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October 7, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

"Does Inequality Make People More Conservative?"

Posted: 07 Oct 2010 02:16 AM PDT

Rising inequality is associated with a shift toward conservatism for both the wealthy and the poor:

Does Inequality Make People More Conservative?, Monkey Cage: Yes, according to some new research (pdf) from Nathan Kelly and Peter Enns. They rely on a a yearly measure of "policy mood" from 1952-2006. This is an omnibus summary of the public's ideological leaning, liberal to conservative. (See the graph and corresponding Excel file at Jim Stimson's homepage.) They also draw on a specific measure of the public's support for welfare. The question is whether and how both measures respond to inequality.

Their first main finding: increases in inequality are associated with a conservative shift in mood and increasing opposition to welfare. (For more on why this would be true, see this paper (pdf) by Roland Benabou.)

Their second main finding: increases in inequality are associated with a conservative shift among both the wealthy and the poor.

One natural objection: perhaps some citizens, and especially poorer citizens, just do not realize that inequality has increased. But the third main finding contradicts this: over time, the poor are actually more likely to perceive increased inequality than do the wealthy.

Kelly and Enns offer some further speculation on why, in particular, the rich and poor respond in parallel to rising inequality:

Despite the fact that parallelism is not driven by lack of information about income inequality, we think it is possible that the way information about distributional outcomes is framed is important. This idea is rooted in Gilens's …argument is that during good economic times news stories focus on individualism (enhancing opposition to welfare) and during bad economic times stories emphasize people being down on their luck (enhancing support for welfare).

Given that rising inequality since the 1970s has been driven in large part by gains at the top of the income distribution, media frames over this period may have increasingly emphasized stories of individualism, thus generating a negative link between rising inequality and public opinion liberalism. The decline in inequality prior to the 1970s, by contrast, was driven primarily by increasing incomes at the bottom of the income distribution and may have generated stories emphasizing government's role in education and job creation. This could explain why declining inequality up to the 1970s pushed public opinion in a liberal direction.

See the paper for some further discussion and appropriate caveats.

That explanation doesn't ring very true to me, but I don't have anything better to offer. Any ideas?

(When you are puzzled by a regression result, the tendency is to question the statistical technique or the quality of the data. So, in that tradition, the autocorrelated error structure for the regressions in Table 2 where the results are disaggregated by income could be signaling a misspecified model. For example, citing the paper they cite to justify the correction for autocorrelation, "analysts should view autocorrelation as a potential sign of improper theoretical specifcation rather than just a narrow violation of a technical assumption." If the model is, in fact, misspecified then the results cannot be trusted. I'd also prefer to see the autocorrelation corrected by adding more lags to the error correction model rather than using the Prais-Winsten estimator as in the paper -- or at least try adding more lags as an alternative -- and see if it makes a difference for the results. That's the more usual correction to the autocorrelation problem in the applications of the error-correction models I'm familiar with.)

The Problem with Inequality

Posted: 07 Oct 2010 02:14 AM PDT

Steven Pearlstein on inequality:

The biggest problem with runaway inequality, however, is that it undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don't work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else.

It's no coincidence that polarization of income distribution in the United States coincides with a polarization of the political process. Just as income inequality has eroded any sense that we are all in this together, it has also eroded the political consensus necessary for effective government.

Americans' Life Expectancy Continues to Fall Behind

Posted: 07 Oct 2010 02:12 AM PDT

More evidence that we need to improve our health care system:

