28 Sep 2011

I Hope Scott Sumner Is Happy

Federal Reserve, Inflation 38 Comments

Over on his blog, Scott Sumner has been saying “I hope the inflation hawks are happy, this is what tight money looks like” after the big sell-off in the markets when “Operation Twist” turned out to be sterilized. That’s a bit like pointing out the heroin addict going through terrible withdrawal pains and saying to his mom (who checked him into rehab), “I sure hope you’re happy now. That’s what cold turkey looks like.”

Anyway, Bob Roddis sends me this recent post from our good friend Matt Yglesias. I hope Scott Sumner is happy; this is what it looks like when you preach for 3 years that printing money leads to costless prosperity:

There’s no particular reason why monetary policy has to be conducted through interactions between the central bank and a banking system. Or, rather, the reason it’s done this way is historical. Under an older set of institutional arrangements, a central bank was actually a bank and it’s importance derived from its interaction with other banks. But in the modern day, you could do something completely different. For example, Peter Frase notes that from time to time, proposals pop up for a national basic income. You could, for example, have the government send a check for $600 each month to every American citizen. Alternatively, you could have the central bank send a check for approximately $600 in newly printed money each month to every American citizen and vary the exact amount of the check in order to stabilize demand. Or, of course, you could use different numbers.

I’m not sure the politics of trying to do things that way would really work out well in the end, but it’s a potential idea for your humanitarian utopia of tomorrow.

38 Responses to “I Hope Scott Sumner Is Happy”

  1. Peter says:

    It sounds like a decent proposal. But Yglesias seems a bit naive about the size of it. 800B * 0.05 / 300M = 133 USD a year. Not much for a basic income.

  2. marris says:

    I admit this sounds bad. But the fact that Yglesias closes with this:

    “That said, I think this focus on the mechanics can get misleading. The key avenue for determining actual outcomes under our current system is expectations, and that would continue to be the case under any of these systems.”

    indicates that he’s too smart to drink the MMT Kool-Aid in its most potent form. There’s hope.

    • mdm says:


      Perhaps I am mistaken, but are you suggesting that MMT ignores expectations, or that expectations play no part in MMT analysis?

      If so, then what are you talking about? Since when haven’t expectations been prominent in MMT analysis? MMT is after all a subset of Post Keynesian economics, where, following Keynes, subjective expectations matter. In fact, the other day I was reading a paper by Wray highlighting the importance of Keynes’ definition of money, its particular attributes (linking the future with the present), and how this plays out in a monetary economy (a world in which expectations of the future are liable to be disappointed).

      • marris says:

        I have not read that paper. Perhaps you can post a link?

        My claim that “MMT does not take expectations into account” is based on Mosler’s presentation in 7 Deadly Innocent Frauds. He seems to believe that expectations fueled inflation cannot exist. That inflation can only rise under full employment or from supply shocks. This seems to be a no expectations, unemployment-inflation-tradeoff, stable Phillips curve analysis.

        Maybe some of his successors have corrected this.

        There is also a surreal anecdote where Mosler claims that pensioners don’t “care about” the value of the currency unit.


        David finally said, “No, we’ll clear the check, but it will cause inflation and the currency will go down. That’s what people mean by unsustainable.”

        There was a dead silence in the room. The long debate was over. Solvency is not an issue, even for a small, open economy. Bill [Mitchell] and I instantly commanded an elevated level of respect, which took the usual outward form of “well of course, we always said that” from the former doubters and skeptics.

        I continued with David, “Well, I think most pensioners are concerned about whether the funds will be there when they retire, and whether the Australian government will be able to pay them.” To which David replied, “No, I think they are worried about inflation and the level of the Australian dollar.” Then Professor Martin Watts, head of the Economics Department at the University of Newcastle inserted, “The Hell they are, David!” At that, David very thoughtfully conceded, “Yes, I suppose you’re right.”


        • mdm says:

          You need to keep in mind the intended purpose of Mosler’s book: to promote the essential message that MMT advocates to a wide audience. This means that the language and writing are meant to be as easy to follow as possible.

