There’s no way I can condense the argument down to a few excerpts. In order for you to understand my point here, you’re going to have to roll up your sleeves and read Scott Sumner’s whole post, in which he presents two different lines of evidence to argue that “real” shocks don’t cause unemployment while slowdowns in NGDP growth do.
Then, after you’ve read his post, you can come back here and see my analysis. At that point, if you already had your doubts about Sumner, you will say, “Holy smokes, Bob is right. That’s hilarious!” On the other hand, if you’re a fan of Sumner, you will say, “I can’t believe I let Bob talk me into cooking a 15-minute nothing burger.”
So if you feel like taking this journey with me, go read Sumner’s post.
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OK, welcome back. Let me now make a series of statements about Sumner’s post (and the fallout in the comments):
==> (1) Sumner’s whole purpose with this post is to argue that shocks in “real” factors can have huge impacts on welfare. However, they do not correspond to the business cycle. So long as the central bank exercises wise monetary policy, real shocks can be offset and full employment can be maintained. In contrast, we don’t need a real shock to get a recession and rising unemployment; all we need is the central bank to stupidly let NGDP growth fall below trend.
==> (2) The first line of evidence for this position Scott offers is Australia. Now Australia is a commodity exporter, so if real shocks mattered for the labor market, you would expect the commodity bust (i.e. steep fall in commodity prices over the last 14 months or so) to have caused unemployment to rise in Australia, But actually, Scott tells us, Australian unemployment has no discernible trend over the past year. Indeed, if you look at a longer history, you’ll see that Australian unemployment was gently rising before the commodity bust. That rise in Australian unemployment was (Scott tells us) probably due to below-trend NGDP growth.
==> (3) The next line of evidence is Texas. With the collapse in oil prices, you might have thought that unemployment in Texas would shoot way up–that’s what would happen if “real” things mattered. But nope, it has continued to gently fall. So again we see that real shocks don’t cause unemployment, it’s monetary policy, stupid.
==> (4) The funny thing is, Scott never believed that either of these items had anything to do with labor markets in the first place, so it’s weird that he’s invoking them as a “test” of the “real shocks” doctrine. In the case of Texas, in the main post itself Scott writes: “[R]eal shocks can have a modestly larger impact on Texas RGDP, as the drop in oil output affects RGDP more than employment. It’s a capital-intensive industry.” He also earlier explained that “most of the Texas growth” of recent years isn’t due to oil, but other factors having to do with wise Texas government policies.
==> (5) Things are even weirder with Australia. Since unemployment was rising in the past, and Scott blamed below-trend NGDP growth, and in the last year was flat (give or take), you would assume that NGDP growth has returned to trend. But nope, that’s not what happened. As Justin D pointed out in the comments:
NGDP growth in Australia was extremely slow over the past year (2014Q2-2015Q2), up just 1.6%, slower than the 3.6% growth over the prior year, and yet unemployment was rising in the prior year and stabilized in the most recent year. How do we account for that in the market monetarist framework?
To this, Scott replied:
Justin, Good question. The decline was due to sharply falling prices of commodity exports, which has little impact on employment. That’s one reason I suggest that commodity exporters target total labor compensation, not NGDP.
You really have to stop and let that sink in. Rather than belabor the point, let me illustrate with an analogy:
Suppose I’m making the case that, contrary to conventional wisdom, moviegoers get more satisfaction from watching 3D movies with their special goggles in their laps, rather than wearing them. To illustrate my point, I cite the case of my cousin, who just watched the 3D version of “The Martian” and said he really loved it.
Someone on a lark decides to go ask my cousin if he wore the 3D goggles or left them in his lap. My cousin says, “I wore them, duh.” Puzzled, the questioner then asks me to explain this discrepancy: why did I cite my cousin in support of this rule, when in fact the opposite occurred? I answer, “Good question. My cousin is one of the rare people who has an oddly shaped head that really fits those goggles well. For people like him, my rule is that for maximum movie experience you want to wear the 3D goggles on the tip of your nose.”
In this (ridiculous) scenario, how would people feel about me citing my cousin to prove the rule?