Olivier Blanchard’s Response

Last week I wrote a critique at Defining Ideas, a Hoover Institution publication, of the views of Paul Krugman and Olivier Blanchard. Blanchard (pictured above) wrote a brief note defending himself and I wrote back. It went a few rounds.

To recall, I had one critique of Krugman and two critiques of Blanchard. My critique of Krugman was that he was unwilling to admit that the “incomes policy” he seemed to favor was really a system of wage and price controls. My critique of Blanchard was that he talked about inflation without mentioning the growth of the money supply and that he got causation reversed: it doesn’t go from slow the economy to reduce inflation; instead it goes from reduce the growth rate of the money supply to reduce inflation and an effect of that is often a slowing of the economy.

Here’s my back and forth with Blanchard:

Blanchard:

Incomes policies, Wikipedia definitions not withstanding, have nothing to do (at least in Europe) with wage and price controls.  They have to do with social partners trying to come to an agreement on how to deal with a particular issue.

On monetary policy.  Yes, in general, it can be the source of the conflict, and thus of inflation.  In the particular case of the US today, I think fiscal policy is more to blame.

Henderson:

Dear Professor Blanchard,

Thanks for your note.

When I checked the web, what I found is that pretty much every incomes policy was designed to affect prices and wages, usually with controls. Of course, you know Europe better than I do. Your brief comment was a little too brief. What specifically were incomes policies in Europe? Also, you refer to “social partners.” I’m not sure what that means. Could you explain?

Regarding inflation, do you think it would have been nearly as high as it has been if the Fed had not monetized much of the increase in debt?

Best,

David

Blanchard:

Don’t trust the web. ????

Incomes policies in europe are tripartite negotiations between labor, business, and the government.  Most celebrated agreements are Wassenaar in the Netherlands, Moncloa in Spain.  And, for a long time, negotiations in the context of the French plan to assess the desirable path for the economy, the appropriate rate of growth of nominal wages and so on. (Agreement on the path of wages is not price-wage controls.  Distortions come when there are constraints on price adjustment)

On monetary policy.  I believe that the effect of QE has been to decrease long rates by about 100 bps [DRH note: basis points], which is not negligible, but is far less, in terms of effects on aggregate demand than the various fiscal plans, especially the ARP [DRH note: Biden’s America Rescue Plan].

Debt has not been monetized.  The Fed has bought long bonds, and issued short maturity, interest paying, reserves.  This does not change total debt, and has a minimal effect of interest payments.

Best.

Henderson:

Thanks for your quick reply.

May I use this in a follow-on blog post?

Best,

David

Blanchard:

Sure.  Always happy to educate Hoover ????

Henderson: Lol.

I will probably have more thoughts on his monetary policy point. I think he’s wrong but I’m not sure. Also note that the only transmission mechanism he conceives of from monetary policy to aggregate demand is through interest rates..

And notice that he didn’t reply to my claim that he mistakenly reversed the causation between slowing the economy and reducing inflation. Maybe I’ve educated MIT. I’m happy to do so.

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