21 Sep 2012

Explainer: Why I Claim Scott Sumner Is Insane in the Brain

Economics, Federal Reserve, Inflation, Market Monetarism 20 Comments

I often say that I think Scott Sumner is “insane.” Now, on the one hand I’m obviously just joking; as I’ve mentioned a few times, Scott has a good sense of humor and I think he (mostly) appreciates my jabs (though not of course my policy recommendations).

On the other hand, though, I choose the term consciously, as opposed to some generic insult like “Scott Sumner is a fool / an idiot / a jerkface” etc. A lot of people think someone who is “insane” is a babbling idiot, unable to follow a logical argument. But on the contrary, I’m thinking of a guy in the psych ward who is (say) perfectly calm and collected, and in fact quite eloquent and intelligent. The thing is, he keeps insisting that he is Napoleon, and no matter what argument you use against him, he will bat it away with mild annoyance because he’s “already dealt with these objections a million times in the past.” What’s really interesting is, you can’t prove that he’s not Napoleon; the guy makes a surprisingly good case. But whenever you leave the conservation and take a walk in the park, you come back to your senses and remember, “No, the guy isn’t Napoleon, he’s insane.”

So that’s a good analogy for what I think of Scott. But add the caveat: The guy who thinks he’s Napoleon is a really cool guy, and you like spending time with him. But, you would never in a million years want him influencing government or central bank policy.

For those who want to explore the validity of my accusations, you can filter my blog posts for the Market Monetarism tag. Below, I’ll give two recent examples of the kind of thing I mean. So to reiterate, what I’m showing you here isn’t why I think Scott is wrong, but why I think he’s insane. There’s all kinds of bloggers making mistakes all the time, but what Scott does is special. Let me show you what I mean.

* * *

In this post from today, Scott first quotes from an Economist magazine description of the Jackson Hole monetary conference:

IMAGINE that the world’s best specialists in a particular disease have convened to study a serious and intractable case. They offer competing diagnoses and treatments. Yet preying on their minds is a discomfiting fact: nothing they have done has worked, and they don’t know why. That sums up the atmosphere at the annual economic symposium in Jackson Hole, Wyoming, convened by the Federal Reserve Bank of Kansas City and attended by central bankers and economists from around the world*. Near the end Donald Kohn, who retired in 2010 after 40 years with the Fed, asked: “What’s holding the economy back [despite] such accommodative monetary policy for so long?” There was no lack of theories. But, as Mr Kohn admitted, none is entirely satisfying.

Now I and most other self-described Austrian economists would say, “Oh, the reason this isn’t working, is that you guys are dumping poison, not medicine, into the system! So you shouldn’t be surprised that it’s not ‘working.'”

But that’s of course not what Scott says. Here’s how he responds to the above excerpt:

I’d like to solve the mystery that perplexed the greatest minds of monetary economics. Money has been ultra-tight since mid-2008.

The real mystery of Jackson Hole is why the greatest minds in monetary economics fail to recognize this fact. Milton Friedman understood. Ben Bernanke explained in 2003 that neither interest rates nor the money supply were reliable policy indicators, and ultimately only NGDP growth and inflation could tell you whether money was easy or tight. By those indicators (averaged) money’s the tightest since Herbert Hoover administration.

I’d like to offer a conjecture. If the monetary economists understood that monetary policy since mid-2008 had been ultra-tight, they would have a very different view as to what sort of policy is appropriate today.

Lots of economists have offered rebuttals to the market monetarist claim that easier money would help right now. For instance, George Selgin and Eli Dourado offered critiques of the sticky wage explanation for persistently high unemployment. But I’ve yet to see a single economist take on my claim that money’s been very tight.

It’s the last sentence above, which I put in bold, that led me to make this post. Of course lots of economists have told Scott that he’s nuts for saying that money has been very tight. It’s not just me, it’s also Brad DeLong. I mentioned this back when he said it, but for the record, here’s DeLong in November 2011 chiding Scott for saying the Fed has been tight since 2008:

Well, I would say that not just “modern Keynesians” but a lot of people believed that monetary policy was expansionary in 2008.

They believed so not just because (safe) nominal (and real) interest rates were falling, but because the money supply was expanding. Indeed, since 2007 the Federal Reserve has tripled the monetary base…

This episode of monetary expansion is surely the largest monetary expansion in the United States in a long, long time…If expanding the monetary base to three times its previous size is not “expansionary”, what could possibly be?

