25 Sep 2012

More Evidence That Scott Sumner Is Out of Touch

Economics, Federal Reserve, Market Monetarism 50 Comments

Look kids, I’m as sick of the Sumner-bashing as you are. But it is apparently my duty, since nobody else is catching this stuff. If not me, who?

First of all, remember back when Garett Jones was talking about sticky prices and how he thought debt was a really good candidate for this? Then Sumner bit his head off (good-naturedly), and I was stunned because I had filed away that sticky nominal debt contracts played an integral role in the Sumnerian system? Well here’s Coach Sumner yesterday giving a pep talk to his team:

Nearly 4 years ago I and a few others started arguing that the crisis was being misdiagnosed by the economics establishment. Market monetarists argued that while banks did make some foolish loans, the deeper cause of the global financial crisis was a lack of nominal income; the resource that people, businesses, and governments have available for repaying nominal debts. The collapse in nominal income in the US and Europe was larger than anything since the 1930s, and hence most pundits and policymakers had no experience dealing with this situation.

It’s amazing how far we’ve come in less than 4 years. NGDP is the hottest idea in macroeconomics, and the lack of NGDP growth is seen as the root cause of the financial crisis. I recall in 2009 how commenters were incredulous when I said “NGDP,” not reckless banking, was behind the financial crisis. They thought I was crazy. Now it’s practically conventional wisdom. This means that all those “policy implications of 2008″ from both the left (who blamed the banks) and the right (who blamed the regulators) will have to be completely re-thought. It’s about time. [Bold added.]

I gave a longish quote to make sure you got the full context. Scott is clearly summarizing his worldview in a few sentences here. He doesn’t talk about sticky wages, no, he singles out nominal debts. Indeed, Krugman himself has argued that (moderately) flexible wages right now would actually make things worse, because of nominal debts. I don’t know if Scott endorses that particular argument from Krugman, but given the above, can you folks now I understand why I was astounded that Scott took Garett Jones out to the woodshed on citing sticky debt? Remember, it wasn’t simply that Scott said, “Well, I don’t think you described its influence properly…” No, he said if people owed a bunch of money, they’d go work harder. He made it sound like Garett had pointed to a factor that was the exact opposite of what the theorist needed here.

* * *

OK but now consider this gem. Today, Scott is trying to be open-minded and say that he acknowledges there are all sorts of real supply shocks to the system; he’s not simply saying it’s demand, stupid. Great, I’m on board. But then Scott casually says:

If [the natural rate of unemployment in the US] did rise to 8.1%, the most likely explanation is that the policies I mentioned above (minimum wage increase, extended UI [unemployment insurance], etc) caused the increase. But monetary stimulus would help on both fronts; reducing the real minimum wage (which never would have been passed had Congress know[n] how little NGDP growth we were going to get) and also causing Congress to reduce the maximum UI benefit more quickly, as they do after every previous recovery from a recession. [Emphasis changed.]

OK, do y’all see it? I’m being dead serious. Even you fans of Scott Sumner need to start preparing plans for the coup d’etat, once his insanity becomes intolerable. (Right now you must think it can be controlled, I guess.)

Scott is actually saying that the people in Congress only passed the increase in the minimum wage a few years ago, because they erroneously forecasted a higher NGDP growth rate than what we’ve in fact seen.

I have previously challenged Scott when he says stuff like, “Businesses signed contracts in 2007 assuming 5% NGDP growth,” on the grounds that I didn’t know what NGDP even meant in 2007, so I’m sure Joe the Plumber didn’t either, when borrowing against a line of credit with his wrenches as collateral. Scott replied that the market acts “as if” people make forecasts of NGDP. OK fine, it’s a harmless shortcut.

But does Scott really think Barney Frank was having a pow-wow with Charlie Rangel and some UAW bosses that went like this?

BARNEY FRANK: I’m going to push to raise the minimum wage 40%.

CHARLIE RANGEL: Are you sure? My Bayesian prior says there’s only a 38% probability that NGDP growth will average 5% over the next five years. We both know how devastating it was when NGDP collapsed in the Hoover Administration.

