03 Jul 2015

Scott Sumner to Fed: “There Is No Justification for Listening to My Advice”

Federal Reserve, Scott Sumner 10 Comments

I know you guys think I’m just being a mosquito, buzzing around Scott Sumner’s ear and criticizing him for no good reason.

Well you’re wrong. I am the sentinel in the night, guarding the integrity of the USD from Sumner’s attempted debasement, while you have barbecues and watch fireworks.

Now I know very well what Sumner’s apologists are going to say when they hear my latest critique. So, first, let’s consider a hypothetical scenario where a teenager goes to work for a famous chef.

CHEF: In my kitchen, there is no justification for breaking an egg. None.

BILLY: Got it.

CHEF: Now, let’s start with something simple. Here’s a standard cookbook. Go ahead and bake a cake.

BILLY: Okay sure thing. Uh, wait a second.

CHEF: What’s the problem?

BILLY: Well, it says in step #3 that I have to mix two eggs into the batter.

CHEF: What’s your point?

BILLY: Well, I mean, you just told me not to break any eggs.

CHEF: So what? I’m a busy man, kid, get moving on that cake!

BILLY: But, how can I do that without breaking any eggs?

CHEF: *sighs* I meant, don’t break eggs as your direct goal. If you end up breaking eggs as an offshoot of your goal–such as baking a cake–then it’s fine. And in fact, necessary. Now stop being such a smarta** and get to work. But don’t you dare break any eggs. There’s no justification for that, none.

My question: In the ridiculous hypothetical scenario above, would Billy be allowed to complain to his parents/friends that his new boss was either (a) completely incoherent or (b) a jerk playing a trick on him? I think we can all agree that the answer is yes.

If you agree with me on that score, then you should also agree that either Scott Sumner is incoherent, or he is actually Andy Kaufman playing a decades-long prank on everyone. Let me explain.

If you read Scott’s blog regularly, you know that for years he has hammered home the point that it is a stupid mistake to think that low interest rates signify easy money. Scott is quite flummoxed how anyone can think that, since Milton Friedman himself made the point in the late 1990s. Scott repeatedly lectures us to never reason from an interest rate change.

Just to drive home the point, Scott often observes that low interest rates are associated with depressions, while higher interest rates are associated with boom times. When the Fed would put out statements saying it will “accommodate” the economy by keeping near-zero interest rates in place for an extended period, Scott would complain that this was actually telling everyone the economy would stay depressed for another year. (Sorry, I can’t find a link on this last point, but I know he said things like that circa 2011.)

Indeed, if the Fed did the optimal policy–credibly implementing a new policy of level targeting of (market expectations of) constant growth in nominal GDP–then investors would expect strong future growth and the Wicksellian natural interest rate would immediately rise, meaning that the Fed would need to allow the fed funds rate to immediately rise in order to fulfill its new policy regime. But that “hike” in interest rates would hardly be a move toward “tighter money”; it would actually be the cessation of the Fed’s disastrously tight money policy, in place since 2008. (Again, I’m not endorsing all of these statements–I’m just summarizing the worldview that Scott has been painting since 2008.)

OK everyone got all that? Very counterintuitive, but there’s a certain elegance to it. So in that context, how in the world does Scott at EconLog today write this?!

I often see Fed officials claiming that the fall in unemployment means that they need to raise interest rates. Sometimes this is based on “Phillips Curve” thinking—the (false) idea that inflation is caused by a booming economy…

Early in the year there was some indication that wage growth was accelerating. But that no longer seems to be the case, and the latest figures show exactly 2.0% hourly wage growth over the past 12 months. That’s the same rate as we’ve been seeing for the past 6 years, and is too low for the Fed to hit its 2% inflation target. There is no justification for raising interest rates when hourly nominal wage growth is below 2.3% on a 12-month basis. None. [Italics original.]

Now I know, I know, you’re going to excuse Scott here by saying, “Oh Bob, c’mon, he just means, given that the Fed is thinking about things in terms of setting interest rates by adjusting its bond holdings–then it would be a move toward tighter money if it were to hike interest rates. But if the Fed adopts his plan, and promises to buy every asset on planet Earth if need be in order to raise next quarter’s nominal GDP to the targeted level, then interest rates would rise rapidly and that would be awesome. But that’s not really the Fed ‘raising interest rates,’ that’s just the Fed implementing a certain policy that will necessarily result in higher interest rates. That’s how to make sense of his statement.”

OK, but then see again my tale of the Chef and Billy.