Now what Scott meant in his post from today is that not a single economist has convinced him that his own preferred measure of monetary tightness–namely, NGDP growth–is the wrong one to look at. But surely lots of economists have thought that, say, a monetary base tripling in 4 years and short-term interest rates being pushed down to zero, might reflect “loose money.” Maybe they’re right, maybe they’re wrong, but in Scott’s insane world, not a single economist has even argued the point with him.

We see further evidence of Scott’s insanity in a post from two weeks ago, when Scott criticized a Garett Jones post like this:

You probably already know what I’m going to say here.  I always dredge up the Friedman quote that low rates usually mean money has been tight.  Garett may have anticipated that objection, as he referred to the Taylor Rule benchmark when arguing money was easy.  But even that won’t work, as the Taylor Rule is highly unreliable.  For instance, John Taylor has a recent post showing that (according to the Taylor Rule) money was too easy during 2008.  That’s right, even though 2008-09 saw the biggest drop in NGDP since the Great Depression, the Taylor Rule says money should have been even tighter!  And the rule also implies money is too easy right now!!  I wonder how the stock market, and the global economy, would react to a tightening by the Fed at this afternoon’s meeting.  (Hint:  Check out 1937.)

Do you see what’s going on here? First, this is yet another economist (Taylor) who is taking on Sumner’s claim that money has been too tight. Taylor is showing that, according to the “Taylor Rule”–which was totally standard up through the advent of Scott Sumner’s blogging–money has been too loose.

Rather than argue with that, Scott now uses that output to demonstrate that the Taylor Rule must be a bad gauge of monetary policy.

This is a crucial point, so let me walk everyone through the progression here:

(1) Back in 2007, most economists didn’t even parse the world in terms of “NGDP.” Indeed, I wouldn’t have even known what those four letters meant if you asked me.

(2) Back in 2007, if you asked economists how to tell if the Fed had “easy” or “tight” money, most of them probably would have said various combinations of, “Look at how quickly they are creating new money,” “look at at how low they cut interest rates,” and–if they were sophisticated, they might say, “Use the Taylor Rule to see if interest rates are appropriate in terms of inflation and unemployment.” Very very few would have said, “See what NGDP growth is.”

(3) Back in 2007, if you asked economists, “Suppose the Fed triples the monetary base in a few years, pushes short-term nominal rates to zero and even negative in fleeting moments, and creates all kinds of credit facilities to bail out banks, do you think this is tight money?” then most of them probably would have punched you in the face.

(4) Now, because he is so sure that NGDP is the right metric to use to evaluate monetary tightness/looseness, Scott thinks not a single economist has even challenged his position, and that any other measure that says “money has been easy since 2008” is so obviously wrong that you can safely remove it from consideration. That is how clear it is to Scott, that money has been tight since 2008.

There is a word for such a viewpoint: insane.

* * *

Last point I want to make: There is something very very disturbing about Scott’s choice of NGDP as the metric of monetary policy. In particular, Scott thinks it’s obvious that if NGDP isn’t growing, then the Fed isn’t doing enough. The problem here is that NGDP is composed of price inflation and real GDP, and real GDP growth is sluggish when “the economy is bad.”

Consider this analogy. It’s a little unfair to Scott, because he has a plausible story to explain how nominal levels affect real factors, but it gets my point across quickly:

Suppose there are a bunch of doctors trying to get a guy to wake up from a coma. They have already pumped him with unprecedented amounts of a new drug, that the producer says should cure comas. Yet for some reason, the guy is still laying there, comatose.

Dr. DeLong says, “Well, I guess we just need to stimulate his body some more. His heart rate is too low, so clearly we haven’t done enough. In the last four years of this coma, we’ve already pumped in 200 mLs, which is twice as much of the drug as we’ve ever administered to another patient over a lifetime. Still, it’s not enough–clearly–so I say we are even more liberal with our treatment.”

Dr. Murphy says, “DeLong no way! That drug is poison. What more evidence do you need that it won’t work? Let’s stop injecting the drug, and let the guy’s body clear that stuff out. Maybe he will recover if we allow it time.”

Dr. Sumner says, “Of the two of you, Murphy is dangerous–his advice would kill the patient–while DeLong is just looking at it wrong. Contrary to Dr. DeLong, the patient has been suffering from you sucking those nutrients out of his body. I don’t know why you guys have been engaged in this policy of starving the patient of this drug. My measure is not to look at the volume of liquid you have injected into his body, but rather at his heart rate. Right now his heart rate is the second lowest I’ve ever seen in a patient, so clearly you have had a stingy medication plan. Now don’t get me wrong, if you pump in the drug and then the heart rate starts racing at 250 beats per minute, clearly you’ve pumped in too much. But right now, the heart rate is consistent with a comatose patient, so clearly you haven’t pumped in enough. Your measures relying on volume of liquid are obsolete. I have an analogy with an ocean liner if you don’t believe me.”

