18 Feb 2016

Tyler Cowen Joins Murphy in Sumner Bashing

Market Monetarism, Tyler Cowen 31 Comments

[UPDATE at the end.]

I really liked this recent post from Tyler, where he writes (all formatting in original):

[Tyler Cowen quotation:] To get more specific yet, I am very much a fan of the ngdp rule approach to monetary policy, but I am uncomfortable with one strand in market monetarist thought.  I worry when low ngdp growth is blamed for low growth rates of real gdp.

Ngdp is an accounting summation, so I still want to know the real cause of the slower growth in real gdp.  Let’s unpack at the most basic level whether the active cause was Fed tightening on the nominal side, or instead a negative real shock, followed perhaps by excess Fed passivity.  That is one reason why I think of it as information-destroying to cite ngdp as a cause of developments in rgdp.

More fundamentally, if a central bank is doing anything close to price inflation targeting, mentioning low ngdp and low real gdp growth rates is simply citing the same fact twice, or almost so, rather than explaining one variable with the other.  Angus once called the ngdp invocation a tautology; I’m not sure that is the right terminology, but still I wish to look for independent, non-ngdp measures of monetary policy when deciding how to allocate the blame for a recession, to real or nominal factors.

For further context, I was disquieted by some recent Lars Christensen posts on monetary policy and the American economy.  I read him as “revving up” to blame a possible recession on tight U.S. monetary policy.  I don’t think he provides much evidence that money is tight enough to cause a recession, other than citing the deterioration of some real variables.

I would encourage market monetarists to define — now — how tight or loose monetary policy really is.  Then stick with that assessment, based on whatever variables you consulted.

A year from now, I won’t count it if you say a) “well, ngdp growth is down, money was tight, therefore real gdp growth rates fell.  Tight money must have been the problem because low rates of ngdp growth are tight money.”

I have been making this point for years. For just one example, back in 2012 I wrote:

[Begin Murphy quote from 2012:] There is something very very disturbing about Scott’s choice of NGDP as the metric of monetary policy. In particular, Scott thinks it’s obvious that if NGDP isn’t growing, then the Fed isn’t doing enough. The problem here is that NGDP is composed of price inflation and real GDP, and real GDP growth is sluggish when “the economy is bad.”

Consider this analogy. It’s a little unfair to Scott, because he has a plausible story to explain how nominal levels affect real factors, but it gets my point across quickly:

Suppose there are a bunch of doctors trying to get a guy to wake up from a coma. They have already pumped him with unprecedented amounts of a new drug, that the producer says should cure comas. Yet for some reason, the guy is still laying there, comatose.

Dr. DeLong says, “Well, I guess we just need to stimulate his body some more. His heart rate is too low, so clearly we haven’t done enough. In the last four years of this coma, we’ve already pumped in 200 mLs, which is twice as much of the drug as we’ve ever administered to another patient over a lifetime. Still, it’s not enough–clearly–so I say we are even more liberal with our treatment.”

Dr. Murphy says, “DeLong no way! That drug is poison. What more evidence do you need that it won’t work? Let’s stop injecting the drug, and let the guy’s body clear that stuff out. Maybe he will recover if we allow it time.”

Dr. Sumner says, “Of the two of you, Murphy is dangerous–his advice would kill the patient–while DeLong is just looking at it wrong. Contrary to Dr. DeLong, the patient has been suffering from you sucking those nutrients out of his body. I don’t know why you guys have been engaged in this policy of starving the patient of this drug. My measure is not to look at the volume of liquid you have injected into his body, but rather at his heart rate. Right now his heart rate is the second lowest I’ve ever seen in a patient, so clearly you have had a stingy medication plan. Now don’t get me wrong, if you pump in the drug and then the heart rate starts racing at 250 beats per minute, clearly you’ve pumped in too much. But right now, the heart rate is consistent with a comatose patient, so clearly you haven’t pumped in enough. Your measures relying on volume of liquid are obsolete. I have an analogy with an ocean liner if you don’t believe me.”

I had another really good post on this, where I had a fictitious person targeting a ratio and somebody else targeting the numerator, but I can’t find it now. I just remember it because Steve Landsburg in the comments said something like, “God I wish I had come up with that line!” A guy remembers a compliment like that.

UPDATE: In his response to Tyler, Scott writes: “Let’s start characterizing unstable NGDP expectations as “reckless monetary policy shocks.” It doesn’t matter if it’s true or not, it’s useful.”

