09 Sep 2011

Scott Sumner, the Unbeatable Foe

Economics, Federal Reserve, Financial Economics 10 Comments

When last we left, in March our anti-hero Scott Sumner was hanging up the keyboard, having taken credit for getting Bernanke to inflate more, and thereby creating several trillion dollars in worldwide wealth.

But now Scott’s back, and his printing press is more powerful than ever. In the comments of a recent post, I was congratulating Scott on his enhanced visibility in the press, but then said: “Scott, you are huge. But remember back in the spring, when you declared mission accomplished and I dissented? How now, Polonius?”

To this Scott replied:

Bob, I’m not in the “wait and see” school of policy-making like almost everyone else. For me the metaphor is steering a ship. There is no “mission accomplished”. Every nudge of the steering wheel is a tiny victory or tiny defeat. But the helmsman can never rest on his laurals. QE2 helped a bit by reducing unemployment (maybe) from 9.8% to 8.8% over 5 months. But since then the Fed’s let the wheel drift in the wrong direction. I don’t make predictions–I let the markets do that. I just want to the Fed to keep policy at a level where the markets expect success. The markets never expected QE2 to be enough, but they thought it would help. It ended up being far too little.

If you made lots of money selling stocks short, I congratulate you. That would have been a much wiser investment than selling T-bonds short on the expectation that QE2 would lead to high inflation. Didn’t some people make that prediction?

Naturally, I was momentarily stunned by Scott’s rhetorical jujitsu. I conferred with the crafty von Pepe, and he advised me, “There is no way to nail someone that says stuff like that.”

I agreed with von Pepe and summarized Sumner’s argument as follows:

(1) When the stock market went up, Sumner claimed it was because of him.

(2) When the stock market tanked, Sumner said it was because the Fed stopped doing what Sumner said it should do.

(3) How does Sumner know the Fed stopped taking his advice? Because the stock market tanked.

It is futile to argue against such an unbeatable foe. Even if I had all the theory and empirical evidence on my side, he would prevail. As Scott himself said in a previous post, “And that, my friends, is why I can sleep comfortably at night. I am proposing a policy that literally cannot fail.”

Like I said, no matter my blogging abilities, I can’t beat such a foe. I feel like this:

10 Responses to “Scott Sumner, the Unbeatable Foe”

  1. David S. says:

    Following this discussion, it’s obvious Sumner has said all along that QE is not his preferred vehicle for monetary stimulus, you dope. I see no indication from him that he thought a bout of QE be an ultimate solution to any problem. If the Fed too his advice, it was only slightly, and without necessarily any indication of permanence.

    Since he favors “level targeting”, specifically NGDP targeting, of course he favors a constant, ongoing effort to keep NGDP at target. The Fed is nowhere near a catch up trajectory to get the US economy back to trajectory, as he states explicitly in many, many posts. Many of his colleagues argue likewise, including Krugman, who was more skeptical of QE.

    You need critical thinking and reading skills before you decide to post anything about economics.

    • Martin says:

      Didn’t you make the mistake of conflating naive Keynesianism with basic economics in another comment? Something about people living in glass houses and stones.

      • David S. says:

        Considering that you apparently don’t even know the difference between Keynesianism and quasi- or new monetarism means you aren’t worthy of further replies.

        • Martin says:

          I understand it’s never pleasant when your mistakes are pointed out, especially when you’re so boisterous about your own ability and so dismissive about the ability of others.

          Best is to ignore it and to go off on a tangent. I am sure it will go away then. 😉

        • Martin says:

          Oh before I forget, it helps when you get really really defensive.

  2. Martin says:

    Bob, isn’t this similar to how proponents of the ABTC defend their view? If fiscal/monetary stimulus leads to growth, it will eventually lead to a bust and if there is a bust, the ABCT is right? If it doesn’t lead to growth, see you can’t artificially stimulate the economy, you need ‘real growth’ or see there is regime uncertainty.

    Let me broaden it even further, isn’t this pretty much the problem with economics? There is no way of testing, only persuasive stories to convince one another.

    • Daniel Hewitt says:

      isn’t this pretty much the problem with economics?

      Yes. If economic theories were falsifiable, there would be a lot less of them floating around.

  3. david stinson says:

    The way I see it, Scott Sumner varies from Hayek in degree not in kind. They both believe a) that the objective of monetary policy is managing monetary equilibrium, either by maintaining equilibrium (Hayek) or managing the relationship between money supply and demand (Sumner), and b) the primary indicator central bankers should use of the presence of monetary disequilibrium is the behaviour of NGDP. Hayek (and Selgin) thought central bankers should aim to keep NGDP constant (or perhaps growing at the rate of growth in real factors of production – i.e., Selgin’s “less than zero”). Sumner wants the target higher. Neither Hayek nor Sumner take explicit account of, for example, asset or commodity prices or exchange rates, in their target. Implicit in Sumner’s view is that when there is excess supply of money, people spend it only on components of current GDP, not e.g., existing assets. In other words, it’s based on an implicit story about the demand for money. I think it is also implicitly based on a notion that EMH holds, even in monetary disequilibrium, and so we can safely forget about asset prices.

    So, in Sumner’s (and Hayek’s) view, if NGDP falls below the desired trend/level, then, by definition, you have excess demand for money or deficient supply of money. So, the central banker needs to keep doing stuff.

    My view is that to persuasively take on Sumner’s view, one needs a different story about the determinants and dynamics of the demand for money. Almost everybody, with the exception of the free bankers, seems to either ignore the demand for money (and focus only on supply) entirely or dismiss the possibility that demand for money could be more complex than they learned in school.

    All of which is a very (very) strong argument for free banking.

  4. Desolation Jones says:

    Speaking of Quasi-monetarists, you were mentioned in David Glasner’s blog.

    “a paper by another blogger, an ardent, but surprisingly reasonable, Austrian business cycle theory supporter Robert Murphy”

    It makes me laugh how “but surprisingly reasonable” has become your tagline among non-Austrian bloggers.

  5. Scott Sumner says:

    Just to clarify, I think QE2 helped stocks because I noticed stocks rise on hints of QE2 in speechs by Bernanke, Evans, and Dudley. I don’t know that the recent decline is due to expectations of slower NGDP growth. But that seems likely as we see long term bond yields falling along with stock prices. And ultra low long term bond yields are often linked to weak NGDP growth (see Japan) I wish we had a NGDP futures market, then we wouldn’t have to guess.