Alan Blinder: How did Countercyclical Policy Get Such a Bad Name?

[ Music ]
>> Hello! So happy you could join us.
My name is John Kerry, I'm with Cengage Learning.
We want to thank particularly the University
of Central Florida and Dean Paul Jarley and, you know, it's a--
in this business, you know, we're all about students and all
about partnering with institutions and instructors,
so we were very pleased when the University
of Central Florida were excited to partner with us
to bring you this keynote this afternoon.
And I'd like to introduce the Chair
of the Economics Department, Mark Dickie,
to introduce our keynote speaker.
[ Applause ]
>> Thank you.
On behalf of the Department of Economics and College
of Business at the University of Central Florida,
I'd like to thank of Cengage Learning
and the Gulf Coast Economics Association,
and I'd like to welcome you all
to the keynote address by Dr. Alan Blinder.
Dr. Blinder's career has taken him through forty years
of teaching research and public service.
As a teacher, he's been at Princeton University since 1971
and many of us are familiar with his Principles
of Economics textbook which has been used by millions
of students around the world, and now I believe it's
in its twelfth, at least, edition.
His research contributions are impressive in their influence
and just astonishing in their breadth,
with important contributions on topics as diverse
as human capital, labor supply, wage discrimination,
the consumption function, intergenerational transfers,
the distribution of income, inventories, price stickiness,
and even the economics of brushing teeth.
He is best known though as an expert on monetary
and fiscal policy and he took that expertise to the Counsel
of Economic Advisers and to the Board of Governors
of the Federal Reserve System where he served as Vice Chair.
We're fortunate to have him here today to address the topic
of "How did Countercyclical Policy Get Such a Bad Name?"
Please join me in welcoming our speaker, Dr. Alan Blinder.
[ Applause ]
>> Thank you very much for that nice introduction,
though all such introductions remind me how old I am.
[Laughter] Something I'm constantly trying to forget,
but haven't succeeded yet.
So, the title of the talk is--
and this is what the talk is actually about,
sometimes the talk is not about what its title says,
is How did Countercyclical Policy Got Such a Bad Name.
I should mention that this is heavily based
on chapter thirteen of a trade book of--
that I have coming out in January called
"After the Music Stopped."
The-- which is about the financial crisis
and its aftermaths, and one of these aftermaths is the bad name
that countercyclical policy has unfortunately obtained.
I don't know if you can read that cartoon,
this was my favorite cartoon of the financial crisis,
it's a New Yorker cartoon which is, if you can see,
it's an executioner about to separate the king from his head
when a messenger runs in and says, "Stop!
Wait, the government is no longer the problem,
it's the solution."
This appeared in the New Yorker, I think, in early March 2009
when things were really going badly and everybody was looking
for the government to help them out.
But the reason I put it up here is the--
on the first slide is this attitude did not last
as you all very well know,
and instead we had a significant fall from grace
of the notion that--
of the basic notion of macroeconomic stimulus
and as I sometimes say, stimulus became an eight-letter word,
which is twice as bad as the four-letter word.
Let me just review with you for about a minute
and a half what was the traditional view
of countercyclical fiscal
and monetary policy prior to the crisis.
This will be familiar to everybody, probably everybody
in this room has taught this at one point or another
in their teaching careers.
I certainly have taught it many, many times.
I might say I sort of still do.
So, that's a picture of Canes of course.
So, in principle, both monetary and fiscal policy can be used
for stabilization purposes,
but just remember the traditional view,
monetary policy has very long legs and that can be problematic
if you have to move fast;
but fiscal policy is a much bigger policy
of being politicized and in large measure at least
in the minds of many people, hopeless.
So it's nice theoretically,
but you can't actually do it in a sensible way.
Fortunately, in the conventional view,
monetary policy should be enough,
so you don't really need fiscal policy,
we can just put this task entirely in the hands--
in the United States of the Federal Reserve
and in other countries of their Central Banks,
and you don't really need the fiscal and--
which you may not be able to get.
Anyway, and by the way, in the US,
monetary policy meant a very simple thing:
moving the federal funds right up or down as appropriate
to influence aggregate demand.
And while fine-tuning wouldn't work,
this is a disparaging term, "fine-tuning",
you're not supposed to try to do it although I must say I served
on the Federal Reserve under Alan Greenspan and he sure tried
to do it and he did it pretty well,
but anyway you can't do it.
But you can do coarse-tuning.
So when things really get out of lack, as now,
as in recent years, in principle, there's a lot of good
to be done potentially by stabilization policy.
So, what did we learn in the crisis that we weren't thinking
about then when this was the consensus?
Well, first of all, if the slump is really deep,
this notion that you can just do it
with monetary policy might not be quite right.
Monetary policy might need help.
It's not a powerful enough engine.
Secondly, as indicated on the previous slide,
if the need for stimulus arises quickly then monetary policy may
be a bit slow.
So, an example of that is unlike--
I've said this in front of Martin Feldstein so I can say it
in front of you, unlike the National Bureau
of Economic Research, I date the start
of the crisis September 15th-- of the recession, sorry,
September 15th, 2008 and the economy just fell
to the ground very, very fast.
If you think about the conventional lags
and monetary policy that we teach our students about,
monetary policy is not going to have an appreciable effect
on demand for a year or two.
Let's say a year and that's-- that could be too slow.
Thirdly, what we've learned is that this notion
that monetary policy is just
about moving the federal funds rate is much too narrow
especially when the federal funds rate gets moved as low
as it can be moved, which the Fed has--
which is where the Fed has
or more less been since December 2008.
I often say that at that point, Ben Bernanke could have said,
"You know, we're closing up shop,
that's all we can do, we got nothing else."
We're all lucky that he didn't do that and of course
as you know, he's done many, many things
and he's probably not finished.
So monetary policy is a lot more
than we thought it was, but it can ran out.
Some-- I almost wrote this line incorrectly, say,
"It can ran out of bullets," what I really mean is it can ran
out of powerful bullets.
The Fed has shot all its powerful bullets a long time
ago, but it's still shooting bullets
of whatever strength it has left.
Very germane to teachers-- oops, I went too far.
Very germane teachers of Elementary Economics,
that includes me, I teach the subject,
is that the money multiplier which we often teach
in a very mechanical way, the Federal Reserve puts
in reserves, that gets multiplied into money,
that affects aggregate demand, that affects the economy.
