22 Aug 2011

More Evidence That Scott Sumner Is Insane

Economics, Federal Reserve, Inflation 22 Comments

For a while I have confidently asserted that economist Scott Sumner is insane. (Believe it or not, Scott himself understands why I say this as a compliment. I’m not saying he’s flattered, mind you, just that he gets my weird sense of humor.)

Today I will not talk about his views that our current recession is largely due to Ben Bernanke’s tight-money policy, or that we didn’t go through a housing bubble. Instead, I will quote from two recent Sumner blog posts that need little comment from me to establish the insanity of our man in Bentley.

First, here’s Scott in a post titled, “Even if I’m wrong, I’m right,” showing that we dare not try to paint him into a reductio ad absurdum, because he’s already done it himself. Some key excerpts:

You might wonder how I can sleep at night knowing my policy proposal, if enacted, might simply lead to higher inflation, without creating any jobs at all. My answer is very simple. Even if I knew that dismal outcome would occur, I’d still favor monetary stimulus. I believe steady growth in NGDP is optimal, even if fluctuations in NGDP don’t affect employment. But let me explain my reasoning using the more familiar inflation targeting criteria.

As you know, the Fed has a dual mandate, stable prices and high employment. They’ve generally assumed that stable prices mean roughly 2% core inflation, for complicated reasons. And core inflation has been around 2% during recent decades…

But whatever your views, the Fed is in a position where if it does more monetary stimulus in an attempt to speed the recovery, and totally fails to create a single new job, the policy will still be smashing success. It will still move core inflation closer to its 2% target.

And that, my friends, is why I can sleep comfortably at night. I am proposing a policy that literally cannot fail.

I leave it as an exercise for the reader to point out one or two possible problems with the above argument.

Next, here we have Scott giving his general view of world events (and knowledge of predictions in the social sciences):

In 1989 Francis Fukuyama made a bold prediction. The world would become increasing democratic and market-oriented. Other political models would gradually wither away. He called this “The End of History.” Here are a couple facts about his prediction:

1. It would be difficult to find any other prediction in the humanities or social sciences that has proved more accurate. There are many more democratic countries than in 1989, and policy has become much more market-oriented in most countries.

2. When intellectuals discuss his prediction today, 99% assume it failed to come true. Indeed most utter the phrase “the end of history” with undisguised contempt.

The juxtaposition of these two realities has made a deep impression on me. How can we explain why so many brilliant people have failed to acknowledge Fukuyama’s prescience?

In the comments I asked Scott if he thought the US in particular was more market-oriented now than in 1989. Like a good believer in the Efficient Markets Hypothesis, Scott wouldn’t answer the question himself, but dished it off on the bond market Heritage Foundation.

22 Responses to “More Evidence That Scott Sumner Is Insane”

  1. Rick Hull says:

    Quite the contrarian, isn’t he?

    I’m not seeing the link between inflation and jobs. I always thought the mandate of Full Employment was putting the cart before the horse, in terms of improving quality of life / satisfying human preferences. After all, USSR had full employment.

    i.e. when you have less than full employment, it is a smell — a sign that something may be wrong. But to chase full employment may only address symptoms and completely ignore causes.

    I think it it should be no problem to construct a counterexample whereby monetary stimulus both fails to create a single job and wreaks havoc on an economy via inflation. I need to think this through some more, though.

    I appreciate Sumner’s take on Fukuyama, but I wonder what FF himself would say? I think FF would tend to agree more with his critics than Scott.

  2. Bob Roddis says:

    I fail to see central bank money dilution as “democratic” or “market-oriented” except to the extent that “democratic” means the unspoken dilution of private property rights and the ability of one group in society to employ the government to loot other citizens not a member of the governing group.

  3. Silas Barta says:

    Scott_Sumner has truly become a case of lost purposes: inflation is no longer a means to an end for him, but the end itself. Apparently, if no good came of it, and no threat persisted in its absence, he would still want to artificially induce 2% inflation. And 5% NGDP growth.

