Some weeks ago, I made some critical observations concerning the Fed's contribution to the recovery. In particular, I complained that, despite the decidedly mixed and ambiguous results of empirical assessments thus far, the view that Quantitative Easing has been a smashing success seemed well on its way to becoming official dogma, if not a more generally-held article of faith.
Even so, I was taken aback by the off-hand manner in which Fed Vice Chairman Stanley Fischer declared a QE victory, in the course of a speech given two weeks ago at the International Monetary Conference in Toronto. Did the Fed's policies work? According to Fischer, "The econometric evidence says yes. So does the evidence of one's eyes" (my emphasis).
In fact, as I've already noted, the econometric evidence concerning the effectiveness of QE is hardly decisive. For one thing, most studies have looked only at the interest-rate effects of the Fed's purchases, without troubling to ask whether those effects translated into any definite changes in spending, output, and employment. For another, the interest-rate effect estimates are themselves not to be trusted. A fairly recent IMF study on "Foreign Investor Flows and Sovereign Bond Yields in Advanced Economies," for example, notes — en passant as it were — that, controlling for such flows, the Fed's large-scale asset purchases resulted, not in the 90-200 basis point decline in long-term rates reported in various other studies, but in a decline of just thirty basis points, which is peanuts. Other studies may, in other words, have conflated the effects of the Fed's asset purchases with those of concurrent "flights" from lower-quality Eurozone securities to higher-quality Treasuries.
But why bother with fancy econometrics when one can simply refer, as Vice Chairman Fischer did, to the "evidence of one's eyes"? Fischer, apparently, found in that evidence compelling proof that QE worked wonders. Fischer actually mentions only one piece of evidence, to wit: the fact that "the recent inauguration of the ECB's QE policy seemed to have an immediate effect not only on European interest rates, but also on longer-term rates in the United States." But here, as with other inferences drawn by looking at interest-rate movements, connecting the dots isn't nearly as easy as Fischer supposes.
Evidence that some good has come from the ECB 's belated easing is, in any event, not evidence that the Fed's easing did any good. Try as I might, I just can't seem to get my eyes to focus on any clear and unambiguous evidence that it did. Has Fischer, I wonder, been looking at the same things I've looked at? If so, is he perhaps looking through rose-colored glasses, or is it my own vision or prescription that's faulty?
With such questions in mind, I decided to put the matter to a test. Call it Doc Selgin's QE Eye Test, or Eye QE Test, or whatever else you wish to call it. The instructions are simple: eyeball the following charts, gathered from various internet sources, recording all sorts of basic information pertaining to Quantitative Easing on one hand and the post-2008 recovery on the other. Then decide for yourself whether the evidence of your eyes agrees with Mr. Fischer's relatively sunny impression, or with my own much gloomier one.
Please don't misunderstand me: I am not saying that my QE Eye Test, or any eye test at all, is a good way to evaluate the effectiveness of the Fed's post-crisis policies. On the contrary: I only wish to cast doubt upon Vice-Chairman Fischer's suggestion that one's eyes are all one needs to determine that those policies worked. My own belief, FWIW, is that it's going to take a lot more fancy econometric footwork to arrive at convincing answers. I just hope it doesn't take as long to come to a proper understanding of the Fed's role as it took following that other "Great" calamity.
Doc Selgin's QE Eye Test
1) Fed Assets and Bank Excess Reserve Holdings.
2) Growth in Monetary Base, M2, and NGDP.
3) Nominal GDP Gap.
4) QE and Treasury Yields.
5) Unemployment and Labor Force Participation Rates.
6) Unemployment Using June 2009 Participation Rate.
7) Employment as Percent of Population.
8) Employment as Percent of Population, Comparison with Great Depression.
9) Real GDP: Actual and Pre-CrisisTrend.
10) Economic Output as Percent of Potential Output.
11) Comparison with Other Postwar Recoveries.
That's it. If these pictures make you feel all warm and fuzzy about the great job the Fed has done, then so far as you're concerned, Vice Chairman Fischer's beliefs are vindicated. If, on the other hand, you find yourself doubting that all those trillions of new dollars have accomplished anything, then you can either count yourself among the pessimists, or have Doc Selgin write you a prescription for some rose-colored lenses.