          In other words, it is not an academic source, and shouldn’t (IMO) be used as such. If you want to know the ins and outs of a particular research program, then you should consult the literature, which in the case of MMT, includes a lot of the work by Post Keynesians, anthropological work on the history of money, and the work which directly comes under MMT, from the last twenty years.

          I don’t agree with your use of the word ‘successor’s either, the paper by Wray easily fits into the overall Post Keynesian tradition, with a MMT twist at the end, and you can find many similar papers by Wray written earlier than the current MMT program, and by other Post Keynesians, or even Keynes himself.

          I don’t really have much to comment about the example. The priorities of pensioner’s is an empirical question. I don’t have any access to any studies to make up my mind. Anecdotally, I’d say most pensioners and people in general don’t understand concepts such as ‘inflation’ and ‘relative value of their currency’. Their primary concern is having an income sufficient enough to sustain their basic lifestyle.

          Reference: Wray, L. Randall. 2006. Keynes’s approach to money: an assessment after 70 years. The Levy Economics institute. Working paper no. 438.

          I don’t have a link at hand, but search for it via levy.org (where you can also find many other papers in the Post Keynesian tradition which discuss the role of expectations).

  3. Bob Roddis says:

    Explain what M.Y. means by “The key avenue for determining actual outcomes under our current system is expectations, and that would continue to be the case under any of these systems.”

    I see the key avenue for determining actual outcomes under our current system as general obliviousness and mendacity coupled with significant Cantillon Effects.

    • marris says:

      Maybe I’m reading too much into it, but it sounds like he’s saying that the “basic income stream” won’t do as much as people think. If you drop money on someone today, then he will be able to bid some goods away from other potential buyers. He will benefit today at the expense of some random potential buyer. Over time, however, the producers will respond. They will come to expect the impact of the new streams and raise their offer prices to avoid shortages. The higher prices will push marginal buyers out of the market. Maybe this will be the basic income stream recipients. Or maybe it will be the low income worker who does NOT receive these streams. The point is that it will not bring us closer to the humanitarian utopia envisioned by the basic stream advocates.

      There are certainly Cantillion effects introduced by the plan. The significance would probably be proportional to the sizes of the streams.

      I think there are even more unintended long term consequences. You’re going to see a whole cottage industry rise to help businesses “navigate” the new environment.

      Let’s say I’m an unprofitable factory owner who’s about to go out of business. I may get the enterprising idea to go to the government and say “Look guys, you’re about to see 1000 more people added to your basic income streams. And most of you have elections coming up. Do you really want a large number of recently fired, angry voters to show up at the polls? How about you kick a few subsidies this way and I’ll keep them happy?”

      It does not need to be the business leaders themselves. You will see lobbyist firms do their patriotic duty and “build a bridge” between the stream creators and their “community.”

      • Bob Roddis says:

        Isn’t that the same as saying it will only work upon a stupid and oblivious populace? It will work only as long as the masses don’t figure out that new funny money amounts to theft of purchasing power from those holding existing money?

        It amounts to nothing more than the illusion of abolishing the law of scarcity, the raison d’etre of MMT.

  4. Bob Roddis says:

    For those of you unfamiliar with the essential concept of “Cantillon Effects”, Major_Freedom, now known as “Pete”, explains the meaning of the universe to the genetically imperious Lord Keynes:


    • MamMoTh says:

      I don’t know why he wasted his time with the obvious. but that is a great debunking of the Cantillon effect Austrian meme by LK.

      • Bob Roddis says:

        No. It’s like comparing Auschwitz with pushing a child out of the way of a train (an LK favorite for debunking the non-aggression principle).

        “I’ve caught you now, you Rothbardian hypocrites!”



      • Bob Roddis says:

        Actually, the big admission here is the statist admission that funny money dilution results in Cantillon Effects. Austians never denied such effects under laissez faire, but claimed they would be de minimis. The debate is between significant and harmful Cantillon Effects and minimal effects. That level of sophisticated differentiation is beyond the limitations of the Keynesian and MMT “mind”.