BARNEY FRANK: First of all Chuck, the proper metric is nominal wage growth, but I’m not going to have that argument with you again. In any event, my boys here from the UAW have created a synthetic NGDP futures contract that they trade in the cafeteria. Check out this PowerPoint show, I think you’ll end up co-sponsoring the bill with me.

P.S. I know some people are going to say, “Oh come on Murphy, cut the guy some slack. What he meant was…” By all means, tell me what he meant. I want to know in what universe the members of Congress raise the minimum wage after considerations of macroeconomics.

50 Responses to “More Evidence That Scott Sumner Is Out of Touch”

  1. Bharat says:

    What really went down:

    BARNEY FRANK: I’m going to push to raise the minimum wage 40%.

    CHARLIE RANGEL: Are you sure? Are the unions really paying you that much?

    BARNEY FRANK: Yes.

  2. Silas Barta says:

    I didn’t know what NGDP even meant in 2007, so I’m sure Joe the Plumber didn’t either, when borrowing against a line of credit with his wrenches as collateral. Scott replied that the market acts “as if” people make forecasts of NGDP. OK fine, it’s a harmless shortcut.

    I thought Sumner’s defense against that argument was that he’s allowed to equate “expectation of the sum” with “sum of the expectations” — that is, adding up all the expected nominal sales of each person gets you the nominal sales that “the market” expected.

    Anyway, I still wish the general reaction to the nominal debt “problem” was “Sorry guys, you based your plans on bad assumptions about how much people wanted to spend and so you failed to appreciate how much your new loans would embrittle your business plans. Better luck next time.”

    Instead, the general response from economists has been, “Aw, shucks, we better jack with aggregate economic variables until total spending is whatever you need to pay off your debts, no matter how much you borrowed. What could go wrong?”

    • Major_Freedom says:

      Silas gets it.

      • Silas Barta says:

        Thanks. What bothers me is that no one else seems to be talking about those same things. I’ve never heard anyone else say that “Gee, maybe businesses didn’t appreciate the importance of liquidity in riding out recessions, so let’s hope they learn from this and rely less on debt and more on equity in the future.”

  3. Gene Callahan says:

    Oh come on Murphy, cut the guy some slack. What he really meant was “Congress wouldn’t have raised the minium wage if they had know a big crash was coming.” He just puts it in terms of NGDP.

    The above version may be right or wrong, but it is not nuts.

    • Silas Barta says:

      So it’s okay for you to put words in someone’s mouth as long as, in your ideology (which I hope you agree NDGPism has become for Sumner), the stuff they did say *implies* the stuff you falsely attributed to them?

      “I support abolition of all drug laws.” — Gene_Callahan (It’s okay; I think your beliefs *imply* that you should oppose all drug laws, so I can just go ahead and make the substitution.)

      • Gene Callahan says:

        “Sensibly reading what someone is saying” is hardly “putting words in their mouth.”

        • Silas Barta says:

          It is when your “sensibility” is predicated on inferences foreign to that speaker, like in the example I just gave.

        • Gene Callahan says:

          Well, Silas, I have resolved this: I wrote Sumner. He said, “Yes, Gene, that is exactly what I meant.” (Write him yourself if you don’t believe me.) So, I interpreted him completely correctly, rather in any way “foreign” to his “inferences,” whatever that is supposed to mean.

          So, perhaps… stop being a jerk? (Sorry, I’m just kidding: your steadiness in that regard is endearing.)

          • Silas Barta says:

            Gene_Callahan: the speakers in question are the politicians, to whom (I claim) Sumner was mistakenly attributing NGDP-based reasoning (or reasoning equivalent to that).

            There is a big difference between “politicians expected a ‘crash'” and “politicians expected an NGDP contraction”, and that difference underlies the whole debate. So if you equate the two, you’re assuming your own conclusion.

            If Sumner “meant” to say that politicians were using a completely kind of reasoning that he said they were using, well, all the worse for Sumner’s ability to express himself.

            It’s unfortunate that you don’t understand what “inferences foreign to them mean”, but I’ll be glad to explain, given your humble request.

            Possible inference: “A minimum wage won’t be a problem because NGDP will be under control.”

            Real politicians: “A minimum wage hike is feasible because the economy will be doing well or inflation will be high.”

            Sumner: “The politicians want to raise minimum wage because of their beliefs about NGDP.”