Americans' life expectancy continues to fall behind other countries', Commonwealth Fund via EurekAlert: The United States continues to lag behind other nations when it comes to gains in life expectancy, and commonly cited causes for our poor performance—obesity, smoking, traffic fatalities, and homicide—are not to blame, according to a Commonwealth Fund-supported study published today as a Health Affairs Web First. The study, by Peter Muennig and Sherry Glied at Columbia University, looked at health spending; behavioral risk factors like obesity and smoking; and 15-year survival rates for men and women ages 45 and 65 in the U.S. and 12 other nations (Australia, Austria, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom).
While the U.S. has achieved gains in 15-year survival rates decade by decade between 1975 and 2005, the researchers discovered that other countries have experienced even greater gains, leading the U.S. to slip in country ranking, even as per capita health care spending in the U.S. increased at more than twice the rate of the comparison countries. Fifteen-year survival rates for men and women ages 45 and 65 in the US have fallen relative to the other 12 countries over the past 30 years. ...
When the researchers compared risk factors among the 13 countries, they found very little difference in smoking habits between the U.S. and the comparison countries—in fact, the U.S. had faster declines in smoking between 1975 and 2005 than almost all of the other countries. In terms of obesity, the researchers found that, while people in the U.S. are more likely to be obese, this was also the case in 1975, when the U.S. was not so far behind in life expectancy. In fact, even as the comparison countries pulled ahead of the US in terms of survival, the percentage of obese men and women actually grew faster in most of those countries between 1975 and 2005. Finally, examining homicide and traffic fatalities, the researchers found that they have accounted for a stable share of U.S. deaths over time, and would not account for the significant change in 15-year life expectancy the study identified.
The researchers say that the failure of the U.S. to make greater gains in survival rates with its greater spending on health care may be attributable to flaws in the overall health care system. They point to the role of unregulated fee-for-service payments and our reliance on specialty care as possible drivers of high spending without commensurate gains in life expectancy.
"It was shocking to see the U.S. falling behind other countries even as costs soared ahead of them," said lead author Peter Muennig, assistant professor at Columbia University's Mailman School of Public Health. "But what really surprised us was that all of the usual suspects—smoking, obesity, traffic accidents, and homicides—are not the culprits. The U.S. doesn't stand out as doing any worse in these areas than any of the other countries we studied, leading us to believe that failings in the U.S. health care system ... are likely playing a large role in this relatively poor performance on improvements in life expectancy." ...

Disability Applications and Unemployment

Posted: 07 Oct 2010 02:12 AM PDT

via FRBSF (no permalink)

One of the many permanent and costly consequences of high unemployment.

links for 2010-10-06

Posted: 06 Oct 2010 11:02 PM PDT

The Foreclosure Mess: Why We Need Better Financial Regulation

Posted: 06 Oct 2010 02:43 PM PDT

The editors at MoneyWatch asked for some comments on the foreclosure crisis. It's not an issue I've followed as closely as I should have, but here's what I said:

The Foreclosure Mess: Why We Need Better Financial Regulation

"Interview with Laurence Meyer"

Posted: 06 Oct 2010 12:59 PM PDT

Larry Meyer, former Governor of the Federal reserve Board, on macro modeling and on Fed policy during the crisis:

