Contradicting the Ghost of Sumner Past
Poor Scott has been worried that I’m forgetting him with my running series on David Beckworth. But I couldn’t do that to the most prolific Market Monetarist blogger! So two quick observations on his recent posts. (And barring a marathon Euchre tournament, I’ll do Step #3 in my Beckworth series tonight.)
==> In his most recent EconLog post, Scott complains of his fellow economists who “lack an imagination.” In particular Scott writes: “I often find it hard to even have a conversation with my fellow economists. Sometimes their views on “scientific” methodology are so narrow that any claim that doesn’t fit some arbitrary mathematical model is ruled out of order.”
I agree! Now Scott was talking about behavioral economists, but there are money/macro guys guilty of this sin, too. For example, I know a guy who says that if your analysis of an economy dealing with 330 million people can’t be reduced to two lines intersecting on the x-y plane, then it’s bunk. How would you feel about a heart surgeon or car mechanic with this approach?
==> You think I’m kidding, but I’m being serious: I also totally agree with Scott’s second-last post at EconLog, titled, “The Fed doesn’t have a magic wand.” Scott wrote:
Here are the monetary base and interest rates on August 1, 2007:
MB = $855.960 billion, fed funds rate = 5.25%
And here is the same data on April 9, 2008:
MB = $855.411 billion, fed funds rate = 2.25%
Why did interest rates fall sharply? Perhaps one is entitled to say the Fed caused rates to fall, in the very limited sense that some counterfactual policy would have produced a different path for interest rates. But one is not entitled to also call that an expansionary monetary policy, even though expansionary monetary policies do in fact sometimes cause interest rates to fall. [Formatting in original.–RPM]
Again, I love it. But not just for its own sake, but because with some minor tweaks I can apply the above-quoted stance from Scott to help out with my dispute with a certain Market Monetarist. Watch how I can make totally plausible tweaks to spit out an analogous view:
Here are the monetary base and NGDP levels on August 1, 2007:
MB = $855.960 billion, NGDP = $14.6 trillion
And here is the same data on August 1, 2009:
MB = $1,677.1 billion, NGDP = $14.4 trillion
Why did NGDP growth fall sharply relative to the previous trend? Perhaps one is entitled to say the Fed caused NGDP growth to fall, in the very limited sense that some counterfactual policy would have produced a different path for NGDP. But one is not entitled to also call that a contractionary monetary policy, even though contractionary monetary policies do in fact sometimes cause NGDP growth rates to fall.
It’s the same thing as Sumner’s view, right?
Something something I can understand how it would have appeared that way, something something here’s how it is different, something something your confusions, something something I’m entitled, not you, so there.
Your rephrasing of Scott’s words simply use similar terminology to say something that Sumner would clearly reject.
Is the point of your post simply that similar words can be used to say different things and that depending upon your assumptions and definitions some of these things will be “true” (that is: consistent with your definitions) and others not ?
If you believe that falling NGDP rates are what defines contractionary monetary policy then obviously you are not entitled say that a period of falling NGDP “was not contractionionay monetary policy” as it would contradict your definitions. But using the same definition you are also not entitled to say of of a period of falling interest rates that also accompanied falling NGDP that it was “expanionary monetary policy” as it would also contradict your definitions.
I get that you don’t like defining monetary policy in relation to the effect it has on NGDP, but I’m not sure that these recurring posts on the theme of this definition really constitute a critique of Market Monetarism.
Transformer I’m not trying to be a pain, but I have to say it amazes me that you can’t at least see why *I* think the second half of this post is so devastating. Don’t you see how Scott’s treatment of people who think the Fed must’ve “cut interest rates” could quite equivalently be used to say that the Fed didn’t cut NGDP growth? In particular, Scott’s whole raison d’etre of blogging is that the Fed should be responsible for the outcome, so long as it could’ve done some counterfactual policy path. And yet when discussing interest rates he says, “Perhaps one is entitled to say the Fed caused rates to fall, in the very limited sense that some counterfactual policy would have produced a different path.”
The “in the very limited sense” in the above quotation is 100% exactly the reason Scott started his blog. He wants the profession to adopt for NGDP growth what he dismisses as “in the very limited sense” for interest rates.
I’m trying to understand your point. I’m guessing its something like:
“Sumner thinks that the fed has total control over NGDP – and that all falls in NGDP are caused by the fed. By extension he must also believe that the fed must have total control over interest rates , and all falls in interest rates are caused by the fed
Therefor for him to say – ‘Why did interest rates fall sharply? Perhaps one is entitled to say the Fed caused rates to fall, in the very limited sense that some counterfactual policy would have produced a different path for interest rates.’ is absurd, as clearly the fed must (in Sumner’s model) also have caused rates to fall.”
Is that correct ?
If so, then:
1. Even if the fed has control over interest rates this doesn’t make all periods where the fed rates fall periods of “loose money” if NGDP falls despite the rate falls. This is a constant theme with Sumner.
2. The natural rate of interest may fall due to things not immediately under fed control. If it responds by cutting the fed rate too little, or expanding the monetary base too little to stop NGDP falling then this is still tightening relative to the change in the natural rate. This is the point I take him to be making in his post.
3. The use of the phrase “very limited sense” does not mean that the fed could not have caused interest rates to be different (hence the “counterfactual policy would have produced a different path.” bit), but simply is meant to distinguish the forces that caused the natural rate to fall (outside the fed’s control) , from the fed’s (inadequate) reaction to these forces.
That is definitely not what Murphy is saying.