            Actual politician reasoning: “What the hell are you talking about?”

            Accurate description of scenario: “Hey, looks like that inference was actually foreign to the politicians.”

            (Thanks for opposing all drug laws btw.)

        • Gene Callahan says:

          I forwarded Scott’s email to Bob; he can confirm that I was not “putting words in his mouth.”

          • Silas Barta says:

            Oh, I don’t at all doubt your claim that Sumner can’t tell the difference between what he said vs. an actual uncontroversial claim, and so equivocates between the two — it’s pretty much par for the course at this point.

            • Gene Callahan says:

              So Sumner and I are BOTH wrong about what he meant, but Silas knows!

              Silas, you’re like the guy in Annie Hall who is saying what McLuhan meant when Woody Allen pulls out McCluhan from behind a column and McCluhan tells him, “That’s is not at all what I meant.”

              Except that guy got embarrassed, whereas you would continue arguing!

            • Silas Barta says:

              Pretty sure that’s not what I said, and that you’re not even reading my comments at this point…

    • Dan says:

      http://www.dailykos.com/story/2012/07/27/1114221/-Democrats-introduce-bill-to-raise-minimum-wage-to-9-80

      So when these democrats (ha, autocorrect changed that to demon rats) suggest we should raise the minimum wage to $9.80, these congressmen are saying,”Sure, we wouldn’t have raised the min wage if we knew the big crash was coming, but now that we have had the big crash, and unemployment is over 8%, it is clearly time to raise it again.”

      • Tel says:

        They think that raising the minimum wage will force tight fisted employers (who, as we all know, secretly hoard massive amounts of cash) to splurge out on higher wages to all existing staff and profitability be damned. That’s the official theory anyway: changing the minimum wage either up or down has no effect on employment. As Krugman so clearly explains it:

        Even in this case, it’s hard to see the point of cutting wages: you could achieve the same effect, much more easily, simply by having the Fed increase the money supply.

        By increasing the money supply you create price inflation (especially when you include food & fuel in your calculations) which in turn gives everyone a pay cut, and in real terms reduces the minimum wage. Oh wait…

        • abe says:

          They are seeing things For example a floor in a minimum wage law when in fact it is a hurdle. It’s not an economics issue – it’s a visual or cognitive disfunction.

        • Matt Tanous says:

          “changing the minimum wage either up or down has no effect on employment.”

          Er, what? So let’s make it a million dollars an hour! Employment will stay the same, right? No effect? (What do you mean we have to also hyperinflate to do that?)

          The minimum wage is a real cutoff. You can certainly inflate to bring wages above it (if you hate the poor old ladies on fixed incomes) but this, in effect, is a lowering of the real minimum wage.

          Raising the real minimum wage force unemplyoment, and lowering the real minimum wage allows for higher employment. Denying that is ridiculous.

      • Gene Callahan says:

        I was not defending Sumner’s claim; I was just saying what it seems to me that he meant.

        But, in any case, 100 representatives is not “Congress.”

        • Silas Barta says:

          Right — kinda like how “Congress is worried about a crash” is not “Congress is worried about contraction of NGDP [unless you’re Scott Sumner, in which case Congress’s thinking style retroactively changes]”

    • Major_Freedom says:

      Then why doesn’t Congress lower the minimum wage when there are crashes?

      • Gene Callahan says:

        Ratchet effect.

        • Major_Freedom says:

          What is the reason for the ratchet effect, in your opinion?

          If it has anything to do with speaking pejoratively about politicians, then it will undercut Sumner’s theory of seemingly rational politicians, which you are defending.

        • Silas Barta says:

          But there can’t be a ratchet effect unless you accept that they aren’t predicating minimum wage policy on NGDP expectations in the first place, exactly as the critics were claiming!

          (Oh, but I know: we have to be charitable, right?)

          • Bob Murphy says:

            Ah but Silas, you had Gene in a full-nelson and then you just twapped his ear. Gene said he believes in ratchet effects–in which the government periodically reverses (but only partially) its earlier interventions–and that’s why he he would NEVER (his caps I think) expect the government to partially pull back on a minimum wage hike.

            But we’re in Opposite Week on economics blogs I think, so it’s all good.