Interview with Laurence Meyer, by Mark Sniderman, FRB Cleveland: ...Mark Sniderman, executive vice president and chief policy officer at the Federal Reserve Bank of Cleveland, interviewed Meyer on June 9, 2010, in Cleveland. ...
...Sniderman: What does that tell us about the state of macro modeling?
Meyer: It tells us something very important—something we certainly should have learned—that macro modeling should not be static. It has to evolve over time, and we're continuously learning. We found holes, and we try to close those holes.
But we know in the future there will be crises coming, or shocks in areas that we didn't anticipate. We'll find new holes that we have to fill. In this case, there were really so many. This notion of the financial accelerator wasn't just a cute idea that the [Federal Reserve] chairman [Ben Bernanke] came up with. It was central to our understanding of how the macro-economy works, particularly when there are intense changes in financial conditions. So you do get these adverse feedback loops that the financial accelerator is all about.
Most of us as macro modelers came out of a tradition in which the transmission of monetary policy, the financial sector, is about real interest rates, about equity values, about the dollar, with virtually no variables that we would call credit variables—they just weren't there. In milder times, that was OK. That probably got the job done. But when the situation was the drying up of credit markets, dysfunctional credit markets, you simply had to give the model more information than otherwise.
Two things seem valuable that we've tried to integrate into our models. First would be "willingness to lend variables" from the senior loan officer survey. Imprecise as it may be, it is a measure of lending terms beyond rates. That's very important and that wasn't there, and I think we can integrate that. And the other is credit spread variables—Baa corporate rate relative to, say, a Treasury rate. The reason that's important is that a risk variable gives an indication of the risk appetites and risk aversion that come into the system when there are financial crises. And that variable tends to be very important in spending equations as well.
Sniderman: Should we expect to be living with our mainstream workhorse macro models for some time, and should we feel good about that? Is there enough progress there?
Meyer: I love that question! So I think we have two kinds of modeling traditions. First there is the classic tradition. I was educated at MIT. I was a research assistant to Franco Modigliani, Nobel laureate, and the director of the project on the large-scale model that was used at the time at the Federal Reserve Board. This is the beginning of modern macro-econometric model building. That's the kind of models that I would use, the kind of models that folks at the Board use.
There's also another tradition that began to build up in the late seventies to early eighties—the real business cycle or neoclassical models. It's what's taught in graduate schools. It's the only kind of paper that can be published in journals. It is called "modern macroeconomics."
We didn't see the fundamental connection between property busts and collateral in the banking system, bringing the banking system toward insolvency, toward the edge of the abyss. Put on top of that the buildup of leverage in the system—this acts as a multiplier.
The question is, what's it good for? Well, it's good for getting articles published in journals. It's a good way to apply very sophisticated computational skills. But the question is, do those models have anything to do with reality? Models are always a caricature—but is this a caricature that's so silly that you wouldn't want to get close to it if you were a policymaker?
My views would be considered outrageous in the academic community, but I feel very strongly about them. Those models are a diversion. They haven't been helpful at all at understanding anything that would be relevant to a monetary policymaker or fiscal policymaker. So we'd better come back to, and begin with as our base, these classic macro-econometric models. We don't need a revolution. We know the basic stories of optimizing behavior and consumers and businesses that are embedded in these models. We need to go back to the founding fathers, appreciate how smart they were, and build on that.
Sniderman: Wouldn't inflation expectations be a counter-example? That has become an important variable in many classical macro models that policymakers use to help them construct their inflation forecasts. Isn't that at least one place where we see this interplay between the research agenda in macro modeling and the practical use of models?
Meyer: A brilliant question! And you're absolutely right. This is a good example of interplay between the classic and modern macro approaches. It is true we had a push toward smaller models. This happened because if you want to use these forward-looking expectations, in the form in which modern macro does, forward-looking expectations that are model-consistent, it's really hard to do if you have a huge macro-econometric model. It's very easy to do in the smaller, modern macro models. But I think what you saw is exactly what you are suggesting, that it jumped out of those models and became a key area for research and integration into the large-scale macro-econometric models.
But that doesn't mean policymakers should say, "I like these modern macro models because they treat expectations the way we should." The Federal Reserve Board's classic econometric model treats expectations the way you think they should. But it's a richer, more valuable model for policymakers, number one. And number two, do you really think that you want to model individuals as having their forward-looking expectations based on solving a model out 20 years? I don't think that makes any sense at all. You need small models to do that, but the reality is that expectations are formed, they're forward-looking, but we don't have any idea what the true world looks like.
Our models are caricatures. Everyone has got different model in his head. I think we learn something about trying to get forward-looking expectations into our model. We model the Phillips curve in a way that is very important. We have long-term expectations directly in the model, playing a very important part. That's something that we didn't used to do. That's the way the profession advances in these classical models as they become refined.
Sniderman: One thing models can do is provide different scenarios about what the future might look like; models that provide simulations thousands of times to give us a distribution of outcomes that could help us understand the future possibilities a little more richly. Should we as policymakers be looking for more modeling of that spirit, that spirit of scenario-planning and distributions about outcomes?
Meyer: I think the answer is absolutely yes. It's not such a simple task to build a sensible, interesting, alternative scenario. I think we should be constantly refreshing and coming up with sensible ideas in each forecast round of what are clearly risks that are on the horizon we want to work into our alternative scenario.
Even more important, we've got to sit down every once in a while and say, "Hmm. What's the worst thing you could think of happening? Tell me something really bad. Find a hot spot." Maybe it's something nobody is thinking about. Maybe we would have thought about this incredibly rapid growth in subprime and structured products and said, "Whoa, what could that mean?" Or we could have thought about sovereign debt developments that were going on and were percolating in Europe. It's not just looking at these incremental things—what happens if this fiscal plan is changed? what happens if oil prices go up?—but looking at these worst-case scenarios.
Sniderman: Of course, that's not the model itself issue; that's the human element.
Meyer: Absolutely. You always have to come back to that. So many times people ask me, "What are the rules for forecasting, what are the ingredients?" And I say, "It's very simple. It's one part science; that's the model. One part art, that's your judgment. And one part luck. That's how you become a really good forecaster!"
Sniderman: We've seen a lot of innovations during the financial crisis in terms of monetary policy. Are there any features in monetary policy design that you think should remain more permanently?
Meyer: To begin to address this question, it's useful to make a distinction between what I call liquidity policy on the one hand and monetary policy on the other. By liquidity policy, I mean providing enough liquidity when there's a panic and the market just wants to hold a lot more liquidity. To prevent that from having powerfully negative impacts on the economy, you give it to them.
The Federal Reserve and central banks around the world acted as liquidity providers of last resort. They all found ways to do that. The Fed was extraordinarily creative, very aggressive. You have to give an A-plus to all those operations. They saved the day. You also have to give high marks to the fact that the liquidity programs were designed so they would naturally go out of business as the panic dissipated. And now the Fed has closed the door on them because no one was there anymore.
