Scott Sumner has flirted with the notion that there is no such thing as truth, that “truth” is whatever your colleagues let you get away with. (I’ve dug up this post of him merely talking about it, but I’m pretty sure there are others where it looks like Scott is receptive to the idea.) And he has also written that he used to use arguments to support his position that he knew were a little bit suspect, but thought he could get away with, until the sharp commenters on his blog forced him to raise the bar. (If someone can find that post–I think it was on EconLog–I’d appreciate it. People will think I’m putting words in his mouth, but no, Scott really did say that.)
So in that spirit, it occurs to me that maybe Scott doesn’t think anyone will bother to go read the text of the recently passed (in the House) Fed Oversight and Modernization Act (FORM Act). Now if you click the link, under the Definitions in the beginning you will find:
(9) Reference Policy Rule
The term “Reference Policy Rule” means a calculation of the nominal Federal funds rate as equal to the sum of the following:
(A) The rate of inflation over the previous four quarters.
(B) One-half of the percentage deviation of the real GDP from an estimate of potential GDP.
(C) One-half of the difference between the rate of inflation over the previous four quarters and two percent.
(D) Two percent.
OK, so if you’ve studied economics, you know that the above is a version of the Taylor Rule, with equal weight placed on hitting the 2% price inflation target and in minimizing the output gap.
In contrast to the “Reference Policy Rule,” earlier in the text they define:
(2) Directive Policy Rule
The term “Directive Policy Rule” means a policy rule developed by the Federal Open Market Committee that meets the requirements of subsection (c) and that provides the basis for the Open Market Operations Directive.
OK, so the FORM Act lets the Fed come up with its own Policy Rule. However, the Fed can’t just issue any old rule, like, “We are going to try super duper hard to foster a good economy.” In the section of the bill explaining the requirements of an acceptable Policy Rule, it says:
(c) Requirements for a Directive Policy Rule
A Directive Policy Rule shall—
(1) identify the Policy Instrument the Directive Policy Rule is designed to target;
(2) describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment of the Policy Instrument Target to respond to a change in the Intermediate Policy Inputs;
(5) describe the procedure for adjusting the supply of bank reserves to achieve the Policy Instrument Target;
(6) include a statement as to whether the Directive Policy Rule substantially conforms to the Reference Policy Rule and, if applicable—
(A) an explanation of the extent to which it departs from the Reference Policy Rule;
(B) a detailed justification for that departure; and
(C) a description of the circumstances under which the Directive Policy Rule may be amended in the future; …
In the block quotation above, I left out (3) and (4) for brevity, but I retained (1), (2), and (5) so you’d get the gist of it. Look now at (6). It is saying that if the Fed’s proposed rule differs from the Taylor Rule (with equal weights on inflation and output gap), then the Fed needs to justify to Congress in detail why they are doing so.
Because of this item, Narayana Kocherlakota–who isn’t some punk journalist at Bloomberg, but is the president of the Minneapolis Fed–recently said in a speech: “The U.S. House recently passed a measure, the Fed Oversight Reform and Modernization Act, that would enshrine the Taylor Rule as a key benchmark for monetary policy.”
Pretty straightforward commentary on the FORM Act, right? I mean, if you get a memo from your boss saying, “Employees are allowed to propose their own lunch hour, but anyone proposing a bloc different from 11:30am – 12:30pm must provide Human Resources with a detailed justification for departing from this time frame,” then your co-worker would quite reasonably conclude, “They are setting 11:30am – 12:30pm as the benchmark for lunch breaks.”
But Scott Sumner likes the FORM Act–it’s a move in the direction toward a “discretion-free, let-the-markets-target-NGDP-growth” rule–and so he doesn’t want anybody criticizing it. So in response to Kockerlakota’s statement, Sumner wrote:
Unfortunately, Kocherlakota is flat out wrong about the recent House bill, it does not “enshrine the Taylor Rule as a key benchmark for monetary policy”. Not even close. It asks the Fed to come up with an explicit monetary rule. I suggest NGDPLT, target the forecast.
Notice that Sumner didn’t merely say, “I quibble with such a strong term as ‘key benchmark.'”
No, Sumner he said it’s “not even close,” and that all the bill does is ask the Fed to explicitly say what its rule is. If you didn’t go read the bill yourself, and relied on Sumner to tell you what it says, you would be horribly misinformed.
Now those of you who think Bernanke was too tight, go ahead in the comments and tell me, “Come on Bob, all Scott is saying is…” But when Krugman does stuff like this, and I call him out on it, most of you give me a high-five.
Last thing: Part of the reason I’m making this point is that I’m going to soon review Scott’s book on the Great Depression. I’m sure it will be a fine piece of scholarship, and will present all sorts of evidence that others were too busy/lazy to research. But I am expecting that I will often have to go dig up the original sources on some key issues, rather than trusting Scott’s paraphrase of what “it means.” This episode with Kocherlakota is a good example of why I feel I have to do that.