  4. Jon Steele says:

    Many years ago I had an internet debate with someone who claimed that germ warfare could not possibly have occurred back in the 17th and 18th centuries, because the Germ Theory of Disease was not articulated until the 19th century. I claimed that was silly, because it’s possible to understand that diseases can be communicable without being able to articulate the exact mechanism behind it.

    I’m kind of reminded of that here. Maybe I’m missing your point Bob, but while you would not have known what NGDP meant in 2007, you would certainly have recognized an argument that the number of people actually affected by minimum wage legislation going forward after a raise occurs will depend in part on things like real economic growth and inflation.

    Even when the Dems had full control, they still weren’t dumb enough to jack up minimum wage to, say, $50/hour. Implicitly this could be an acknowledgement of the potential for unemployment. I don’t know if I agree with Sumner’s conclusion, but you don’t find it remotely plausible that Barney Frank sees minimum wage legislation as a kind of cat’s paw to keep the base in line, and that he has a political calculus in mind about how much he can raise it (his base cheers!) without actually pricing too many people out of jobs? You don’t think he could have told Rangel, “Look, Charlie, we jack this 40% and we’re getting x votes out of it. Don’t worry about unemployment, I just saw Ben in the hallway, and he waved the keys to the helicopter in the air. 5 years from now no one is going to be making this wage rate.”

    I’m not saying this happened, I’m just saying I don’t think you can dismiss it as crazy talk. Don’t tell me you aren’t sufficiently cynical about politicians to think that they might overtly deny but secretly believe that wage floors cause unemployment, but advocate raising them anyway if they think it will get them more votes.

    • Silas Barta says:

      Many years ago I had an internet debate with someone who claimed that germ warfare could not possibly have occurred back in the 17th and 18th centuries, because the Germ Theory of Disease was not articulated until the 19th century. I claimed that was silly, because it’s possible to understand that diseases can be communicable without being able to articulate the exact mechanism behind it.

      Right, except that even then, you would have been ridiculed for believing that germs could transmit that way. remember, all the way past the mid-19th century, they ridiculed the idea gee, maybe you should wash your hands in between touching dead bodies and touching newborn babies.

    • Silas Barta says:

      As for the rest of your comment, you seem to be saying that because politicians would reject a (stupid) policy like a $50/hour minimum wage, and NGDPism opposes that policy, then politicians must have been reasoning from an equation of steady NGDP growth with prosperity.

      Let’s try that in another context.

      – Jon_Steele opposes exterminating puppies.

      – The Puppy Abuser Society opposes exterminating puppies on the grounds that it would prefer to abuse them.

      – Therefore, Jon_Steele was *really* opposing puppy extermination all along because he wanted to abuse them instead.

      • Jon Steele says:

        Uh, no Silas, I have no idea where you’d get that from. That is nothing remotely like what I’m saying.

        I am saying that while the term “NGDP” may not have been flying around the lexicon 5 years ago, the concept that people might include things like future expectations of inflation in their economic planning. I am suggesting that it could — not must, but could — be the case that politicians did factor in future expectations about the economy into their decision about whether to raise the minimum wage, and how high. It might be true or it might not, but it can’t be dismissed prima facie as crazy.

        Here, let me try a different tack. Suppose you read someone who makes the following claim:

        “Man, Rothbard was so full of crap. He’s claiming that Joe the Plumber is walking around talking about stuff like psychic disutility of labor. Like Joe gets to the end of his day and says to himself, ‘Gosh, the resources I may call out of the economy as a result of this next marginal unit of labor score lower on my subjective, ordinal value scale than going home and drinking a beer. Since I am a rational agent trying to maximize psychic revenue, it’s Miller time!’ Obviously Joe the Plumber isn’t talking like that. Joe the Plumber has never even heard of marginal utility. Rothbard’s theory is idiotic!”

        We agree that would be silly, right? Maybe subjective value (for example) is right and maybe it isn’t, but you don’t dismiss dismiss the theory as crazy just because people in the real world aren’t using the same terms to describe their own thinking that economists are using.

        I don’t know if Sumner is right or wrong about the political calculus of Barney Frank, but I think he’s merely claiming that that calculus includes things like what will happen to nominal wage rates in the future, and that doesn’t seem crazy to me.

