Stephen Williamson Takes the Stand on QE and Price Inflation
In light of all the attacks on Stephen Williamson–Noah Smith has provided the best summary I’ve seen in his updates at this post–my inner defense attorney instincts have been activated. (Nicky, this is not Nam, this is blogging; there are rules.) So I offer the following testimony. Do with it what you will:
Dr. Williamson, if you’ll bear with me, I am truly trying to make sure the blogosphere mob doesn’t lynch an innocent man. So can you please clarify your position by telling me if I’m understanding you?
You are saying that if the Fed hadn’t engaged in QE, then price inflation (such as the increase in CPI from 2008-13) would have been higher than what we observed. Further, you are saying that the mechanism at work here is *not* that the Fed’s policy announcements of QE led investors and consumers to revise their forecasts about the economy; in other words, it’s NOT that people said, “Whoa, they’re announcing another trillion in asset purchases, so they must think we’re on the edge of a depression here. I’d better put off buying that plasma screen TV.”
Finally, you aren’t claiming to have discovered some knife-edge equilibrium result that wouldn’t survive a “trembling hands” perturbation. Rather, you are saying that given the situation the last few years, a burst of QE would quite naturally lead to lower price inflation; there doesn’t exist a more stable path toward an equilibrium of higher price inflation.
I realize you might not have worded everything the way I did, but do you endorse the above statements?
Then he answered:
My original post actually didn’t focus on QE, I merely wanted to suggest reasons why, if the Fed maintained policy at the zero lower bound for a long time, we need not observe deflation, and why we could see falling inflation. In the model, it’s a long-run proposition. Then, some people wanted to focus on the QE result in my working paper which is that, as a long run proposition, at the zero lower bound QE will lower inflation (while also raising consumption and making us better off, through a mechanism which involves relaxing collateral constraints. That idea ran away with itself, and people started putting words in my mouth.
So,
1. There are some complications. For example, I haven’t worried about the short run effects of monetary policy. That’s going to complicate what we see in the actual time series of prices 2008-13.
2. I wouldn’t rule out announcement effects from QE. The effects I’m talking about could be quantitatively small, and all you’re seeing are signaling effects of QE. Maybe it’s only the policy rate that matters, and QE is just signaling future policy rates.
“Finally, you aren’t claiming to have discovered some knife-edge equilibrium result that wouldn’t survive a “trembling hands” perturbation.”
Definitely not. When Krugman was discussing “little arrows,” he seemed to have a well-specified notion of dynamic stability in mind. I addressed that. There’s no stability problem in that sense at all. As to the other “stability problem,” that was just some nonsense.
“Rather, you are saying that given the situation the last few years, a burst of QE would quite naturally lead to lower price inflation; there doesn’t exist a more stable path toward an equilibrium of higher price inflation.”
I would put it differently. The original issue that I was focused on, was the idea that there is another long-run equilibrium with higher inflation, but the liquidity trap equilibrium was indeed highly stable. It’s so stable in part because of policy errors the Fed is making, or it’s own misunderstandings.
A lot of people are reading things that other people are writing about what I’m writing, rather than actually reading my writing unfiltered, and that’s bound to be confusing.
I added the bold above, which was precisely why I asked him.
Consider the type of real science which can predict what will happen, and so is suited to guide policy. It is not primarily up to the reader to find the evidence which supports and contradicts the proposed theory. In real science, the theorist examines all of that, especially the contradictory evidence.
The late particle physicist Richard Feynman was a plain-spoken genius. This speech considers why we continue to not know the truth about many things, hundreds of years after people discovered how to do good science. An enjoyable must-read.
Cargo Cult Science
1974 by Richard P. Feynman – Commencement speech at The California Institute of Technology
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[edited] Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can to explain them, if you know anything at all wrong or possibly wrong.
If you make a theory, for example, and advertise it, or put it out, then you must also put down all the facts that disagree with it, as well as those that agree with it.
There is also a more subtle problem. When you have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining what it fits, that those things it fits are not just the things that gave you the idea for the theory, but that the finished theory makes something else come out right, in addition.
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Prediction is everything, and it must work more than once. Explaining everything after the fact is merely making up complicated stories.
Feynman says that real science is a method for discovering facts about our world, and it requires bending over backwards not to fool others, and especially not to fool oneself. He notes it is particularly easy to fool oneself, and so requires the greatest dilligence and openness to criticism and disproof to avoid being that fool.
The complicated theorizing of New (and old) Keynesianism is a lot of story telling combined with math models which have not been shown by experience to predict anything. Then, these stories are presented, without being tested against the known supporting and contradictory evidence. It isn’t science, and it is not reliable. Yet, it is used to promote and justify massive experiments on the lives of the peasants. These experiments just happen to deliver massive resources to politicians for distribution to themselves and their friends.
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The rule in medicine is “First do no harm”. This is the reluctant position of doctors. They understand from hundreds of years of experience that it is far easier to make things worse than to make them better. People are medically complicated.
This is not the position of public economists, who pose this or that policy by making up stories about what is causing what. They just don’t know, but they are willing to guess. Giving an equation as an illustration is merely a trick to make their statements seem real.
EasyOpinions
I presume that’s intended as a blast at Nick Rowe.
I agree with Nick, the egg would fall to the North.
However, let’s suppose a Fed economist is balancing a broom on her hand and a little bird lands on one corner of the broom. The broom would not automatically fall over, the Fed would adapt and the broom would end up leaning the other way as compensation.
I’m sure I have mentioned before that you can’t directly judge how a feedback loop works by looking at the open-loop behaviour (although of course there is a relation, but it often comes out unintuitive).
So does he, or does he not, believe that (other things equal, including interest rates ) a demand for a greater return for holding money will lead to a lowering of the inflation rate ?