[Update: Steve Williamson says in comments the lack of communication started much earlier. If that's right, then I think my theory fails empirically in this case.]
If you are in a position of power and responsibility you need advisers. The main job of your advisers is to stop you saying something stupid in public. You say it to your advisers first, in private. If it's stupid, your advisors should tell you it's stupid. That's their job. If they fail to tell you it's stupid, and you say it in public, and the public tells you it's stupid, and you realise the public is right, you should fire your advisers. They have failed to do their job.
Update: you don't fire your advisers because they disagree with you; you fire your advisers because they didn't disagree with you when they should have disagreed with you.
In August 2010, the President of the Minneapolis Fed said something stupid in public.
In May 2013 he again said something stupid in public.
There may be other examples I don't know about.
That's OK. Even very intelligent people sometimes say stupid things. But it's the job of their advisers to stop them saying stupid things in public. And in these two cases, any halfway competent macroeconomist could have advised him that he was about to say something stupid in public. By saying something like this, and this, like I did, only in private.
Noah Smith thinks that [update: Noah in fact says we can't tell whether] Narayana Kocherlakota fired his advisers because he has seen the saltwater light and his advisers are freshwater. Maybe that's part of it. But it's good to have some advisers who see things differently from you, because they might see things you would miss. Provided they do their job.
I think it's much more mundane than that. I think he fired his advisers because he realised they had failed to do their job.
If you model the central bank as setting a nominal rate of interest, then if the natural rate of interest falls, and the central bank does not change the nominal interest rate in response, then there will be excess supply of labour and goods if nominal wages or prices and their inflation rates are sticky. The inflation rate would need to rise to reduce the real interest rate to restore equilibrium. But the inflation rate would actually fall, if there is excess supply of labour and goods. This is a problem with central banks setting nominal interest rates and not responding to shocks. Wicksell knew about this problem. Any halfway competent macroeconomist knows about this problem. If his advisers had been halfway competent macroeconomists, they would have told him about this problem. If they failed to do that, they should have been fired.
This is like a bus driver saying you need to turn the steering wheel clockwise to turn left, and his advisers not pointing out the problem.
In May 2013, he wrote: "I thank participants in a FRB-Minneapolis bag lunch for comments." Unless those comments included something similar to what I have said above, they were useless.
Worthwhile Canadian Initiative 
Steve: if that’s right, then I think my theory fails empirically. (Unless he already knew from the beginning they wouldn’t be able to do the job they needed to do. But even then it’s a puzzle why he didn’t fire them earlier, if he didn’t want their advice.)
Sorry, but when a new leader joins a big organization what Steve describes is common, even if NK was perhaps clumsy about it given the description.
For instance, new CEO came aboard. Senior leadership went on a retreat. CEO identified power rival in the org. He set the agenda at the retreat: discuss how it is hard to work with this other guy. Ostensibly this was to help the other guy. But it was also to establish a power hierarchy and reduce the others guys standing–signaled it’s okay to not align with him.
This was smoothly done in my example– I only realized what happened and why when the CEO explained his coup to me a few years later.
Firing your rival can work, but it can also be counterproductive because it isn’t an organic shift in the power structure; it’s purely exercising positional power
Nick,
I’m baffled by your argument in the above link to the effect that a Friedman/Mosler regime (where the government / central bank machine issues money, but no debt) would be communist.
You start by saying “suppose we had a very high long run growth rate in the stock of money supplied by the central bank (CB), and a very high inflation rate.” Then you say that in that scenario, the private sector would hold a relatively small stock of money. True: obviously holding money given high inflation is not smart.
You then say that given declining inflation, the private sector would hold a larger stock of money. Agreed. Then you say that as inflation drops to near zero, the size of the central bank expands enormously and approximately equals all the assets in the economy because the private sector would want an astronomical amount of central bank money.
I have three problems with that argument, as follows.
First, there is no need for a CB or indeed the CB / government combined to hold assets that equal its liabilities. As Warren Mosler pointed out, a CB is like an umpire in a tennis match: handing out points that are of value to players and which the umpire produces from nowhere. That may contravene the rules of double entry book-keeping, but book-keeping entries are irrelevant: the important factors are real effects on the real economy, like the fact that excess money printing by the CB / government produces inflation.
