It is all but forgotten now, but in the latter part of 2012 there was widespread angst about a looming “fiscal cliff.” The so-called stabilizers put in place during the crisis were set to expire on January 1, 2013. That’s the deal with stabilizers, as they are always meant to be a temporary boost during recessions. The fact that there was very little recovery after 2008 wasn’t a situation that lawmakers or the economists advising them had even contemplated.

The econometric models produced by the Congressional Budget Office, for example, were showing that the $500 billion (that number might have been technically correct but still misleading) in tax increases and fiscal spending phase-outs would push the US economy into recession later in 2013. Economists, including those like Paul Krugman, spent the latter part of the 2012 election and afterward spreading hysterics against “austerity.” In a column written on November 14, 2012, Krugman wrote about this “austerity bomb”:

And it can’t be emphasized enough that everyone who shrieks about the dangers of the austerity bomb is in effect acknowledging that the Keynesians were right all along, that slashing spending and raising taxes on ordinary workers is destructive in a depressed economy, and that we should actually be doing the opposite.

The irony of that statement was that the economy had already by then fallen off sharply. He was warning about a bleaker future without acknowledging the arrival of bleakness already (in furtherance of his ideological argument that “Keynesians were right all along”). You could make the argument that US economic agents were reacting in anticipation of this looming “austerity bomb”, battening the hatches for what economists like Krugman were warning about, but the 2012 slowdown was global and had nothing to do with the US budgetary situation. Threats of tax increases in the US didn’t push Europe into recession, that was the monetary events from the year before which were applied via global eurodollar banking to every part of the world.

For his part, then-Federal Reserve Chairman Ben Bernanke warned specifically about the “fiscal cliff”, too. As usual, he was more reserved in his language though the overall message was similar. Speaking to the Economic Club of New York less than a week after Krugman’s column, Bernanke said:

The drag on economic growth from state and local fiscal policy has diminished as revenues have improved, easing the pressures for further spending cuts or tax increases. In contrast, the phasing-out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining GDP growth. Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level.

It had been a near-constant theme to that point for Bernanke, and would continue to be for the rest of his tenure. Though his public persona exemplified the power and confidence of the Fed Chair trying to resurrect the myths of Greenspan, he believed, as any good Keynesian, that though monetary policy was very powerful it was even more so combined with fiscal “stimulus.” Having undertaken yet another QE earlier in September 2012, he would very often imply that Congress should have taken up the same direction as QE.

Standing in late 2016, however, views on QE have dramatically shifted, though often for very different reasons. When I write that central bankers now recognize that QE doesn’t work or that it outright failed, I do so from our perspective, the view from the real economy. To hear Bernanke and really “his” media tell it, QE was going to ensure recovery in the common sense meaning of that term; that was what was understood (just ask stock “investors” in 2013). It wasn’t so much stimulus as it was insurance, working in mysterious and nebulous ways, including asset prices, to boost demand.

Reviewing all this from the central bank side, the rewriting of QE is quite different. It didn’t fail; rather to these economists they now realize that it couldn’t possibly have succeeded. In other words, if the US economy had undergone a “normal” shortfall in aggregate demand QE would have accomplished everything that was modeled for it. For years, economists believed that the US was under those very conditions. Thus, by moving on from QE in 2016, they now see that it was the economy that wasn’t “normal” and therefore monetary “stimulus” could never have achieved a full recovery.

That’s because recovery is contained within economy that is itself dictated by forces beyond the control of monetary policy. Again, as I wrote earlier this week, monetary neutrality is a hardline in orthodox economic theory. The economic trend is determined by “real” conditions like productivity due to innovation and capital investment in all of it, including labor (education). If it has been the economic trend that has been altered, rather than a cyclical shortfall in “demand”, there is nothing for monetary “stimulus” to achieve.

To believe that for monetary policy is to believe the same for fiscal policy. In her remarks at the post-FOMC press conference this week, current Federal Reserve Chairman Janet Yellen was asked specifically about fiscal “stimulus.”

JIM TANKERSLEY. Jim Tankersley, Washington Post. I’m curious, you and your predecessor had both at times called for more fiscal stimulus to help with the outlook, the growth outlook. And I’m wondering how much do you judge the economy has capacity for fiscal stimulus right now? It’s a version of Steve’s question but I think we’re trying to get at how much can happen before we run that risk of overheating?

