During the 2010s, Jim Bullard was probably my favorite Federal Reserve bank president. David Beckworth has an interview with Bullard, in which he makes a number of insightful observations. As usual, I’ll focus on an area where I seem to spot a difference of opinion:
Bullard: So, the mentality at the time [2020] was, still, that this shock was going to be like the global financial crisis shock, in the sense that it would take many, many years for the economy to fully get back to trend, and a lot of the rhetoric at the time was that this is not going to be V-shaped. This is going to be an L-shaped recovery, and all of those kind of things. So, there’s a lot of fighting the last war, and I would actually give credit to former Chair Ben Bernanke, who, I think, had a better analogy for the pandemic. He said that it’s like a big snowstorm, and you have to wait for the snow to melt, but it’s really just waiting for the snow to melt.
So, it’s not a fundamental disruption, the way that the financial crisis was, and you shouldn’t necessarily expect this very long recovery. Well, if you look at the data now— it’s about GDP anyway— It’s about as V-shaped as anything that you’ll ever see, and so I think that just this misreading of it and this kind of rhetoric around the idea that we were going to be in a very, very long recovery period, and so, therefore, if that’s what you thought, then you should say, for monetary policy, look, we’re not going to deviate from our balance sheet policy or our interest rate policy for a couple of years at least, because we think that the recovery is going to be so slow.
I would expect a slow recovery if a recession were caused by “real” or supply-side factors, and a fast recovery if the recession were a demand side problem. After all, demand shortfalls can be easily addressed with monetary stimulus. So was the 2008-09 more of a real shock whereas 2020 was a demand shock? I’d say the exact opposite. In 2008, the problem was a lack of aggregate demand (falling NGDP), whereas in 2020 the problem was real—much of the economy shutdown by Covid. That’s a harder problem to resolve.
Now of course the advent of vaccines in early 2021 made the real shock less persistent than expected in 2020. Even so, I cannot see why we’d expect a faster recovery from Covid than from the 2008 recession.
I worry that the Fed is too fatalistic. The Fed sees itself facing problems like an L-shaped recovery, whereas I see the Fed creating problems like an L-shaped recovery.
Bullard is a smart guy, and presumably would have a good response to this line of argument. He might argue that while inadequate NGDP was the problem after 2008, there was nothing the Fed could do about it. Or perhaps that there was something the Fed could have done about it, but it would have required such a rapid and radical regime change as to be politically impossible. If that is the argument, then I’d agree.
But my goal is not to discuss what’s politically feasible at a point in time; it’s to make people rethink the way the macroeconomy works so that ideas that once seemed politically infeasible (say NGDP level targeting), can move within the Overton window.
Later in the podcast, Bullard makes a strong argument for NGDP level targeting, which centers on the observation that almost all of our contracts are specified in nominal terms.