03 Jul 2015


Potpourri 2 Comments

==> Commenter Keshav pointed to this 2013 Steve Landsburg post in which he anticipated the spirit of my recent FEE article. I definitely knew that Landsburg was the first person I had read making the point about minimum wage burdening a small group (employers) to achieve a social goal (helping unskilled workers) instead of society as a whole, but I had forgotten that he used analogies too. Good thing I don’t believe in intellectual property!

==> Rand Paul taps Mark Spitznagel to advise him.

==> Stephen Colbert apparently took over a local access cable show in Michigan. (I’m still open to the possibility that the whole thing was invented, but the guy at the link got over his initial incredulity.) At the 21:50 mark he brings on a local Michigander making a name for himself in the competitive world of music, Marshall Mathers. It is extremely clever, and Eminem does a good job playing the role.

==> A Forbes writer is happy about George Gilder’s new monograph on gold (which criticizes Milton Friedman along the way).

==> People love or hate his past activism, but I think Adam Kokesh’s new idea is great, assuming he assembles a good team of trainers. There are thousands of young people who recognize that the current system is broken but they don’t see any practical options.

02 Jul 2015

Is This a Good Way to Help the Downtrodden?

Economics, Shameless Self-Promotion 15 Comments

My latest article at FEE poses some hypotheticals:

Or consider families who adopt children from war-torn regions. These actions, though seemingly noble, are clearly a drop in the bucket, with hundreds of thousands of orphans left behind. What if the government passed a law saying that US families were only allowed to adopt foreign children if they did so at least 15 kids at a time? Would activists agree that such a “pro-adoption” measure would increase the number of adoptions and be an unmitigated boon for foreign orphans?

Currently there are people who volunteer to teach adults how to read. But adult illiteracy is still a vexing problem in certain communities, so clearly these volunteer efforts have been inadequate to overcome the challenge. The obvious, pro-literacy way to fix things is to pass a law saying volunteers must give at least 15 hours of tutoring per week. If they are caught only teaching adults how to read for, say, 14 hours, then the volunteers will be heavily fined.

You see where I’m going with this?

02 Jul 2015

Scott Sumner: “I’ll Be Making All the Ironic Jokes Around Here, Thanks”

Scott Sumner 31 Comments

Oh Scott, why do you vex me so? In the midst of an EconLog post, Scott had this throwaway line (in my bold):

I first got into blogging in 2009 out of frustration over Fed policy. The US obviously had a huge demand shortfall, and the Fed wasn’t doing enough to address the problem. Indeed I believe the Fed caused the huge demand shortfall.

So most people think I’m a demand-side economist. (Some even equate “demand-side” with “Keynesian,” which would make Milton Friedman roll over in his grave.)

Now follow me on this. In order for that parenthetical statement to make any sense whatsoever, surely both of the following statements must be true:

(1) Milton Friedman never said that his occasional focus on monetary aggregates could arguably qualify him as a Keynesian.

(2) Scott Sumner never referred to himself as a Keynesian.

And yet, Milton Friedman famously said there is a sense in which all (sic) economists were Keynesians because they rely on the Keynesian language and apparatus, and Scott once referred to himself as the last New Keynesian economist.

(That giant sucking sound you hear is the universe imploding.)

30 Jun 2015

Chinese Stock Market Crashing

Business cycle 22 Comments

Details here. It’s down about 25% in the last two weeks, and 11% in the last two days.

Meanwhile, Scott Sumner is running victory laps, over those broken records who called it a “bubble” but didn’t give the precise timing. (See the P.P.S. in his post.)

30 Jun 2015

Bias in the Published Estimates of Social Cost of Carbon

Climate Change, Shameless Self-Promotion 10 Comments

This is a bit technical, but if you care about the climate change policy debate, you should try to get through it. I made it as easy as possible.

28 Jun 2015

Chris Tomlin Mellows Out With Live “Indescribable”

Religious 3 Comments

This is a big hit for this guy, but this live version is more mellow than his standard one.

27 Jun 2015

Quick Comment on SSM and I’ll Move On

SSM 52 Comments

If you want to see my thoughts, see FB. I want to make one quick comment here, but first, watch Obama:

I am not shocked by libertarians saying, “On balance, I am glad this happened, though I totally understand people who are alarmed that consolidated federal power will end up destroying any prospects for liberty long-term in this country.”

But I DO have a problem with people–and yes I have specific people in mind, I’m not just throwing out strawmen–who would have, without irony, called Obama a war criminal on Thursday, on Friday gushing about how beautiful the White House rainbow light show was, and denouncing any opponents as cold-hearted bigots.