20 Responses to “Explainer: Why I Claim Scott Sumner Is Insane in the Brain”

  1. Adrian Gabriel says:

    And kids at GMU think this guy is a God. As if he is Friedman’s clone or something. He is no different than Friedman, he wants money injection measured on false Keynesian assumptions. Taylor was Friedman’s buddy and Friedman advocated the Taylor rule. Not sure about Sumner’s difference here, but he seems like an egotistical Chicagoan that’s trying to prove his master Friedman wrong with Friedman’s very tools and mechanics. Its like Friedman trying to prove Keynes wrong with Keynes’ mechanics.

    Do these guys realize the paradox in their arguments. Statists are funny, and they are useless at economics. Now I see why George Selgin fears fully embracing true Austrian Economics. He makes up these idioms like “cultish” when describing Rothbardians, when the real cult is the intelligentsia and their love for Keynesian mechanics, most specifically Fractional Reserve Banking. I remember reading Jeffrey Hummel if Selgin were Keynesian since he uses Keynes’ tools. Selgin then replied with some sort of ballyhoo that his ideas were different in some other unique way: http://hnn.us/blogs/liberty_and_power/141060.html

    I’m surprised Selgin tries defending himself here. I’ve never fully understood where Hummel stands, but he seems to also believe in some of that statist jargon as well. Velocity of money is bs, thanks for the tips Prof. Murphy: http://www.econlib.org/library/Columns/y2012/Murphymoney.html

    I’m sure that last link I provided, shows how Jeffrey Hummel is also on the wrong track, even if he does produce some decent work.

    No need to be perplexed, we must remember they all get paid to espouse all that statist ballyhoo. Their income relies on advocating those models, even if they manipulate them in odd ways to arrive at the conclusion they so see fit. It is still all wrong and those models are still always statist and unnecessary. They will also always lead to ratcheting of state power and advocacy of the pernicious fractional reserve banking practices. I wonder if any of them have taken the time to read any of Rothbard’s work. Their dogma is diffusing a stench of irony and inaccuracy.

    • Bob Murphy says:

      Ah, Adrian, I appreciate your enthusiasm and the praise, but I really think you are taking this stuff too much to heart. You’re going to burn yourself out, my friend. Maybe you should not look at econ blogs for a three-day stretch, and go to a petting zoo instead. I really think you would benefit from this strategy.

      • Adrian Gabriel says:

        haha thanks prof murphy. sorry for the passion. i seriously believe your efforts will change the world some day. i’m going to go pet some animals now….brb

  2. marris says:

    Bob, this Napoleon plot sounds like a great movie. Has it been made?

    I think K-PAX is pretty good. It is sorta like this.

    • Bob Murphy says:

      Marris I actually think K-PAX influenced my goofy narrative in this “Scott Sumner is insane” theme…

    • Keshav Srinivasan says:

      If you liked K-PAX, then I think you’ll like “The Man from Earth.” It’s also about someone who speaks perfectly rationally and coherently about something that’s pretty much impossible to believe.

  3. Max says:

    Milton Friedman argues persuasively that the Fed had a tight money policy in the Great Depression, despite 0% rates. But there was deflation, so – adjusting for inflation – the Fed actually set a high interest rate. All this proves is that nominal rates are a very poor guide to monetary policy when there is significant inflation or deflation.

    • Bob Murphy says:

      Max, OK, and inflation-adjusted short-term rates since 2009 have been negative, right? (I’m not looking that up but I’m thinking that has to be true, since the CPI rose more than 0.25 basis points per year since 2009.) Right now, 5-, 7-, and 10-year TIPS yields are negative.

      The one thing the “tight money” crowd has–and I grant you, it’s a very powerful card to play–is that consumer prices haven’t gone through the roof. Except for that, any other measure you pick shows that the Fed has been looser than at any other time in history.

      • Max says:

        Yes, negative real rates. So you can’t say that the Fed is tight in the same way that the Fed was tight in the GD. Which is good, because GDs suck.

        Now whether the Fed is following an optimal policy is another issue. You can say – okay, the Fed is loose, but it’s not enough. The economy wants what it wants, history be damned.

      • Adrian Gabriel says:

        Prof. Murphy, CPI? I always thought Austrians had the more accurate card in hand. Doug French once mentioned shadow stats and their description of CPI. This is indeed still a flimsy tactic, CPI is a government manipulated number.


  4. Jeremy R. Hammond says:

    “Maybe they’re right, maybe they’re wrong, but in Scott’s insane world, not a single economist has even argued the point with him.”


