04 Oct 2011

Scott Sumner Caricatures Himself

Economics, Federal Reserve, Inflation 11 Comments

I’m not sure why I’ve been on the warpath against Scott Sumner lately. Maybe it’s because he was on hiatus for a lot of the summer, so my angst built up. Maybe it’s because I didn’t get accepted into the Chicago doctoral program and he did. Who knows.

Anyway, in a recent post Scott continues to astound me. Now, not only does Scott still maintain that Bernanke has been engaged in tight money since 2008 (!!), but there are really no other possible explanations:

There is only one force in the economic universe powerful enough to cause trillions in asset values to suddenly disappear, for no apparent reason. To cause nominal incomes to plunge further and further below trend, causing massive job loses. The center of the black hole sees itself as a force for good, helping to solve the problems it is actually creating. Others see it as a potential source of help, which is not acting forcefully enough. Both are wrong. It’s the center of the black hole. It’s pulling down the things we see disappear over the event horizon. But we can’t see it, and hence most of us don’t understand the problem. It’s the only force capable of determining NGDP growth over time. It’s the force that several decades ago decreed that henceforth NGDP will grow at about 5%, not 11% or 3%. It said “let there be 2% inflation.” And the force saw the 2% inflation, and saw that it was good. Only one force in the universe could pick a 2% inflation rate out of thin air, and make it happen.

It’s the part I put in bold that stunned me. “[S]uddenly disappear, for no apparent reason”??

By the end of the above quotation, you might be getting uncomfortable, since Scott is bordering on blasphemy. But don’t worry, Scott isn’t saying the Fed is God. To continue the above quotation:

“Is it God? No, it’s much more powerful than that. And since mid-2008 the force has decided that 1.4% annual NGDP growth is good enough.”

I still maintain that any day now, Scott is going to put up a post saying, “Gotcha! I can’t believe I managed to convince all of you that the problem these past 3 years has been inadequate money pumping. Ha ha, like nationalizing banks and car companies, 10% deficits, taking over health care, having the EPA threaten to put 95% of the country in non-compliance, and extending unemployment benefits for 99 weeks don’t affect the economy. It was all I could do to keep a straight face when arguing with that punk Murphy down in Nashville, who was the only one who didn’t fall for it.”

11 Responses to “Scott Sumner Caricatures Himself”

  1. DT says:

    I think Sumner would say the problem has been inadequate NGDP, not inadequate “money pumping”.

    The ability to appreciate this subtle yet important point is what separates a great economist like Sumner from a third rate economist like Murphy.

  2. Warren says:

    Nashville? Radley Balko of theagitator.com also lives in Nashville and he’s bald too! You guys should start a club. .

  3. Yosef says:

    Bob, when did Sumner suggest that all of those things in the final paragraph have no effect on the economy?
    Sumner has repeatedly talked about how wrong it is to rely on fiscal policy, since the monetary authority moves last. (Seriously, how many times has he said that?). As for nationalizing car companies and banks Sumner has said:
    “I’m trying to get the Fed to target NGDP so that we can have a more capitalistic economy, without feeling that if we don’t bail out GM, the unemployment rate might rise. My hope is that if we do this, eventually we’ll see the obvious need for a NGDP futures market. And that will lead us to see the obvious need to target NGDP futures prices, and let the market determine the money supply and the interest rate. And then we’ll abolish TBTF, as we’ll no longer fear that big bank failures will lead to recessions. And then we’ll abolish FDIC. And then we’ll allow free banking”

    Yes, Sumner believes that money has been tight based on those crazy things like low interest rates (and the related observations of Milton Friedman), TIPS spreads, exchange rates (his use of international comparisons are particularly interesting), and even commodity prices like copper.

    • Bob Murphy says:

      Yosef wrote:

      Bob, when did Sumner suggest that all of those things in the final paragraph have no effect on the economy?

      The part I put in bold. All of this wealth disappeared for no apparent reason. The only thing that could possibly explain it, is a force allegedly greater than God Himself…the mighty Bernank.

  4. Scott Sumner says:

    I think the 99 week extended UI has signficantly increased unemployment. But that doesn’t reduce M*V.

    • Bob Murphy says:

      Scott, I thought what we were trying to explain to people is why unemployment was so high / real output was so low. You had a theory saying it was because of MV not growing fast enough. OK maybe that’s right, maybe that’s wrong. But lately–as your latest comment indicates–you have morphed. Now you don’t seem to even care about high unemployment or real growth, your purpose is to goose MV (NGDP). You are so sure that that is the problem, that you have made it the new goal.

      (Of course if I ask you officially, you will deny that that’s what you’ve done [I think]. But a lot of your posts lately, and your comment here, suggest to me that this is what you’ve done perhaps subconsciously.)

  5. Rob says:

    “Now you don’t seem to even care about high unemployment or real growth, your purpose is to goose MV (NGDP)”

    I’ve been reading Scott Sumner’s blog regularly for the last month or so (presumably after the alleged morph took place) and feel that this statement is very mis-leading.

    Its clear from reading the MoneyIllusion that the main take away is indeed the need to increase MV to address the NGDP shortfall, but this policy would not make any sense if it was thought it would not address the issues of high unemployment or real growth,

    I guess Bob’s post was meant to be light-heated but I really hope that he does a serious analysis of what he dis-agrees with in the NGDP targeting approach (that is : why it does not address the issues of unemployment and real growth) and gets away from misrepresenting what Sumner is actually saying.

    • Bob Murphy says:

      Rob, are you so sure I’m misrepresenting Scott? I’ve been reading his blog regularly for two years. Here’s what he said in August:

      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.

      Granted, I’m a third-rate economist, but that sure sounds like Scott cares more about monetary stimulus than unemployment.

  6. Rob says:

    My take on the post you link to is this:

    Sumner believe that a correct monetary policy would target NGDP growth at the rate of historic productivity improvements (3%) plus inflation expectations (2%). Even if (short-term) supply-side factors prevent this NGDP growth from turning into RGDP growth (and resulting in higher than 2% inflation) then (according to Sumner and if my understanding is correct) this is still an appropriate policy because eventually when the supply-side issues are addressed the money supply needs to be sufficient to allow a catch-up (via a period of faster RGDP-growth and lower inflation).

    Its pretty clear that he sees this option (low or zero RGDP growth) as pretty unlikely – he’s just saying that even if that was the outcome the economic costs would be low.

    I don’t fully support these views (I do not understand why the target should include productivity growth ,which should simply put downward pressure on prices and I do not see how we can expect the fed to implement this policy in a way that would not just lead to indirect subsidy’s to its friends) but I still feel they need to be addressed ,more seriously than what I have seen to date.

    BTW: I’ve always though of Bob as at least a second rate economist (j/k- he’s one of the smartest bloggers out there).

  7. John Becker says:

    If Scott concedes that Unemployment insurance has raised the unemployment rate then it has decrease real GDP which is a portion of the NGDP that he cares about. Further it does affect M*V because MV=Py=C+I+G+X-M and if fewer people are working then C+I+G+X-M goes lower therefore M*V goes down BY DEFINITION. That seems really sloppy on his part.