What Evidence for Market Monetarism Sumner Giveth, Sumner Taketh Away
There’s no way I can condense the argument down to a few excerpts. In order for you to understand my point here, you’re going to have to roll up your sleeves and read Scott Sumner’s whole post, in which he presents two different lines of evidence to argue that “real” shocks don’t cause unemployment while slowdowns in NGDP growth do.
Then, after you’ve read his post, you can come back here and see my analysis. At that point, if you already had your doubts about Sumner, you will say, “Holy smokes, Bob is right. That’s hilarious!” On the other hand, if you’re a fan of Sumner, you will say, “I can’t believe I let Bob talk me into cooking a 15-minute nothing burger.”
So if you feel like taking this journey with me, go read Sumner’s post.
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OK, welcome back. Let me now make a series of statements about Sumner’s post (and the fallout in the comments):
==> (1) Sumner’s whole purpose with this post is to argue that shocks in “real” factors can have huge impacts on welfare. However, they do not correspond to the business cycle. So long as the central bank exercises wise monetary policy, real shocks can be offset and full employment can be maintained. In contrast, we don’t need a real shock to get a recession and rising unemployment; all we need is the central bank to stupidly let NGDP growth fall below trend.
==> (2) The first line of evidence for this position Scott offers is Australia. Now Australia is a commodity exporter, so if real shocks mattered for the labor market, you would expect the commodity bust (i.e. steep fall in commodity prices over the last 14 months or so) to have caused unemployment to rise in Australia, But actually, Scott tells us, Australian unemployment has no discernible trend over the past year. Indeed, if you look at a longer history, you’ll see that Australian unemployment was gently rising before the commodity bust. That rise in Australian unemployment was (Scott tells us) probably due to below-trend NGDP growth.
==> (3) The next line of evidence is Texas. With the collapse in oil prices, you might have thought that unemployment in Texas would shoot way up–that’s what would happen if “real” things mattered. But nope, it has continued to gently fall. So again we see that real shocks don’t cause unemployment, it’s monetary policy, stupid.
==> (4) The funny thing is, Scott never believed that either of these items had anything to do with labor markets in the first place, so it’s weird that he’s invoking them as a “test” of the “real shocks” doctrine. In the case of Texas, in the main post itself Scott writes: “[R]eal shocks can have a modestly larger impact on Texas RGDP, as the drop in oil output affects RGDP more than employment. It’s a capital-intensive industry.” He also earlier explained that “most of the Texas growth” of recent years isn’t due to oil, but other factors having to do with wise Texas government policies.
==> (5) Things are even weirder with Australia. Since unemployment was rising in the past, and Scott blamed below-trend NGDP growth, and in the last year was flat (give or take), you would assume that NGDP growth has returned to trend. But nope, that’s not what happened. As Justin D pointed out in the comments:
NGDP growth in Australia was extremely slow over the past year (2014Q2-2015Q2), up just 1.6%, slower than the 3.6% growth over the prior year, and yet unemployment was rising in the prior year and stabilized in the most recent year. How do we account for that in the market monetarist framework?
To this, Scott replied:
Justin, Good question. The decline was due to sharply falling prices of commodity exports, which has little impact on employment. That’s one reason I suggest that commodity exporters target total labor compensation, not NGDP.
You really have to stop and let that sink in. Rather than belabor the point, let me illustrate with an analogy:
Suppose I’m making the case that, contrary to conventional wisdom, moviegoers get more satisfaction from watching 3D movies with their special goggles in their laps, rather than wearing them. To illustrate my point, I cite the case of my cousin, who just watched the 3D version of “The Martian” and said he really loved it.
Someone on a lark decides to go ask my cousin if he wore the 3D goggles or left them in his lap. My cousin says, “I wore them, duh.” Puzzled, the questioner then asks me to explain this discrepancy: why did I cite my cousin in support of this rule, when in fact the opposite occurred? I answer, “Good question. My cousin is one of the rare people who has an oddly shaped head that really fits those goggles well. For people like him, my rule is that for maximum movie experience you want to wear the 3D goggles on the tip of your nose.”
In this (ridiculous) scenario, how would people feel about me citing my cousin to prove the rule?
Contra Krugman Episode 5: Who’s Crazy?
Tom and I tackle Krugman’s latest column, wherein he complains about the “con man” Paul Ryan and his (allegedly) insane budget plan.
Things That Make You Go Hmmmm
Sorry blogging has been so sparse lately, but Tom Woods is a slave driver.
In the meantime, here are three quotes from economists I read regularly, and my reactions.
==> Alex Tabarrok, in his case for open borders: “What moral theory justifies using wire, wall, and weapon to prevent people from moving to opportunity?”
My response: At face value, that can only mean that no moral person can ever use wires, walls, or weapons to deter other people, period. But I think Alex is perfectly fine with the owners of banks using wires, walls, and weapons to prevent people from exercising their freedom of movement and seizing some opportunity.
I’m not quibbling over words. See here for why I think the “Open Borders” guys have picked the wrong slogan (and accompanying rhetoric), even though we agree 99% on the issue.
==> Scott Sumner writes: “The passivity of real world central banks should not lead us to doubt what a really determined monopoly producer of intrinsically worthless fiat money can do, if sufficiently determined.”
My comment: To be clear, Scott is writing the above in support of more central bank action. He is telling the coach to put him in the game, so he’ll debase the currency.
==> Tyler Cowen, on the new Matt Damon movie: “(Planets, by the way, create erotic bonds stronger than those of actual marriages.)”
