I've been struggling a lot lately with some really, really challenging economic policy questions, and I've shared some of my thoughts on this blog. One issue I've been grappling with is the efficacy of nominal wage cuts. A little further back I struggled with the unconventional monetary policies that have been suggested recently, specifically whether they would be efficacious in a "liquidity trap" (however you want to define that - and there are lots of definitions floating around... don't just blindly trust someone that tries to tell you "so-and-so misunderstands the idea of a liquidity trap" - because there simply is no consensus on what the term even means). I honestly am still agnostic on both of these questions - still groping my way around. The issues are very complicated, and we simply don't have a lot of empirical experience to draw on to understand how either works in an environment where we would need to know most: namely, abnormal depressionary conditions.
Scott Sumner isn't nearly so timid. Today, he wrote of Janet Yellen:
"her failure to understand that monetary stimulus was still possible at
zero rates should be an automatic dis-qualifier for the Board of Governors,
roughly equivalent to a Supreme Court nominee who opposed Brown vs. Board of
Wow. I don't have much to add to this, except to say that I always appreciate Sumner for his extremely intelligent and unorthodox perspective on these issues. I don't usually expect hyperbole from him (I go elsewhere for that)! There are unconventional monetary policies that might work. Others argue that they won't work and that we now need to turn to fiscal policy. Granted, there's a lot we don't know about fiscal policy - but we know a hell of a lot more about fiscal policy than we do about the unconventional monetary policies Sumner is refering to. Even if you buy into quantitative easing in theory, that lack of experience alone is a justifiable reason to be skeptical. Is it really fair to compare caution and skepticism to embracing segregation?
And they say Krugman is shrill!
Sumner also notes that Yellen is a "dove", and he sorta says this is a good thing at a time like this. That's a little disconcerting for me to hear too. Yes, I agree that now we need a very dovish Federal Reserve Board. But what about several years down the road? It may come back to bite us. I'd personally prefer more people like Bernanke - people with a strong price stabilization bias, but who are intelligent enough to act like doves when the situation calls for it, and who are enough in touch with everyday people to recognize that they have a responsibility to rein in unemployment as well as inflation. The balance that Bernanke strikes will probably serve us better in the long haul than a Board full of doves. That having been said, I am very supportive of Obama's selection of Janet Yellen and wish her the best of luck.