But very mechanical on the money multiplier is just not good
enough in crisis periods.
We have seen what probably none of us ever imagined we'd see
in our lifetime, certainly, I never imagined,
but total incredible explosion of bank reserves
with very little effect on the money supply.
I mean the M2 money supplies has been growing since the crisis
about seven percent a year or something like that
and the monetary base or bank reserves has grown
by many thousands of percent.
So this is far from a mechanical relationship.
And finally, switching to fiscal policy,
that fiscal expansions can be constrained
by very large budget deficits.
The constraint might be economic in the sense of--
think Greece, you-- eventually, you ran out of the ability
to float debt, that's certainly not true in the United States
or it might be political, which is very germane
in the United States and I'm going to come back to that.
So, in-- but instead of--
or maybe in addition to learning those lessons,
all this policy activism
since 2008 plus the terrible economy we've had has led
to a backlash and that's the backlash is what I want
to talk-- or aspects
of the backlash is what I want to talk about.
A backlash against the Fed,
a backlash against the politicians, that's bracketed
because I'm not talking about that.
We're just taking the economics today.
That's a whole other story, the backlash against politicians,
the backlash against Keynesian economics, which is very germane
to what I have to say today and more generally than that,
the backlash against policy activism.
So, those are the things I want to talk about,
leaving aside the politics.
But first the question, why worry-- whoops, no, sorry.
I left that last.
Americans talk conservative, but are pragmatically liberal.
This has been a finding of political scientist
for a very, very long time.
It still looks true.

The quintessential example
of this during the crisis was during the long hot summer
of 2009 when you-- probably a lot
of you remember this famous quotation of somebody
in a town home meeting against the--
or what's come to be called ObamaCare, told the speaker,
who I think was a democratic congressman or woman
to "keep your government hands off my Medicare," you think
about that a little it-- this is ether deeply philosophical
or nonsense.
[Laughter] I'm not sure which.
So now, the question I wanted to ask is why do we worry--
why should we worry about this?
And my answer is simple, what's going
to happen I wonder the next time something really bad
macroeconomically happens and we need to marshal our monetary
and fiscal forces again?
It may be much more difficult to get that done politically
than it was in 2008, '09, '10 because of this backlash.
So, let's go in turn, first starting the backlash
against fiscal policy.
This is a quotation from sometime in 2010,
I should've written in my notes what month,
but I don't remember.
Tim Geithner said, "We save the economy,
but we kind of lost the public doing it."
I couldn't agree more, except for the modifier "kind of."
They lost the public doing it.
Despite facts like this, so here I call this an
interesting graph.
If you look at this, this is the monthly change in employment
in the BLS payroll survey starting in--
I can't quite read the legend, I think, January '08 when it's
about zero going negative very sharply
after Lehman Brothers crashes and burns in September 2008.
The two red bars are to mark the inauguration of Barack Obama
as President of United States, and the next one, February,
one month later, the passage of the big stimulus package.
Now, if you drop down from Mars
and I just showed you this graph, I think you would think
that Obama was covered with garlands of roses,
lauded everywhere in America as the man who came in
and saved the day just in the nick of time
as we were just heading down the tubes.
That's exaggerated, of course.
There are lags in policy we know that's partly coincidental,
but that only deepens the mystery of how it is that he
and his team got blamed for doing so badly
when what you see here is an amazing change
from things getting worse, worse, worse, worse,
worse to things getting less worse, less worse, less worse.
There's a big political problem to claim victory when you say--
by saying things are getting bad but at a slower rate.
[Laughter] But this is what that graph shows you,
and it's very dramatic, exactly at the time
that President Obama took office.
Let me go to the backlash against Keynesian Economics,
this is actually a cartoon from the Baumol & Blinder textbook,
which the kid is saying-- I can't read this.
Can you read it?
>> Yeah.
>> Free gifts for everyone in the world, are you a--
>> Are you a Keynesian or something?
Thank you, John.
When you make these slides small, like this,
they become illegible, at least if you're my age, they are.
So you may remember that Nixon once declared we're all
Keynesians now, a Republican of course.
By 2011, this is a quotation out of an article in The Economist
that says, "If there's one ideology
that unites today's republicans,
it's Keynesianism whose nefarious influence they are
determined to stamp out"-- or stomp out, whatever that says.
And John Boehner, you may remember, kept referring
to government spending that was part of the stimulus
and other government spending as job-killing government spending,
that is not a language that you and I speak
that the fiscal multiplier was negative, that you raised G
and why GDP went down, not up.
That's quite different from saying
which is a much more legitimate way to attack many
of the policies, it was foolish spending,
it was inefficiently spent on the wrong things
with the wrong timing, there are lots of places where those kinds
of policies can be criticized legitimately, but the notion--
is this the next slide?
The notion that-- yeah, let me come to the next slide--
that the stimulus didn't create any jobs,
which all of us have heard many, many times in the media in a--
coming out of politicians' mouths,
is fanciful in the extreme.
I mean, suppose you assigned somebody to the task,
I'm going to give you 831 billion dollars,
I want you to spend it without creating a single job.
It's impossible.
You could waste it, you could spend it badly,
but lots of things can be--
lots of the spending
in the stimulus could be legitimately criticized;
but the notion that you could spend all that money
without creating any jobs, I mean, it's unimaginable.
So, this says why, why this backlash
against Keynesian Economics and there are two main reasons.
One is the myth that the stimulus failed,
I believe it's a myth and I'll elaborate on that
for a few minutes, but the other is a fact having to do
with the big budget deficits that came in its wake.
So, I already mentioned this.
How could that be even if we would spend wastefully?
John Taylor whose one of the more vocal
and thoughtful critics of the stimulus package, an old,
old friend of mine by the way, is always focusing
on the federal purchases of goods and services.
If you actually look at how much
of the stimulus was federal spending on purchasing goods
and services, it's trivial.
He's right.
So, he's always making that case.
It was trivial and of course when you do a trivial amount,
you're not getting any bang out of that few bucks.
Most of it was on tax cuts, on transfers,
state and local governments, on transfers themselves, and so on.
It was not G as you find it in textbooks, but that's irrelevant
because it's just not what the government did.
Second criticism coming from the left, not from the right is
that it wasn't big enough as you're--
a lot of you are probably aware there's been a lot of-- sorry--
a lot of argumentation, both at the--
both before when the stimulus was being planned
and after once the stimulus was in the field
about whether it was just too small to do the job that it--
that was assigned to it.
