15 Aug 2012

Update on Scott Sumner Debate

Economics, Federal Reserve, Market Monetarism 25 Comments

A few people lately have been asking me about this. Well, I am still not yet ready to face Vader. I don’t want to lose a hand.

However, it occurs to me that I could win the debate just by saying, “Scott Sumner published this on his blog. And fans of the free market are looking to him as a guru?”

And what sort of consumption does China need more of? Obviously the urban middle class are doing OK. The big problem in China is the vast rural population, as well as the 100s of millions of migrant workers in the cities. Their living standards are quite low (albeit rising fast.) Most Chinese have enough to eat, and clothing is dirt cheap in China. So what comes next? If you are living in a ramshackle rural dwelling, then you dream of a sleek modern urban apartment. Yes, you might also want lots of other things, such as home appliances. And in the very long run you might want services like dog psychologists and spa treatments. But most Chinese are far from that level of consumption. So for now it’s a nice place to live and lots of stuff to put into your new house.

This is where George Carlin comes in. He pointed out that the only real purpose of a house is to have a place to “put all your stuff.” So if the Chinese need to consume far more goods (and they do) then they need a place to put all their stuff. That means more houses, lots more.

Of course there is a grain of truth in the skeptics’ critique. China has a state-dominated economy, and is building some houses in the wrong places. But that is certainly not the big story. Most houses are going up in big urban areas, where the Chinese are moving by the 100s of millions. Another criticism is that the Chinese can’t afford to live in these places. So print more money. The response is that this would create inflation. But weren’t you just telling me that Chinese housing prices were going to collapse? Is it a supply-side problem or a demand-side problem? Or a misallocation problem? I’ve tried to show that with many hundreds of millions of poor Chinese people still in need of housing, it’s not a major misallocation issue, as the vast majority of housing is being built in the cities where people are flocking in huge numbers.

In case that doesn’t convince you, check out the next post, where Sumner is more specific, and explains the type of dwelling-units that “China” “should” be producing. He’s actually over there right now, which is how he knows. He wouldn’t dream of being a central planner from across an ocean, for heaven’s sake. The guy has a PhD from Chicago!

25 Responses to “Update on Scott Sumner Debate”

  1. Peter says:

    Who needs markets when free introspection from Chicago PhD’s is on tap?

  2. Wonks Anonymous says:

    I think he’s acting less like a central planner than a libertarian-economist justifying something that observers complain about. Left-libertarians often refer to that activity, ignoring the effects of government intervention, as “vulgar libertarianism”.

  3. Ken B says:

    Isn’t he essentially making a prediction? A reasonable sounding one based on the evidence? He is saying that there will be a big demand for low level housing in the cities where people are already moving, and not in some other zone some 5 year plan envisions. And he is predicting that there will be a high demand for small (cheap) houses as most buyers need basic shelter in the city (as opposed to the current ‘ramshackle’) not big ones to keep foose-ball tables.

    And he is not suggesting an Organization Todt to build them, but a loosening of money to let the market function freely. he is not endorsing having the govt decide, just asserting that right now the policy *is* meeting demand and predicitng it will for the near term. I just don’t see any signs of a dirigiste inner soul showing through here.

    • Bob Murphy says:

      The central planner stuff was mostly for fun, Ken B. My real problem was how he dealt with the objection that these units were too expensive for the Chinese by saying “so print more money.”

      • Major_Freedom says:

        That comment made my jaw hit the floor.

      • Silas Barta says:

        Exactly. “The poor need housing, so print them some money to buy it” is just the “sophisticated” way of saying, “let’s give them housing vouchers”, which in turn is the sophisticated way of saying, “let’s build them public housing!”

        Amazing how the idea evolves in response to attacks in order to infect the “free market” meme.

        • Ritwik says:

          Or, Milton Friedman was a commie.

      • Christopher says:

        When I first read that piece I didn’t even understand that particular part. I thought my English was off or something. Is he actually saying the Chinese should print more money to enable themselves to buy homes? I mean, as an actual suggestion for a policy?

