29 Oct 2015

The Two Faces of Scott Sumner

Scott Sumner 28 Comments

I don’t know if Scott Sumner’s world view contained contradictions all along and I am just recently noticing them, or if he decided to punt on most of his original views and focus on “we need more inflation” to not muddy the waters.

In any event, Scott used to lecture people when they thought about central bank policy in terms of interest rates. Nowadays, all Scott talks about is how it would be a mistake for central banks to raise rates.

It used to be that Scott said “there is no such thing as wait and see” when it comes to evaluating monetary policy. For example, here and here. If you read those links, you’ll see that this was a principle he used to try to ram into people’s heads; I don’t just mean he adhered to it the way, say, he might like vanilla ice cream. No, to say “there is no such thing as ‘wait and see’ when it comes to monetary policy” was a tenet of Scott Sumner, blogger.

But now things have totally flipped. Not only does Scott think the last six years have amply proven that the hawks were wrong, but he in fact is aghast that some people might deny that you could look at several years of experience and then determine whether the hawks in 2009 had been right or wrong:

I argued against a rate increase in September, and will probably argue against one in December. If it turns out that 2 or 3 years from now the Fed is setting rates where the Fed currently expects to set rates, then I will have to concede that my current views are wrong, and that a rate increase in December would have been called for.

In contrast, if 2 or 3 years out in the future the Fed is setting rates where the market currently thinks they will be setting rates, then the Fed hawks (and even some doves) that now favor a rate increase in December will have clearly been wrong.

What discourages me most is not that people are right or wrong (there’s a good chance my views will turn out to be wrong.) Rather what discourages me most is that people don’t seem to even understand that after the fact it is possible to ascertain who was right and who was wrong about monetary policy. For instance, in retrospect Richard Fisher was clearly wrong in advocating a rise in interest rates in July 2008.

Last thing: As with Krugman’s Kontradictions, I am sure Scott can reconcile all of the above. But 99% of his EconLog readers of that recent post would walk away thinking, “Scott Sumner is saying that after waiting three years, we will have convincing evidence about whether today’s hawks or doves are right.” If that’s not “wait and see” to evaluate monetary policy, I’m not sure what is.

28 Responses to “The Two Faces of Scott Sumner”

  1. Transformer says:

    I am sure the first one has been addressed many times: Accepting something obvious like the fact that in current circumstances a raise in rates would represent tighter money compared to no rate increase is very different from thinking “about central bank policy in terms of interest rates”, which I take to mean seeing interest rates as the primary policy instrument which Sumner consistently opposes.

    On the second one: From reading the two linked-to posts I think his view is not that you won’t be able to look back in the future and see who was right and wrong on a policy – but that you don’t need to – you can tell right away by looking at the right indicators if a policy is effective or not. If a doctor was so confident in his ability to recognize the early signs of a disease he might be able to say both “you don’t need to wait and see if he has the disease – those spots mean he has it already” and then after the patient has died of the disease “see , you can look back and see I was right”. Isn’t that all Sumner is saying here ?

    • Bob Murphy says:

      I am sure the first one has been addressed many times: Accepting something obvious like the fact that in current circumstances a raise in rates would represent tighter money compared to no rate increase is very different from thinking “about central bank policy in terms of interest rates”,

      No, if the Fed did what Sumner recommends, then interest rates would go up. Milton Friedman is cited time and again by Scott saying “it is a mistake to associate very low interest rates with easy money.”

      I get what you’re saying, and there’s a way we could elaborate on your remarks to make them correct. But this is part of my point: All the people Scott has been lecturing over the years would be able to clarify “what they meant” too. Scott is now being just as lazy/sloppy/efficient with his time (take your pick) as the people he previously abhorred.

      • A says:

        As a member of the 99% readership, the quoted passage looks like frustration that ex post information has been ignored. There is no clear contradiction with expectations adjustment communicated through market signals.

      • Transformer says:

        Sumner would probaly recommend increasing the monetary base right now which would initially cause rates to fall (or at least stay low) initially and then rise.

        He is opposed to the fed reducing rates becasue he thinks this would decrease the monetary base which would at first raise rates, and then lead to them going and staying low.

        This is consistent with Friedman’s view and I’m not sure what parts of your quote from Sumner’s post are lazy/sloppy.

        • Transformer says:

          **typo: He is opposed to the fed reducing rates = He is opposed to the fed INCREASING rates

  2. Levi Russell says:

    I got really confused with Scott’s stuff after his recent “banking doesn’t matter” post. Just bizarre.

    • guest says:

      I think this is the article to which you refer:

      Please stop talking about banking
      http://econlog.econlib.org/archives/2015/09/please_stop_tal.html

      That some pretty good theory, if not application, as were his points that, “Print more currency than people want to hold and NGDP gets forced higher—that’s monetary economics”, and, “A quadrillion Zimbabwe dollars will do wonders for NGDP, regardless of what else is going on.”