I think there's some truth to that.
It was vigorously debated within the Obama team,
announced that 787, a very unfortunate thing.
The first digit of that is seven,
which is the same digit as the tarp.
By then, everybody hated the tarp.
So if you came up without 700 billion dollar programs,
it was going to be confused with the tarp, which it was,
and hated for that reason, guilt by association.
The true stimulus was lower than that.
Let me skip over that to make what I think is a more important
point in this context which is the critics that, from the left,
that criticize the Obama administration
for only doing 831 billion,
which is what it was ultimately priced at, I think,
are unrealistic about what might have actually gotten
through the Congress.
It was pretty tough to get
through the Congress the actual stimulus package
that was passed.
I'm quite dubious that a bigger one could've passed,
and you might have lost the whole thing
by trying say for a trillion.
So I'm not critical of the Obama Administration for that
"mistake," although some of my friends are.
There's also a huge controversy among economists, the public is
out of this one, about the size of the multiplier.
If you actually look at the literature, there is--
so remember John Boehner's answer is zero.
If you actually look at the scholarly literature,
there is a divide which surprised me for a long time,
but I think I may have it figured out now,
between multiplier estimates you get
from reduced form methodologies and multiplier estimates you get
from big macrostructural models,
with the latter always bigger than the former.
So the latter tend-- now it does depend
on what you're looking at, but let me just think about G,
federal spending on goods and services.
The latter, the ones that come out of the big macro models tend
to look like 1.2, 1.5, sometimes 1.8, in that kind of range.
The former, the things that come
out of reduced form methodologies tend to look
like 0.4, 0.6, big, big difference.
And for a long time, I was puzzled by that.
I think I figured it out and then I found--
this is the old saying, "It's often smarter to look it up than
to think it up," but I didn't do it that way.
I thought I thought it up and then I looked it up,
could've saved me some time because it was then verified
by a number of scholarly papers.
And it's this, when people use the reduced form methodology,
that is a government spending shock comes into the system
and you observe GDP without having any structural model
of what's going on in between, they tend to get most
of their econometric action from war time spending, from wars.
If you think of when you have war time spending,
that's when the economy's at peak employment.
When everything we think we know about macroeconomics says,
"Fiscal multiplier should be small
because you can't increase the GDP that much anymore
and in big slumps like we've been in,
fiscal multipliers are large."
So I think, and as I say,
there is some scholarly evidence supporting that.
That's the main reason why you see this tremendous divide,
small fiscal multipliers coming out of reduced form work,
large fiscal-- comparatively large fiscal multipliers coming
out of structural modeling.
And by the way, what that says to me then if that's
at all right and you think of yourself in the position
of February 2009 which was when this--
the big stimulus was enacted,
you know which situation we're in.
We're in the big multiplier situation with huge amounts
of slack in the economy.
Okay, so that's a digression for this audience
from which you don't see in the media.
We don't discuss that in the media.
Coming back to reasons why, the one place I would join in many
of the critics of the Obama stimulus is it wasn't
particularly well-targeted until it's creating jobs.
There is a philosophy of fiscal stimulus, and I might--
I guess, you could say monetary stimulus also
and I think it's the dominant philosophy that I like to call
"build it and they will come."
So build a bigger GDP and jobs will come.
It's correct.
There's nothing wrong with that.
But if you just look at the numbers involved,
GDP for job in the US is about--
was in 2010, a hundred and twelve thousand dollars.
We're a rich productive country.
That means if the multiplier was one, remember what I was saying,
the reduce form crowd wants to say you're lucky to get 0.6,
the structural models say maybe 1.5.
Just use one, but you can change this in your mind
to any number you want.
One is an easy thing to multiply by that's why I use it.
And that will imply that it takes a hundred
and twelve thousand dollars per job in fiscal stimulus,
and so you know, somebody's going to look at you,
criticizing and look at you and say,
"You're spending a hundred twelve thousand dollars per job
to create jobs?
That must be evidence of waste and inefficiency and foolishness
and stupidity and all kinds."
No, it's evidence that your fiscal stimulus is basically
creating average jobs with average GDP
because that is the ratio of GDP per job in--
then, now it's a little higher, and it is roughly,
this is the second-- that's the last thing that it says
on there, if you look on the numbers
of the much criticized Obama Administration analysis
of its own stimulus package,
that is roughly what they claimed.
Then roughly for every hundred twelve thousand dollars
in the stimulus package, they create one job.
So they weren't pie in the sky, but what that means,
coming back to the criticisms,
they weren't particularly targeted.
You could do special kinds of spending, and I'll come back
to this in a minute, that are more targeted on creating jobs
to get that number of cost per job lower,
which is a politically wise thing to do especially
when you're going to be spending a lot of money.
So-- oh it says what I was just saying.
Two examples are these direct federal hiring, which in modest
to low skill jobs, which you could do for a lot less
than a hundred and twelve thousand dollars,
but we didn't do that in the United States,
that's socialism I guess or something like that.
And my favorite policy is the New Jobs tax credit where I have
in my mind a total political economy mystery and it's this,
the New Jobs tax credit is the-- I'm sorry--
is the subsidy to businesses,
so it's a business tax cut conditioned on new hiring.
When I close my eyes in the shower and I say,
"Should Republicans like that?"
the answer comes back, "Yes!
It's a business tax cut, to encourage hiring.
They should love it."
Well, they don't.
They hate it and it never went anywhere.
Finally, in terms of the myth of the failed stimulus,
there was this very unfortunate, as you may remember,
a forecast the administration made early,
actually during the transition saying that is
with the administration stimulus,
the unemployment rate would never have breach eight percent.
Well, it breached eight percent.
In fact, it breached eight percent in the first month
of the Obama Administration,
that forecast was obsolete before it was even rolled out.
But I could explain to you folks and to economic students,
if they're paying attention, that what they really meant
in that forecast, the blood and guts of that forecast was
that the stimulus would lower the unemployment rate
by about 1.8 percentage points compared
to what it otherwise would have been.
In the actual administration forecast, they said,
instead of getting a peak at 9.8, we'll get a peak at eight.
But number 1.8 as the delta appears to be pretty accurate,
but what it was is instead
of getting 12 percent, we got 10 percent.
But try explaining that on the NBC news in twelve seconds.