So that's gone—beautiful. Central banks all around the world did a great job. Now we're talking about monetary policy and we say, "That's just a lot more complicated!" And we have a disagreement about what's really part of this. Does it matter what the size of the balance sheet is? Does it matter how many reserves you have in the system? Or do you just need to raise rates, using interest on reserves? I'm sure you and I could have a nice debate on that.
We've never had this super-abundant level of reserves. We've never had this size of a balance sheet. So, for reasons I think we can understand, there's a desire to do all of these things—shrink the balance sheet, drain reserves, and raise rates. But we've never taken these things away. We put them in, and now we're trying to take them away. We've never done that before.
So we don't know, really, what the impact is if we begin to do asset sales today. How can we unwind that balance sheet without having such adverse circumstances on the markets that we regret it? We're learning about that, too. I think views have changed dramatically even over the last six months or so with market participants much less concerned about the market consequences of asset sales. There are three things that we have to get done, and we have tools for every one of them. For draining reserves, we have reverse repos and term deposits. For shrinking the balance sheet, we can just let it run off or we can sell assets. And for raising rates, even there we have complementary roles of both raising interest on reserves and managing reserves at the same time.
Does it matter what the size of the balance sheet is? Does it matter how many reserves you have in the system? Or do you just need to raise rates, using interest on reserves? I'm sure you and I could have a nice debate on that.
The Fed was more aggressive and more effective than any other central bank in the monetary policy dimension. That's because other central banks, whether they admitted it or not, were doing what we call quantitative easing. They were just pushing reserves into the system.
What the Fed did and other central banks didn't do, because the Fed was in unique circumstances, was make use of the mortgage-backed securities, or MBS, market. The Fed was allowed to hold MBS in its portfolio, and yet MBS was a market that had become illiquid and distressed. It was tied to the housing market, which was under incredible pressure. The Fed was able to go into that market and have big impacts because the market was so distressed and illiquid.
That's the good news. The bad news is now we've still got all those assets on the balance sheet. How do we get rid of them? Being the most aggressive and effective during the stimulus means that you're the most challenged when it comes to exit.
Sniderman: There's been a long-running debate about how central banks should deal with asset bubbles. One of the issues that's come out in the wake of the financial crisis has been the interplay between using regulatory tools and techniques as opposed to, or in conjunction with, monetary policy. Do you have thoughts on that spectrum?
Meyer: This is a very important and evolving area of thought among central banks. We really should start by making a distinction between types of bubbles, between equity bubbles and property bubbles. We lost something like $7 trillion in the bust of the tech bubble. Sounds like a lot, but the economy just shrugged it off—with a very shallow and very short recession.
Equity bubbles are just not a big deal. But property bubbles are absolute killers. We know that from historical experience. The difference is that property is held by leveraged institutions, are the collateral of the banking system, and if you make your banking system insolvent, you've got real problems.
The good news here is that although we don't have good supervision and regulation procedures for dealing with equity bubbles, we do for property bubbles. We've got a lot of ways of handling that. We could lower the loan-to-value ratio—essentially increase the down payment that people have to have on their homes to build a better capital cushion. We could do a whole variety of things on the regulatory side. We could increase capital requirements against those properties that seem to be more risky because of bubble-like conditions. We could do a whole variety of things that in principle should be, could be, effective.
The question is, would we recognize that a bubble was emerging in time to implement supervisory and regulatory policies that could have some effect? My views have changed a lot since I was on the Board. I'm a firm believer now that you can always catch bubbles and identify them in time to do something about them before they get dangerous. The question is, what to do? The first line of defense—and this is certainly what the chairman [Bernanke] and others have said—is supervisory and regulatory policies.
I think it's important for the public to understand two things: the responsibilities of the Fed—what you should be holding it responsible for and what you shouldn't be holding it responsible for—and then the limits of what any central bank can do.
But we have to be realistic. It might work; it might not. And so the big question for central bankers is therefore—what do you do if it doesn't work? Do you have to do something in addition? That's the real issue—do you want to use monetary policy itself, and do you want to lean against bubbles even when the broader macroeconomic conditions would not lead you to, for example, want to tighten? That is a taxing issue.
The issue is less whether you can identify a bubble than what do you do if you think it's emerging. I've come away with a very different understanding of the risks of allowing bubbles to go unchecked. But that's property bubbles. I'm not so concerned with equity bubbles. Property bubbles—that can be handled to some extent by supervision and regulation, but I think we should be very open minded here. We're searching, we're debating, we're not sure what monetary policies should or could do in those circumstances. If we come to that place again, I'm sure there will be a very good debate in the Federal Reserve System, as there should be, before deciding whether to be more pre-emptive than was the case before.
Sniderman: What is it that you wish the general public would better understand about central banks and their role in the economic system in which we live?
Meyer: What should the public know? First of all, the public has its representatives in Congress. And Congress has a very important job overseeing the Fed. I've said this many times—wouldn't it be good if Congress learned a little bit more about monetary policy and how it works? I'm always amused and distressed about how poor the questions are during Congressional oversight committee hearings. The first part of the public I'd like to see understand more about monetary policy is the Congress, particularly members of the oversight committees.
Other than that, I think it's important for the public to understand two things: the responsibilities of the Fed—what you should be holding it responsible for and what you shouldn't be holding it responsible for—and then the limits of what any central bank can do.
It's partly the limitations of our knowledge. It's partly the limitations of what central banks' tools can accomplish in the real world. But I would say to understand what they do, what their responsibilities are, and then understand how they try to achieve those objectives and appreciate that there are limits. When you want to hold central banks accountable, understand that perfection in central banking is no more possible than it is in any other profession.
Sniderman: Maybe you can leave us with some thoughts on things you've been reading these days?
Meyer: My wife and son always warned me that if anybody asked me that question, I shouldn't even answer it because they view my reading list as, shall we say, not intellectual enough to go along with my reputation.
I have two sets of readings on my night table. One is books on the financial system and recent history in particular. Too Big to Fail [Andrew Ross Sorkin], it's like a story unfolding before you, and I'm in the middle of that one. The Black Swan [Nassim Nicholas Taleb] has fascinating stories about the weight that should be given to improbable events, brainstorming on catastrophic things that could happen, and how to protect yourself in advance from those possibilities. And then I've got the book by Michael Lewis, The Big Short, that's on my list.
Finally, I read mysteries, spy novels, and my current group is by the author from Sweden, Stieg Larsson, The Girl with the Dragon Tattoo and all the ones that followed. Fantastic reading. These books are insanely popular all around the world. This is a series that has really caught my attention, and I've got one more of those to go.
Sniderman: Thanks for taking the time to talk with us today.

