delays to argue the effects were evident in January.

5. There's plenty of evidence that the stimulus led to the employment (new or saved jobs) of one to two million people (the estimates vary, but even the very lowest find a considerable effect). I can't see how giving people struggling with the recession the means to pay their bills is a wasted effort, but apparently there are people who want to characterize it this way.

"Cheap shots" are easy when you don't understand the empirical evidence on the effects of policy, when you assert the earliest possible date for the start of QE2 because if fits your story (and even then the story is implausible), and when you claim someone says something they aren't saying.

If Sumner wants to argue that the empirical evidence for the effectiveness of QE2 on the real economy is out there already (or tht fiscal policy had no effect), as he apparently does, then he ought to present it instead of wasting our time with cheap shots that fall apart under scrutiny.

    Posted by on Wednesday, February 16, 2011 at 10:08 AM in Economics, Monetary Policy | Permalink  Comments (12)


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