  5. marris says:


    First, this is a fantastic teaching post since it combines so many important concepts (what the Fed is currently doing, the fact that it can target *different* aggregate nominal measures, falsifiability of macro theories, etc). And I think the Napoleon analogy is a really evocative way to tie these ideas together.

    Maybe I can move the ball a little further down the court by suggesting that Scott does suggest a test that would convince him that NGDP level targeting is not good monetary policy. He’s stated that if the Fed *does* target NGDP levels for an extended period of time and things don’t get better, then he will be convinced that this is a bad idea.

    [He has a plausible story that the Fed can always hit nominal level targets, so let’s assume for now that they can]

    If we unpack Sumner’s suggestion, it becomes: If the Fed hits its RGBP+inflation target for an extended period of time, and RGBP stays low, then he (Sumner) will be convinced that this idea is a bad one. So we would have to see an extended period of low RGBP and higher (3-5 percent? >5%?) inflation.

    I think the reason that Tyler Cowen and the rest of the GMU gang are somewhat supportive of Sumner is that they don’t think that situation (3% inflation for an extended period of time) will be so bad. Most business investments in the real world require much larger expected profit margins (15+%) before they are undertaken. So as far as they’re concerned, this is a low risk idea that will cause minimal bad disruptions.

    My own personal intuition is that *any* macro policy that targets nominal measures in an attempt to affect real measures will eventually become ineffective as the actors in that system develop new ways to both pierce and exploit the new money veil [NGDP indexed wages? political influence in the NGDP futures market?]. Once such a system experiences its next big shock, people will start complaining again, and the central bank, thinking it needs to *do something different*, will throw aside the old veil and start weaving a new one,

    • Major_Freedom says:

      This is Goodhart’s Law in action, which market monetarists do not seriously consider.

    • marris says:

      Wow, I’ve heard the term “Lucas critique” used to refer to this (and similar) ideas, but not Goodhart’s Law. Thanks!

  6. Christopher says:

    The funny thing is what’s gonna happen if the economy eventually recovers.

    Imagine, hypothetically, Bernake had a sudden change of mind and became an Austrian. The FED would tighten money, raise interest rates and let all the bad debt be liquidated. Imagine, still hypothetically, the economy got better and eventually grew after that. Scott Sumners would say:

    “See folks, that’s exactly what I told you, the FED loosened money to the point were NGDP rose and here we are, back to normal! I’m a genius, harharhar.”

    • Bob Murphy says:

      Yep, that’s what he would say, and with some justification. But that just proves my point.

  7. Edward says:

    I hear the same fallacy, over and over again, the “they’ve done more than the ever have before” fallacy. Now I don’t agree that low rates NECESSARILY means money has been tight, just that there is a strong correlation.
    (As Scott himself has said.)

    But back to the fallacy, why should we consider history. History is irrelevant here, Bob. WHO CARES WHAT THEY”VE DONE BEFORE! If you have a raging infection that requires 100 doses of antibiotics, and the moderately conservative doctor gives you 50 doses, (which is more than he EVER did in the past) There is no mystery as to why the patient wont recover. (Despite that reasonable conservative doctor’s utterly bat**it crazy radically conservative colleagues who hallucinate and imagine that the antibiotic is actually arsenic.

    • Mike T says:

      ” If you have a raging infection that requires 100 doses of antibiotics, ”

      >> Edward, do you not see how that’s part of the problem? How do you *know* the infection requires 100 doses of antibiotics? How do you *know* the 100 doses won’t cause any side effects that are worse than the initial infection? You’re assuming your conclusion.

      You’re making a silly counter argument here. If we were certain that if we do “x,” then “y” will happen without any harmful unintended consequences a, b, c, d, etc., then I don’t think anyone would rationally disagree with you. However, that’s simply not the case and this has been shown many times through what apparently you consider to be “irrelevant historical” examples.

  8. Matt Tanous says:

    It seems like determining whether money has been “tight” based on NGDP is begging the question.

    Assume that NGDP will rise if money is “easy”. NGDP does not rise. Thus, money is too “tight”! Perhaps the assumption is wrong – that “easy money” does not mean a happy time of rising NGDP (which,of course, ignores inflation) during a bust? Absurd! No (mainstream) economist would dare think in such terms!

  9. Suzanne says:

    I think you ALL are missing the point. Money is NOT tight if you are a major bank, in fact, money’s being thrown at you everyday to hold up the markets. Money IS tight for you if you are a mom and pop shop trying to get a loan…as usual, it depends upon who you are and who you know…

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