More on the Romer Symposium at the Economist (Comment on Alan Meltzer) (June 19, 2009) by James DeLong

More on the Romer Symposium at the Economist

6/21/09 9:56 AM

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More on the Romer Symposium at the Economist I confess that I think Alan Meltzer's contribution to the Christie Romer symposium at the Economist ill-advised for two reasons. Meltzer writes: Romer roundtable: Think, plan, and tell us the plan: CHRISTINA ROMER... like generations of policymakers before her... counsels "trust us"... [I]t was they who allowed banks to circumvent the Basel regulations, that permitted Fannie and Freddie to expand beyond any reasonable standard, that brought us too big to fail and, as John Taylor has shown, abandoned a policy that brought us almost 20 years of the Great Moderation.... http://delong.typepad.com/sdj/2009/06/more-on-the-romer-symposium-at-the-economist.html

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More on the Romer Symposium at the Economist

6/21/09 9:56 AM

[L]ike most other defenders of this inflationary, low productivity policy, Christina puts the choice as whether we act against recession now or against inflation now. That leaves out a multitude of options.... [Y]es, stimulate now to reduce unemployment, but avoid creating a big inflation in a year or two. And even announce in advance how you propose to reduce the high money growth rate and the excessive deficits. Don't just say you'll do it, think, plan, and tell us the plan. The first reason that it is ill-advised is that Meltzer really should not be claiming that Christina Romer is one of the "they" who "allowed banks to circumvent the Basel regulations... permitted Fannie and Freddie to expand... abandoned a policy that brought us almost 20 years of the Great Moderation..." Christie has not been doing any of these things. She has been sitting in her southeast corner office on the sixth floor of Berkeley's Evans Hall lecturing about monetary policy before, during, and since the Great Depression. If Meltzer wants to blame the actions of the American conservative politicians he has consistently voted for and the officials they appointed for our current mess, fine. But to say that Christie Romer = Phil Gramm because both are "policymakers" is simply wrong. The second reason that it is ill-advised is that Meltzer misleads when he implies that the Obama administration and the Federal Reserve have not "announce[d] in advance how [they] propose to reduce the high money growth rate and the excessive deficits..." The Obama administration wants, as OMB Director Peter Orszag explains every hour on the hour, to balance America's long-run budget by reducing the extraordinary economic inefficiency of the American health-care system via health care reform. The fact that the people staffing the executive branch are in large part those who in the Clinton administration did such great work at bringing America's public sector back toward fiscal balance in the 1990s (but whose work was then largely undone by the American conservative politicians Alan Meltzer has consistently voted for and the officials they appointed) should give observers some confidence that they will at least try to reduce excessive deficits. At the very least Alan Meltzer should not be claiming that they have not told us how they intend to do so. The same applies to the Federal Reserve, which Meltzer implies needs to "tell us the plan." I have found the Federal Reserve extremely eager and anxious to explain how it intends to unwind the large increase in the money supply when monetary velocity starts to recover. The basic problem, I learned back in my first year of graduate school, is that the central bank's ability to soak up excess liquidity in an economy and reduce the supply of "monnaie" is limited by its balance sheet: it needs to be able to induce banks to part with their cash by offering them something else to hold, and the Fed cannot offer what it does not itself have to trade. The solution the Federal Reserve is proposing is to allow it to create additional kinds of liabilities on its balance sheet. If congress grants the Federal Reserve the power to accept not just interest-free but interestpaying reserve deposits (which it has) and the power to issue and sell its own interest-bearing bonds (which I hope it will), then the Federal Reserve will have no trouble reducing the transactions balances that make up our monetary base when it wishes to do so. Once again, we have already been told the plan--and it is unfair to claim that Bernanke and company have not told us. RECOMMENDED (5.0) by 5 people like you [How? ] You might like:

The Fed Is Running A "Laboratory Experiment" On What Drives Inflation (@InvestorCentric) Romer roundtable: A reply to Brad DeLong (@Free exchange) 2 more recommended posts Âť Brad DeLong on June 19, 2009 at 08:45 AM in Economics, Economics: Federal Reserve, Economics: Finance, Economics: Fiscal Policy, Economics: Macro, Obama Administration | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340115712efae0970b http://delong.typepad.com/sdj/2009/06/more-on-the-romer-symposium-at-the-economist.html

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More on the Romer Symposium at the Economist