        • Silas Barta says:

          And I’m trying to explain to you that you don’t have to drink the NGDP koolaid to recognize that “the printing money” causes inflation and lowers the real minimum wage.

          • Jon Steele says:

            Of course it does. I can’t imagine why you think I’d disagree.

            • Silas Barta says:

              Because you were claiming that it’s reasonable to represent their beliefs in terms of implicit NGDP (rather than the more common inflation) expectations, maybe?

              • Major_Freedom says:

                There is a difference between saying it is REASONABLE to view the economy in terms of X, and saying that one MUST view the economy in terms of X.

    • Christopher says:

      Even when the Dems had full control, they still weren’t dumb enough to jack up minimum wage to, say, $50/hour. Implicitly this could be an acknowledgement of the potential for unemployment

      That’s not the impression I am getting over here in Europe. The argument goes kind of backwards to what you are saying. Proponents of high minimum wages such as labor unions usually claim that higher wages will spur economic growth and thereby reduce unemployment.

      So at least here in Europe I’d say that even if the people in favor of higher minimum wages had known NGDP and had been expecting it to drop or to grow slower, they would still have argued for higher minimum higher in an attempt to stimulate NGDP.

      • Jon Steele says:

        I think there are 2 different things to sort out here.

        For one thing, I am not making a point about raising the minimum wage by a few dollars. Insofar as I understand it, the people who believe higher minimum wage helps employment do so because they thing enough people will see that money and — being poor with a high marginal propensity to consume — spend it into the economy, creating additional demand that raises employment by more than enough to offset any job losses. I’m not saying it’s true, I’m saying that’s what I understand them to believe. But those people recognize that you can’t jack up the minimum wage by 1000%, or 10000%, and get the same effect, because the unemployment tradeoff does exist.

        Second, you mention labor unions where I did not. That’s a different group from politicians, with a different set of incentives. I do think politicians see unemployment as a problem, but a tolerable one if it gets them votes. Whereas unions know it causes unemployment and consider it a feature, not a bug. That’s because it causes unemployment 1 rung down the ladder from where the union members are sitting, and reduces competition among laborers. So yes, a labor union might advocate for higher minimum wage laws even if they expected an economic slump, but this discussion was about what Congress would have done, not what unions would have advocated.

        • Christopher says:

          Points taken. I thin both your remarks are correct.

          What I wanted to say, however, is that there are politicians/lobbyists (who influence politicians) who actually do take the stance that when it comes to (minimum) wages the more the better. I can’t say whether there are similar views in the US, though.

          One thing I completely forgot to mention is that I rarely hear economic arguments in political discussions at all. Most of the time, politicians will say things like “we need to raise the minimum wage by x because families can’t get by.” or “it’s unjust to pay people less than…”.
          So that’s more of a moral argument and leads me to doubt Sumners impression that politicians decide on economic arguments let alone uncertain and disputed expectation about the future.

    • Gene Callahan says:

      Exactly, Jon. Right or not, this idea is not crazy.

  5. noiselull says:

    He obviously means that Congress would have been under more pressure from free marketers not to pass the increase and less support from “free marketers (see Daniel Kuehn)” for raising it = not enough political capital for passage.

  6. Bill Woolsey says:

    It is simple.

    The long run growth of the economy depends on the growth of productive capacity–population, desire to work, accumulation of capital goods, and technology. Supply-side policies have some impact on these things. Most market monetarists are libertarians and support the same sort of “supply-side” policies as other libertarians.

    Slow downs of spending on output can cause a persistent shortfall of actual production from potential. Market Monetarists believe an appropriate monetary regime can and should both prevent and/or rapidly reverse such slowdowns.

    If spending remains on its target growth path, Market Monetarists don’t favor accelerations of spending growth in response to lower or slower growth of real output.

    If spending slows down or falls, reverse the short fall from trend. If it speeds up and rises above trend, slow it back down so that it returns to trend.

    Spending is a matter of the monetary regime. A stable growth path for spending on output generates the least bad environment for microeconomic coordination. It is the microeconomic process of creative destruction that generates growth in real output, per capita real income, and standards of living.

    If spending slows down or falls, reversing that slowdown can result in very rapid growth in real output, per capita real income, and standards of living. That is because the disruption is being relieved.