      What he’s saying is that lending is not, technically, a necessary component of the kinds of stimulus that Keynesians want. That’s true.

      What he misses, though, is that banking is *psychologically* necessary, because it hides the fact that printing bank notes in excess of specie is just counterfeiting, which would be more readily apparent under what would seem to be Sumner’s preferred system: government notes given out, directly, to specific people or classes of people.

      Though the following video doesn’t directly address this issue (if I recall), the concepts explained should be helpful:

      The Economics of Fractional Reserve Banking | Joseph T. Salerno
      http://www.youtube.com/watch?v=33RXhv0IuPc

      • A says:

        Even if you are skeptical of EMH, that is an extraordinarily aggressive view of human irrationality.

        • guest says:

          I’m telling you, I tell people, “It’s *paper*!”, and they look at me like I’m stupid.

          People, in their hearts, believe the paper is backed by *something* more than “nothing”. That’s how they treat FRNs.

          Which is why they see someone accepting paper and reasonably (though mistakenly) conclude that it’s money.

    • Dan W. says:

      I have a big problem with Sumner’s equivocation. In addition to his dismissal of the role banking is his declaration that monetary policy is not related to the credit markets. Perhaps in his mind this is so. But reality is that the functions of the Federal Reserve are tightly linked to the credit markets.This means that in the real world the Federal Reserve needs to be mindful of the impact its policies have on creation of credit and the financial instability caused by excessive credit.

      If Sumner imagines a new type of Federal Reserve he ought to be explicit about this purpose and expound on the changes that need to be made to its operations..Some institution has to be an intermediary to supply money to the real economy. If not banks, who? If not via loans, how?

      • Levi Russell says:

        The unwillingness to tackle problems in a real-world fashion is a function of spending one’s life in a Keynesian world of accounting-as-economics.

  3. trent steele says:

    This of this in terms of: Sumner has moved to Mercatus. Mercatus wants to place its scholars in government, then have them come back w/ cred. Sumner is angling for a position at the Fed.

    Does this make it make any more sense?

    • Tel says:

      So your theory is that once Sumner demonstrates he can deliver a blog post that is both perfect unintelligible gibberish, and simultaneously alluring with the teasing hint of great depth, yet no one can precisely put their finger on what’s wrong with it; the Fed will immediately hire him to write their next FOMC minutes.

      Kind of like a modernized and overly verbose Zen Koan I suppose.

    • guest says:

      “1. The level of interest rates is not a reliable indicator of the stance of monetary policy.”

      The fact that a particular rate is actively being pursued using monetary policy is the indicator, not the specific level.

      So, to the extent that the Fed is successful in achieving their preferred nominal rate *against otherwise market-set rates* is the extent to which it is wrong.

      The Fed thinks market-set rates can be economically destructive, at times, which is why it targets a different rate; But that’s logically impossible, since interest rates reflect the time preferences of savers, which doesn’t need to be corrected.

      • Rick Hull says:

        > The Fed thinks market-set rates can be economically destructive, at times, which is why it targets a different rate; But that’s logically impossible, since interest rates reflect the time preferences of savers, which doesn’t need to be corrected.

        This is not a persuasive argument. It’s not logically impossible that aggregate time preferences can have follow-on effects that imply some sort of death spiral. This is (sort of) the basic premise of macro. I don’t buy the exact premise either, but it’s certainly plausible.

        • guest says:

          ” It’s not logically impossible that aggregate time preferences can have follow-on effects that imply some sort of death spiral.”

          If the price of food doesn’t stop dropping after seven days, are people going to stop buying food until it does?

          At some point, the prospect of starving to death outweights the monetary profit one might gain by waiting for the lowest price.

          The same is true with every other good. Either the price will stop falling when the seller takes it off the market because he’s not getting the profit he wants, or when the buyer’s time preference for the good becomes higher than for the monetary profit.

          As Tom Woods says: “At some point, you need the laptop.”

          • Rick Hull says:

            100% agree that the goods, rather than monetary, view of the economy removes much of the uncertainty.

            I still think that some analogy to an insurance death spiral is plausible. Changes in the real world can make prior decisions and arrangements so unprofitable as to bankrupt an enterprise. Macro views the economy as such an enterprise and sees its job as preventing bankruptcy at all costs.

            • guest says:

              “Changes in the real world can make prior decisions and arrangements so unprofitable as to bankrupt an enterprise. Macro views the economy as such an enterprise and sees its job as preventing bankruptcy at all costs.”

              Austrians also recognize what you’re describing, but we view it from a different paradigm.

              All it means for an enterprise to become bankrupt as a result of the conditions you describe is that consumers don’t want the final goods enough to have justified the creation of that enterprise in the first place.

