At first I was getting really frustrated with Craw and then Gene in the comments of this post. I couldn’t believe they were accusing me of misrepresenting Scott Sumner’s views; I thought I was almost literally quoting him, with the exception of translating the discussion into the world of a household thermostat (which of course was the analogy he had used to take me out to the woodshed).
But now I totally see what is happening here:
1) OBVIOUSLY Scott wins the debate in the analogy as he set it up. He puts ridiculous arguments into my mouth, and he puts obviously correct arguments into his own mouth, when it comes to a discussion of household thermostats. In that setting, I look ridiculous and Scott looks obviously correct. In fairness, Scott explicitly said that I don’t hold the view about thermostats. But the implication is that I do hold analogous views when it comes to monetary policy, whereas Scott still holds the obviously correct view.
2) But no no no; Scott has not adequately translated our respective monetary views into the world of the household thermostat. That was why I wrote my own post. I was saying (though perhaps I should have been clearer) that if you want to take the monetary discussion into the world of thermostats, my dialog was a lot closer to everyone’s (including Bernanke, Krugman, etc.) views than Scott’s dialog.
[Now one aside before I begin: As Tel pointed out, it actually doesn’t make much sense to talk about thermostats because a thermostat keeps a constant temperature. Rather, it would make more sense if Scott had talked about a furnace with settings from 1 to 10, indicating the power level at which it blew hot air into the house.]
For example, in the thermostat world, Scott says:
Bob Murphy’s theory of temperature would be that when people are frequently turning up the thermostat, you can expect houses to be relatively warm. And when people are frequently turning on the AC, you can expect houses to be cool. The Sumner theory is that when people are most frequently turning up the thermostats, houses will be relatively cool, even though that action makes them warmer. Bob Murphy’s theory is that houses are relatively warm in the winter, because people frequently turn up their thermostats in the winter. Sumner’s theory is that houses will be relatively cool in the winter, despite the fact that people turn up the thermostat more frequently in the winter, and despite the fact that turning up the thermostat does in fact make houses warmer, ceteris paribus. Bob Murphy will claim that Sumner contradicts himself on house temperatures.
No no no, that is totally wrong, if we’re using this as an analogy for monetary policy. Watch: If I translate the “Sumner theory” above into a theory about monetary policy, it would mean this: “The Sumner theory is that when central bankers are most frequently cutting interest rates, economies will be operating below full employment and price inflation will be below target.”
Yes that’s right, but who doesn’t believe that? That’s why the central bankers keep cutting.
Where Sumner differs from other people is that he says ultralow interest rates are a sign that money has been too tight. And that the Fed’s actions since 2008 have been the tightest monetary policy since the Hoover Administration.
Those type of statements aren’t analogous to the “Sumner theory” above. Instead, they would be analogous to someone saying, “A lot of people assume that when the homeowner has continually pushed up the thermostat until it finally hits 80–the maximum setting–that he is engaged in a deliberate policy of warming. But actually, this is usually a sign that the homeowner has engaged in a cooling policy.”
Ben Bernanke, Paul Krugman, Brad DeLong, and 90% of the economics profession think that the outside got really cold, that Ben Bernanke pushed the thermostat up to 80 in a deliberate WARMING policy, but gosh shucks it wasn’t enough to offset the exogenous outside forces of nature.
That is precisely the view that Sumner wants to blow up; it’s why he started blogging. Sumner thinks that we should DEFINE the stance of heating policy not with reference to the objective actions the homeowner takes (like pushing the thermostat up to 80, or running higher utility bills in one month than in the previous decade), but rather by looking at the temperature of the house compared to the desired temperature. If the homeowner realizes that his actions will not make the house as warm as he wants it to be, then by definition he has engaged in a cooling policy–even if he pushed the thermostat up to 80.
I am saying that’s a nutty approach, which no normal person would adopt when it comes to houses and thermostats. Amongst its problems, it assumes the very thing under dispute. If our economy doesn’t in fact need looser money in order to recover, then Scott’s proposal (to make “tight money” mean the same thing as “an economy the NGDP of which does not grow sufficiently”) would make it very hard to realize he had misdiagnosed the problem.
Likewise, if we’ve let the furnace blast for a month straight, paying exorbitant bills, and yet we’re still shivering with sweaters on, it’s not very helpful for someone to define that situation as “inadequate furnace exertion.” Maybe there are a bunch of windows open, or maybe we all have pneumonia, or maybe there’s a crazy weather pattern and the optimal thing would be to turn off the furnace and go to Florida for a week. But to literally define any undesirably cold house as “inadequate furnace exertion” would be crazy.