        • Joseph Fetz says:

          I wondered the same thing. I didn’t know if he was saying “print more money” as a policy recommendation, or that would be the action recommended by the critics who say the “Chinese can’t afford to live in these places”. I assume that it was his own recommendation in response to the previous sentence, but I am not sure.

          • Major_Freedom says:

            It’s a policy recommendation.

            The quote in context:

            “Of course there is a grain of truth in the skeptics’ critique. China has a state-dominated economy, and is building some houses in the wrong places. But that is certainly not the big story. Most houses are going up in big urban areas, where the Chinese are moving by the 100s of millions. Another criticism is that the Chinese can’t afford to live in these places. So print more money. The response is that this would create inflation. But weren’t you just telling me that Chinese housing prices were going to collapse?”

            Sumner is calling for more money printing.

            He anticipates that his critics will say that it would create inflation, so he is ready with the rhetorical question of “but weren’t you guys saying house prices are going to collapse?”

            In other words, he’s saying “print money” and his critics who talk about housing bubbles can’t argue against it.

      • Ken B says:

        OK, that more narrower objection makes sense.

        BTW I am pleased to learn who is Vader in your mind, because I’m pretty sure you see me as the Dark Side itself …

        • Major_Freedom says:

          Probably more like Salacious B. Crumb.

    • Jason B says:

      Isn’t he essentially making a prediction?
      Yes, and he’s also making a recommendation. One that probably isn’t such a good idea considering they’ve already built too many houses, ones that many Chinese already can’t afford. And what does Sumner want them to do, build more houses, just make sure they are more expensive. http://www.themoneyillusion.com/?p=15806&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Themoneyillusion+%28TheMoneyIllusion%29

      Sumner referred to Yichuan, and here’s Yichuan’s take on the bubble:
      It’s just that current real housing prices are extremely high and out of reach for even most middle class Chinese. This imbalance is likely because of financial controls that make the real price of housing not just the stream of consumption services, but rather the perception of future price growth. Chinese families need a store of value, and because housing depreciates slowly enough (4), rich Chinese people invest in it, driving the price up. It’s likely that China will need a real price readjustment to get on the stable real price path that you outlined. But once the prices start to drop, what are credit guarantee companies supposed to do? I remember reading a story a few months ago about concrete companies doubling down on their concrete truck investment to sell concrete on credit to housing companies who have yet to fully build their houses, much less get around to selling them. Even if housing is what Evan would term an “efficient bubble”, it doesn’t mean there won’t be serious financial problems. I’m not sure how monetary policy would respond, and a breakdown in finance may cause further supply side issues. That’s my concern on the housing situation

      • Tel says:

        That is exactly what has happened with Sydney house prices.

        [1] The banks are leveraged to the hilt on mortgage debt and this has become society’s primary store of value.

        [2] Every other investment other than the family home is subject to Capital Gains Tax at full marginal income rates (for many people that’s between 30% and 40%). Thus destroying many legitimate business investments.

        [3] The government dingbats are so afraid of bank insolvency that they need to consciously hold their sphincters shut at the merest hint of house prices falling… so they go out of their way to keep supply throttled and support the market.

        [4] The big super funds are forced to invest in property as well, because “everyone knows” it’s a good investment.

        [5] Many people can no longer afford a house at all, and are either crowded together with relatives or have their hand out for welfare and government assistance.

        [6] People don’t sell because selling a house invokes a substantial tax known as “stamp duty” and renting a house has its share of risks and complications (including many dodgy realestate agents and quite a lot of renter protection laws) so people just don’t rent and leave the house empty. Thus, in a city where people cannot afford to live, a significant proportion of houses are empty!

        Of course, the central planners are responsible for this mess, but yet they now propose to start trying additional rules to see if that fixes stuff (it won’t).

  4. Desolation Jones says:

    Skipping Sumner for Krugman? If this was boxing, this would be like trying to jump straight to Floyd Mayweather or Manny Pacquiao without paying your dues by fighting some of the high risk and low reward guys [Sumner] to earn your shot. Sure, you “beat” Karl Smith, but that was obviously a hometown decision.