6/21/09 9:56 AM

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Comments so prof, my conclusion would be that alan meltzer is either ill-informed or dishonest (as a sub-variant, or blinded by partisan considerations masquerading as ideological ones). in either case, it would appear that he belongs on the long list of people to whom we should pay no attention despite their presence in the commentariat. is there a reason we should pay attention to him? Posted by: howard | June 19, 2009 at 08:49 AM "The basic problem, I learned back in my first year of graduate school, is that the central bank's ability to soak up excess liquidity in an economy and reduce the supply of "monnaie" is limited by its balance sheet:" It's a shame these things aren't taught in graduate school any more. Posted by: jeff | June 19, 2009 at 09:15 AM ...The Obama administration wants, as OMB Director Peter Orszag explains every hour on the hour, to balance America's long-run budget by reducing the extraordinary economic inefficiency of the American health-care system via health care reform.... There NO evidence that the government will capture the future monies accruing from the efficiencies of the system resulting from the current proposals. If this were so, why is there so much discussion on what taxes need to be imposed to pay for the reform? If there were a single-payer system with the government capturing all the former insurance premiums, then you could talk about a move toward general budget balancing. As it stands now, balancing the budget is a long way off. Posted by: Neal | June 19, 2009 at 09:29 AM Have you sent this comment to the Economist? It seems to me that the Economists' own biases would tend to favor Meltzer unless there is vigorous protests shoved under their noses. I go back to Mankiw, who spent his time in the BushCo Admin. being intellectually dishonest (contradicting his own textbook) in order to curry favor with his masters. It's time for some rough and tumbe in the ranks of professional economists and academic economists. To the barricades! Get out the long knives! Posted by: Cal | June 19, 2009 at 09:30 AM "The Obama administration wants, as OMB Director Peter Orszag explains every hour on the hour, to balance America's long-run budget by reducing the extraordinary economic inefficiency of the American health-care system via health care reform. The fact that the people staffing the executive branch are in large part those who in the Clinton administration did such great work at bringing America's public sector back toward fiscal balance in the 1990s (but whose work was then largely undone by the American conservative politicians Alan Meltzer has consistently voted for and the officials they appointed) should give observers some confidence that they will at least try to reduce excessive deficits. At the very least Alan Meltzer should not be claiming that they have not told us how they intend to do so." okay, maybe Meltzer should be claiming that they haven't told us credibly how they intent to reduce excessive deficits, because "cutting health care costs" is right up there with "cutting waste and fraud" when it comes to the sniff test (and this is even more true given Obama's handling of health care 'reform'.) Orzag is nuts if he thinks better data and more studies are going to significantly reduce health care costs. The private insurance companies have been doing those studies for decades -- its what they base their HMO treatment modalities and drug formularies on. In other words, we already have the "managed care" system that Orzag is counting on, and its both grossly inefficient and ridiculously expensive. (This is not to say that some savings cannot be achieved in Medicare -- but we already know that HMO administered Medicare is more expensive than providing the same care on a "fee for service" basis. Given that, its highly likely that most of the costs savings that can be achieved by cutting unnecessary tests and treatment under medicare will be eaten up by the costs of administering the system.) Bottom line here is that absent fundamental change in the health care delivery system (i.e. 'single payer') there will be no significant savings in health care. And not only is Obama opposed to single payer, he doesn't even support the kind of "public option" that would http://delong.typepad.com/sdj/2009/06/more-on-the-romer-symposium-at-the-economist.html

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savings in health care. And not only is Obama opposed to single payer, he doesn't even support the kind of "public option" that would lead to a single payer system if properly administered. Hence, Orzag's 'deficit reduction' strategy is just not credible. Posted by: paul lukasiak | June 19, 2009 at 09:33 AM if it's true, that the obama administration plans to balance the budget, in the long-run, by producing greater efficiencies in health care spending, it has an odd way of going about doing so. the most certain method of achieving that goal, single-payer/public plan, has been taken off the table, at the behest of the private insurance companies and the AMA. both screamed like stuck pigs, and the obama administration, along with the "progressive" democrats in congress responded. that baby was aborted nearly simultaneous with conception. so much for economies of scale, and providing health care to all americans. according to WHO, paul krugman, etc, etc, etc, the US ranks on the low, low end of industrialized nations, in terms of its provision of decent health care to all its citizens, while spending more per capita than anyone else in the process. this will not change during the obama administration, if he, and the dems in congress, have anything to say about it. Posted by: colin | June 19, 2009 at 10:47 AM Good one doc, but you left some money on the table, so to speak. It is pretty rich seeing Alan Meltzer leaning on John Taylor for rhetorical support. After all, monetarist Meltzer spent about a decade directing his whack-job SOMC to resist the idea that the Fed should even target a short-term interest rate. The Great Moderation to which Meltzer refers arose coincident with highly-successful and near-universal indifference to his dated policy ideas. His effort to sound there at the founding is pretty funny. Posted by: Gerard | June 19, 2009 at 01:29 PM

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