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.