02 Nov 2011

Sumner Needs to Watch Some Film and Hit the Gym

Inflation, Market Monetarism, Shameless Self-Promotion 12 Comments

I used to say that Scott Sumner would be a far more formidable debating opponent than Paul Krugman, but lately I’m not so sure. I think for our debate, I just may print out 5 of Scott’s posts and ask the judge if I can submit them as exhibits.

For example, here’s Scott’s latest post that is quite clever, but ends up leading him into absurdity. (This is a metaphor for Scott’s entire program.) I reproduce it in full:

RMS Queen Elizabeth 2

“Attention passengers. Due to wind and currents, the ship has been pushed 12o miles north of its expected path.

The captain met with the QE2’s officers (the Frequently Off-course Mariners Committee), and decided that the setting of the steering wheel was still ‘appropriate.’ Thus rather than change our steering, we are changing our forecast. We no longer expect to make our scheduled arrival in New York, and instead expect to reach Boston on Tuesday. Unless we hit an iceberg. Enjoy the rest of your cruise.”

[Memo to Fed: Your job isn’t to change your forecast, it’s to change your policy in such a way that you don’t need to change your forecast.]

Funny stuff, to be sure. (Note the FOMC reference.) But, as is Scott’s wont, he ends up in CrazyVille.

First let’s make sure we understand the context. The Fed today lowered its forecast for economic growth next year, and raised its forecast for unemployment. So Scott is saying, rather than refusing to pump in more money, and resting content with a worsening forecast, the Fed should do what it needs to do, so that it doesn’t have to give the public the bad news about gloomier prospects for next year.

OK, now that we understand what Sumner is doing in his cute analogy, we are ready to get knocked onto the floor by how wrong the analysis is. Even on Sumner’s own terms, his critique of the Fed makes no sense. The Fed folks aren’t revising downward their projections for NGDP (though in fairness that could be backed out of their statement), rather they are revising downward their projections of real GDP growth. And the reason (officially) they give for not doing more, is that they think to do so would push inflation unacceptably high. So on Scott’s own terms, given the Fed’s current view of the world, he is asking them keep pumping in money to raise NGDP even though that might show up (in the Fed’s eyes) largely as an increase in prices, with little impact on real output or a drop in unemployment.

And just to show that the Fed isn’t doing something outrageous with its acknolwedgement that it isn’t omnipotent, look again at Scott’s analogy. He is actually making fun of the idea that people running a ship might announce, “We’re going to be late.” Scott thinks this is a BS invention of central bankers, to admit that we might have to change forecasts, rather than altering the universe to make our previous forecasts correct.

Would you step onto a plane where the pilot adhered to Scott Sumner’s philosophy? “Don’t worry folks, I promise I will do whatever it takes to make sure we land in Boston at 3pm. Let’s just hope there isn’t congestion at Logan when we get there, because I’m not going to adjust my forecast. We are landing in Boston at 3pm, period. You can take that to the bank. And don’t worry about these so-called ‘mid-air collisions’ that the airline bloggers are always talking about. I’m going to ban that phrase from my flights from now on, because any problem allegedly due to a ‘collision’ is really a problem with kinetic energy.”

* * *

While I’m on the topic of Sumner’s superficial argumentation ability, look at this response he gives to Greg Ip. Now some of Ip’s arguments are goofy, but at least one of them is pretty good: Ip points out that the Fed hasn’t been inflating more, because it feels constrained by inflation hawks. So Ip is asking, why does Sumner think that switching to targeting NGDP would suddenly give the Fed more backbone to print money?

Scott answers:

Ip’s data shows that Fed policy was disastrously off course in October 2008…. They weren’t even expecting to hit their own policy goals.

Think about the Fed’s dual mandate; low inflation and high employment. In October 2008 they forecast inflation of 1.5%; below their 2% implicit target for “stable prices.” And they forecast a sharp rise in unemployment. The Fed should never make that sort of forecast, as it implies their policy is far too tight….The Fed should always set policy so that either both variables are on target, or if one variable calls for easier money, the other variable calls for tighter money. And yet both the inflation and unemployment forecasts called for easier money….

Check and mate. Scott just proved Ip’s whole point. Look at what’s happening here:

(1) Ip says that Sumner thinks the Fed needs to inflate more, but that Sumner is naively thinking the Fed will suddenly have the will to stand up to the inflation hawks if it changes from its current framework (where it strikes a balance between unemployment and inflation) to one in which it targets NGDP.

(2) Scott says no way Ip, you’re crazy. The Fed isn’t inflating enough even with its current framework. That’s why, if the Fed switched to an NGDP framework, the Fed would begin inflating more in order to satisfy its framework.

Let’s at least put on a show, Sumner. I think you need to watch some more film and hit the gym.