So, that's the bad forecast.
I think I-- sorry, I should have shown that slide,
I've already done that.
And then there's the second reason, which is not a myth,
which is that a big stimulus like that is going
to add quite a bit to the deficit and the national debt,
and Americans at least
at the lip service level don't much like that.
Now, why do I say, "At the lip service level"?
If you poll, you will know this, if you poll Americans,
they hate the budget deficit.
They think it's horrible.
They don't only think it should be smaller,
they think it should be zero and so on.
If you then continue, if you're the pollster and asked them
about ways to reduce the deficit,
you come up pretty short.
So here's a Gallup Poll from January of 2011,
this is the favor in oppose of Gallup suggesting
to these respondents different ways you could cut the deficit.
So, foreign aid, well, I think
in this room you know how much good that will do you.
That will not-- what county is this?
Orange County?
That will not close the deficit of Orange County,
never mind the whole country.
Aid the farmers?
No, close.
National defense?
No. Anti-poverty programs?
No. Medicare?
Certainly no.
And social security?
Absolutely not.
And you can go on like this.
And by the-- I didn't put raising taxes,
they don't like that either.
So folks do want the deficit to be much smaller,
but they want it to happen by magic.
They don't want to actually do anything
that reduces the deficit.
Let me move on-- so that was fiscal policy and Keynesianism.
Let me now move on to the Federal Reserve
where I hope you can read this.
"To stay up in the corner" is one
of my favorite protest signs.
If you can't read it, the lower sign--
this is stuff against the bailout and the Fed and with
that kind of a rotten [phonetic] poll sort of a crowd,
but the lower sign says,
"Fractional reserve banking is inherently fraudulent."
I love this.
[Laughter] It's a great thing
to show your students just before you explain fractional
reserve banking.
It's not really inherently fraudulent,
but it is a little funny and that's why we have to teach it
because it's counter-intuitive.
So what happened here-- wait a second, [inaudible].
Oh I'm sorry, I went out of order.
Okay.
This is about-- just some indicators
of the backlash against the Fed.
I was stunned in July 2009 when I saw a Gallup Poll
which gave a list of federal agencies and they asked people
to rank them, how good they are, how well they perform,
and the Federal Reserve came at the bottom of a list of nine
that included not only the Department of Homeland Security,
which everybody that knows anything
about that knows it's a total dysfunctional mess.
The CIA which I thought is not so popular and the IRS
which I know is not so popular, the Federal Reserve
at that point is ranking below all of these.
I mean, that was astounding to me as somebody
who was once Vice Chairman of the--
well, they wouldn't have said
that in my days [laughter] as Vice Chairman.
Second indicator, when president Obama re-nominated Ben Bernanke
to a second term as Chairman in January 2010,
he got thirty negative votes, the most in history
by a long, long margin.
This was part of his reward for doing such a great job.
And then probably a lot of you know about Ron Paul's book
which briefly became a bestseller, "End the Fed."
Never mind curb the Fed's powers,
end the Fed, pretty extreme.
So, the backlash against the Fed.
I think, it came from two basic very different sources.
So the first is the totally uneducated source,
these are the people that really need Economics 101.
This is the crowd that somehow discovered while this stuff was
going on, these extraordinary actions by the Fed
that the Federal Reserve, a government agency has the power
to print as much money as it wants and they didn't
like that idea at all.
Now, our students understand that, at least they--
better not pass their final exams
without understanding that.
The Federal Reserve has had this power since 1913,
but a few people, mostly on the right, just discovered this
around 2009 or 2010 and probably reacting the way Hayek would've
reacted, said that's a bad thing.
We don't want to put that kind of power
in the hands of the government.
Let's never mind that although I think in the public domain,
that was more important than the educated critiques.
So, Allan Meltzer and John Taylor knew very well
that the Federal Reserve has been creating money since 1913
and know lots and lots of things about the Federal Reserve,
they didn't learn anything.
But here's the criticism from Allen Meltzer,
look at the date, 2009.
This is not looking back when you're sort of back
into a safe situation.
This is a dangerous situation in 2009.
Meltzer says, "Chairman Ben Bernanke seemed willing
to sacrifice much of the independence
that Paul Volcker restored in the '80s.
He worked closely with the Treasury," and listen to this,
"and yielded to pressures from the chairs of the House
and Senate Banking Committees and others in Congress."
What were they urging him to do?
Save the economy from going down the toilet?
Probably. I'm glad he yielded to those.
John Taylor wrote that the Fed is now operating a completely
unprecedented policy regime from which the Fed should exit
and return to traditional monetary policy.
Now, that means the Taylor Rule as probably most
of you had figured out.
And then he says, "In my view the financial crisis was
caused," pause on that verb for a second, "caused then prolonged
and worsened by the Fed's departure
from traditional monetary policy."
I have a hard time looking at the facts in coming
to a conclusion like that, but these were--
I put these quotations from Meltzer
and Taylor very different from the first bullet point,
this is really the educated part of the Right Wing
of the Republican-- of the Economics profession, you know,
left of center, they're right of center,
but these are not dumbbells by any means, these are people
that really understand the Federal Reserve
and monetary policy and all of this stuff very, very well.
Still the backlash against the Fed, a major criticism
that you got from a number
of politicians is the Fed had overstepped its legal authority
and made itself a fourth branch of government.
Why do people say this?
Well, what was the Fed doing?
It was lending massive amounts.
Federal Reserve lending has been going on since the beginning
of the Federal Reserve System, but almost always
in quite small magnitude, very small magnitude.
In fact on the eve of the Lehman collapse,
we were still measuring Federal Reserve lending in millions.

Just like that we were measuring it in billions
and pretty soon we are measuring it in trillions.
So, sometimes a quantities change starts looking
like a qualitative change.
Nobody imagined that the Federal Reserve would ever be lending
to banks one and a half trillion dollars,
which at the peak it was.
Second thing, it wasn't limited to banks.
The Fed lent money to non-banks, like Investment Banks,
which it had never done since the 1930's.
It bought unusual assets like commercial paper
and mortgage bank securities that they'd never done before.
And it participated actively with the Treasury
in deciding okay, you're-- sorry, I don't mean to point
at you individuals-- you banks, you're going to die,
you're going to live, you're going to get bought
out by another bank, the Federal Reserve became an
investment banker.
It was doing deals, which is a very unusual thing
and a very uncomfortable thing for the Fed to do.
