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Archive for November, 2010

QE2 Roundup

Posted by Eliot Weinstein on November 30, 2010

A prominent topic of conversation among the political and economic cognoscenti is the second round of major quantitative easing recently enacted by the US Federal Reserve under the leadership of its chairman, Ben Bernanke. This second round has been (somewhat humorously) nicknamed QE2. Below are some collected links of interest regarding QE2, with brief comments.

1. Robert Barro, a Harvard University economics professor, offers a brief explanation of QE2 followed by a critique of the Fed’s proposed “exit strategy”, hosted by The Economist.

2. Greg Mankiw, also a Harvard economics professor and one of the most popular economics bloggers, has a short post that places him mildly in favor of QE2.

3. Megan McArdle, business and economics editor for The Atlantic, explains why China doesn’t like QE2, and why they’re being hypocritical (and we are too).

4. Scott Sumner, an economics professor at Bentley University and a standard-bearer for mainstream (albeit slightly-right-of-center) monetary economics, provides seven reasons why conservatives should support QE2.

5. Gary Becker, economics professor at the University of Chicago, and Richard Posner, judge on the 7th Circuit US Court of Appeals, offer some contrary opinions here and here.

6. A handful of conservative economists signed an open letter to Ben Bernanke opposing QE2. This is primarily what Sumner is reacting to in the link above. Paul Krugman, a Princeton economics professor and New York Times contributor, attacks these signatories from the left, here and here. John B. Taylor, a Stanford economics professor and the most influential monetary economist among the signatories, defends the letter here.

7. Also from The Economist‘s Free Exchange blog, here are two short posts, the first on why QE2 skeptics are wrong to worry about runaway inflation (at least so far), and the second about some “inside baseball” at the Fed, particularly whether or not support for QE2 will remain when a new group of officials rotates onto the Federal Open Market Committee next year.

8. Paul Krugman also notes that inflation is low, and seems alarmed, here and here.

My own position on QE2 is closest to Sumner’s. While Becker and Posner make pretty convincing arguments that QE2 will have little positive effect, I prefer Sumner’s reasoning that nominal GDP growth is too low, and that QE2 is a relatively low-risk way of addressing that problem. However, part of me disagrees with Sumner in that  I suspect that the current recession has a large real component, as Arnold Kling and (to a lesser extent) Tyler Cowen have argued.  I think that one’s position on QE2 is largely influenced by whether one believes inflation is a bigger threat than deflation, or vice-versa. If you believe that (potentially massive) inflation is lurking in the US monetary system, then you are likely to oppose QE2 on the grounds that it might unleash inflation that the Fed will be unable or unwilling to rein in. Those who worry more about deflation tend to favor QE2, even if (like me) they are also concerned that real aspects of the downturn make government policy–both fiscal and monetary–nearly useless. As you may have gathered from the links I chose above, I am not concerned about short- or medium-term inflation, so I view QE2 as a low-risk method of potentially boosting the economy.

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