  5. Bob Roddis says:

    1. Sumner, as a quasi-Keynesian monetarist, sees “the economy” as a machine. Austrians see the world as full of real live acting people. The act and they are ignorant. Making stuff and exchanging goods and services with other people is what they do. That is civilization. The terms of their exchanges (prices) provide essential information to the rest of the world for informed economic calculation. The Keynesians and monetarists simply refuse to understand this and their policies impair the process. Major Freedom has been informing Sumner almost daily that Sumner is a central planner. However, it is Sumner’s stated policy to ignore Major Freedom’s blog comments when MF respectfully points this out in detail on a daily basis. That says a lot.

    2. After a Keynesian/monetarist bust, how can average people be expected to engage in realistic re-pricing when they are relentlessly, perpetually and purposefully misinformed regarding the nature of the bust and its cure by Keynesians and monetarists?

    3. I had been thinking for awhile of telling Bob Murphy that his “debate” with Sumner would be over in about four minutes. This post suggests he was thinking along these lines too. But he’s polite about it and I’m not.

    4. DK and I actually agree on something. Obama said, “Look, I get the Keynesian thing. But it’s not where the electorate is.” That’s what I’ve been preaching. Explain to the public that the people who “run” the economy and teach in our schools actually believe that money dilution and unpayable debt help cure economic problems. They are called Keynesians. The public does not believe that these programs are helpful and could easily understand how they cause all of our problems. (Note that DK and Delong disagree with me on the importance of the public’s hostility to Keynesian policy, however.)


  6. Blackadder says:

    Look, Sumner wrote this post while he was in China, alright. We have no way of knowing that it wasn’t written under duress.

    • Silas Barta says:

      The Chinese need to coerce him to say more intelligent things than “Printing money solves affordability problems”.

    • Peter says:

      When Sumner starts quoting Thomas Friedman we’ll know it was coerced.

  7. JSR08 says:

    Could this classify as Sumner’s “jumped the shark” moment? Some people are just so smart they are dumb.

    • Bob Murphy says:

      It is Shark Week.

      • Egoist says:

        I find it interesting how the shark, an apex predator of the oceans, which will kill anything it wants, are viewed by otherwise “normal” families and children as worthy of devoting a week of respect and admiration to them every year.

        Yet those same people would recoil at the notion of devoting a week of admiration and respect to shark-like men, who kill anything they want.

        But then, those same people shout praises and hurrahs for shark-like men in uniform.

        A bit all over the place, isn’t it?

        I bet the wheels are spinning in the heads of those who want to rationalize the above to me in order to make the world seem a more just place in their minds.

        • Ken B says:

          An interesting thought Egoist. I think sharks are popular partly for the frisson of fear available to those safe in their houses, and because of the clean efficiency of the shark’s design. The shark might be exhibit #1 in Bob’s claim we can see god’s handiwork and excellence whereever we look.

  8. Ken B says:

    Sumner’s print money remark is kinda crazy. I wonder though if it isn’t a garbled attempt at turning what he sees as an opponent’s principles back upon him. The sort of thing Bob prefaces with “in your own worldview” (The sort of thing that should be in the subjunctive.) I rarely read Sumner but 1) he doesn’t seem crazy and 2) his writing is not always clear.

  9. jj says:

    There are two distinct issues in Sumner’s post:

    1) Is he making a recommendation, doing some spare-time central planning, or what?

    Well he’s not central planning unless he recommends that the government step in and do this by force of law. Is it central planning any time somebody posts “Buy this stock” or “Invest in solar”? Only if it’s the government doing it. Sumner didn’t specify, so why jump all over this?

    2) Is “print more money” a reasonable response to critics who think that Chinese housing prices are going to collapse?

    Yes it is. He was NOT saying that you can just print up money any time you want to be richer — if that’s your reading of Sumner, let me assure you that Sumner is going right over your head.

    Murphy, is this really too hard for you to follow? Or were you just reading everything in the most uncharitable sense possible?

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