Bellwether Bullard versus Sirenic Summers

Bellwether Bullard versus Sirenic Summers

 So this is about the now getting to be passe topic of what will happen to inflation this year, with Larry Summers having gone out of his way to make a lot of noise in criticizing the expansionary fiscal policy partly passed but partly still under consideration in Congress as threatening a possible outbreak of 60s-70s style inflation at an entrenched much higher rate than we are seeing now.  He has put the probability of that at about a third, but considers this to be high enough to call for the Biden fiscal policy to be cut back in order to avoid that one third chance of a serious increase in the rate of entrenched inflation.

This forecast has not been accepted by the leading economic policymakers, notably Treasury Secretary Janet Yellen and Fed Chair Jerome Powell, as well as the various lesser lights at the CEA and elsewhere in the Biden administration.  Their official line is that it looks like we shall see an increase in the rate of inflation, and the latest monthly report does have it over 2 percent now, but with this likely to come back down later in the year or by early next year. This is seen to be due to much of the uptick aggravated by supply issues related to pandemic, especially in global shipping, although also with some specific sectors hitting bottlenecks, with all this crashing against rising demand with GDP growth projected at over 6 percent for the year.  But they see the supply issues becoming resolved with the fading of the pandemic and there not being mechanisms in place to entrench the higher rate of inflation, with those at the Fed even hoping that inflation expectations might end up “centered around the 2 percent target rate,” which the Fed has not been able to get to on a sustained basis.

The originator of this argument is James (Jim) B. Bullard, President of the St. Louis Fed since 2008.  While he is not well known by the public, he has been since roughly 2011 viewed by people at Bloomberg and elsewhere as being “the bellwether” of views and policy at the Fed.  He was the first in late 2009 to call for using quantitative easing to maintain a solid expansionary course to avoid the US falling into deflation.  In 2016 he became the first major figure at the Fed to argue that they should think in terms of multiple equilibria possible paths, an idea coming out of nonlinear dynamical growth theory.  In February of last year he became the first at the Fed to call for aggressively expansionary monetary policy to deal with the upcoming economic collapse due to the pandemic. That had not happened yet, indeed the pandemic was just getting going, but in fact the Fed followed his advice and in retrospect it is clear he really called it at the crucial moment.  A slower or smaller reaction by the Fed could have led to a much deeper and longer economic downturn than we saw in the US.  So his forecast on this year’s inflation path is taken very seriously, and I take it serously.  He has more credibility than does Summers with his siren call for cutting back fiscal expansion, with Bullard for staying the monetary policy course with an expansionary fiscal policy.

It was not at all obvious that he would be the person making some of these forecasts and arguments.  He arrived at the Research Division of the St. Louis Fed in 1990 after getting an econ PhD at Indiana University. At the time the St. Louis Fed had a well-deserved reputation as the hardest line classically monetarist of all the regional Fed banks. This was the stronghold of the most faithful of Milton Friedman acolytes in the entire Fed system, and initially Jim went along with it mostly.  Even now it remains a bastion of the most immediate successor of that view in the “new monetarist” school of thought led by people like David Andolfatto who is there. Jim worked his way up to become the Director of the Research Division and the VP in terms of policy prior to becoming president in 2008.

I confess that I have known him for over 20 years, first meeting him at a conference on nonlinear dynamics back in the late 90s.  He was publishing papers on chaotic dynamics in macroeconomies in the Journal of Economic Theory at the time, among other things, not the usual St. Louis Fed stuff.  I found him most interesting and open minded. He was still a rising grunt in the research shop then. He would become a coeditor of the Journal of Economic Dynamics and Control, where he is still on the board, a journal where models of multiple equilibria growth paths would get published regularly, so that when he pulled this stuff out in 2016 for serious policy consideration he was applying serious research onto policy. 

That is sort of funny because about ten years ago I heard him give a plenary talk at a computational economics conference in which he spent a lot of time talking about the conflict between the “front room” (policymakers) and the “back room” (researchers) at Fed and other central banks. Obviously as someone who had moved from one to the other (and several other regional Fed bank presidents have followed this path) he was certainly well positioned to observe this. I note this was not long after the financial crashes and the Great Recession and also when he first argued for using quantitative easing. He made some quite disparaging remarks about the unreality of some of the models being taken seriously in the back rooms, even as he clearly supported vigorous back room research.  

But in the end he seems to have been able to figure out what may be useful from those back room research activities as well as showing an ability to move on from old ideas no longer so useful such as the classical monetarism that dominated the place he now runs when he first got there. 

Barkley Rosser