Hoisted from Mark Thoma's Archives: Clarida and DeLong on Fiscal (and Monetary) Policy

Fed Austerity Dissenters Believe That They Are Entitled to Their Own Facts

Paul Krugman:

Economics and Politics: [T]he claim is that Narayana Kocherlakota, and presumably the other Fed dissenters, are “sticking to economic facts“, basing their opposition to expansionary policies on falling unemployment and rising inflation…. Kocherlakota seems to have been very selective… [the] fall in the unemployment rate is basically a statistical artifact, not reflecting actual job gains…. And… there is good reason to believe that the modest rise in core inflation was a blip driven by commodity prices, and is already fading out…. [T]his isn’t fact-based policy. The Fed dissenters are obviously looking for excuses to pursue tight policies; they’re looking at the facts only in search of support for their prejudices. As the old line goes, they’re using evidence the way a drunk uses a lamppost: for support, not illumination.

Mark Thoma:

What Was Kocherlakota Thinking When He Dissented on Monetary Policy?: Narayana Kocherlakota makes it clear that the rate at which the recovery is proceeding is just fine with him…. "[W]ell-calibrated" should include both the direction and pace of change. Even if the direction is correct, is he satisfied with the pace of change for employment? I realize he thinks we will have to tighten in 3-6 months, but it's hard to see how a data-based projection takes you to this outcome….

[T]his is not a rock solid commitment from the Fed. This is their view of the most likely path for the federal funds rate, they have not said this is what they will do independent of how the data evolve. All they have said is that economic conditions are likely to warrant this outcome. The dissenters seem to believe that another outcome is more likely, the view is that economic conditions will force the Fed into a different posture -- you know, that high inflation and rapid recovery we've been seeing to date -- in as soon as 3-6 months. Anything is possible, but again, it's hard to see how recent data point to this outcome.

Matt Rognlie:

Macroeconomics in action | Matt Rognlie: We can only conclude that Fisher, Kocherlakota, and Plosser are not interested in even a mild expansionary commitment of the kind in the August 9 statement. This would be understandable if they had some alternative proposal—say, an aggressive price level target—for escaping the current morass. In reality, however, their votes seem to be determined (at least for Fisher and Plosser) mainly by a wildly distorted view of macroeconomic conditions. Fortunately, the rest of the FOMC is a little more worried about the worst recession the United States has endured in over a half-century, and less sanguine about the prospects for recovery…

It is at moments like this that it would be very useful to have two additional Fed governors who see reality in the FOMC meetings.