Arnold Kling Being Too Kind to Scott Sumner?
Arnold Kling has mood swings on his posts over at EconLog. When he wants to blow somebody up, it’s best to duck and take cover because he can really let the guy have it, especially if it involves housing and mortgage finance (since Kling really knows what he’s talking about).
On the other hand, Kling will often be unnecessarily conciliatory to people, like when he forgave Krugman for his unfortunate phrasing when quoting Paul McCulley on the housing bubble.
Case in point, lately Kling has been almost-congratulating Scott Sumner for a job well done in explaining our financial crisis de la semaine (sic?). Kling hasn’t totally thrown in the towel on his own Recalculation story (which is far more compatible with my Austrian views than Sumner’s calls for money printing), but Kling says we can’t definitively know one way or the other:
1. If you believe that aggregate demand matters, then monetary policy is too tight.
2. We won’t know whether or not to believe that aggregate demand matters until we see higher inflation. If we see 3 percent inflation or more for six months and no improvement in unemployment, then those of us who are skeptical of aggregate demand can say “told ya so.” But as long as inflation is as low as it is, it remains an open question.
I have two responses:
First, I think Kling hasn’t fully grasped the post-modernist, Copenhagen interpretation of Sumner’s views. I am not kidding, I am pretty sure that Sumner says we can’t look back at the data (ten years from now) and decide if a particular burst of monetary inflation “worked” or not. Or rather, the only thing we would be looking at, is the change in things like the stock market, TIPS yields, etc., that occurred immediately upon the new policy announcement. So there’s no need to wait.
Second, unless I am misunderstanding Kling’s chosen benchmark, the question is already settled: Sumner is wrong. Over the last six months, the (seasonally adjusted) CPI increased 1.8%, for an annualized increase of 3.6%. So we’ve just had Kling’s desired (price) inflation.
So what happened to unemployment over the last six months? The official rate increased from 8.9% in February to 9.1% in August. (Those are the same start/end months as for the CPI calculation.)
So, price inflation ran at a 3.6% annualized rate over the last six months, while unemployment increased. Time to kick Sumner out on the curb, Dr. Kling?*
* Again, it’s possible that Kling meant, “…starting now!” or that I have misunderstood his test in some other way.
Presumably he’s talking about some type of core inflation.
Desolation Jones, maybe he is, but then what would be the theoretical justification for that? I think it would be harder for Sumner to justify a core metric than it would be for Krugman to do so.
“some type of core inflation”
What’s that? More jargon to confuse the masses?
1. If you believe that balance-sheet debt matters, then default-by-inflation is too low.
2. We won’t know whether or not to believe that debt matters until we see default-by-inflation. If we see 300 percent inflation or more for six months and no improvement in unemployment, then those of us who are skeptical of hyperinflation can say “told ya so.” But as long as inflation is under 300%, it remains an open question.
1. If you believe that emotions make many people miserable, then ice-pick lobotomies are too rare.
2. We won’t know whether or not to believe that ice-pick lobotomies raise aggregate utility until we see more of them. If we see 30 percent lobotomies or more for six generations and no improvement in utility, then those of us who are skeptical of forced lobotomies can say “told ya so.” But as long as lobotomies are as low as it is, it remains an open question.
Okay, I’ll stop. I like Kling in general.
If nominal GDP returns to the trend of 1984 – 2008, and real GDP and employment remain more or less 10% below trend, then Sumner is proven wrong.
Sumner doesn’t trust the CPI figure, either core or headline, but his theoretical approach is sticky wages. And so, really, if nominal GDP return to trend, and this resulted in nominal wages rising more or less in proportion, that would show that the shift of nominal expenditure to a lower growth path wasn’t a problem. (Presumably, the price level for current output would rise more than in proporition.)
Anonymous, you’re right that quasi-monetarist hero Bill Woolsey gave himself the falsifiable benchmark that you list. But Sumner himself has been far craftier. He explicitly said on his blog that even if his policies just led to rising price inflation, he would still favor them. (I’m not going to dig up the quote to give you context, but he really did say that recently.)