No, let’s not. Let’s use descriptions that correspond to the truth. I can’t believe this is where we are.

31 Responses to “Tyler Cowen Joins Murphy in Sumner Bashing”

  1. Major.Freedom says:

    “No, let’s not. Let’s use descriptions that correspond to the truth. I can’t believe this is where we are.”

    Sumner’s main flaw isn’t his economics, it is his epistemology. That is the corruption which causes the insane statements he makes, e.g. “We can’t say the Fed was inflating the money supply to a high degree during the 1920s because they weren’t measuring M3 back then”, and ” Truth us what your peers let you get away with”, and “Back when I started blogging I would purposefully lie but I soon learned I could not do that, so I stopped” (or did he?), and “My favorite philosopher is Rorty”.

    That cringe you experience when you read Sumner’s posts is a result of his brain dead philosophy.

  2. E. Harding says:

    “I worry when low ngdp growth is blamed for low growth rates of real gdp”

    -Boo.

    “I worry when low ngdp growth is blamed for low growth rates of real gdp”

    -Whaa?

    “That is one reason why I think of it as information-destroying to cite ngdp as a cause of developments in rgdp.”

    -Cowen doesn’t understand NGDP(!)

    “More fundamentally, if a central bank is doing anything close to price inflation targeting, mentioning low ngdp and low real gdp growth rates is simply citing the same fact twice, or almost so, rather than explaining one variable with the other.”

    -True. Perfect price inflation targeting will result in slow RGDP growth causing slow NGDP growth. But that doesn’t necessarily mean the RGDP shock couldn’t be helped with faster NGDP growth, it just makes it more likely.

    “I would encourage market monetarists to define — now — how tight or loose monetary policy really is.”

    -Aggregate nominal expenditures on gross domestic product, as well as market expectations of such.

    “A year from now, I won’t count it if you say a) “well, ngdp growth is down, money was tight, therefore real gdp growth rates fell. Tight money must have been the problem because low rates of ngdp growth are tight money.””

    -Boo. Tyler has a shred of a point here. If inflation rose to 12% and NGDP growth slowed to 1%, it would not be reasonable to blame most of the recession on slow NGDP growth. But that’s not the situation we’re facing today.

    Murphy, your 2012 post confuses real and nominal GDP. Poor show. Scott doesn’t make that confusion. Scott doesn’t believe 1990s Russia and 1980s Brazil had tight money.

    “No, let’s not.”

    -No, let’s. Target the numerator. And I might make a video of that someday.

    • E. Harding says:

      That “Whaa?” was supposed to be in response to

      “Let’s unpack at the most basic level whether the active cause was Fed tightening on the nominal side, or instead a negative real shock, followed perhaps by excess Fed passivity.”

    • Major.Freedom says:

      “But that doesn’t necessarily mean the RGDP shock couldn’t be helped with faster NGDP growth, it just makes it more likely.”

      Please explain how printing more pieces of paper brings about more real goods, and why NGDP manipulation by the Fed would have no adverse impact on RGDP such that “shocks” are observed.

      • E. Harding says:

        A positive NGDP shock helps remove the problems of sticky prices and wages. It helps get the economy closer to equilibrium.

        Tired of my email being blocked.

        • guest says:

          You can’t help the economy get closer to equliibrium because equilibrium is based on what consumers want and can pay for.

          Production is *for* consumption.

          Wages are sticky because employees are still trying to get blood out of stones: the place they’re working at doesn’t have the consumer demand to back its attempts at profit given the current wage demand.

          Solution: The worker should work for an employer that has aligned his production processes according to consumer demand. Problem solved.

          Since consumers, and not producers, determine what will be profitable to produce, producers are at the mercy of changing consumer demand – and therefore so are the employees that work for them.

          The employees are additionally at the mercy of the employer acting in his capacity as a consumer.

          The goal of production is to make a profit off of consumers – that’s the only reason the business exists. That means that it only makes economic sense for an employer to hire someone that will increase the employer’s profit – that’s the only reason to hire someone.

          Laborers aren’t competing with employers or consumers, as if they are classes.

          Economics is about satisfying consumer preferences. The consumer does this on his own all the time when he feels unease and believes he can alieviate it. The producer can profitably do this by trading with the consumer. The laborer can indirectly do this by lowering the costs of production for employers.

          Each of these kinds of people have one goal if they want to make a profit: satisfy consumer preferences.

          In short, sticky wages are a sign that workers are not aligning themselves with consumer preferences. Consumers don’t want their employers’ goods enough to justify a higher wage for them.