12 Responses to “Sumner Needs to Watch Some Film and Hit the Gym”

  1. Joseph Fetz says:

    Elephant in the room– M2.

  2. Rick Hull says:

    > Scott says no way Ip, you’re crazy. The Fed isn’t inflating enough even with its current framework. That’s why, if the Fed switched to an NGDP framework, the Fed would begin inflating more in order to satisfy its framework.

    Well, perhaps they are just wussies and chronically come up short. If we just extend the framework a bit, then they will go a little hotter, where the manna really is.

  3. Anonymous says:

    So now we have plosser, fisher, and kocherlakota opposing more accomodation; evans dissenting on the last action wanting more accommodation; and the rest stuck somewhere in the middle. Now they have to adjust their forecasts to lower growth, higher unemployment, and higher inflation with no prospect of fiscal stimulus and europe on the brink.

    I’m starting to feel bad for Bernanke.

  4. Scott Sumner says:

    I was referring to NGDP. And Bernanke’s press conference statement suggested that the Fed should do more stimulus, based on the dual mandate. But then he bizarrely stopped short of advocating what his analysis clealrly recommended. I am referring to:

    Inflation expected to be at or below target, and unemployment expected to be way above target. Put them together, and you need more stimulus.

    QED

    • Bob Murphy says:

      Scott, is this thing on? (Referring to my microphone.) The Fed isn’t inflating enough (in your mind) based on its current stated policy goals. So why, if they currently had an NGDP target and were predicting that they wouldn’t hit the target, would they suddenly inflate more? You might say, “How could they blatantly be failing to live up to their own stated target?” but you claim that’s exactly what they’re doing right now, and no bolt from Zeus is stopping them–right?

      Also, you missed my first point. The Fed lowered its forecast of real growth. Even you don’t think the Fed has the power to directly control real growth. You don’t even think the Fed should be targeting real growth.

      Yes, in these current circumstances you have a theory that higher NGDP growth==>higher real growth, which may or may not be true. But it is weird for you to lecture Bernanke on lowering his forecast for real growth, and urging him instead to implement policies to make his previous forecast come true, when you think he shouldn’t have been forecasting real GDP and unemployment in the first place.

      So in your ship analogy, it would be like the captain saying, “We now forecast that we will have 2400 pounds of vanilla ice cream left in the kitchen when we arrive, rather than our original estimate of 2500.” (That analogy really works–they would eat more ice cream if the trip took longer.) You wouldn’t tell the captain to adjust the ship’s steering so that he hits the original ice cream forecast. Yet that’s analogous to what you’re telling Bernanke in your post.

    • Major_Freedom says:

      Haha, I laughed at the “QED.”

      If we were living in a different world, where the mandate of the Fed is to target “NGDP”, then Sumner’s other dimension self would be saying:

      I was referring to flippity floppity. And Bernanke’s press conference statement suggested that the Fed should do more stimulus, based on the NGDP mandate. But then he bizarrely stopped short of advocating what his analysis clearly recommended. I am referring to:

      Flippity expected to be at or below target, and floppity expected to be way above target. Put them together, and you need more stimulus.

      QED

      This stuff is golden. Thanks Murphy, for being so bold in pointing out the hilarious contradictions coming from the central planning crowd.

  5. Jon O. says:

    So now we have plosser, fisher, and kocherlakota opposing more accomodation; evans dissenting on the last action wanting more accommodation; and the rest stuck somewhere in the middle. Now they have to adjust their forecasts to lower growth, higher unemployment, and higher inflation with no prospect of fiscal stimulus and europe on the brink.

    I’m starting to feel bad for Bernanke.

    • kavram says:

      “I’m starting to feel bad for Bernanke.”

      Don’t, that’s exactly what he wants you to do. It’s why he tears up on C-SPAN every time Ron Paul grills him in front of Congress

  6. AP Lerner says:

    Off topic, but something I thought you would enjoy, Mr. Murphy.

    http://hpronline.org/campus/an-open-letter-to-greg-mankiw/

    Folks are finally waking up to the biased, neo liberal economics being taught in University. As I’ve said many times, the textbooks used in undergraduate and graduate classes are filled myths, lies, and deceptions. They are joke, and students are finally waking up to this. I realized this when I was getting my joke of a neo liberal degree…I feel a little bad for the PhD’s of the world…they bought a degree filled with lies.

    • marris says:

      This part is hilarious:

      > This class is required for Economics and Environmental Science and Public Policy concentrators, while Social Studies concentrators must take an introductory economics course…

      I think what we have here is a bunch of people who don’t like the conclusions of economic analysis walking out because they either “don’t want to think about it,” or would prefer to see “different conclusions.”

      “Staging a walkout” is just the respectable label for cutting class. Does anyone really think these guys are spending class time at the library, carefully working through “alternative” economic theories?