Monetary versus Fiscal Policy

Posted: 06 Oct 2010 10:33 AM PDT

Joseph Stiglitz says that, for the most part, monetary policy has been a failure:

The Federal Reserve's Relevance Test, by Joseph E. Stiglitz, Commentary, Project Syndicate: With interest rates near zero, the US Federal Reserve and other central banks are struggling to remain relevant. The last arrow in their quiver is called quantitative easing (QE), and it is likely to be almost as ineffective in reviving the US economy as anything else the Fed has tried in recent years. Worse, QE is likely to cost taxpayers a bundle, while impairing the Fed's effectiveness for years to come.
John Maynard Keynes argued that monetary policy was ineffective during the Great Depression. Central banks are better at restraining markets' irrational exuberance in a bubble – restricting the availability of credit or raising interest rates to rein in the economy – than at promoting investment in a recession. That is why good monetary policy aims to prevent bubbles from arising. ...

The best that can be said for monetary policy over the last few years is that it prevented the direst outcomes that could have followed Lehman Brothers' collapse. But no one would claim that lowering short-term interest rates spurred investment. ...
They still seem enamored of the standard monetary-policy models, in which all central banks have to do to get the economy going is reduce interest rates. ... So, while bringing down short-term T-bill rates to near zero has failed, the hope is that bringing down longer-term interest rates will spur the economy. The chances of success are near zero.
Large firms are awash with cash, and lowering interest rates slightly won't make much difference to them. ... In short, QE – lowering long-term interest rates by buying long-term bonds and mortgages – won't do much to stimulate business directly.
It may help, though, in two ways. One way is as part of America's strategy of competitive devaluation. Officially, America still talks about the virtues of a strong dollar, but lowering interest rates weakens the exchange rate. ... The fact is that a weaker dollar resulting from lower interest rates gives the US a slight competitive advantage in trade. ...
The second way that QE might have a slight effect is by lowering mortgage rates, which would help to sustain real-estate prices. So QE would produce some – probably weak – balance-sheet effects. But potentially significant costs offset these small benefits. ...