          That’s not a problem to be solved, it’s information that can be used to make a profit.

          • E. Harding says:

            Or you can just fool workers into stopping trying to get blood out of stones via the money illusion.

            • guest says:

              Transfer to them the illusion of wealth and hope others will fall for the illusion, too?

              The problem with that is that you never can tell where the threshold for losses are for those who are holding older printed money.

        • Major.Freedom says:

          At what cost?

          Just becauze wages don’t instantly adjust to changes in demand, that does not mean there is a net gain to printing more paper to keep existing labor conditions intact.

    • RPLong says:

      “-Cowen doesn’t understand NGDP(!)”

      E. Harding, I don’t know how old you are, but I think I am old enough to offer you a modest piece of advice: When you claim that the author of economics textbook doesn’t understand NGDP (by implication, “as well as E Harding, internet guy extraordinaire”) you don’t do yourself or your argument any favors.

  3. E. Harding says:

    My other email’s blocked. Again. I’m sure this is an accident.

  4. Levi Russell says:

    This post linked (indirectly) by Cowen shows the utter inanity of Market Monetarism and Keynesian theory. Angus is an insightful dude.

    http://mungowitzend.blogspot.com/2014/08/the-tools-of-ignorance.html

    • E. Harding says:

      Poor post. He has a trace of a point, but he can’t seem to even try to explain the evidence for NGDP shocks causing RGDP problems. He’s attacking a wood man.

      • Major.Freedom says:

        How is it poor.

        • E. Harding says:

          He doesn’t attempt to argue that many seeming demand shocks are actually supply shocks behind the scenes; he just assumes some might be. The former might be a reasonable and good thing to attempt; the latter’s lazy.

          • Major.Freedom says:

            If there is a change in total spending, it is never a change in spending on everything equally. It is always unequal. This is extremely important, and yet goes ignored by the monetarists, because it cannot be forced into a crude aggregated concept like NGDP.

            Inflation has unequal, heterogenous effects on real productivity. Asking for more or less NGDP is actually asking for a different distribution of spending and a different capital structure, regardless of whether there is a total increase or decrease in “output” or “employment”. That is what market monetarism fails to allow anyone to understand.

  5. Transformer says:

    The key assumption behind Market Monetarism is that you can get “demand shocks” that can be corrected for by good monetarist policy and “supply shocks” that cannot be corrected for, but which good monetary policy can minimize the effects of.

    I think the disagreement between Scott and Tyler is not on monetary policy in either scenario (they both appear to support NGDP targeting) but on the the issue of how to categorize supply shocks where monetary policy fails to minimize the effect. Scott would call that monetary policy failure, while Tyler would say it was a supply side shock accompanied by sub-optimal pokicy

    As far as I can see this is just a matter of definitions of what “supply shock” and ” Monetary policy failure” mean.

    Bob appears to think that “demand-shocks” are impossible. The unhampered market would adjust for them instantly. All shocks are supply side shock (perhaps caused by bad monetary policy – (ABCT) ).

    I am missing why Bob is siding with Tyler here (beyond the fact that Tyler is criticizing Scott). If Scott and Tyler were doctors they would both diagnose the same treatment but may describe the symptoms differently , while Bob wouldn’t even recognize the possibility of the disease.

    • E. Harding says:

      +1, Transformer. You’re very perceptive here.

      • Major.Freedom says:

        He’s not perceptive at all about Murphy’s position.

        This claim:

        “Bob appears to think that “demand-shocks” are impossible. The unhampered market would adjust for them instantly. All shocks are supply side shock (perhaps caused by bad monetary policy – (ABCT) )”

        Is the same old tired straw man, and in addition betrays a basic understanding of ABCT. First, free market theory does not assert that prices and wage rates adjust instantly. In no free market text is this proposed. Second, even if there is a “demand shock”, this does not imply that the solution is for a government institution to attempt to “correct” by inflation or deflation according to some silly anti-market rule pulled out of some market monetarist’s keester. No more than a “supply shock” implies that the government should attempt to direct more resources to it to fix.

        The problem is the lack of economic calculation in the production of money itself. In other words, the lack of a market in money. The problem is not wage rates that don’t instantly fall in a world of persistent inflation. That is like blaming an alcoholic’s morning after headaches on sticky recoveries and not enough alcohol ingestion. It would be like telling the doctor “You silly doctors, talking as if alcohol poisoning is instantly cured by cold turkey. If you had any pragmatic sense, you would recommend whatever doses of alcohol are necessary to ensure that the patient experiences 5 headache points of growth of pain each day. Why 5? Because the doctor cannot NOT keep affecting the patient. Even not giving further doses for a day to the patient is doing something. Clearly the doctor must administer alcohol to the patient. Silly Austrians.”