CHAIR YELLEN. Well, I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So, with a 4.6 percent unemployment and a solid labor market, there may be some additional slack in labor markets. But I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment. [emphasis added]

Yellen qualified her remarks a bit by suggesting she wasn’t giving policy advice to the new Trump administration, realizing the politically loaded question she was given. She also at other times refused to directly answer questions on hypothetical tax policy changes, preferring to demure without being given specifics to answer to. Even still, the highlighted words above stand out for all the reasons I have been writing about this week.

Mr. Tankersley for the Washington Post was right, since Bernanke and at times Yellen had been adamant (for a Fed Chair, anyway) that they would have preferred Congress pick up some of the slack so as to remove the labor slack. Now she clearly believes there is very little if nothing left for fiscal policy, like monetary policy, to do.

The reason is this reclassification of economic stagnation and malaise. This is what is so very important about what is going on in official circles and not just in the US; the malaise and stagnation haven’t been eliminated at all, though that is not what is being written in the mainstream especially about the rate hike this week. Instead, the malaise and stagnation are being reclassified, officially, from demand to supply; from an “aggregate demand” shortfall to structural deficiencies in economic potential.

When Bernanke invited counteraction against the “fiscal cliff”, he did so from the perspective of a demand shortfall. Had he determined then (or, like Yellen, been forced to), as he really should have, that the economic problems were structural rather than cyclical, he would have sounded like Janet Yellen in December 2016. The very fact that they were debating the possible effects of the predetermined end of stabilizer actions with no recovery yet in place was a very big clue, a blaring warning sign, that it was never a demand shortfall in the first place.

Far be it for me to agree too much with Janet Yellen, but this is a point relevant to “reflation.” She is right in the very narrow sense that if the US economy is beset by lower potential, all the dreamed up measures that are pushing “reflation” won’t lead to the Promised Land, and all those will instead fall short in the same way that QE did. I wrote on Wednesday:

Cutting taxes, ripping up tens of thousands of pages in regulations, repealing Obamacare, etc., will all be very helpful, but won’t actually achieve reflation. To use one final analogy, it would be like giving a terminal cancer patient better pain meds. They don’t cure the disease, they just make life temporarily, even intermittently, more comfortable.

That is the sum total of my agreement with the Fed Chair. She has finally come around to the structural issues, but in doing so has only recognized that there are structural issues and that only they matter. She has no idea what they are, of course, preferring instead to cite some loose literature about Baby Boomers retiring, or that US workers have skills that US employers don’t want or value. These are absurd excuses that are necessary from her perspective because she can never admit that the diminished global economic potential has been placed on all of us by the eurodollar.

This is one very big reason why economists took so long, seven years since the official end of the Great “Recession”, to finally admit it was never a recession. That is what Janet Yellen and the FOMC have essentially declared by undercutting every former argument for “stimulus”, monetary as well as, we see now, fiscal. The most visible and obvious answer to the pressing economic questions is global money, but that offends core beliefs of Economics. So in 2012 Bernanke went on with a third QE, then a fourth, while calling for fiscal help because it was either recognize they had money all wrong (2011 removed any last doubts that might have lingered after all the proof in 2008) or cling to the theory about a stubborn, highly unusual shortfall in demand.

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And because it was wrong, their responses to being wrong grew increasingly wacky and emotional; witness 2014’s expectations under 2015’s “global turmoil”, the constant, increasingly shrill response to all the bad data of “but the unemployment rate.” In 2016, they have instead had no choice but to face up to this reality because their hardline absurdities in the context of what was clearly a monetary threat further threatened full-blown loss of credibility.

I think it vitally important to understand these points and more so how even economists have come to recognize them. In other words, what is significant about the FOMC vote continues to be this redefinition of the US economy in these official terms. Not so much that policymakers have finally arrived at these conclusions, rather that the inarguable reality of it has worn them down so much that they no longer have any choice now but to accept them even though they still have every reason not to. If it took seven years (really nine, at least) just to get past “demand shortfall”, how much longer still before dollar instability is likewise forced into their vocabulary and working principles?

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