    Why 2 and 5? Why not 5 and 2? Or 10 and 10? Because he got a divine vision? More likely, because historically, those numbers have _correlated_ with economic goodness. And we all know how realiable that kind of reasoning is…

    • Brent says:

      Remember that (historically) part of the reason for 2% is to leave the Fed policy-making wiggle room in case they have to lower rates to fix the economy… given the current predicament, that should leave people very uneasy.

  4. Bill Woolsey says:

    5% money expenditure growth because that is the trend of the Great Moderation.

    2% inflation because that is 5% – 3%, the trend growth rate of the Great Moderation of
    money expenditures minus the trend growth rate of the productive capacity of the economy.

    Sumner is open to shifting to a 3% growth rate for money expendituers and zero inflation,
    just not right now–in the aftermath of banking problems.

    Like everyone who favors keeping money expenditures on a stable growth path, reduced productivity
    leads ot higher inflation.

    And, by the way, a fixed quantity of money has a similar consequence when there is a decrease in
    productivity. Real income falls, the demand to hold money falls, given the quantity of money, the
    purchasing power of money falls. As the price level moves from a lower to a higher level, there is inflation.

    What is sad is that this isn’t common knowledge amoung “hard money” advocates.

    • Bob Roddis says:

      [R]educed productivity leads to higher inflation.*** What is sad is that this isn’t common knowledge among “hard money” advocates.

      Wow. When there’s less stuff around, it’s scarce and costs more! Who knew? I guess that’s what I get for taking so many Bob Murphy and Tom Woods courses at the Mises Academy.

      • Bill Woolsey says:

        And so, if there “less stuff around” then you will expect a higher price level and shifting to that will involve inflation.

        And so, you shouldn’t be griping about inflation during recession, because that is what should happen.

        Recession–less stuff around.

        Inflation–higher prices.

        Recession caues inflation–unless there is something going wrong.

        All that you would need to do is grasp growth paths, and you would be on the way to quasi-monetarist wisdom. (A lower growth path of real output, then a higher growth path for prices, and going from a lower to a higher growth path of prices is a transitory increase in inflation.)

        My view is that about 1/2 of the reduction of output below trend is due to supply side factors and half is due to an excess demand for money/a quantity of money that is too low/prices and wages that are too high..

        Fixing the monetary disequilibrium would result in both more production and employment and higher prices (and not higher wage rates, though more total wages paid since more people are working.) Real wages would be lower.

        The higher prices aren’t a good thing really, but just an implication of reduced productivity. The lower real wages are a bad thing, but an unfortunate side effect of reduced productivity.

        The increase in output and employment due to correcting the monetary disequilibrium would be a good thing.

        I don’t really agree with Sumner’s apparent endorsement of the Fed’s dual mandate. On the other hand, stable growth of money expenditures does tend to avoid reductions in employment or increases in the price level due to monetary disequilibrium. Which is why it is a good idea!

        And price level targeting implies causing monetary disequilibrium to reverse changes in the price level to offset the impact of changes in productivity. That monetary disequilibrium has an adverse effect on employment when there is a decrease in productivity. So, targeting the growth path of money expenditures is better than price level targeting according to the Fed’s dual mandate. Still, I don’t care about the Fed’s mandate.

        The difference between quasi-monetarism and “hard money” or whatever you call this stuff is that quasi-monetarists favor monetary institutions where the nominal quantity of money adjusts when the demand for money changes. The hard money folks believe that the prices and wages should all adjust so that the real quantity of money adjusts to changes in the real demand for money.

        Quasi-monetarists and “hard money” advocates have similar views regarding changes in productivity. Output will rises and the price level will fall in the happy scenario. In the more depressing scenario, the price level rises and output falls.

    • Silas Barta says:

      So it is because those magic numbers have recently correlated with economic goodness, without understanding of the causal factors. Thanks for clearing that up.

      Also, check out the “reply” button.

  5. Yosef says:

    I think Sumner is pretty right about the Fukuyama part.

    Consider first that these days even authoritarian states feel the need to hold elections to give their rule legitimacy. Yes, these elections are often corrupt, but what an amazing victory for democracy that these rulers feel the need to couch their rule in its terms. And then think that as the mentality of elections becomes common, people will then want their elections to actually matter. Case in point was the recent Green Movement in Iran, where people began to say that hey, if we are already going to the voting both maybe it should actually matter. (I wait with baited breath to see the results in Libya, Egypt [especially important to me given my Israeli birth], and Syria).

