Four things I believe
By Scott Sumner
Here are four things I strongly believe to be true:
1. The Great Recession was caused by tight money at the Fed, and other major central banks. Period. End of Story.
2. Fed policy almost never strays far from the consensus view of professional economists.
3. To prevent the Great Recession, Fed policy would have had to stray far from the consensus view of professional economists.
4. Ergo, professional economists (as a group) caused the Great Recession.
I won’t try to justify the first couple of assertions here; I’ve provided lots of evidence in hundreds of other posts, here and at TheMoneyIllusion.
A recent survey of 257 business economists showed:
A majority of respondents (53%) indicated they believe monetary policy is on the right track, but 39% felt that monetary policy was too stimulative.
The first thing that struck me is that they didn’t even report the third choice, money is too tight. I had to go to the raw data to find out that 6.6% supported that view, while 2.1% had no opinion. Of course now that we are this far along in the recovery, it’s not obvious that more stimulus is needed. So let’s go back to the bottom of the recession, mid-2009, when any idiot could have told you that more monetary stimulus was desirable. What did economists think back then?
Nearly 70 percent of business economists believe that monetary policy is “about right,” up from 63 percent in March and 56 percent a year earlier. Another 25 percent view the Federal Reserve’s current policy stance as too stimulative, up slightly from March. Respondents are split on whether policy should remain on hold (49 percent) or become more restrictive (45 percent) over the next six months.
Again, no discussion of how many favored easier money. At most 5%, and probably closer to 3% (assuming 2% undecided.) In contrast, in mid-2009 100% of market monetarists believed that money was too tight, and of course in retrospect we were right.
So there are basically two groups of economists, those who agreed with the Fed, and those who thought Fed policy was too stimulative. If the Fed had done what was necessary to prevent the Great Recession, they would have had to move far out of the mainstream. As it was, their views were already better than average. It is simply unrealistic to expect a major conservative institution to take radical positions on important public policy questions. I’m not even sure it’s desirable for powerful institutions to make radical decisions. Instead, we need to fix the economic profession, so that economists as a group favor monetary policy regimes that provide slow and steady growth in nominal spending.
Which reminds me of Bertolt Brecht:
Had leaflets distributed in the Stalinallee
Which said that the people
Had forfeited the government’s confidence
And could only win it back
By redoubled labour. Wouldn’t it
Be simpler in that case if the government
Dissolved the people and
OK, so my belief in the “wisdom of crowds” is hereby suspended for one blog post, while I temporarily become a Stalinist.