So these are some of the reasons why people thought it had
overstepped its authority.
[ Pause ]
Whoops, wait a second.
Did I get that?
No, okay. Sorry.
So this is a picture of Harry Houdini,
if you forgotten what he looks like, I certainly had
until I pulled this up.
During the debate over Dodd-Frank, just to remind you
of the timing, that was sort of from mid-2009 to mid-2010,
that passed in either June or July 2010.
There was a tremendous--
a long list of ways to curb the Fed's power that were
under consideration in the Congress, and the Fed dodged all
of them except one, that's why Houdini's picture is on there.
The one was some clipping of the Fed's wings in the--
what became the famous Section 13-3,
that's the emergency lending, which used to say the--
in an emergency, the Fed can lend to anybody, and that--
so that would include AIG and Bear Sterns and so on,
and now says it can only lend to--
I'm forgetting the exact language,
but classes of institutions.
You can't just pick-- lend to them.
You could define a class of needy institutions
and lend broadly, but then the window, so to speak,
is open to anybody that falls in the class,
that's what Section 13-3 says now after Dodd Frank,
but everything else they dodged.
So it was pretty impressive.
Okay, so this is where I thought I was going.
The last thing I said I would talk about, the backlash
against policy activism.
You know whose picture this is?
Right? An audience like this recognizes Milton Friedman,
right.
John Taylor, as we saw before,
claimed that the financial crisis has caused, prolonged,
and worsened by the Fed's departure
from traditional monetary policy.
Alan Greenspan, a name we still remember, wrote that,
"The presumption that intervention can substitute
for market flaws, is itself highly doubtful.
Much intervention turns
out to hobble markets rather than enhancing them."
Just please note that he didn't write this-- well, he would--
he might have said exactly the same thing,
but these words did not come in 2005, they came in 2011,
after we saw what happened in 2007, '08, '09.
I find that pretty amazing.
And then of course
in the presidential campaign just ended, except in Florida,
Mitt Romney continually said, "He did it."
He was graceful enough to say
that President Obama didn't cause the crisis.
That was nice.
He only became President in January 2009,
but he kept saying, "But he made it worse
by thvarious activist policies."

So, on President Obama, what went wrong?
Did he take on too many things at once?
Historians are going
to be debating this for a very long time.
My answer is yes.
Let me just show you a few.
He had to cauterize the financial system,
it was bleeding when it came in.
He had to stimulate aggregate demand, we talked about that.
He had to reform the financial system, which was a mess
and needed tremendous reform.
He didn't have to, but he decided to reform health care,
something that eluded every president since Truman.
He didn't succeed in getting the energy climate policy based
on Cap-and-Trade, true, but he tried
and spent a lot of effort on that.
There was education reform and then there was dot, dot, dot,
this is not the total list.

You could admire him or criticize him for this,
but it had consequences.
One consequence is that it became very unclear
to the people what President Obama stood for.
What was he trying to do?
This was a massive violation of the KISS principle,
"Keep It Simple, Stupid."
It was not simple.
It was-- I-- make it a contrast, you may remember this quotation
from Bill Clinton during his transition in 1992,
"He's going to focus like a laser beam on the economy."
President Obama refused to focus like a laser beam on anything.
He wanted to focus on many things at once.
And so, for example, it raised questions like well,
explain to me how mandating health insurance coverage is
going to-- or from businesses
that [inaudible] provided is going
to create jobs, how does that work?
Well, it doesn't actually.
It's a completely different policy.
It's not a job creator.
He was not focused.
He was all over the map.
And as I say, historians may ultimately praise him
or criticize him for that.
Second reason for the backlash against activism,
the slump was very big and the recovery was--
has been pretty slow.
So people lost huge amounts of wealth, they lost their jobs,
they lived through the worse recessions since the 1930s,
and here's the point that I made before.
Politically, you don't want to run on a counterfactual,
this is the world that we, economist and other scientists,
and by the way scientist scientist live
in all the time, counterfactuals.
What if this was different?
How would the other thing have turned out?
But as Barney Frank said, if I can read this--
there it is, "No one has ever gotten reelected
where the bumper that sticker said,
'It would have been worse without me.'
You probably can get tenure with that, but you can't win office."
[Laughter] And he is exactly right.
And that was the position that President Obama
and his supporters wound up in, that it would have been worse
if we didn't do these things.
The hard fact is it's very hard to get people
to believe a counterfactual or even to think that way.
This is by the way is one of the few things we teachers
of economics try to get our students doing.
Think about counterfactual.
Think about if things were different,
how would outcomes have differed?
But it's a very unnatural way to think.
Danny Kahneman in this wonderful book "Thinking, Fast and Slow"
which I think is 2011, I think I got the year wrong
on that slide, I think.
Many of you may have read it, talked about WYSIATI.
WYSIATI-- he talked about this as a fundamental aspect
of the way humans actually think and process information;
and WYSIATI is What You See Is All There Is.
So if you think WYSIATI about what happened after the stimulus
and all the things the Fed did,
if that's the way you think rather
than counterfactually you're not going to be very happy
with the things that the Fed did in the administration.
It did cost-- the net outcome was still pretty bad.
And I think they were a big victim of that.
Let me finish up briefly-- oh sorry, there was one more.
And the second thing really is I think the administration's
fault, both the Bush Administration
in its last few months and the Obama Administration for most
of its time, which is they just didn't explain themselves
so much.
You heard very little from either President Bush
or President Obama of-- in the way of explanation of what
in the world has happened to the United States,
how did this happen and what are we going to do about it.
I don't want to say none, but not much, nor did you hear much
from the two secretaries of the Treasury.
You heard lots from economists and pundits of all kinds,
but nobody listens to us.
So, we don't have the kind of big megaphone that a President
of United States or even the Secretary of the Treasury has.
So those are-- that's the list of my reasons
for why we've had this backlash
against countercyclical policy against activism.
It leads me to prescribe the following five-step rehab
program for wayward policymakers designed
to address this question that I raised before.
What's going to happen the next time?
There will be-- hopefully in our lives,
there will not be anything as bad as what we've experience
since 2008, but there will be something bad.
And eventually there will something that bad again,
hopefully that will be a long time.
Step one, don't try to do too many things at once.
I'm going to go over this quickly, but if anybody wants
to come back and dwell on this--
there are three reasons for this in the United States.
