Suffice to say that their forecasts are no better than others, and none are very accurate

From Free Exchange: My kidney stone is making me harsher:

"Romer roundtable: Think, plan, and tell us the plan

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Economist.com | WASHINGTON

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Romer roundtable

Allan H. Meltzer is a professor of political economy at Carnegie Mellon University, and the author of “A History of the Federal Reserve”. This discussion can be followed in its entirety here.

CHRISTINA ROMER makes two traditional mistakes. First, like generations of policymakers before her, she counsels "trust us". They will know the right time to change from stimulus to restraint. There is no factual basis for "trust us". If policymakers at the Fed and in the government had the ability to time their actions appropriately, we wouldn't be in this mess. For it was they who allowed banks to circumvent the Basel regulations, that permitted Fannie and Freddie to expand beyond any reasonable standard, that brought us too big to fail and, as John Taylor has shown, abandoned a policy that brought us almost 20 years of the Great Moderation. Suffice to say that their forecasts are no better than others, and none are very accurate. Short-term judgments are often wrong and misleading. Best to avoid them.

Second, like most other defenders of this inflationary, low productivity policy, Christina puts the choice as whether we act against recession now or against inflation now. That leaves out a multitude of options. Two of my former colleagues won the Nobel prize for showing that it is much better to think now about the policy problem that lies ahead. Yes, avoid the mistake of doing what seems urgent today while neglecting the longer-term consequences that will be the problem of the future. Much better to think about the path the economy will be on; yes, stimulate now to reduce unemployment, but avoid creating a big inflation in a year or two. And even announce in advance how you propose to reduce the high money growth rate and the excessive deficits. Don't just say you'll do it, think, plan, and tell us the plan.

Further, the administration agreed to a terrible stimulus package. Our long-term problem is to slow the growth of consumer spending, so that we can export more to service the debt we sold to foreigners. That calls for more investment and higher productivity growth. Cap and trade, health care, and the so-called stimulus either tax businesses to subsidise consumers or simply shift resources to consumption. Keynesians should read Keynes. He opposed spending to increase consumption; he favoured planning to increase investment. And if they can't stomach Milton Friedman, they should read Franco Modigliani, a leading Keynesian. Both showed that temporary tax reduction was an inefficient stimulus programme."

Me:

Don the libertarian Democrat wrote:

June 19, 2009 0:35

This post confuses me:
1) Don't trust govt officials
2) Don't trust forecasts
3) Don't trust short term judgments
4) Don't trust academics when they become policymakers
And yet:
1) Trust two Nobel Prize winners. After all, they're Nobel Prize winners, and they have shown that, paradoxically, we can't trust forecasts. But, if we do, the farther off they are in time, the better.
2) You can trust John Taylor's policies. By the way, who administered this policy? That the Great Moderation could be based on the fact that we allowed all these other policies mentioned, which occurred at the same time, is a priori false. In other words, the Great Moderation can't be the Great Forestalling.
3) Trust Keynes, Friedman, and Modigliani. Read them, and you'll be enlightened.

Essentially, the author lists four categories of mistrust, all of which he and the people who agree with him are immune to. The basis of his argument is: Trust Me.

By the way, if you subsidize consumers, and they then purchase goods, isn't somebody profiting from that? I would think that the problem is really that you borrowed money for the plan, not that people spent the money that you gave them. That's how businesses make money. Selling goods.

"That calls for more investment and higher productivity growth"

I agree. That's why we have tax incentives for investment during a recession. That's a stimulus. It's an incentive for investment.

"That leaves out a multitude of options."

That's how we make decisions. We narrow the list down. We don't keep expanding it.

"Short-term judgments are often wrong and misleading. Best to avoid them"

How do you do that? It's a temporal paradox.

What exactly is the factual proof that we should trust Allan Meltzer?

whereas the world is blessed by a rules-based trading system that staves off protectionism, there is no similar architecture governing exchange rates

TO BE NOTED: From the WaPo:

"Repeating A 1930s Mistake?

