24 Dec 2012

As Usual, Sumner Ignores Micro

Market Monetarism, Scott Sumner 21 Comments

In this post Scott Sumner shows he would make a great talent agent:

Back in 2009 I argued that only elite monetary economists should sit on the FOMC. Some of its current members are not even monetary economists, elite or otherwise. They are unqualified people serving in the most important economic policy position on the planet. I also argued that we should do whatever it takes to attract the best:

I don’t care how much is costs, even if we have to pay FOMC members a billion dollars a year, we will save much more money in the long run if we can get “strong” central bankers (pun intended) who have the vision to see what needs to be done, and who understand that effective policies require explicit target paths for macro aggregates.

Three years later Matt O’Brien made an even better case:

That’s another way of asking how long it will take the economy to return to trend. Here’s where things get really depressing. According to Fed Vice Chair Janet Yellen, we won’t get back to full employment until after 2018. If we assume the output gap will steadily shrink until then, that leaves us with roughly another $4 trillion in lost income. Maybe more. If Svensson really could double our recovery speed, he’d be worth $2 trillion to us. Even if that’s being wildly optimistic, something on the order of hundreds of billions of dollars probably isn’t. Tell me that wouldn’t be worth paying Svensson a billion dollars a year. Maybe more.

A trillion dollars . . . a billion dollars . . . and now the Financial Times is quibbling over a lousy million dollars:

Mark Carney took some persuading to become the next governor of the Bank of England. We know that he initially resisted George Osborne’s blandishments, only agreeing to apply when the term of the appointment was reduced from eight years to five.

But the full price paid by the chancellor has only this week emerged with news that on top of the £624,000 in salary and pension contributions Mr Carney negotiated for himself, the next governor will also receive a housing allowance worth £250,000 a year. This number was computed, we are told, on the basis that it would, after tax, give Mr Carney enough money to rent a house for his family in one of London’s smarter neighbourhoods. It also makes him, when all the cash amounts are totted up, among the best-paid central bankers in the world.

Scott focuses on macro but misses the marginal analysis. This is basic stuff. Yes, we can stipulate that Mark Carney’s move to the BoE will make the world many trillions of dollars richer. But that doesn’t mean we should pay him that much. I would be willing to say, “Keep printing money until the economy ain’t broke no more!!” for a mere £300,000 a year, and a monthly visit to dine with the Queen. I’d hate to see how much Scott thinks we should pay garbage men or teachers.

21 Responses to “As Usual, Sumner Ignores Micro”

  1. Tom G P says:

    I think you misquoted Sumner at the end, Bob.

  2. Bob Roddis says:

    That’s another way of asking how long it will take the economy to return to trend.

    Trend? What trend? There’s no trend. There can’t be a trend. One can never expect whatever data set exists today to provide a reliable guide to future outcomes. The market is a nonergodic stochastic system. The great and power Lord Keynes taught us this:

    “Keynes’s description of uncertainty matches technically what mathematical statisticians call a nonergodic stochastic system. In a nonergodic system, one can never expect whatever data set exists today to provide a reliable guide to future outcomes.” (Davidson 2002: 187).

    http://socialdemocracy21stcentury.blogspot.com/search?q=ergodic

  3. Tom E. Snyder says:

    Sumner has adopted Hayek’s fatal conceit. Or as Milton Friedman asked, “Where are we going to find these angels?” THERE IS NO MAN OR GROUP OF MEN WHO KNOW ENOUGH OR HAVE MOTIVES PURE ENOUGH TO MANAGE OUR ECONOMY.

    As God said to Pharoah through Moses, “Set my people free!”

    Merry Christmas–God is still on the throne.

    • Bob Roddis says:

      As with all non and anti-Austrians, they seem unaware of even the existence of the problem of limited and dispersed knowledge. Regardless, they sure don’t like the topic.

      In February, 2011, the American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:

      Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519–30.

      http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.1.1

      So now what is the excuse for continued purposeful obliviousness on the subject? Fringe fringe fringe?

      • Gene Callahan says:

        “As with all non and anti-Austrians, they seem unaware of even the existence of the problem of limited and dispersed knowledge. ”

        The problem of limited and dispersed knowledge is now standardly included in micro textbooks, Bob. But I guess if you only read Austrians, you wouldn’t know that, would you?