My comment: I can’t decide if my favorite part of this sentence is the “by the way” or the parentheses.
“Where I Come From…”
People say this to mean, “The code of moral rules and social etiquette that I picked up from my peer group in puberty is superior to the code that you acquired during your period of puberty.”
First, I encourage you to acknowledge that on a subjective relative scale, we’re all probably hitting our own moral targets pretty well with the same rate of success. Then, I ask you to acknowedge that on any absolute scale we can construct that is remotely reasonable, we’re all failing miserably.
If you do those two things, all of your hostility toward your neighbors should melt away. In particular, don’t evaluate their actions in terms of your subjective code, but do it from their code. In worldly values, their code probably has some pros and cons relative to your code, for success in this world. There were probably exemplary people from that culture over the decades or centuries who modeled that code put to the test.
Look, when a French guy walks up to me and says, “Comment allez- vous?” I don’t answer, “Huh? Where I come from, we would say, ‘How ya doing?'”
Last thing: I’m not engaging in moral relativism in this post. Rather, I’m saying you have no business judging anybody else if you use a subjective code. And if you try to use an objective code to judge others, guess what? You just judged yourself too, you hypocrite.
Ladies and Gentlemen, Introducing…
…the Creator of the universe!
I’ve often remarked that critics of Christianity often deploy the following two distinct objections:
(1)”The Christian God is a monster because he doesn’t stop the evil people.”
and
(2) “The Christian God is a monster because he goes ballistic on people for the most trivial ‘infractions’ of his inscrutable and/or immoral code.”
So, does anyone see a way to understand how the above might actually cancel out? Here’s a hint: We’re dealing with an infinitely intelligent, knowledgeable, wise, and good being, by construction (of the argument, not of God).
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I attended an excellent Presbyterian Bible study in Nashville. Once, someone asked the teacher why God only punished the whole Earth once (in the Flood), since (the guy in the crowd thought) humans were just as sinful today as they had been in Noah’s day. The problem with God’s apparent consistency was twofold: (a) If God is okay with the world being as sinful as it is day, why did He punish the people back then for being essentially as bad as us? In other words, God should have had 0 worldwide catastrophes. (b) If God thought those people deserved to be (almost) wiped out, then He should do the same every few generations, so that there ought to be many many episodes like the Flood. And yet, God chose to punish all of humanity exactly 1 time. Why?
The teacher’s answer surprised me. He said something like, “Well, the reason I think that the answer couldn’t have been zero, is that in that case, people might have thought God was bluffing. This makes us take Him seriously.”
The more I think about that, the more I like his answer. Remember, the Bible says that one day, the “world is going to end”–because God is going to come back and do it personally. People say, “Hey, it’s not the end of the world,” to mean that we should all relax and stop fretting about a situation. But actually, in this particular case, it is the end of the world, and you should pay attention. No time to stop beating yourself up and take a pill chill. You want to have anxiety (until you reach the solution) on this one.
Because God destroyed the world once, at the “end of the world” nobody can play dumb. They can’t pull a George Constanza, “Was that wrong? Should I not have done that? I tell ya, I gotta plead ignorance on this…”
* * *
The more I study the Bible (with my study partner–it’s like this), the more sense it makes to me. I remember when I was a lot younger thinking something like, “The gospel accounts are wonderful–who doesn’t like Jesus?–but man there’s some crazy stuff in the Old Testament. God was so mean back then!”
But now, if I had to sum up the “Bible as literature” in two sentences, it might go like this:
In the first part of the book, this one character has to explain who he is to everybody else. Then in the next part of the book, he gives them the perfect example to follow, given that they now know who he is and can understand the full context of his model behavior.
More on the Crude Oil Export Ban
I’ve written on this topic before, but at FEE today I made a new observation:
There’s another way of seeing the foolishness of the hostility to [U.S.] oil exports. Normally, when it comes to international trade, the layperson is wary of “cheap imports.” Those wily foreigners are always scheming to send us their products to help their own producers, at the expense of our own workers.
So isn’t it interesting that when it comes to crude oil exports, the layperson’s gut instinct has totally flipped? In other words, shouldn’t foreigners be angry at the United States for seeking statutory permission to flood their markets with cheap American oil, hurting their own workers and inculcating “dependence on US oil”? Isn’t it amazing that — apparently — shipping goods across borders causes pain to both the receivers and the senders?
More Murphy Meandering (through) Minimum Wage Literature
At EconLib. Here’s something that might surprise you, but you need the background info that when Krugman told the NYT readers that there is “just no evidence” that minimum wage hikes reduce employment, he linked to a 2010 paper by Dube et al. So with that:
If we are discussing proposals to increase the minimum wage to $10.10, then Dube et al. are telling us that they are 95-percent confident that teenage employment will fall by no more than about 6 percent.11 If, instead, we consider the more aggressive proposals to raise the minimum wage to $15 per hour, then Dube et al.’s results assure us with 95-percent confidence that the hit to teenage employment will be no worse than about 16 percent. (!) These outcomes are hardly negligible, and they are fencing in a spectrum of bad outcomes, not just an isolated (and improbable) disaster. In other words, when we translate the quotation from above into plain English, we are not saying that there is just a small probability of an awful result, but that otherwise things are fine. Rather, Dube et al. are merely placing a ceiling on how bad the employment drop will likely be.
If that doesn’t surprise you, then you probably won’t flinch when you see me favorably mention Daniel Kuehn either.
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