A key phrase Sumner made that you may want to think about more is “But one is not entitled to also call that…”
Sumner says that just because rates fall one is not entitled to say that is expansionary monetary policy. Within his model that is 100% consistent.
Bob rewrites his words to say “just because NGDP falls one is not entitled to say that is contractionary monetary policy.”. This is totally inconsistent with Sumner’s model.
Bob’s beef seems to be the us of the phrase “Perhaps one is entitled to say” in the context of the fed controlling interest rates – but I think that reflects a failure to distinguish between the natural rate and the fed funds rate.
Transformer, you are rewording what Sumner actually said to make it different from what he actually said.
What Sumner wrote, that Murphy replied to, is not merely “falling interest rates does entitle one to say monetary expansion has occurred.”
If that was all that was said, then you would be right. But…
The first idea is that the Fed caused rates to fall, which can be regarded as possible “in the limited sense” that the FOMC could have acted differently such that interest rates did something else.
OK, then by that LOGIC, we can say although the Fed cut NGDP in the limited sense that it could have made NGDP change in some other way, we are not entitled to call the cut in NGDP “contractionary.” We would in this framework only be “entitled” to say the Fed could have made NGDP change in some other way, period.
If this merely nothing but a statement of definition, doesn’t it strike you as a little strange that Sumner would write a whole post full of words and phrases purporting to show some lofty theoretical consideration, when all it really is, according to what you are saying here, is “I define monetary policy in terms of NGDP”?
It would be like your responses here on this blog to be met with Murphy saying nothing but “Transformer, all your points are moot, because I am really just defining expansionary monetary policy in terms of something other than NGDP, namely X.”
Obviously Sumner is making a theoretical relation claim, and Murphy identified an antinomy within that. For you to say “Sumner would clearly reject that statement” only reinforces the point Murphy made.
“Your rephrasing of Scott’s words simply use similar terminology to say something that Sumner would clearly reject.”
It is not merely similar “terminology” though. It is using identical logic. If what Murphy said is to be rejected, then so would Summer’s statement, since it is using the exact same logic.
Yeah, I’m not sure why this isn’t obvious.
Do you wish to argue for the existence of the liquidity trap?
Ryan, do you wish to argue that the only possible variable that affects the level of NGDP is action by the Federal Reserve? You really don’t get my point here? Scott didn’t say, “The Fed can’t perfectly control interest rates.” Instead he gave a numerical example where the Fed reduced monetary base, and yet interest rates fell, to drive home that stuff in the market could affect interest rates too. Thus it was goofy to say “the Fed cut rates” in that example.
So by the same token, if I give an example where the Fed doubles the monetary base and NGDP falls, it should be goofy for anyone to say “the Fed cut NGDP growth.” And yet that’s Scott’s whole purpose for blogging, to get us to talk like that.
Do you understand the example in the context of the post? He’s simply making the same point as Hummel does here: http://www.econlib.org/library/Columns/y2013/Hummelinterestrates.html
If the central bank began targeting an interest rate distant from the market, we would fly off in extreme price deflation or extreme price inflation in short order. That’s it. It can’t shake a magic wand to make that fact go away.
Regarding my troll question, it’s because I can interpret your position in one of two ways. One, you think Sumner thinks the Fed can wave a magic wand and make it so the quantity theory of money always holds, which isn’t the case, and is a straw man many times over. The market monetarist position is that the central bank ultimately has control over these nominal variables, even if the quantity theory of money does not mechanistically hold. But if you don’t think the central bank has control over these nominal variables, that is theoretically equivalent to the liquidity trap. So since you would not argue a very superficial criticism of market monetarism (that it believes QTM always and everywhere holds), I am forced to conclude you are a theoretical proponent of the liquidity trap.
I disagree, the market rate for credit cards is about 20%, the market rate for a business overdraft is about 10%.
Market rate for a rock solid mortgage with better than 50% downpayment is somewhere between 3.5% and 4.0% but the very non-market overnight bank rate is 0.25% and that’s been the case for years without extreme price inflation.
Why? Cantillon effects of course… most people don’t get offered the rates than banks get offered, because it operates as a cartel, not as an open market. This is NOT a matter of risk, because once a mortgage is paid up to 50% or more there really is no risk. However, it IS a matter of the Fed offering special privilege to some, and not available to others. It’s nonsense to talk about “the” interest rate… there’s your interest rate, my interest rate and their interest rate.
Ryan Murphy:
“But if you don’t think the central bank has control over these nominal variables, that is theoretically equivalent to the liquidity trap.”
No it isn’t. One can claim the Fed does not have laser like precision control over interest rates, or NGDP, or any other singular nominal variable, AND claim without contradiction that the Fed could “make prices and interest rates rise by printing trillions of new dollars regardless of where interest rates are now.”
Your “two choices” are fallacious. One can reject both without any issue.
Boo.
Seasonally profound title, Bob.
None of economics achieves strict adherence to empirical scientific method, because you can never build a control experiment running a second world in parallel with the first as a reference.
Thus, every statement depends on some basis of presumptions. If you want to compare this year with last year, you presume that you know all the causal factors that have changed (you don’t really know that). If you want to compare one country with another country you presume you can allow for any cultural or structural differences (but how?)
Sumner, two days ago, wrote to me in comments that 1) he does not understand how the Fed setting interest rates below the natural rate could ever create malinvestment or a crash; and that in his opinion the exact opposite happened, i.e. he believes the 2008 crash is caused by the Fed setting interest rates above the natural rate, in 2007 and 2008. So why are we discussing this terminoology issue about NGDP, when Sumner is more than willing to stop talking NGDP and express his theory in terms of interest rates, so as to directly contradict ABCT?