        • Bob Roddis says:

          1. My omission about those ideas slowly bubbling into the mainstream. I could have sworn I provided the citation to the American Economic Review announcing Hayek’s article on the subject as one its top 20 articles of the last 100 years.

          2. If these ideas are so well known, why is it that, except for a thimbleful of ex-libertarians, absolutely no one incorporates those ideas into their analysis? Certainly none of the anti-Austrians who comment on this blog understand those ideas in a serious manner.

    • Gene Callahan says:

      Sumner is not suggesting “managing” the economy. He is trying to get the money supply right.

      Maybe his system doesn’t do it, but it is a quite different issue.

      • Jason B says:

        “He is trying to get the money supply right.”

        Perhaps I’m misreading you, but if Sumner thinks the supply of money is “incorrect” and wants to make it “correct” then wouldn’t that definitely be one of the most economically important aspects of “managing” that he could do?

      • Richie says:

        What is the purpose of getting the money supply “right”?

        • Bob Roddis says:

          DK and LK are miles ahead of Callahan in the serious art of doubletalk, topic-changing and obfuscation. When Callahan attempts one of his deep contrarian thoughts, it’s usually pretty easy to take your flyswatter and smack the thing dead. But when you are up against an experienced Keynesian, it’s like taking your flyswatter to a living-room size pile of Jell-o. That’s probably because Callahan hasn’t been a Keynesian long enough. He’ll probably get better at it in a few years.

      • Major_Freedom says:

        The only source of information that can enable one to KNOW if the money supply is right, is the market process, not ivory tower intellectuals sitting on their arm chairs using their “intiution” to know what the money supply ought to be.

        Sumner is suggesting managing the economy, because managing the money supply is managing one half of every single trade.

        Or I guess Stalin wasn’t a communist because he only had 95.3% control over the means of production. I forgot about quibbling one’s way out of common sense understandings.

        • Joseph Fetz says:

          I would say that the money isn’t half of every trade, but is instead the opposite side of every trade in a monetary economy, the other side being the good ultimately desired. To say money is “one half of every single trade” would be to say that the utility received by the parties of the trade benefited equally. This is not so, at least not in terms of profit.

          Don’t worry, I know what you meant, I am just nitpicking.

          • Major_Freedom says:

            You’re right. I should say money is a positive portion of every trade. That rescues what I said while rejecting the presupposed equality that comes with “one half”.

        • Bob Roddis says:

          And we all know that Mr. Sumner always incorporates those apparently well-known Hayekian insights into his analysis:

          http://www.themoneyillusion.com/?p=17692&cpage=1#comment-205619

          • Major_Freedom says:

            That comment proved to me that I am on the right track.

            • Bob Roddis says:

              It shines a new light on his refusal to engage you: He does not know how to engage you and he knows it.

              It’s as if our arguments are strong magnetic north magnets and so are their minds. As our magnets approach, their minds scoot and shift the other way.

          • Joseph Fetz says:

            Ha, Murphy’s comment is priceless.

  4. Tel says:

    You mean that economics involves both demand AND supply?!?

  5. Tel says:

    If Svensson really could double our recovery speed, he’d be worth $2 trillion to us. Even if that’s being wildly optimistic, something on the order of hundreds of billions of dollars probably isn’t. Tell me that wouldn’t be worth paying Svensson a billion dollars a year. Maybe more.

    And if that recovery doesn’t come? Still pay a billion dollars as a sweet reward for failure? Worked for all the bailed out bankers, who couldn’t give themselves enough taxpayer-funded bonuses. Hasn’t fixed the banking industry though.

    Let’s start by putting some performance metrics on these guys, huh. Everyone else has to be able to show that they delivered.

  6. Porphy's Attorney says:

    Oh! I have a brilliant idea! You quoted Sumner as quoting himself writing:

    I don’t care how much is costs, even if we have to pay FOMC members a billion dollars a year, we will save much more money in the long run if we can get “strong” central bankers (pun intended) who have the vision to see what needs to be done, and who understand that effective policies require explicit target paths for macro aggregates.

    I have a brilliant idea that works with some of the earlier debates this year! Since it doesn’t matter what the entry point is for new money, Summer could just recommend that they pay themselves all the monies: every dollar the Fed increases the money supply by goes to the FOMC members first, as their pay (split however they wish). They then use the monies to buy the stuffs. No one else can have any complaint because everyone will adjust their rational expectations to the FMOC Members getting the monies first, and this method of payment will attract the best grifters that money can buy!

    Total win!

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