    Next consider that states like Britain and Greece have chosen to respond to the current crisis with reductions in government and, in the case Greece, privatization and assets sales. This is more market oriented. (I don’t know your view on the Euro, but it does reduce the discretion of individual nations to devalue their currency). Yes, the US has in recent years slipped a bit (surely a blip in history!) but even here we see a strong backlash movement. Last I checked the bailouts are very unpopular and talk of nationalization is a non-starter. Were the “spending cuts” in the debt deal sufficient? Obviously not, but the first step is always to change direction before starting to move, and the directions has obviously changed in the US. The world is by and large moving in market oriented directions.

  6. Robert Fellner says:

    I wish Mises was still around to give these people the intellectual thrashing they deserve.

  7. Adrian Gabriel says:

    Bill Woolsey sounds like a man that loves Fractional Reserve Banking, the very system that got us into this mess. Sadly he needs to study the essential of capital theory. The 1920s is a particularly instructive decade, because then we had expanding money and credit, and a stock and bond market boom, while prices remained constant. As a result, all the experts as well as the politicians announced that we were living in a brand “new era,” in which new tools available to government had eliminated inflations and depressions.

    But the problem is not simply history. There are very good reasons why monetary inflation cannot bring endless prosperity. In the first place, even if there were no price inflation, monetary inflation is a bad proposition. For monetary inflation is counterfeiting, plain and simple. As in counterfeiting, the creation of new money simply diverts resources from producers, who have gotten their money honestly, to the early recipients of the new money to the counterfeiters, and to those on whom they spend their money.

    Counterfeiting is a method of taxation and redistribution from producers to counterfeiters and to those early in the chain when counterfeiters spend their money and the money gets respent. Even if prices do not increase, this does not alleviate the coercive shift in income and wealth that takes place. As a matter of fact, some economists have interpreted price inflation as a desperate method by which the public, suffering from monetary inflation, tries to recoup its command of economic resources by raising prices at least as fast, if not faster, than the government prints new money.

    Second, if new money is created via bank loans to business, as much of it is, the money inevitably distorts the pattern of productive investments. The fundamental insight of the “Austrian,” or Misesian, theory of the business cycle is that monetary inflation via loans to business causes over-investment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real-estate prices are titles to capital goods, there tends as well to be an excessive boom in the stock and real-estate markets. It is not necessary for consumer prices to go up, and therefore to register as price inflation. And this is precisely what happened in the 1920s, fooling economists and financiers unfamiliar with Austrian analysis, and lulling them into the belief that no great crash or recession would be possible. The rest is history. So, the fact that prices have remained stable recently does not mean that we will not reap the whirlwind of recession and crash.

    Furthermore, indeed the misallocation of resources leads to lower productivity and malinvestment which could be perceived as inflation, yet what he needs to understand is the Austrian theory to see that it is simply a misallocation of resources that took place that requires a purely “free market” and natural correction. Resources need to be reallocated to the higher-ordered goods, it is absolutely not necessary to print more money. By Bill stating these idiotic statist concepts, he seems to support a system by which Friedman made himself famous. One where we raise the interest rate, allowing banks to create more money, at every tick up of inflation. DUMB!!!!!!!!!!!!!! The printing of money is inflation, the perception of it on a free market is the Austrian Business Cycle Theory at hand, and the perception of it. Pick up a book by Rothbard some time dude.

    • Blackadder says:

      For monetary inflation is counterfeiting, plain and simple.

      In a 100% gold-backed system monetary inflation would occur whenever someone dug gold out of the ground. Do you think that’s counterfeiting, plain and simple?

      • Ivan Ivanov says:

        “In a 100% gold-backed system monetary inflation would occur whenever someone dug gold out of the ground. Do you think that’s counterfeiting, plain and simple?”

        Yeah, I’d say mining gold and counterfeiting are morally equivalent.
        All that means is that counterfeiting is not immoral. Of course people would say “but if we allowed everyone to print exact copies of currencies, we’d have hyperinflation in no time”. True, but all that means is that paper currencies make poor money, because they can be easily reproduced.