    • Bob Murphy says:

      Bill, you keep telliing me (here and on Sumner’s blog) “it is simple” to reconcile his views on debt. Are you telling me you can’t even understand, prima facie, why that might be confusing? That Sumner summarizes his whole worldview by saying, “Slowdown in nominal income–the means by which people pay nominal debts–leads to crisis” and yet when Garett Jones says sticky nominal debt contracts are responsible for crisis, Scott says, “No, debt isn’t a price, and anyway it would make you work harder, not less, end of story”?

      I pity the fools taking Sumner’s classes if that’s how he grades exams. The kids gets a D- then the next lecture Sumner starts off by saying exactly what the kid was trying to say in his essay. He would switch majors out of econ thinking he was stupid.

    • Mike T says:

      Bill,
      I’m one of the econ amateurs on this board (and it probably shows). So, consider this response being made as a casual outsider observer.

      1. As you summarize, it seems Sumner mainly sees this as a pure spending problem. From that perspective, how are bad producers punished in the marketplace if they, say for example, are not selling because maybe they’ve mispriced their inventory? Or invested in the wrong projects? Or misdiagnosed consumer preferences? It seems that there is a not so insignificant lack of owner accountability in this model as the “monetary regime” essentially attempts to correct these problems away by forcing spending higher.

      2. Let’s say I voluntarily choose to cut back on my spending. Perhaps I want to pay down some debt, or I want to save for a future big purchase, or whatever. And what if a large enough number of Americans similarly cut back based on their own personal set of circumstances, needs, wants, preferences, etc such that it impacts AD. As AD would fall, this would be a spending “problem” in Sumner’s eyes that needs correction. So, some monetary regime should force me to spend more against my will at prices I don’t like at a time I don’t want? Or to get to Bob’s point, why would Sumner also suggest that perhaps I should just work harder?

      There’s just something about this that really doesn’t sit well with me. And certainly something that doesn’t sound very libertarian to me (except for his moment of clarity about working harder).

    • Bob Murphy says:

      OK Bill, you obviously don’t understand what my problem is, because you’re not mentioning the word “debt” in your comment here. I am surprised you feel you need to tell me Market Monetarism 101, but so be it. If this post comes off as me saying, “I don’t understand what Scott Sumner thinks about how the economy works” I guess I need to write more clearly.

    • Major_Freedom says:

      Bill Woolsey:

      Slow downs of spending on output can cause a persistent shortfall of actual production from potential.

      Why isn’t the actual the potential? Isn’t it a blind assumption that a boom that is in reality unsustainable can be sustained forever anyway, as if all we need to do is naively extrapolate from a line on a chart of history?

      If spending slows down or falls, reverse the short fall from trend. If it speeds up and rises above trend, slow it back down so that it returns to trend.

      That’s funny, considering how NGDP targeting forces its own trend. It doesn’t “help” an existing, non-NGDP targeting trend.

      If spending slows down or falls, reversing that slowdown can result in very rapid growth in real output, per capita real income, and standards of living. That is because the disruption is being relieved.

      NGDP targeting IS a disruption of free market activity.

  7. Blackadder says:

    I believe Sumner’s view is that nominal debt stickiness is important for financial crises, but not for your ordinary garden variety recession, where it’s sticky wages/prices that play the key role.

    The imagined congressional dialogue was hilarious, BTW.

    • Ghengis Khak says:

      The line “Check out this PowerPoint show” is the real winner.

    • Richard Moss says:

      Blackadder,

      But, in the link Bob provided to Sumner’s criticism of Garrett, he quotes Sumner stating;

      I’m still morose about Arnold Kling’s retirement from blogging, but the entry of Garett Jones into the blogosphere is a nice silver lining. I plan on welcoming him the only way I know how—attack, attack, attack.

      Garett argues that the sticky wage/price mechanism is not strong enough to create major business cycles, and that debt is the key sticky price:

      Any force strong enough to fight against the power of prices should be a strong force indeed, strong enough for all to see. …

      Does Sumner say anywhere else that a “major business cycle” is different from a financial crisis? They sound the same to me…

      • Richard Moss says:

        Sorry; *Garett*

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