By Sebastian Mallaby
Sunday, May 17, 2009

Those who are ignorant of history will be condemned to repeat it, as a teacher no doubt told you long ago. But the urgent question today is actually the opposite one: Can a team that is positively steeped in history -- particularly the history of the 1930s -- avoid the mistakes of that era and engineer a quick recovery from a Depression-size shock? Christina Romer, the chair of the White House Council of Economic Advisers and an authority on the 1930s, recently gave a hopeful answer to this question at the Council on Foreign Relations. But there was one gap in her argument, and therein lies a threat to the "green shoots" of recovery.

Romer has a right to optimism. Managed adroitly, crashes need not take a catastrophic toll. A year or two after the 1929 panic on Wall Street, there was no inevitability about calamity, as Philip Zelikow of the University of Virginia recalled recently. There were signs of an economic rebound; Germany's democratic government was holding together; Japan remained a responsible player in the international system. It took the policy errors of the early 1930s to change all that. Those errors need not be repeated now.

What errors? In 1930, the United States imposed the notorious Smoot-Hawley tariff, setting up a pattern of retaliation that exacerbated the downturn and splintered the world. This time, by contrast, there has been surprisingly little backlash against open trade. In 1931, the U.S. Federal Reserve hiked interest rates aggressively. This time the Fed, led by another scholarly expert on the 1930s, is forcing down interest rates by printing money. In 1932, the U.S. government tightened fiscal policy. Again, the lesson of that error has been absorbed aggressively -- witness the enormous fiscal stimulus.

But there is one less comforting part of the 1930s comparison. The international tensions of the 1930s were not just about trade; they were also about exchange rates. To get a leg up on each other, countries devalued their currencies, and each devaluation triggered the next one. In 1930, New Zealand secured a cost advantage for its butter exports by devaluing its money. The next year Denmark, its main butter rival, responded with its own devaluation. The two nations proceeded to chase each other downward.

Today, nothing quite so damaging seems likely. But whereas the world is blessed by a rules-based trading system that staves off protectionism, there is no similar architecture governing exchange rates. Countries can keep their money cheap to boost exports, even if they risk exporting trouble at the same time. Indeed, this is a fair description of China's behavior over much of this decade. Whereas Romer can confidently say that economic policy is better now than in the 1930s with respect to trade, interest rates and stimulus, it is hard to be so confident with respect to exchange rates.

This chink in Romer's comparison with the Depression clouds her sunny outlook for U.S. economic growth. In her Council on Foreign Relations speech, Romer acknowledged that the traditional engine of the economy -- U.S. consumers -- will be sputtering for the near future: U.S. households lost about a quarter of their wealth during the 2007-08 chaos and must now save. She also acknowledged that the new engine of growth -- spending by the U.S. government -- will have to slow down, too: The federal deficit will have to shrink once this stimulus is done. So Romer pinned her hopes for sustained recovery on export growth plus higher rates of business investment, with the investment presumably dependent on expanding markets abroad.

Will that export growth prove possible? The trouble is that other major economies harbor the same hope. Angela Merkel, the German chancellor, has stated categorically that Germany likes its export-led growth model and has no plans to change. Japan, to its credit, has passed a hefty stimulus, allowing government spending to replace exports, but it cannot sustain this policy because its national debt is astronomical. That leaves one other big economy -- China. Some Chinese leaders want to shift toward domestic consumption rather than exports, which is why the government's stimulus package includes money for health care. But the Chinese also want to boost growth urgently, and the surest way to do that is to spend money on the things that they are used to spending money on -- ports, roads and other infrastructure that winds up stoking China's export engine.

If the United States, Germany, Japan and China all aim to boost exports, we are in for trouble. It is impossible for all the big economies to improve their trade positions simultaneously; a jockeying for advantage, through the manipulation of exchange rates or through other measures, is certainly conceivable. Just as in the Depression, we have no rules for governing the disputes that may arise out of such conflict. It is too early to congratulate the scholar-statesmen for banishing all whiff of 1930s-style tensions."