        It’s the advocates of fiat money who say counterfeiting is immoral, but then somehow want to make a special case for allowing the government to do that immoral thing. So it’s their position that is inconsistent and convoluted, and saying “inflation is counterfeiting” merely points that out.

        • Blackadder says:

          Yeah, I’d say mining gold and counterfeiting are morally equivalent. All that means is that counterfeiting is not immoral.

          Then your argument is not with me but with Adrian.

      • Silas Barta says:

        Printing money is trivial, while “printing” new gold takes significant effort per unit injected into the economy. (In computer science terms, mining gold and printing money differ in terms of the “proof of work” they provide. Generating new paper money has difficulty scaling linearly with the amount produced, while gold scales exponentially.)

        So, counterfeiting or not, there is an important difference. The reason printing money is sometimes associated with counterfeiting, even when done by the authorities, is that it produces new money units without adding the same value or “proof of work”, just as counterfeiters lay claim to $X without having produced $X worth of value.

  8. Major_Freedom says:

    So Sumner is a Hegelian inflationist.

    Yup, crazy.

  9. Adrian Gabriel says:

    Blackladder, read this: http://mises.org/daily/4527

    That should answer your question. Murphy answers that quibble under Door #2.

    • Blackadder says:


      I’ve read Bob’s article. It does a good job of pointing out a contradiction in the Rothbardian system (though of course Bob doesn’t put it that way).

      On the one hand, Rothbard is committed to the view that an increase in the money supply leads to suboptimal effects (e.g. a boom/bust cycle).

      On the other hand, Rothbard is committed to the view that whatever emerges from voluntary transactions is by definition optimal.

      Bob’s hypothetical shows that you can’t coherently hold both of these views. You have to choose. Either you give up the economic theory or you give up the moral principle (personally I think they are both wrong, but that’s neither here nor there).

      • David K. says:

        “On the other hand, Rothbard is committed to the view that whatever emerges from voluntary transactions is by definition optimal.”

        Yes, but only in the follwing two senses (see Rothbard’s “Toward a Reconstruction of Utility and Welfare Economics” in Economic Controversies, pp. 289–333, in particular pp. 319–323):
        1. Every voluntary exchange benefits all participants (in the ex ante sense and according to their demonstrated preferences).
        2. No government intervention can be said to increase social utility, since at least one person is coerced and thus harmed.

        This is compatible with the fact that voluntary exchanges sometimes harm third parties. Rothbard’s welfare economics is consistent.

  10. Bill Woolsey says:

    I do love fractional reserve banking–or rather, don’t have any problem with banks borrowing by issuing
    debt instruments that can be used as media of exchange and then matching their borrowing with loans of
    one sort or other–commerical loans, consumer loans, or holdings of bonds.

    I don’t think that malinvestment in the twenties was a serious problem, or more importantly, that there was a need for a significant reallocation of resources in the thirties that significantly reduced the productive capacity of the economy or significantly increased structural unemployment. I think that any such problems were swamped by the massive excess demand for money, or in other words, that the nominal quantity of money was too low and/or the level of prices and wages were much too high.

    The problem with your brief description of the Austrian Business Cycle theory is that you apply a ceteris partibus analysis where the quantity of money increases given the supply of saving, demand for investment, and the demand to hold money. In the real world, all of those things are changing. How they are changing will impact the consequences of an increase in the quantity of money and/or a reduction in the market interest rate.

    However, the most serious flaw in your analysis is that slow, steady growth in money expenditures isn’t the same thing as stablizing the average level of consumer prices. And so, when you roll out the argument against stabilizing the price level without thinking about the differences between a price level target and stable money growth target, you fall into error.

    In particular, arguments that booms can develop without immediately impacting some measure of consumer prices may be true, but what you need to do is argue that a boom can develop without impacting money expenditures on output. While that may also be true, you then need to explain how it impacts the allocation of resources and create malinvestment without impacting the flow of money expenditures on output.

