I’m going to start talking about monetary policy today, and continue with it in the next lecture, and again next week.
So think about the Federal Reserve, and their decisions directed to monetary policy. They have just met, and decided not to change anything, but they are looking ahead to March to see if they will raise rates as they did in December.
They know where the economy is, and where it has been, and infer where it is going in order to decide to do something to nudge it in one way or another. So I have handed out a sheet, a bit of information certainly used by the Fed, and the investment community in trying to decide what are they going to do.
Table 1 on the left hand side of the sheet shows what happened to GDP and its components in the last two quarters, based on what was released on January 29th. Table 2 on the right hand side shows the contribution of each component to the change in GDP.
The Fed likes to say that they have a plan, but what they actually do is data dependent and they are adjusting policy accordingly. Here is one example of new data, and we have to recognize that there are problems with actually measuring real GDP.
What do I learn from these numbers? And if I were at the Fed I would have to recognize measurement problems in trying to interpret them.
I missed class on February 4th (my bad) when Martin Feldstein of Harvard University gave the 4th lecture of his course “American Economic Policy,” but fortunately my classmate Matthew Tyler took notes and kindly accepted an invitation to post them as a guest on this blog. He also offers some personal reflections on what it feels like to be a left of center observer in a class taught by a self-avowed “conservative economist.” You can reach Matthew on twitter @Matt_B_Tyler .
Feldstein takes to the podium on a relatively mild Cambridge morning for this term’s fourth American Economic Policy lecture. The crowd has thinned slightly since day one, although the rapid tapping of laptop keys throughout suggests those who remain hang on every word. Like sponges, the economists of the future are absorbing the insights of a distinguished five decade career. Today, these eager young minds cover much ground: reflections on the Obama administration’s response to the great recession; the accuracy of real GDP measures; and skepticism regarding the size of the inequality problem in the United States.
It’s December 2008. The National Bureau of Economic Research has just declared the American economy has been in recession for almost 12 months. Both fiscal and monetary policy responses are falling short. $78 billion of tax rebates introduced by President Bush generated only $20 billion of additional consumer spending which was far less than the multiplier predicted by Feldstein, Summers and others. Similarly, traditional monetary policy is not working as the crisis was not caused by rising interest rates.