        The problem is that you and Transformer cannot even recognize the disease because you refuse to understand how an anti-market monetary system is itself the disease. That it cannot be salvaged by the right anti-market rule of money printing. You only use sticky wages as an excuse, the same say a twisted doctor would use a patient’s withdrawal symptoms as an excuse.

        As Mises proved way back in the 1910s, there is no such thing as different economic laws for money in the “macro” sphere and in the “micro” sphere. You people are misled, confused, and peddling socially destructive propaganda, no matter how much you believe you’re helping. You’re not helping.

        There is absolutely no rational basis behind the belief that because wage rates and prices don’t instantly adjust to every change in demand, that this is sufficient grounds to not only attack the free market via state aggression, but to pretend you actually have a sound intellectual case for doing so. You’re peddlers of socialist propaganda, nothing more. Nothing new. I won’t even bother explaining that what you believe in is a derivative of Keynesianism, which is itself a cover for Marxism, which is a neurotic psychological disorder projected into a world myth.

        • Transformer says:

          Perhaps it was an overstatement to say ‘Bob appears to think that “demand-shocks” are impossible. The unhampered market would adjust for them instantly’. I think it would be more accurate to say that he probably thinks that what MMers would classify as ‘demand shocks’ are really just changes in market condition that an unhampered market would adjust for efficiently and quickly but not instantaneously – certainly not a sickness to be treated in anyway.

    • guest says:

      “Bob appears to think that “demand-shocks” are impossible.”

      All “demand shocks” are really just the market correcting for malinvestments.

      The reason demand shocks are impossible is because production is *for* consumption; You’re not supposed to produce for non-existent demand.

      Demand, therefore, is not a problem to be corrected.

      Only production can be wrong; To say otherwise is to say that consumers are demanding the wrong things with their own money.

      Economics is about one thing: satisfying consumer preferences. Consumers have to want to buy what is being produced for that business to be profitable.

      • E. Harding says:

        “All “demand shocks” are really just the market correcting for malinvestments.”

        -Were you aware of history, you’d know just how false that was.

        Even MF has a more nuanced view.

        • guest says:

          “-Were you aware of history, you’d know just how false that was.”

          Were you aware of logic, you’d know I’m right.

          Consumer demand is the beginning of all economic activity.

          It logically follows from this that economic problems never come from demand.

          (Production, itself, happens so that goods can be traded for money which will ultimately be used to buy consumer goods, even if it’s invested to increase one’s capacity to consume in the future.)

    • skylien says:

      Demand shocks are nothing more than an unsustainable credit structure usually build/enhanced by “good” monetary policy, which can be propped up by more “good” monetary policy, so that an even bigger demand shock at a later stage needs to pe propped up further with more “good” monetary policy aka more extreme measures.

      What is more extreme? Just like “suppressing” cash use…

      • E. Harding says:

        No demand shocks need ever happen. Ever.

        • skylien says:

          Largely right (I don’t really like words like ever, always, never etc), just stop the monetary policy crazyness..

          😉

  6. skylien says:

    BTW: Really nice articles on your new Lara Murphy HP.

    Is it planned to be able to comment on the articles in the future?

    • Bob Murphy says:

      I don’t think so skylien, I have enough trouble managing the comments here.

      • skylien says:

        OK, makes good sense.

  7. AD says:

    If you start one of your extended analogies by saying it’s “unfair”, you should probably delete it and talk about the actual arguments. No wonder these debates never get anywhere.

  8. Capt. J Parker says:

    “I would encourage market monetarists to define — now — how tight or loose monetary policy really is.”
    Very good point. Saying that the only meaningful measure is the future path of NGDP might be correct but it regrettably makes market monetarism non-falsifiable.

    But, while we are at it I would encourage ABCT advocates to define — now — how tight or loose monetary policy really is. Not whether it is getting looser or tighter but, where it is relative to where ABCT says it should be. ABCT might be correct, but if it, like market monetarism, can’t tell us where we are now relative to where we should be then it too is non-falsifiable.

    I think we’ve all had plenty of Keynesian non-falsifiability. I notice Dr. Krugman hasn’t mocked the “permanent stimulus” hawks in a while.

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