Wow. Scott Sumner’s success has gone to his head so much that he thinks we’re all market monetarists now. In this post, Sumner first quotes from a news article about Bernanke:
The Fed, he said, believes inflation will remain near the central bank’s target of 2% or a little less. The economy can support an unemployment rate around 5% to 6% without fueling inflation, he added.
“I do believe we will return to a healthier growth rate. I don’t see any reason why we couldn’t,” he said.
Now kids, I want you to truly see Scott the way I do. To do that, you have to read the entire commentary he gave on the above news excerpt. Here’s Scott’s reaction to the above:
It’s good to hear that Bernanke thinks the problem is demand side, not structural. Oddly, I actually think it’s more structural than he does. If we stay at 99 week maximum UI benefits, I’d expected the natural rate to be in the 6% to 7% range, especially if the minimum wage rate stays this high.
So Bernanke thinks easier money would help the economy even more than I think easier money would help the economy. But he fails to see one very obvious potential problem. There is something that could prevent a return to “healthier growth.”
Let’s assume inflation stays near at 2%. And let’s also assume that they allow NGDP to grow at a bit over 4%. Then we won’t get a “healthier” recovery.
But why would I make such a pessimistic forecast about NGDP growth? Why expect it to be so low?
Umm, maybe because it’s been low for the past several years.
Maybe because private forecasters expect it to remain low.
And maybe because the bond market seems to expect low NGDP growth (as far as we can tell.)
Other than those three reasons, there’s no reason at all that the economy can’t have a healthier recovery with 2% inflation.
And who determines the rate of NGDP growth? There’s probably an answer somewhere in Bernanke’s intermediate macro textbook.
This is really astounding. Let me walk you through this.
First, when Scott says right off the top, “It’s good to hear that Bernanke thinks the problem is demand side…” he has no justification for this. Watch:
Suppose you asked me what I thought was wrong with the economy. I would say that there are a lot of misallocated resources from the mistakes of the housing boom years. If we had laissez-faire, they’d get moved around right-quick. But we have unemployment benefits, blah blah blah, that are making this thing drag out. If the government just locked its policies in place, it might take a few years to slowly grow out of this mess, but we’d eventually return to a regular growth rate (though we’d be permanently lower than we otherwise would have been). I’m disregarding the ticking time bomb of the Fed’s injection of reserves, for the sake of argument.
Now if you said, “OK Bob, why doesn’t the Fed just print up another trillion dollars right now, to speed that process up?” I would say, “Aren’t you listening? I just told you the problem was structural. This isn’t a demand problem. Why would we print up money to deal with a structural problem?”
I’m not saying Bernanke thinks like I do, I’m just saying someone who did subscribe to (at least a certain class of) structural theories of the recession, might say exactly what came out of Bernanke’s mouth.
In contrast, if you thought the problem were demand-side, then what Bernanke said makes absolutely no sense. Don’t take my word for it, Scott Sumner himself goes through and explains why Bernanke’s comments make no sense, if Bernanke in fact thinks we are suffering from a demand problem, not a structural supply side problem.
So to sum up, here’s what Sumner has done in this blog post: He takes a Bernanke quote that is consistent with someone who thinks we are suffering from a structural problem (which can’t be fixed by easier money), and erroneously concludes that Bernanke is saying we have a demand problem–even though Bernanke says no such thing, either explicitly or implicitly. Then, Scott proceeds to ridicule Bernanke for not being consistent with his (alleged) belief that we are suffering from a demand side problem.
I really hope Scott tunes up his rhetoric before our debate. I want the bookies to at least keep the line within two touchdowns.