American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 8, Monetary Policy: Business Cycles and Inflation

“The plan for today,” says Martin Feldstein as he begins his 8th lecture to the Harvard students enrolled in a course called American Economic Policy, “is to finish up my three lectures on monetary policy.”

It couldn’t come at a better time, because today [February 10th] Janet Yellen is offering testimony on monetary policy. The news stories seems to say she is “on the one hand and the other hand” in her thinking about the future. The labour market is improving, but she is worried about the future slow down because of economic developments in China. But our trade with China is less than 1% of GDP, so why change US policy?

The Fed has a problem, it is pursuing multiple goals, targeting low inflation but also maintaining full employment,  but how do you deal with two goals when you have only one instrument? The Dutch economist Jan Tinbergen taught us that we need two instruments for two targets.

Well, I keep saying there is also fiscal policy, and the Fed should keep reminding Congress that they need help.

But operationally how does the Fed balance these competing goals?

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American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 7, Monetary Policy: Business Cycles and Inflation

Today we are continuing to talk about monetary policy. We have been discussing the issue of how the Federal Reserve Bank should respond to the extent of slack in the economy: when there is high unemployment, the Fed should be increasing aggregate demand, but at full employment more aggregate demand would lead to inflation. It is a difficult problem to find this balance because of lags in the process and host of measurement issues.

Bureau of Labor Statistics Economic News Release February 5 2016
The first Friday of the month is the usual release date for statistics about the previous month’s employment situation. (Click on image to see the full release.)

On Friday  the Department of Labor  of released its monthly report. What did we learn? Here we are at the Fed trying to make sense  of the data. [Professor Feldstein is referring to the February 5, 2016 release by the Bureau of Labor Statistics.]

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American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 5, Monetary Policy: Business Cycles and Inflation

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.

Martin Feldstein Excerpt from Handout on GDP preliminary estimates American Economic Policy
Excerpt from class handout (click on image to enlarge).

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.

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American Economic Policy, as told by Prof Martin Feldstein at Harvard University: Lecture 4, Obama’s response to the great recession, real GDP measurement issues and America’s middle class is doing better than you think

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 .

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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.

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American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 3, Keynesian Economics: Retreat and Return

Emerson Hall Side Entrance
The path to economics class is through a door called philosophy. Emerson Hall, side entrance.

[In this third lecture of his American Economic Policy class at Harvard given on January 29th, Martin Feldstein explains how he and the profession turned away from Keynesian economics, and how he made his way back.]

This morning the Department of Commerce published preliminary estimates of what happened to GDP in the fourth quarter of last year. These estimates will be repeatedly revised, “but you’re a policy maker and you know only what you know, and this is what you know.”

The estimates are seasonally adjusted and expressed as annual rate after controlling for price changes. Growth was pretty crummy at an annual rate of 0.7%, down from an annual rate of 2.0% during the previous quarter. Should we be worried? Are we slipping into a new recession?

Consumer spending was growing at 2.2%, contributing 1.5% to GDP growth, and residential construction was good. But fixed investment in structures and equipment was negative and pulled growth down, as did exports and changes in inventories. These negatives added up to 1.2, the pluses to 1.8, so we are left with about 0.7% for overall growth.

This gives you a picture of what was going on. The folks at the Fed have to ask if they will keep raising interest rates.

This is the great thing about being in economics: there is always new stuff happening and new information being released to help you figure it out.

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American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 2, Where are we? How did we get here? What next?

Martin Feldstein American Economic Policy Harvard January 27 Lecture 2 Graphing Housing Prices

What caused the Great Recession, and could it happen again? These are the questions that motivate Martin Feldstein in the second lecture of his course “American Economic Policy” given to undergraduates at Harvard.

The good professor suggests that the housing sector is where we should look for an answer, and that we should appreciate that public policy played a role in both causing the recession, and in helping the American economy recover from it. But also important policy changes putting this sector on a more stable footing were reversed for political reasons, and this raises the risk that it could all go terribly wrong again.

Where are we? How did we get here? What next?

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