    If we imagine that we start with a regime of a constant quantity of money and in full equilibirum, and then shift to a new regime where money expenditures growth is stable, then it is possible that in the transition, there will be a short run effect on market interest rates that cannot be sustained. If people take those interest rates as persistent, then the growth of money expenditures from nothing to some positive level might involve a misallocation of resources. With money growth stablized, once prices quit falling, then market interest rates would rise, and the malinvestments would be recognized. The productive capacity of the economy would be lower for a time (and perhaps slightly lower permanently,) and structural unemployment would be higher for a time too. As different capital goods are constructed and people are employed producing those and consumer goods, the real economy recovers despite interest rates remaning at a higher sustaintable level. Now, money expenditures are rising and the prices aren’t falling. Market interest rates are the same as under the previous regime. The allocation of resources between current consumer goods and capital goods (and so future consumer goods) is back where it started.

    Trying to contantly hammer every alternative scenario in to an imagined one where the supposed purpose is to permanently lower interest rates and increase capital accumulation leads to error. Ah ha! The real market interest rate is no lower and wealth is no higher. Money expenditure targeting must have failed. Well, it wasn’t supposed to have those effects.

    Now, we aren’t in a situation with a constant quantity of money and so what might happen if we moved to stable money expenditure growth is not relevant to determining what would actually happen if we moved to such a situation from the status quo. Further, the U.S. economy wasn’t in a stable quantity of money equilibirum between 1910 and 1920 and so imagining that the twenties and thirties can be understood as such a regime change in also wrongheaded.

    Generally, watching the change in the quantity of money or short term market rates and imagining that the effects are the same as they would be if the demand to hold money were constant, the supply of saving was constant, and the demand for investment was constant is a mistake. Perhaps the demand for investment fell and the supply of saving rose, and the demand for money rose. In such a scenario, an increase in the quantity of money and lower market interest rates would be consistent with coordination of production and consumption through time. It certainly would have some effect, but not necessarily malivestments related to excessively low market interest rates. In fact a lower market rate and increased quantity of money would be consistent with market interest rates being too high.

  11. Adrian Gabriel says:

    This is where you indeed fall to error Mr Woolsey. It is important to understand why you yourself are making some very naive assumptions on the quantity of money. You are automatically assuming that fractional reserve banking will naturally stabilize the interest rates through market forces, but the creation of money out of thin air (something you coin as banks issuing debt instruments that can be used as media of exchange and then matching their borrowing with loans of one sort or other–commerical loans, consumer loans, or holdings of bonds). In other words, you favor a credit expansion. I have read extensively that credit expansion makes assets such as mortgage-backed securities or government bonds more liquid. Assets become less costly to liquidate as their negotiability increases. (The recent boom is a case in point.) A bank may reduce, therefore, its precautionary reserve demands for cash because the assets it acquires during a credit expansion become increasingly negotiable, i.e., they tend to progressively approximate cash. This indeed leads to stabilizing central banks since of course the banks work in unison to work through the overinflated fraud on their books.

    First, banks could choose to not present notes or demand liabilities of other banks for redemption but expand credit on top of them. Second, borrowing in the interbank market can render precautionary reserves obsolete. Third, the interval of the clearing periods can be lengthened, eventually resulting in a long run with no reserve losses in a coordinated credit expansion. Any one of these three methods can potentially limit the need for precautionary reserves. Given that Selgin (the cult leader of Fractional reserve Free Banking) relies on precautionary reserves as the limit to credit expansion, it is unclear why he repeatedly fails to thoroughly address these pertinent cooperative measures. It seems he desires to rely on his banking mechanisms learned at his university, where he has his credentials from. It would take a mere radical perspective to deviate from this ballyhoo, something Selgin desires to firmly adhere to since of course his college degrees could be in jeopardy of being rendered useless if Fractional Reserve Banking were proven as fraudulent and the creator of coercive banking and booms and busts.

    I point you to two very important sources in how free banking in a system of hard money works, and another that points you to how Austrian Business Cycle Theory should be properly understood:



  12. Adrian Gabriel says:

    It is important to be clear that Fractional Reserve Banking leads to coercion and fraud, most specifically through central banks as I explained above. This undoubtedly leads to a central government.