Jared Bernstein: John Taylor Is Not Reponsive, and Misses the Point

I agree with Jared on this one:

Jared Bernstein: More on Summers, Taylor, and Secular Stagnation:

I didn’t think [John Taylor’s] response to me was… um… responsive.  His main argument is that since I didn’t address the decline in the equilibrium interest rate, we’re talking past each other….

[Jared] does not even mention the decline in the equilibrium interest rate which is at the heart of the view that Larry put forth.  So Jared’s response has missed the main point of the argument between Larry and me, and I’m disappointed that there’s not much to respond to in that regard.

I’m confuzzled….

Everyone else… frame[s] the issue in terms of weak output, high unemployment, low investment and the decline in potential GDP, even in the face of very low interest rates…. The interest rate point is diagnostic: a near-zero Fed funds rate since 2009 amidst this continued weakness leads Larry to worry about secular stagnation and John to worry about the ACA, Dodd-Frank, et al. No one, John included, denies the fact of the near-zero FFR and the weak recovery. Larry then emphasizes a very common macroeconomic argument these days that the [Wicksellian natural] equilibrium [real] rate needed to clear the output market is a few points below zero…. I entered the argument viewing this diagnostic as given…. [I] objected to John’s WSJ oped… [because] I think the current problem is weak demand; he thinks it’s those bad Obama policies that House Republicans are always trying to repeal…. [He thinks the] 2000s cycle is evidence against secular stagnation[;]… [I note] employment and growth were notably weak in those years…. Nor does he offer any defense for his case that it’s ACA, Dodd-Frank, and bad fiscal and monetary policy that are currently holding things back….

So I too am disappointed. I’m happy to argue about the extent of the decline in the equilibrium interest rate, but we can all see that an FFR at zero hasn’t “cleared the market.”  My (and Larry’s, Brad’s, Paul’s et al) “why not” has to do with inadequate demand. John’s “why not” has to do with policy uncertainty. That’s the debate.

I am going to declare this debate closed, and John Taylor’s position defeated:

  1. Policy uncertainty that generally discourages businesses from spending to invest shows itself in a low value of new capital and also a low value of old capital–that is, low stock market valuations. Stock market valuations are not low. John Taylor has not presented a theory by which general policy uncertainty that reduces the value of new investment does not reduce the value of “old capital”. He thus lets this point go by default.

  2. The shortfall in investment spending by businesses is not to be found in nonresidential but in residential investment. John Taylor has presented no theory whereby policy uncertainty about the ACA or Dodd-Frank would disproportionately reduce residential but not non-residential investment. He thus lets this point go by default.

  3. There remain important arguments about policy uncertainty vis-a-vis the future of the housing GSEs and the treatment of underwater mortgages, and its effect on residential investment and also (via housing wealth) on consumer spending. But we cannot have this debate as long as Taylor talks about forms of policy uncertainty–ACA and Dodd-Frank–that should not have a disproportionate effect on residential vis-a-vis nonresidential investment.

580 words

January 6, 2014

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