One is the constitution is designed
to make it hard to do things.
It's not an accident.
It's exactly what James Madison had in mind.
Secondly, it gets much harder if you have rampant partisanship.

Thirdly, there's the bandwidth problem.
Citizens are bombarded with information
of all sorts vying for their attention.
They can't be expected to absorb complicated things on the run
and develop a real understanding of them,
that's why of course you needed those explanations
that I said weren't coming.
So that's the second thing.
Explain yourself better to the people.
Here's what Barack Obama should've done a hundred times.
This is how we got into this mess.
Here's what we're doing to fix the problems.
We have a coherent plan and here's why it makes sense,
and please be patient because you can't turn a battleship
around in a minute.
He could have done this, he didn't do it.
Third, say it in a language people can understand.
By the way, this is why we economists aren't too useful
to this task.
[Laughter] We talk like economists too much.
When you heard it come out of Bill Clinton's mouth
at the Democratic Convention, it all seems simple and clear,
he can do that better than we can.
A good politician, in general, can do that better than we can.
Most people basically don't understand these things, okay?
Step three-- step four, repeat steps two and three.
[Laughter] You all know you can't repeat it too much.
This is another place, by the way,
where we academics fall down.
In the academy, especially in the research part
of the academy, like the worst thing you can do is say the same
thing on Tuesday as you said on Monday.
You're supposed to be bright and original everyday.
There aren't actually that many sensible original thoughts
and that's why you get nonsensical original thoughts
because the cardinal sin in the academy is to repeat yourself;
but that is not a sin in the political world,
you must do that in the political world especially
if you're trying to get across something that's complicated.
I mean, what happened to the United States
in 2007-'08 was very complicated.

Step five, set expectations low.
I love this sign.
I found this on Google images.
Like one day, I'm going to have to find out what
that was, danger-expectations.
There is a big danger if you set expectations too high
because you'll be expected to live up to them.
And progress in getting out of a hole such as the one
that got dug for us in 2006, '07, '08, is going to be slow.
And the punishment and rewards are very asymmetric.
There is no punishment for doing better
than you said you would do.
But there's a very severe punishment,
politically, for doing worse.
So, you know, we economist, when you're doing theoretical models,
like to do symmetric laws functions,
this is not symmetric.
This is not symmetric.
If you over-claim and under-deliver, that's poison.
If you under-claim and over-deliver,
they think you're a genius anyway.
They never look back.
I'm a case in point.
I'll make a confession.
At the beginning of the Clinton Administration, I was in charge
of the five-year macroeconomic forecast that you need
to prepare to do the budget.
We did in a day.
We did it on the second day of the Clinton Administration.
It-- so you can say it wasn't the most carefully done
forecast ever.
[Laughter] But more germane, it was a terrible forecast.
If you then watched what happened
over the next five years, the economy did vastly better
in every respect, usually better across the board.
Nobody has ever come to me and said,
"You did a really lousy job with that forecast."
That includes Bill Clinton who never came back and say,
"Why did you give me that terrible forecast?"
Nobody. There's no punishment at all for that.
And as those of you who have been paying attention
to the election, which is probably everybody,
especially in Florida, where you must have really been bummed,
I can hardly imagine the number
of advertisements you must have endured.
In New Jersey, nobody bothered.
[Laughter] This eight percent forecast, eight percent peak
on employment forecast that I mentioned a few minutes ago was
as you know still used during the campaign
to beat the incumbent who is running
for reelection over the head.
So, to finish, the overall conclusion for teachers
of Macroeconomics are two,
that in recent years the real world has generated
for us fantastic examples,
examples we could barely have imagined before of ways
to teach Macroeconomics, that's the good news.
The bad news is the heated political rhetoric has exposed
our students to a lot of nonsense before they ever get
into the classroom and meet us.
That's the bad news and that's our job as educators to try
to get those silly thoughts out of their head
and put some sensible thoughts in there,
which does not mean we give them the answer
to everything as you know.
We can't. We don't know the answers to everything.
And that's it.
[ Applause ]
>> We do have time for some questions.
Got one back here.
Hold on.
[ Noise ]
>> It seems like you're a little bit hard on President Obama,
he won the election and he seemed to convince more
than 50 percent of the public that things had gotten better--
>> Right.
>> -- or will get better.
>> Right.
>> So-- and then maybe President Clinton helped him along,
but I just think he, in his own way, he was successful in--
and he won the election, so.
>> Well, I guess I can't disagree with you too much.
He did win the election.
That was not obvious until pretty late on.
I mean, I was very worried about him winning the election
and if he lost, he was going to lose it, I believe,
for this kind of reason.
People blaming him for things they shouldn't be blaming him,
not crediting him enough for things
that he should've been credited for.
He himself has said in recent months
that he didn't explain things well enough
and he wishes that he had.
But in terms of the bottom line, he did win the election.
You could not be more correct.
So there is some slack.
You don't have to get everything right to come
up on the plus-side, and he did come up on the plus-side.
>> We have a question here.
>> Do you think there could be any merit to the idea
that Obama's approach has sometimes been called
"gorge the beast" as opposed to "starve the beast"?
And I find--
>> Gorge the beast, yeah.
>> Yeah. Gorge the beast.
>> So, what's the question?
>> Well, if your topic was
"Why does countercyclical policy get a bad name"--
>> Right.
>> -- then is-- could that be part of the thinking?
>> Oh absolutely.
I think I was saying-- I was trying to say things like that.
So for example, people looked at the massive size
of the stimulus, 800 billion dollars.
They looked at the huge deficits,
over a trillion dollars.
And that caused-- those were significant aspects
of the backlash against the policies.
Those were-- so that's "gorge the beast," that's the opposite
of "starve the beast."
Now, Keynesian economics teaches us, which is controversial
as I mentioned, still teaches us that in a terrible slump,
you want to gorge the beast.
The problem with the slump is that private individuals
and businesses are not spending enough, so you want to turn
to the-- part of the society that's willing to spend and able
to spend, which is the government.
So you are gorging the beast in that sense.
Now, as I also mentioned, if you're going to pursue a policy
like that, you want to try to be pretty careful not to stuff
into the gorging a lot of silly stuff that's going
to elicit huge criticisms.
I actually think they did pretty well on that.
If you think about how many new stories were there about the
"wasteful this" or the "foolish that" that came
out of the stimulus package, not that much.
Not that much.
