11 Nov 2011

Scott Sumner Sees Sumnerites Everywhere

Economics, Federal Reserve, Market Monetarism 15 Comments

Wow. Scott Sumner’s success has gone to his head so much that he thinks we’re all market monetarists now. In this post, Sumner first quotes from a news article about Bernanke:

The Fed, he said, believes inflation will remain near the central bank’s target of 2% or a little less. The economy can support an unemployment rate around 5% to 6% without fueling inflation, he added.

“I do believe we will return to a healthier growth rate. I don’t see any reason why we couldn’t,” he said.

Now kids, I want you to truly see Scott the way I do. To do that, you have to read the entire commentary he gave on the above news excerpt. Here’s Scott’s reaction to the above:

It’s good to hear that Bernanke thinks the problem is demand side, not structural. Oddly, I actually think it’s more structural than he does. If we stay at 99 week maximum UI benefits, I’d expected the natural rate to be in the 6% to 7% range, especially if the minimum wage rate stays this high.

So Bernanke thinks easier money would help the economy even more than I think easier money would help the economy. But he fails to see one very obvious potential problem. There is something that could prevent a return to “healthier growth.”

Let’s assume inflation stays near at 2%. And let’s also assume that they allow NGDP to grow at a bit over 4%. Then we won’t get a “healthier” recovery.

But why would I make such a pessimistic forecast about NGDP growth? Why expect it to be so low?

Umm, maybe because it’s been low for the past several years.

Maybe because private forecasters expect it to remain low.

And maybe because the bond market seems to expect low NGDP growth (as far as we can tell.)

Other than those three reasons, there’s no reason at all that the economy can’t have a healthier recovery with 2% inflation.

And who determines the rate of NGDP growth? There’s probably an answer somewhere in Bernanke’s intermediate macro textbook.

This is really astounding. Let me walk you through this.

First, when Scott says right off the top, “It’s good to hear that Bernanke thinks the problem is demand side…” he has no justification for this. Watch:

Suppose you asked me what I thought was wrong with the economy. I would say that there are a lot of misallocated resources from the mistakes of the housing boom years. If we had laissez-faire, they’d get moved around right-quick. But we have unemployment benefits, blah blah blah, that are making this thing drag out. If the government just locked its policies in place, it might take a few years to slowly grow out of this mess, but we’d eventually return to a regular growth rate (though we’d be permanently lower than we otherwise would have been). I’m disregarding the ticking time bomb of the Fed’s injection of reserves, for the sake of argument.

Now if you said, “OK Bob, why doesn’t the Fed just print up another trillion dollars right now, to speed that process up?” I would say, “Aren’t you listening? I just told you the problem was structural. This isn’t a demand problem. Why would we print up money to deal with a structural problem?”

I’m not saying Bernanke thinks like I do, I’m just saying someone who did subscribe to (at least a certain class of) structural theories of the recession, might say exactly what came out of Bernanke’s mouth.

In contrast, if you thought the problem were demand-side, then what Bernanke said makes absolutely no sense. Don’t take my word for it, Scott Sumner himself goes through and explains why Bernanke’s comments make no sense, if Bernanke in fact thinks we are suffering from a demand problem, not a structural supply side problem.

So to sum up, here’s what Sumner has done in this blog post: He takes a Bernanke quote that is consistent with someone who thinks we are suffering from a structural problem (which can’t be fixed by easier money), and erroneously concludes that Bernanke is saying we have a demand problem–even though Bernanke says no such thing, either explicitly or implicitly. Then, Scott proceeds to ridicule Bernanke for not being consistent with his (alleged) belief that we are suffering from a demand side problem.

I really hope Scott tunes up his rhetoric before our debate. I want the bookies to at least keep the line within two touchdowns.

15 Responses to “Scott Sumner Sees Sumnerites Everywhere”

  1. Scott Sumner says:

    He said we can get to 5% to 6% WITHOUT FUELING INFLATION. That means it’s demand side. If it was structural then an attempt to get lower unemployment would fuel inflation.

    • Bob Murphy says:

      Scott, if only you had put it in CAPS in your original post, maybe I would have gotten it…

      Let’s try it again (in case you are still reading): Suppose I, as a good Austrian, or take Arnold Kling–an economist with an actual teaching post–thinks that right now a few million workers need to move to different states, in order for the economy to get recalibrated in light of the changed circumstances. After that shuffling of workers, the economy will be able to resume its historically normal growth rate, without fueling inflation.

      But, it takes time–maybe 18 months–for this process to really happen. (It would be quicker if the feds stopped sending people checks, we all agree.) So we’re not going to get that growth rate in 4q 2011 or 1q 2012, but the growth rate will eventually rise up to the desired level, and the unemployment rate will gradually drift down as this adjustment on the supply side unfolds.

      Now, in the meantime, what if we started printing a bunch of money? Then prices would shoot up and real output wouldn’t do too much. So that’s why Arnold Kling and I would oppose monetary “easing” at this time. It wouldn’t help.