        • MamMoTh says:

          No, Cantillon Effects have to do with flows of money, not stocks of money. And flows of money change all the time and are beyond the control of anyone. You just have to live with it in a monetary economy. But you didn’t even figure that out in your 40 years of being obsessed with Cantillon effects?

          No wonder you became an attorney.

          • JJ says:

            ‘flows of money change all the time and are beyond the control of anyone.’

            MamMo, please correct me where im wrong, but wouldn’t the government printing a load of money which then flowed into bank reserves & financial assets be construed as controlling the flow of money, at least to the degree that the flow could’t have occurred without an increase in the stock???

            • MamMoTh says:

              Mostly wrong. The flow can always change with a fixed stock as Austrians say.

              Fed OMOs, QEs, etc are not government spending, and they don’t change the amount of net financial assets held by the private sector, only the portfolio composition. So they have basically no effect at all, other than the misguided fear about hyperinflation, for example.

              • JJ says:

                I don’t think I said QE is government spending!!

                So to understand your point clearly, are you stating that you believe increases in the money supply will not cause inflation, even in the medium to long run??

                I understand that it would have to be lent out first through the banking system, which may restrict this short run impact, but once it does begin to be lent, you still think this wont cause inflation??

              • MamMoTh says:

                I think once the private sector starts net borrowing again the economy will pick up, and there might be some inflation, and that the longer the recession lasts the more likely it is there will be some inflation. But as long as the economy starts growing again, inflation is the least of my concerns.

          • Bob Roddis says:

            Ridiculous. If you propose to inject funny money into society, you must account for Cantillon Effects. You MMTers pretend those problems do not exist and you ignore them in making your idiotic proposals. You’ve never even considered them before, which is telling.

            • MamMoTh says:

              Cantillon effects are your problem, and no one should really care about your problems.

              You are the idiot who doesn’t understand it’s got to do with flows and not stocks, even after 40 years of being obsessed with them.

              But you are an attorney.

          • marris says:

            Here is a translated excerpt from Cantillon’s essay where he discusses this effect [essay was originally written in French]

            “An increase of money circulating in a State always causes there an increase of consumption and a higher standard of expenses. But the dearness caused by this money does not affect equally all the kinds of products and merchandise proportionably to the quantity of money, unless what is added continues in the same circulation as the money before, that is to say unless those who offered in the Market one ounce of silver be the same and only ones who now offer two ounces when the amount of money in circulation is doubled in quantity, and that is hardly ever the case. I conceive that when a large surplus of money is brought into a State the new money gives a new turn to consumption and even a new speed to circulation. But it is not possible to say exactly to what extent.”

            When new money is dropped on some people, they are able to go out and bid goods and services away from other people who don’t have the new money. Specifically, the bid prices of the other people are LOWER than the ones they would make if they too had received drops.

            This is clearly “flow related,” because we’re talking about trades. It is also stock related. The new bids would not occur unless the money drops had increased some people’s money stocks. It is a very different phenomena from “random free market trades.” In the latter, people bid up the prices of some goods because they either decide to forego other goods, or because they are OK with decreasing their money stock in exchange for some good or service. The latter does not involve an initial money drop.

          • marris says:

            @Bob I think MamMoTh wants low unemployment. He thinks there are too many people out of work and he wants to put them to work. That’s definitely something that MMT can do. You can certainly pay people if you can print money.

            However, he does not see that this approach may lead to rising prices, where these new income streams race against consumer goods prices. For example, suppose prices start rising as soon as we put half of the currently unemployed people on “basic income streams.” The people who are left behind will see prices rise away from them. So will low income non-stream workers.

            Now, here’s the tricky part. He really believes this CANNOT HAPPEN. That is, as long as we have some unemployment left over, he thinks prices cannot rise this way.