A CB is not like a commercial bank, which I agree has to have assets to back its liabilities. For a CB or CB / government combined, the value of their liabilities lies in the fact that those liabilities are the dominant form of money in the country concerned. And that in turn derives from, first, the fact that money has been declared legal tender, and second, the fact that private sector agents must acquire a stock of that money so as to pay taxes – else they go to prison. And that’s a very persuasive reason.
Second, why would the private sector want an almost infinitely large stock of CB money? Households want enough money for the well known precautionary and transaction motives, and that’s about it. Any more money they get will get turned into a new car or a larger house or world cruise.
Third, you take the argument further, and consider what happens when inflation becomes negative: i.e. there is a return (in real rather than nominal terms) to be earned on holding central bank money. I think that is entering the realms of fantasy. It’s generally accepted that a positive 2% rate of inflation is optimum (which I agree with).
Ralph: “It’s generally accepted that a positive 2% rate of inflation is optimum (which I agree with).”
Milton Friedman’s essay (as opposed to Friedman himself) disagreed.
If you haven’t read his essay, you might not get my point. Try this:
Inflation is like a negative interest rate on currency (which pays no explicit interest). 3% deflation is like paying 3% interest on currency.
What is the socially optimum rate of interest on currency? People are prepared to hold currency, despite it’s paying a lower interest rate than other assets, because it is more liquid. But it costs the government nothing (ignore paper and ink etc.) to provide that liquidity service. Therefore (on the same basis as the optimality of marginal cost pricing), the government, as monopoly supplier of currency, should price that liquidity service at zero. Therefore it is socially optimal for currency to pay the same rate of interest as other assets. But if people always prefer more liquid to less liquid assets, this requires people to hold only currency. And the central bank has to hold all the other assets, and use the interest it earns on those other assets to pay the interest on currency. Zero-profit central banking.
Assume (for simplicity) a monopolist has horizontal MC and ATC curves, where MC=ATC at all outputs. It is socially optimal for that monopolist to earn zero profits. So we want the central bank to earn zero profits on its business. Assuming MC=ATC=0 for the central bank, it must never print money, unless it pays interest on that money equal to the interest it earns on the assets it buys with that money. Otherwise it will earn positive monopoly profits.
Nick Rowe: “But if people always prefer more liquid to less liquid assets, this requires people to hold only currency. And the central bank has to hold all the other assets, and use the interest it earns on those other assets to pay the interest on currency.”
People don’t always prefer more liquid to less liquid assets, do they? Many prefer land. Others prefer gold. Others prefer huge round stones. 🙂 For others the optimal liquidity is more than 0 but less than 100%.
Nick Rowe: “it is socially optimal for currency to pay the same rate of interest as other assets.”
Are you sure about that?
Nick Rowe: “People are prepared to hold currency, despite it’s paying a lower interest rate than other assets, because it is more liquid.”
If so, why not let them? Are they wrong?
Min: “People don’t always prefer more liquid to less liquid assets, do they?”
For the same rate of return, and other things equal, yes (except for the people who put their credit cards in the freezer). But maybe other things aren’t equal.
“Are you sure about that?”
I’m sure about nothing. But the social optimality of marginal cost pricing isn’t something I just thought up.
“If so, why not let them?”
But that’s the whole point of my argument, that we should let them. Which ends us up in the bizarre conclusion that the central bank should hold all the assets in the economy!
Basically, to implement Milton Friedman’s optimal quantity of money, we stay at the ZLB forever, and the central bank does a truly massive QE to buy any asset that people want to sell and keep us at full employment despite the ZLB!
… of course, doing that along with unlimited satisfaction of demand for money goes right back to communism. Serves me right for first reading the quoted post in the context of the Say’s Law thread rather than here.
Nick Rowe: “it is socially optimal for currency to pay the same rate of interest as other assets.”
Moi: “Are you sure about that?”
Nick Rowe: “I’m sure about nothing. But the social optimality of marginal cost pricing isn’t something I just thought up.”
Nick Rowe (earlier): “It is socially optimal for that monopolist to earn zero profits. So we want the central bank to earn zero profits on its business.”
But the CB, as part of the gummint, is special. It has an indefinite amount of money. Therefore profit and loss are meaningless for it. To speak of the CB earning a profit is to commit a category error. (Yes, I know that people do. Sigh.)