Not the anyone paid much attention, but I've been worried about the ability of monetary policy to stimulate the economy as much as needed for several years now, and have called for aggressive fiscal policy as an important complement to attempts to revive the economy through monetary policy. I was making this point at a time when others who get credit today as strong proponents of fiscal policy were saying let's wait to see if monetary policy works, and if not, we can turn to fiscal policy. I thought that was a mistake, and still do. For example, from January 2008:

Monetary policy is very good at slowing down an overheated economy, but it is not always so good, for the reasons just stated, at stimulating a lagging economy. It might do the trick, lower interest rates and other measures might provide the needed stimulus, but it wasn't all that long ago that some of the smartest people in this business argued that money had little if any effect on the real economy - some still do - and there are still uncertainties about the extent to which monetary policy can revive a lagging economy, especially an economy in a fairly steep downturn. I don't think it's a given that monetary policy will work.
Unfortunately, a serial approach won't work either. If we wait to see if monetary policy will work, and if it doesn't then turn to fiscal policy, it will be too late for fiscal policy to do much good...
So why not shoot with both barrels? Implement both monetary and fiscal policy measures as soon as possible, hope like heck one of the two works because there's no guarantee either will do enough to matter, and if the economy recovers and begins to overheat due to the dual stimulus, use monetary policy to cool things down. As I said, using monetary policy to temper an overheated economy seems to be the one place we are pretty sure policy can be effective, and monetary policy can be reversed fairly quickly... And even if we do provide too much stimulus for a time, if we put extra people to work, build a few more roads and bridges, give rebates to struggling families when less would have sufficed, measures such as that, well, I can think of worse mistakes to make. So the danger of overstimulating the economy isn't as large as the danger of failing to provide adequate stimulus, thus, why not use both types of policies?

Or, more than three years ago, before the recession officially started, in March 2007:

Recall Keynes' contention that monetary policy may be ineffective in a depression. Keynes said "there's many a a slip twixt the cup and the lip" meaning lots can go wrong with monetary policy - a change in the money supply must lower interest rates, which must then stimulate investment, which in turn must stimulate output. If, for example, interest rates don't fall when the money supply is increased (as in a liquidity trap), or if people are unwilling to invest even if interest rates do fall, monetary policy is ineffective. Keynes noted that fiscal policy, by contrast, operates directly on aggregate demand so it can work even in severe depressions where monetary policy has too many slips twixt cup and lip to be effective.

As I said, that was before the recession officially began, and interest rates weren't yet at zero (federal funds rate=5.25% at this time), so unconventional policy tools weren't considered. I made the same point about monetary versus fiscal policy the other day as well, and Krugman makes the same point today:

why did some of us emphasize the need for fiscal stimulus, rather than just calling for more expansionary monetary policies? ... I wanted and still want fiscal expansion because it's relatively certain in its effect: if the government goes and buys a trillion dollars' worth of stuff, that will create a lot of jobs. On the other hand, if the Fed goes out and buys a trillions dollars' worth of long-term bonds, the effect is quite uncertain, with many possible slips between the cup and the lip.
The truth is that it's very hard for central banks to get traction in a zero-rate world. This doesn't mean that they shouldn't try. But nobody is sure how much effect quantitative easing will have on long-term rates; even a decade ago, I thought Ben Bernanke was too optimistic on that front, which is why I was more of an advocate of inflation targeting — yet I was also aware that making inflation targets credible is itself tricky. Furthermore, even if long rates can be reduced, how much effect will they have? Business investment is relatively insensitive to interest rates, mainly because equipment doesn't have all that long a lifetime. Housing is the place where the rubber usually meets the road; but not in the aftermath of a huge bubble and vast overbuilding.
So I didn't and don't think that we can count on monetary policy to do the job; blithely declaring that the Fed should target nominal GDP misses the difficulties. And that means we need fiscal policy.
Of course, at this point, with the loss of political will, it looks as if we're going to see an attempt to do the trick with quantitative easing alone. I hope it works, but I wouldn't bet on it.

I appreciate Stiglitz' shining the spotlight on the ineffectiveness of monetary policy in a recession, but I think fiscal policy is where the biggest mistakes were made and I wish he would have talked about that as well.

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