            There is no mathematical justification for this view. It’s a sort of “gut faith” in an inflation-unemployment tradeoff: something which operationally does not exist.

            • MamMoTh says:

              Putting people back to work as with the Job Guarantee is not necessarily inflationary.

              The program hires from the bottom at the minimum wage, people who are already receiving unemployment benefits for doing nothing.

              As such, the Job Guarantee program might imply a small one time price adjustment, but that is not inflation.

              • marris says:

                When prices readjust in the post-JG world, marginal buyers will be pushed out of markets.

                (A) If JG workers are pushed out, then JG workers will democratically ask for stream size increases.

                (B) If non-JG low income workers are pushed out, then they will democratically ask for stream size decreases [unlikely to pass] OR some complementary program to increase THEIR purchasing power [payroll tax cuts, low taxes, whatever]. This will push JG workers out and we’ll end up with (A).

                A “one time” price adjustment seems unlikely.

              • Anonymous says:

                But surely the increase in stock leads to an increased flow. If I have loads of any good, even money, I am much more likely to use it (as a flow) than I would be if I had a lower stock in the first place, right???

    • Lord Keynes says:

      If fact Major_Freedom/Pete says little of substance there, except that he agrees that Cantillon effects by themselves cannot constitute a serious argument against government spending.

      If Cantillon effects (even significant ones) were a serious argument against govenrment spending, then they would all also be an argument against all private sector activity such as capital account flows into a country that cause significant Cantillon effects.

      • MamMoTh says:

        If fact Major_Freedom/Pete says little of substance there

        As usual.

        • Dan says:

          Which one are you going to be Mammoth, the pot or the kettle?

          • MamMoTh says:

            The stove.

      • marris says:

        Capital flow accounts cause Cantillon effects? Aren’t they just trades of currency 1 for currency 2? You may see the price of the demanded currency rise, but this is just a goods price increase.

        Cantillon effects occur when the supply of the monetary unit increases.

  5. kavram says:

    Wow. So we’re really at the point where professional economists are promoting the idea that we just print money and shower it upon the citizenry. As long as we’re going this route let’s do it correctly – let’s mail a check for $10,000,000 to every man, woman and child in the country. That way we can really spur AD and we can go back to the good ole’ days when someone could earn an income by living in a nice house. Also everyone will be able to drive a luxury sedan, buy the latest gadgets from Apple, and never have to worry about their financial security ever again.

    On the other hand, at least this would be a more ‘equitable’ way of inflating the money supply, as it would basically end the financial sector’s long lasting Treasury Bill arbitrage party (where they flip bonds from the Treasury to the Fed, then flip loanable funds from the Fed to the Treasury, collecting a hansome profit with each deal)

  6. roo says:

    I don’t see how Yglesias’s proposal would be worse than the current system. It still wouldn’t be good by any stretch, but at least it would crush the banking cartels.

    • Silas Barta says:

      If it substituted one-for-one with current social program spending, it would have my vote.

  7. Rob R. says:

    Recently Bob (in his Gnome article) demonstrated that there are some situation where economic slowdowns have entirely structural causes and an increase in the money supply will have only detrimental effects.

    Austrians believe that most real recession are like the gnome attack and are (as described by the ATBC) structural in nature.

    All the evidence right now however suggests that we are currently in the grip of a “‘secondary deflation” where lack of AD due to heightened demand for money (rather than the initial bust caused by the previous mal-investments) is driving the current recession.

    In an unhampered free market we would likely see alongside the liquidation of malinvestments that a combination of more flexible prices and a more flexible money supply (driven by FRFB responsive to market signals) would address the AD aspects of the recession.

    Given that neither of these things are likely to happen any time soon are hardline Austrians really so comfortable mocking Scott Sumner’s position ?

    • marris says:

      > All the evidence right now however suggests that we are currently in the grip of a “‘secondary deflation” where lack of AD due to heightened demand for money (rather than the initial bust caused by the previous mal-investments) is driving the current recession.