              Therefore that enterprise *should* go bankrupt, rather than be propped up with other people’s money / purchasing power.

              Investors should stop investing in lines of production that consumer demand hasn’t justified.

              But nominal paper prices distort the use-value of the goods that the paper is supposed to represent (at least in the minds of savers / investors, because that’s how they treat FRNs).

              So, what you call death spirals, Austrians say are always, necessarily, corrections of malinvestments that shouldn’t have been started in the first place.

              Then the question is: How do we know ahead of time which of those are malinvestments?

              The answer is that, if you’re trying to bypass the signals sent by consumers because you don’t like the prices or interest rates they set, then investments that were undertaken as a result of loose monetary policy are necessarily malinvestments.

              Why? Because individuals always, and can only, economize for their own profit – even when pursuing individual egalitarian ends.

              This is the Action Axiom. Economics is always about the individual, not aggregates. So, you have to use Methodological Individualism to understand it, properly.

              Producers produce for consumers, and no one else. Even the act of production is for the purpose of future consumption (we’re all consumers).

              So, market-set prices / rates are always correct, and stimulus is never needed.

              • Major.Freedom says:

                Well said, guest.

                There is no such thing as an insurance death spiral, or deflationary death spiral.

                They are weapons of fear mongering for political purposes, nothing more.

    • guest says:

      “Here’s an analogy. Suppose Bob claims to be able to predict the future. He tells me that when I toss a die the number will end up being 1. I’d say that’s a bad forecast, as there is only a 1 in 6 chance that 1 shows up on the die. There’s no “wait and see”, Bob simply made a bad forecast, based on probability theory.”

      *Theory* tells him that, he says.

      😉

  4. Bala says:

    “Here’s an analogy. Suppose Bob claims to be able to predict the future. He tells me that when I toss a die the number will end up being 1. I’d say that’s a bad forecast, as there is only a 1 in 6 chance that 1 shows up on the die. There’s no “wait and see”, Bob simply made a bad forecast, based on probability theory.”

    That……. is a good game of “Heads I win. Tails you lose.” If he can label a prediction of 1 as a bad forecast because the probability is only 1 in 6, he can call any other prediction a bad forecast. Since you can only predict an integer from 1 to 6, if you must predict, you will be making a bad forecast in his book. And he will be able to declare that right when you make the prediction.

    I just wonder why you bother arguing with Sumner. He can never lose on his own terms.

    • A says:

      Your argument is confused by your own assumptions, resulting in you arguing with yourself. 1, or any other number, is a bad choice because it is presented as the most likely choice. None of the numbers are more likely than the others. Any good choice acknowledges that parity. You are injecting a “if you must predict” condition that does not apply (notice the lack of odds making).

      • Bala says:

        “None of the numbers are more likely than the others. ”

        I am surprised you do not see the presumptions in this statement. First, even if one is talking of making predictions on the outcome of the throw of a die, one needs to mention that it is an unbiased die to make such a statement. A biased die where the person making the prediction has prior knowledge of the bias of the die can throw up any 1 number with a greater probability than that of others.

        Second, you seem to miss the point that I did not make very explicit, which is that Sumner is (quite incorrectly) likening Bob’s “prediction” on interest rates to the predictions on the outcomes of the throw of a die. If they are not equivalent and Bob could be making his predictions on some knowledge that goes beyond probabilities, Sumner’s analogy would be rendered invalid.

        Third, you presume that I did not understand this point when i operated within the realm of an unbiased die. I was making precisely the point you are making now when I said “you will be making a bad forecast in his book. And he will be able to declare that right when you make the prediction”

        I can therefore see why you missed the point I made about how you cannot defeat Sumner on his own terms. You need to question the terms of the debate, starting from the point that NGDP is nonsense data that tells you precious nothing about the state of an economy and that gazing at it is no better than navel-gazing.

        • Harold says:

          We could say that Bob’s prediction of a 1 is a bad one if he cannot predict the future, but it may be a good one if he can in fact predict the future. Saying it is a bad prediction pre-supposes that he cannot predict the future, and is thus begging the question.

  5. Adrian F says:

    This is a bit off bob murphy’s point in this particular post, but just reading through some of ssumner’s posts I noticed two things:
    1)ssumner writes: “They currently want to raise rates to 3.5% over the next few years, and I suspect the markets will say no again. If I’m wrong and rates do rise that much, then markets and I will have been wrong”.
    Markets will have been wrong? What happened to EMH?

    2) “On any given day a Fed decision to raises rates is a tighter policy that a Fed decision to not raise rates”
    I’m sure I’ve read ssumner write “never reason from an interest rate change” and “enough has been said by Milton Friedman that high interest rates don’t mean tight money, but the opposite!

    ?

  6. Yancey Ward says:

    If Sumner is making less and less sense to a rational mind, then he is one step closer to being Fed Chairman.

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