There was some.
And the other thing is that it does leave you with something,
I didn't talk about at all in my talk, but it does leave you
with the problem of eventually getting back to normal, right?
So we've had now trillion dollar deficits
for several years running.
That is not the new-- we cannot make that the new normal.
We're going to have to lower the rate of spending.
I think though, not everybody thinks, raise taxes;
but in any case do a bunch of things
to shrink the budget deficit.
I don't think we need to do it now, but we will eventually have
to do it and that is part of the aftermath
of what you were calling "gorge the beast,"
you can't gorge them forever.
[Inaudible Remark]
>> With regard to the multiplier, is there any work
to try to relate its magnitude to negative expectations?
>> Yeah, you mean to pessimism so it doesn't work so well
and I think that's what you-- is that what you mean?
>> Meaning that if it is low or if it's even less than one,
is it because people have negative expectations?
>> I'm not aware of work that does it exactly that way,
except when it's fit into such a tight theatrical corset
that there's no slippage between the events and the expectations.
My reading of the evidence is
that you get actually bigger multipliers when things are bad.
Presumably that's also when people think things are bad
and are more pessimistic.
But it's just that the resources are plentiful
and they can be put into--
if you have the right fiscal monetary policy that can be put
into useful activity or least activity.
The useful is in the eye of beholder, they can be put
into activity in ways that when the economy is booming,
they can't because you're pressing
up against capacity constraints and things.
So, it seem-- if you identify the pessimism with bad times
and the optimism with good times,
then I think it goes the other way.
>> You have a question?
>> If you were one of the voting members of FOMC,
would you have favored QE3, and why?
>> Yes. Did you all hear the question?
The answer is yes, and it comes back to the characterization
of Ben Bernanke that I made way back, which is that if you're--
if you've used up all your powerful instruments
and you're only down to weak ones or you're just going
to say, "I give up and there's nothing much more I can do,"
are you going to use your weak ones?
So my view is you, you know, if you got a bazooka,
you fight with the bazooka.
If you got a rifle, you fight with the rifle.
If you got a pistol, you fight with the pistol.
If you got a pea shooter, you use the pea shooter.
Use whatever you've got less.
So, it's not that I think QE3 is going
to have powerful stimulatory effects on the economy,
but it probably will have some and we can still use them.
We got, you know,
the unemployment rate is coming down,
but it's still 7.9 percent.
The so-called EPOP, the employment
to population ratio is way low.
Long-term unemployment is way high.
So, we got a long way to go on this recovery.
And importantly, it's almost inconceivable that in terms
of stimulating aggregate demand, the Fed is going
to get help from fiscal policy.
The operational question which is--
gets extreme in the fiscal cliff is how much harm is fiscal
policy going to do in terms
of contracting aggregate demand rather
than boosting aggregate demand?
So while QE3 would not have been my favorite Fed policy,
Ben Bernanke knows what my favorite Fed policy is,
which is to lower or indeed turn negative the interest rate
that the banks earn by holding excess reserves.
I've tried to make this case to him multiple times.
I haven't yet persuaded him, but I haven't given up either.
So that would've been my favorite policy,
but if in your hypothetical, the question on the FOMC that was
on the table was QE3 or no,
I would have hesitated for a second.
>> Question-- hello?
>> Yup.
>> Now that we're past the election and, you know,
we've seen all these ads for like the last, you know,
18 months, and you mentioned
about President Obama really laser-focusing on the economy,
we're past the election now, we're kind of in the aftermath
of the financial crisis, is there a laser-focus
to fiscal policy that he's going to be focused on
or can we expect him to try to do everything and how is the--
like even the Fed going to kind of--
>> Yeah.
>> -- work together or what are they going to be doing
with the fiscal policy?
>> Yeah. I don't see a laser-focus now even being
feasible because it's related
to the question the gentleman at your table asked.
We're now on the verge of 2013.
We got to be thinking about how
to reduce the deficit [inaudible], which is going
to be contractionary on aggregate demand,
not expansionary on aggregate demand.
The policy that I've advocated or the class of policies
that I've advocated many times is to combine
in one legislative package, ho-ho-ho as if I could do this,
a near-term stimulus so that it raises a deficit
with a 10-year budget reduction, say second cousin
of Simpson-Bowles, that's vastly larger, that's 10
or 12 times the size of the stimulus,
so that by the Washington scorekeeping,
you've paid for the stimulus 10 or 12 times over.
That's what I'd like to see done.
So, that's already too subtle by half for a lot
of political discussions because it says basically, "I want to go
that way, but I stopped walking that way."
That's a hard sell and to sell it will--
would require a degree of bipartisanship
that I think is inconceivable in America now.
In some past years, maybe; but in America now,
I just can't see that.
But it's the right thing for President Obama to do in terms
of fiscal policy, whereas when he came in, in January 2009,
it was "gorge the beast."
I mean, that was the right thing to do.
And that's kind of a simple thing, it's--
you can sort of be monomaniacal about it,
"This is what we're going to do."
But that's long past.
>> We have a question over here.
>> Thank you for taking my question.
Now that we are experiencing on the horizon of a fiscal cliff,
and my feeling is that because Americans are in a lot of debt,
my question is do you feel that during this time that we maybe
or may have a liquidity trap situation that may occur
in the economy as result of this?
>> Oh, well, I think we are.
I mean, the way economist use that term,
we've been in a liquidity trap for sometime
where we have the interest rate essentially zero.
Not just the Fed funds interest rate, I don't know if--
you probably have looked.
This is an educated group that looks at things like this
at the interest rate [inaudible] your checking account lately?
I get one basis point.
I don't know why they don't just make it zero,
but I get one basis point.
The money market mutual fund is seven basis points
or something like that.
So we've been in that kind of a world for a long time and it's
in a world like that where the Federal Reserve,
they're just going to do anything
to stimulate aggregate demand has to stop looking
at interest rates and look at other stuff.
And that's what it's been doing since the early part of 2009.
That's one way to think of all these QEs and operation twist
and things like that, as ways to try to get
out of the liquidity trap, which you can't get out of simply
by printing more money because you've already driven the
interest rate down to zero.
So the answer to your question is a resounding yes,
absolutely yes.
>> Okay, we have three more questions, one,
two, three, and that's it.
>> All right.
So this is along the same lines, but looking back, do you think
that a two percent target inflation rate was too low?
You think maybe higher in the future?