Nick Rowe: “People are prepared to hold currency, despite it’s paying a lower interest rate than other assets, because it is more liquid.”
Moi: “If so, why not let them?”
Nick Rowe: “But that’s the whole point of my argument, that we should let them. Which ends us up in the bizarre conclusion that the central bank should hold all the assets in the economy!”
I don’t think that I was clear. I meant, Why not let them hold currency that pays a lower interest rate than other assets. It could even pay negative interest, like Gesell’s money or store coupons. Use it or lose it.
Anyway, you assume that the CB should pay interest on currency because that would be socially desirable, and end up with a conclusion that seems to be socially undesirable. A nice reductio ad absurdum, eh?
This sentence of Nick’s has caused some interest above: “Therefore it is socially optimal for currency to pay the same rate of interest as other assets.” I don’t agree with that sentence.
I agree that “the government, as monopoly supplier of currency, should price that liquidity service at zero”. But if private sector entities are going to hold assets over and above their stock of money (ignoring personal assets like houses and cars) they’ll quite reasonably want a reward for doing so, and for two reasons. First because of the risk involved, and second because they’ll have forgone consumption in order to purchase those assets.
Offering a reward for forgoing consumption seems perfectly reasonable and “socially optimum” to me.
Ralph: “Offering a reward for forgoing consumption seems perfectly reasonable and “socially optimum” to me.”
Yes, it (usually) is. Suppose that reward should be (say) 3%. Then 3% deflation means that people holding Bank of Canada currency, which pays 0% nominal interest, also earn a 3% real interest reward for postponing consumption.
Whether your adviser is « rightist » or « nerdy » is rarely that important. During the Cold War, lots of research was done by scientist from NATO-WarPact on weird things from 63 Mt bombs to nuclear grenades and various horrible gases. Not counting what we never knew and probably never will (Russians are still mighty scared of microwaves).
Some did it to exterminate the godless-communists-who-pollute-our-precious-body-fluids or the running-dogs-lackeys-of-international-capitalism or to prevent being exterminated by same. Some did it by patriotism for the-land-of-the-free or mother-Russia, irrespective of the political regime. Many did it because it was a well-paying job. Most did it because it was a cool project.
Most of the time, their inner motivation was irrelevant. Most important is the motivation of the decision-maker.
The tsar chooses his Cossacks even though he doesn’t know how to fight on the steppes.
The principal has to choose advisers. But how? If he needs advisers, it’s because he doesn’t know about the subject. How can he evaluate the candidates or the value of their advice? By asking somebody else? How can he choose them? This is an infinitely recursive problem: “Quis custodiet ipsos custodies?”
So Barack Obama chooses Tim Geithner whose own objective is to save the U.S. economy by saving Wall Street. Or maybe just saving Wall Street. Or just Wall Street bankers. How am I supposed to know?
Your primo probably know nothing. Worse, sometimes he thinks he knows something. In economics, almost anyone from the business world will be a catastrophe. The best compliments we could bestow on a minister was: ”He could be deputy minister.” Even better: “He could be his own deputy minister.” Civil servants hates them because a) they can outwit their advisers and b) their example let other ministers think they can outwit their staff…
The primo’s knowledge is limited, And he may say stupid things “We’re running out of money”. Or “We need to tighten our belts.” It’s stupid in the context of the economic adviser. But are they stupid in the context in which the primo works? The primo work in the world of politics.
I tell the primo what it should do. He knows what he can do. Yes maybe he should teach the public. But there are limits to what the public wants to hear.
Walter Bagehot wrote in “The character of Sir Robert Peel”
http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=2260&chapter=212967&layout=html&Itemid=27
that Peel never was in favor of an idea before the English bourgeois found it obvious (I condense the chapters…).
What Obama said was not stupid but he has to take into account the limits of what the people are ready to hear and understand.
Last Thursday, Québec Minister of Finances Nicolas Marceau published his Economic update. An economically well-versed journalist asked him why his target for budget equilibrium was so fast. “Because the public expect it.” About as stupid as an economist can get. He knew it was stupid But you could see the sadness in his face. It was the only political answer he could give…
This the world the adviser work in.
Good lord Ralph Musgrave is an idiot.