      Now maybe we’re right, maybe we’re wrong, but notice we would have been willing to say the exact words that you quoted from Bernanke. And then you would have concluded, “Since Bob and Arnold think that the economy is capable of eventually returning to a high level of real growth, without fueling inflation, they are obviously saying this is a demand-side and not a supply-side recession.”


      Here’s what’s happening, Scott. You are taking Bernanke to mean, “We could achieve this growth rate tomorrow without fueling inflation.” But that’s not what he is saying. And then, since you misinterpret him, you then lament, “Why doesn’t Bernanke take the steps necessary to get this growth tomorrow? He’s making no sense!”

  2. Joseph Fetz says:

    Bob, this is actually intricately related to my opinion of why Wenzel’s call is not tenable.

    I know, this is completely unrelated to this post, but this post of yours helps to explain why I do not feel that mere money creation gets an economy humming. You cannot ignore the structure itself if you want to explain the mechanisms thereof. Increasing the flow of liquidity only exacerbates the process, leaving a great deal of regular folks unable to realize the statistical gains of such an increase in circulating money.

  3. AC says:

    Do you mean because Bernanke is not planning to ease more, that’s why you’re saying his is not a demand-side explanation? Not sure I follow you in this post, but I could be a retard.

  4. Scott Sumner says:

    You claim that Bernanke meant “the economy will be able to support 5% unemployment at some time in the future, but not now.” Possible, but if he meant that why wouldn’t he have said that? Why use present tense?

    Plus, from his long list of writings before and after joining the Fed, we know conclusively that he’s a AS/ADer, not a Murphy/Klingon, in his approach to macro theory. You think he had a sudden conversion in an obscure speech given in Texas?

    • Bill Woolsey says:

      Kling favors targeting nominal GDP.

      His view appears a bit like Krugman’s–it might work.

      • Silas Barta says:

        Market monetarists have a frustrating habit of interpreting, “yeah, I guess that would be the least harmful way to misguidedly use monetary policy when the problem is structural” to mean “I favor that”.

        • Contemplationist says:

          “when the problem is structural”..

          Prove it. Please show your work. And your snarky tone is quite inconsistent with your professed Bayesianism. Nominal shocks have real effects. Real shocks also have real effects. There’s disagreement whether the current predicament is one or other or both. There’s disagreement as to whether Monetary Policy can help. Or that if it can help, should it be tried by the current institutional Federal Reserve.
          These are the points of disagreement. Scott has argued that most of the problem is nominal, that monetary policy can help, and should be tried. It has been an honest, very-well documented argument. You do yourself no favor with your stupid snark.
          I am one of some people I know who were “converted” (so to speak) from ABCT to Market Monetarism.

          • Silas Barta says:

            *yawn* You’re too predictable, too vindictive, too wordy. Not worth my time.

    • Brian says:

      Scott says: “Why use present tense?”

      He didn’t, except in the sense of hypothetical possibility, or better inherent capacity. Murphy’s example above says the same thing – i.e. The economy has the inherent capacity of being at 5% if we would only (for example) move all these workers to different states. Thus, it CAN (tomorrow) support that level, but IN PRACTICE workers won’t be moved that quickly. If he means anything but the fact that the economy has the inherent capacity to support 5-6% unemployment but in practice the structural fixes will take time to get us there, then he would have to follow with: “therefore, we intend to loosen monetary policy” or “however, various contraints keep us from loosening monetary policy…” [or the Greenspan-speak equivalent of one of those two statements].

      Scott says: “You think he had a sudden conversion in an obscure speech given in Texas?”

      From Murphy’s original post:
      “I’m not saying Bernanke thinks like I do, I’m just saying someone who did subscribe to (at least a certain class of) structural theories of the recession, might say exactly what came out of Bernanke’s mouth. In contrast, if you thought the problem were demand-side, then what Bernanke said makes absolutely no sense. Don’t take my word for it, Scott Sumner himself goes through and explains why Bernanke’s comments make no sense.”

      Murphy’s example is only intended to show that an extreme “structuralist” could/would say the same thing as Bernanke. Therefore, this quote is anything but evidence that Bernanke was saying that it’s all a demand-side problem and not structural.

  5. Rob says:


    Scott Sumner clearly believes that the current unemployment rate is caused by a combination of demand-side and supply-side factors. Stabilizing AD by NGDP-targetting will presumably only address the demand-side issues.

    Is your view that all the reasons that unemployment is high are supply-side and so AD is relevant ?

    If not, and you would concede that at least some of unemployment is caused by demand-side issues then am I correct in assuming that even then you be against stabilizing AD on the grounds that though we have underused resources in the economy you still think that increasing the money supply will reduce interest rates below the natural rate and cause mal-investments and trigger the ABCT, and therefore the only solution to AD problems is price adjustments ?

    (I’m just trying to get a handle on your views as many of your recent posts on Sumner have been vague on the reasons you oppose NGDP-targeting – though perhaps this would be obvious to those who have been following your blog longer than I have).

  6. Gene Callahan says:

    They don’t know they’re Sumnerites. They only see what they want to see.

    • Bonaparte says: