Scott Sumner Restores My Faith in Economists
Wow. I am totally blown away by Scott Sumner’s blog, The Money Illusion. He is a Chicago PhD who specializes in the gold standard and the Great Depression. I don’t even necessarily agree with his overall views, but WOW his posts are really really good. It’s what I would have expected from nerdy academic economists before I actually saw the real world buffet available for sampling. People have been linking to him a lot, but for some reason I never clicked on it until DeLong linked to him recently.
In particular, check out this post on Friedman and Schwartz’s success with their Monetary History. It is a very long post and you need to just sit down and read it (if it interests you), but here is an excerpt to show why I am so impressed with this guy:
The difference between my view and Krugman’s view cannot be resolved through econometrics, it is a complex question of interpretation, including how one thinks about the relevant counterfactuals. For instance, for me the relevant counterfactual is what would have happened if the Fed had abandoned the gold standard as soon as it began to constrain their policy. We know that after they did so in 1933, NGDP rose very rapidly. So what Krugman views as evidence of monetary policy ineffectiveness (say the failed 1932 open market purchase program), I view as merely reflecting the constraints of the international gold standard. On the other hand Krugman could point to recent liquidity traps in Japan and the U.S., which occurred under fiat money regimes. And you already know my views on those episodes.
One of the things that has most puzzled me about recent events is that many of the very same economists who were persuaded by F&S’s evidence, most notably Ben Bernanke, now seem strangely passive in their evaluation of current Fed policy options. And almost none blame the Fed for the rapid decline in NGDP that began last September. So does that mean Krugman wins the argument? More likely it means both Krugman and I will lose in the short run.
