Posted by Joseph Y. Calhoun, III

Well, sort of. Actually he just wants some optimists on the FOMC:

I’m thinking of people like Jim Cramer and Larry Kudlow.  When I say “like them,” I don’t mean people with similar views on monetary policy, I mean people with similar personalities.  People who are optimistic about America, strongly pro-growth, people that are not passive, but rather want to make things happen.  You get the idea.  The point is to instill the public with a feeling that good times are just around the corner, and that they will pull out all the stops to make it happen.  The last thing we need right now is a central banker with shoulders hunched over, who solemnly intones about the looooong difficult period America has ahead if it.  Who keeps talking about how we need to tighten our belts, and get used to a lower standard of living.  Come to think of it, I’d like to nominate my commenter JimP to the FOMC.

Back to reality, I have two serious points in this post.  One is that Nick has correctly pointed to the key role played by beliefs in the transmission of monetary policy.  Academic economists have an enormous responsibility to make people understand that liquidity traps do not limit the effectiveness of monetary policy.  Unfortunately among the people who need to be educated are Fed Presidents like Janet Yellen, and what Krugman calls the “economic analysts” who advise them.  But my second point is that this “expectations” issue should not be misunderstood.  The previous examples of monetary policy at the zero rate bound (US in the 1930s, Japan more recently) make it crystal clear that (contrary to Krugman) there is no such thing as an expectations trap.  No central bank has ever tried but failed to reflate.  Central bankers set the agenda, it is up to them to provide leadership, if they wish to do so.  But right now the leaders of the Fed, ECB, and BOJ, have absolutely no desire to raise NGDP growth expectations.  And that’s a shame.

The entire modern liberal ideology is based on pessimism about the ability of the public to take care of themselves. It is based on the idea that a few technocrats in DC can figure out better than millions of individuals how to spend and invest. If that isn’t pessimistic, I don’t know what is. Here’s what I said in a post from August titled, The Triumph of Pessimism:

Unfortunately, despite the rhetoric of hope and change, the new administration displays a pessimism about the resilience of the US economy that prevents the real changes needed to ensure our future prosperity.

In a recent article for The New Republic, Noam Scheiber makes the pessimists’ case:

So far as I can tell, the only solution to the underlying economic problem is something that’s been a dirty word in Washington the last generation or two: industrial policy (that is, an active government role in the development of certain industries.) In his LSE lectures, Krugman quipped that “if someone could invent the 21-st century moral equivalent of the railroad, or actually even the moral equivalent of IT in the ’90s, that would help a lot.” I agree–that would help a lot. But waiting around for this to happen seems risky when the alternative is a decade of stagnation.

If, on the other hand, the government were to place some massive bets on R&D, we might substantially increase our chances of stumbling onto a major technological breakthrough–or at least accelerate the process.

We have millions of companies and individuals across the country and around the world, but Mr. Scheiber and his fellow central planners apparently believe the best way to enhance the odds of innovation is to employ fewer minds in the pursuit of it. I’m not sure which is more disconcerting; the utter lack of logic in that thought process or the stunning lack of faith in the abilities of the American people. How does this work? Is there something in the DC water supply that endows politicians with a foresight not available to the rest of us? Do dollars attain some kind of magical quality that ensures success when they are passed out by government agencies? President Obama obviously understands the power of the network; he used his own grass roots network very effectively to get elected. What is the value of a network? To put it in the language of mathematics; as the number of nodes in the network increases arithmetically, the value of the network increases exponentially. We have a network of millions; all the government needs to do is make sure the network continues to function and remains accessible. Economic policy should focus on accelerating the accumulation of new pools of capital so it is available to fund the good ideas that emerge naturally. What seems more likely to be successful? Allowing politicians to make a few large bets or encouraging millions to make the investments of their choice?

Scott Sumner concentrates on monetary policy on his blog, The Money Illusion. He’s got some very different ideas about how to conduct policy that have the entire economics profession buzzing. If you have an interest in monetary economics (or if you enjoy good economists poking at Krugman) you should stop by every day just to see what new provocative thing Scott has come up with. I frankly don’t understand everything he advocates but it makes a hell of a lot more sense than anything the Fed is doing.