>> That's a very good question.
I think in the-- so this is one of those questions
where answering it in the abstract and answering it
in the context of how history has actually evolved give me,
anyway, two different answers.
It's historicist if you want.
In the abstract, I think we would have been better off
with a higher inflation target,
which would have meant presumably,
probably a higher Fed funds rate when things started going badly
and therefore more ammunition to use to fight the inflation.

That's the answer in the abstract.
The answer in the historical context,
is given the criticism the Fed has taken
from being too inflationary from a number of quarters,
given the struggle it had internally
to enunciate an actual inflation target,
which you couldn't quite get out of its mouth
until this year actually,
I mean everybody knew what it was last year,
but they couldn't quite say it.
And there was a big struggle inside for Ben Bernanke
to get enough consensus to get this done.
And given the fact
that virtually all our fellow countries have got
about a two percent inflation target, given all that,
I find it extremely understandable
that Ben Bernanke is dead against the suggestion to move
to a higher inflation target.
One thing you definitely don't want to do
with an inflation target is to change it frequently
because then you don't have a target, really.
And the Fed, being so late to that gain, is very much
in danger of getting criticized like that if we would now say,
"Okay, you know now it's four percent."
So, in the context, I wouldn't favor it,
just as Bernanke doesn't.
>> And we have a question over here.
>> Given that the Fed is unpopular, I noticed this
in the classes that I teach, the kinds of questions I get
from students, what is the solution to that?
Is it more front covers of the Atlantic with Ben--
pictures of Ben Bernanke, the hero,
or is it a Bundesbank style kind of appearing on more chat shows,
or what's the solution there?
>> You know that's a really good question.
I think probably the answer is there is no solution,
but some good press like that helps.
I think Ben Bernanke did a wonderful thing for the country,
but also for himself when he went on 60 Minutes.
So instead of acting like the Wizard of Oz behind a curtain,
he sort of came out and talked to the people
in commonsensical sort of words.
And I think finally what will do it-- and this is a forecast,
but I'm confident in the forecast, is as the history
of this episode is written, the Fed is going to come off very,
very well, looking very, very good, and it's going to be,
"Thank God the Fed did the things it did."
Now, by the way, what I mean by that is starting, say,
in the very end of September 2008.
I've been very critical of the Fed and Ben Bernanke knows this
for letting Lehman go under.
It's not just the Fed, the Fed and the Treasury together,
but starting after that, in my mind, they've earned A-plus
and I think the verdict of history will be A-plus.
And eventually people then come around,
but that's not going to happen right away.
It's not-- it's definitely not going to happen right away.
And as you know, every time they make a move, the QE3,
which is not such a big deal, it elicits more criticism
from some quarters and people hear that criticism.
So if Ben Bernanke comes up for confirmation again
for a third term, he'll probably get thirty votes
against the [inaudible], I guess, I don't know.
>> We have another question here.
>> Yes, you mentioned that the Obama Administration focused
on many-- too many things at the same time,
some economist even accuse the administration of--
by doing so, it caused the, you know,
ignoring more structural problem and diverting resources
from more structural problem, especially income distribution.
I would like to know your opinion about that
and about income distribution, specifically.
>> Well--
>> And it's impact on current crisis.
>> Well I think it's-- well,
I don't think it had a great impact
on the current crisis, to start with that.
The current crisis hasn't helped, that's for sure.
I think the criticism that he ignored a number of things
or almost ignored them including greater inequality,
is largely correct but highly unfair.
I mean, he did an enormous amount.
Basically in the first two years of his administration,
remember it was in the 2010 midterm
that the house turned Republican
and basically just wouldn't do anything anymore
that President Obama wanted done.
It wouldn't have mattered what he asked for.
So if you think of how much he accomplished
in the first two years of his administration,
I can hardly understand how they ever had time for sleeping.
I mean, I was once at the council on--
at the Council of Economic Advisers at the beginning
of Clinton administration, we didn't sleep that much either
and we didn't do a third of what they got done.
So I don't-- I mean, they got an enormous amount done.
So I'm not sympathetic to the people that complain
that though they didn't get the energy policy done,
they didn't do much about inequality and a whole variety
of other things, which is I said, it's true.
It's true, but I think there's a limit
to how much you can expect any administration to get done.
>> We-- since we are in a social media world and a digital world,
we do have a question through Twitter.
Daniel Grundy asks, "How long can the US continue
to run trillion dollar deficits
to continue stimulating the economy?"
That will be your last question.
>> Everybody would love-- Ben Bernanke and Tim Geithner
and Barack Obama and the most of the Congress would really
like to know the answer to that.
So the answer is I don't know,
but let me say a little bit more about that.
It's pretty clear that we're nowhere near the end
of our rope.
You can tell that just from the interest rates.
I mean, the Treasury-- we have to have-- since the late '90s,
the Clinton Administration, I'm proud to say, we have tips,
index bonds in this country, so we can read
out of the market rather than have
to estimate real interest rates.
And the real interest rate that the United States government has
to pay to borrow money is negative
out beyond ten years, negative!
This means in purchasing power terms,
the asset holders are paying us to hold their money.
When you're in a position like that, it's pretty clear
that running up against a constraint,
like we better get the budget deficit down this year
because we can't borrow anymore is pretty far down the pike.
Now, that doesn't mean it's 20 years down the pike,
I don't believe it is; but it's--
at least a couple of years down the pike.
The other aspect of the answer which makes me confident
that we're not near the end, we're not near the point
where we're going to be forced to reduce our budget deficit,
is the old principle that you can't beat something
with nothing.
So if all this money is not going to US Treasuries anymore,
in this hypothetical, where is it going to go?
The most logical candidate is euro-denominated debt.
Well, we all know what's going on there and it's not very--
it's not a-- its no longer a very attractive option
for many asset holders, for some it is,
but for many it's not very attractive,
and we know that from the stability of the exchange rate
and from the stability at very low levels
of US government bond rates.
Money is not fleeing the United States to go to Europe.
And as I look at the likely evolution of the situation
in Europe over the next couple of years, not couple of weeks,
couple of years, that doesn't look likely to change, to me.
So, while nobody knows the answer, I--
to me, it's pretty clear we have at least another couple
of years before we have to worry about this seriously.
>> Okay.
>> Well, thank you Dr. Blinder.
[Applause]
>> Thank you.
Thank you all very much.