      Is this really what the evidence suggests? Consider


      If these statistics are true, then it seems that the “consumer spending” portion of AD has already recovered. Private investment has not. So I think a “fall in aggregate demand is _the_ problem” explanation is simply trying to squeeze too much into Keynesian terminology. A better explanation is “a fall in private investment is _the_ problem.” And private investment is driven by a spread between expected money revenue and expected money cost. That spread has gone negative for many projects.

      The Keynesians (and monetarists) think we should try and force new streams into existence by lowering money costs [at least the interest component] and giving potential consumers more money to spend. Worry about the sustainability of the new structure tomorrow. The classical Austrian solution is to let unsustainable projects fail now, let the capital goods currently being applied to bankrupt projects be sold for marked down prices, and let the entrepreneurs who can think of new sustainable projects buy them up. Worry about sustainability now.

      The other part of your statement “heightened demand for money” is also worth a careful look. Can we really see a “demand for money” increase? If so, then the prices of both capital and consumer goods would fall. Aren’t we instead just seeing the prices of capital goods fall? And isn’t this just because people’s expectations of the profitability of existing production structures has fallen? If I thought the profit spread was still good on my production structures, why would I sell them?

      There is a paper by Alex Leijonhufvud called “Keynes and the Crisis” which is interesting. He argues that the crisis is more Keynesian than monetarist, but more Austrian than Keynesian. Specifically, lots of production structures were built assuming that people would borrow increasing amounts of equity against their homes. Now that those homes are underwater and no one is interested in borrowing more, these structures are no longer sustainable.


      Scott Sumner is probably correct that giving people lots of money this year will boost GDP this year [boost consumption]. But it’s not clear that private investment will recover. Not unless there is some reasonable expectation that the money drops will continue [for something like the lifetime of the producer good]. Sumner may simply respond with “well, we should then make it clear that the streams WILL continue indefinitely…” I think they will respond to that, but you’re going to get lots of unintended political consequences [voting groups who want to increase stream sizes, crowding out of marginal non-stream-recipients from goods markets, etc].

      • Rob R. says:

        AD includes both consumption and investment demand. The chart you link to indicates that while investment demand is relatively more depressed (compared to trend) the combined data is consistent with the statement that AD is way down compared compared to trend.

        Again with regards to money demand: it is clear that businesses are sitting on large amount of cash , as are households. I have not seen much data on falling capital good prices, but in any case there surely can be no doubt that currently we are at a high level of demand for money compared to the norm.

        Of course these two facts do not “prove” that what is needed is for the fed to increase the money supply. Whenever the fed creates money it distorts the price signals that a healthy economy needs. (BTW: I plan to check out your second link tomorrow)

        However I strongly believe that years of interventionist activity (by the government and the fed) has largely broken the mechanism by which the economy can fix itself via market-driven adjustments in prices and the money supply. This has allowed the structural problems that led to the crash to morph into a “great recession” driven by low AD.

        We need a program to get out of this mess that will need huge amount of free-market reform and the rolling back of government on a massive scale. This may involve spells of “cold turkey” My concern right now though is that recovery is being throttled by a politically-motivated program to deprive the addict not only of of drugs but also of oxygen. Dr Obama will then be around to hand out the drugs again closer to election time.

  8. Matt Flipago says:

    Wait I thought the reason this was never done was because the FED was never interested in a one time set long term increase in the money supply. If you give to banks, you can get it back when things start coming around. The increase in money supply was supposed to be a largely temporary injection, but with some long term increase. This gets completely ignored.

    • Bob Roddis says:

      The MMTers claim that it’s a simple matter to mop up this inflationary funny money with taxes and then just burn the receipts. But David Colander, co-author of a 1980 book with the original Abba Ptachya Lerner (King of the MMTers, author of “The Economics of Control” fame and darling of our own AP “Hut Tax“ Lerner) wrote that Lerner wanted to make it illegal to change prices without a permit:

      Initially he [Lerner] toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [page 12]


      I suppose it must be one or the other. See, inflation worries are just part of the irrational Austrian religion.