Scott Sumner (how many times have I started a post off with that?) tries to troll the left-econoblogosphere:
Suppose we were back in the 1990s, and unemployment was 5.0%. But now suppose the economy was growing slowly due to slow growth in the working age population and slow growth in productivity. A “Pop Keynesian” says that we can solve this problem with fiscal stimulus. What do the smart 1990s Keynesians say in reply?
What do they say today?
Tyler Cowen re-trolls us all by quoting it and adding a new title: Questions that are rarely asked. I guess I'm feeding the trolls.
Scott's question is rarely asked because it's a dumb question. The US in the 1990s wasn't in a liquidity trap as inflation was 4% and interest rates were higher. Many economists didn't think a liquidity trap as an issue, although some were concerned at the time about the proper inflation target to keep away from the zero lower bound on nominal interest rates. No Keynesian would suggest fiscal stimulus in the 1990s in the US. There is a difference in the answer between 1990s and today because today the US (and Japan) seem to be persistently undershooting their inflation targets, a sign of a lack of traction for monetary policy and a liquidity trap. In a liquidity trap, fiscal stimulus becomes a viable option.
This is one of those dumb 'gotcha' questions where Sumner is saying: You say X now when you used to say Y -- ha ha! Really what is happening is that f(x, y, z, t = 1990) = Y and f(x, y, z, t =2015) = X.
And Scott would understand that if he understood the Keynesian model. But Scott Sumner does not understand the Keynesian model.
He doesn't know whether an independent central bank matters or not.
He doesn't know the effects of fiscal stimulus or what qualifies as fiscal contraction.
He doesn't know how to measure the impact of fiscal stimulus or contraction.
We should take his pronouncements on anything Keynesian with a grain of salt. Better yet: ignore them altogether.
And it doesn't matter if Keynesian economics, broadly construed, is wrong. Maybe it is. Scott doesn't understand it either way. It could be the aether or general relativity. It doesn't change the fact that Scott doesn't know what it is.
What Scott does is substitute market monetarism (Green Lantern Institutional Bank theory) for Keynesian economics and then tries to understand Keynesian policy prescriptions in terms of GLIB theory.
I've recently discovered that his inability to understand Keynesian economics (and instead inexplicably filling the gaps with GLIB theory) is part of a more general inability to understand any macro model besides market monetarism.
You see ... Scott Sumner doesn't understand RBC theory:
My counterfactual is that had NGDP kept growing at 5% in 2008-09, then RGDP would have also kept growing (although it would have slowed slightly for supply-side reasons) and I claim that wages would have continued growing at about 4%. An RBCer would not agree. In their view the counterfactual result would be high inflation and high nominal wage growth, indeed wages soaring at perhaps 10%/year, or something like that. And because wages would have soared by 10%, the stable 5% NGDP growth would lead to 5% fewer hours worked, and the unemployment rate would soar from 5% to 10%. RBCers don’t believe than nominal shocks have real effects. The Great Recession was caused by real factors, in their view.
The math fits, but how plausible is that counterfactual? And keep in mind, BTW, this is the ONLY possible counterfactual to my claim that stable NGDP growth would have maintained high employment in 2008-09 ...
An RBC economists would say that if NGDP and RGDP had kept growing at roughly the same rate as it had before, then there couldn't have been any real factors causing a recession. Massive changes in wages isn't the only possible counterfactual -- nothing happening at all is also completely consistent with Scott's counterfactual path of NGDP and RGDP. RBC economists don't believe you can have a recession but keep NGDP and RGDP growing at their trend rates. They think Scott's GLIB theory counterfactual is impossible while still having a recession. I have no love for RBC, but at least I get it.
I have a rule of thumb:
All existing theories are superficially consistent with the qualitative behavior of the data.
That is to say there is probably some way that any theory can describe some set of data or some thought experiment; your job as a critic is to find out what that is and present your critique in a way that takes that into account. It's essentially being charitable towards other theories (in a way, a corollary of "Feynman integrity"). That's why I knew there had to be a problem with the way Scott was critiquing RBC theory -- there had to be a way to make it superficially consistent with his counterfactual.
My problem with market monetarism (GLIB theory) is that finding that plausible consistent story is too easy. Any data or thought experiment can be made to fit the theory. Market monetarism isn't falsifiable. There are no states of the world that are inconsistent with its statements. That's probably why an army has gathered behind Scott (Noah Smith makes a joke about terra cotta grad students).
Scott doesn't take my rule of thumb into account in his criticisms of Keynesian economics or any other macro theory. He can't! He doesn't understand the other theories [1]! And of course it's easy to show how something is consistent with market monetarism -- everything is! Counterintuitive macro results are easy to understand if you have a theory that can't be wrong [2].
So you have the Dunning Kruger effect colliding with an unfalsifiable theory, and the result is glib criticisms.
...
Footnotes:
[1] I think this goes a long way towards explaining why he doesn't understand information equilibrium even though when he wrote down his model, he wrote down an information equilibrium model.
[2] If you think market monetarism is falsifiable, please let us know. But I can assure you that you are wrong. All you have to do is take the supposedly unobservable state X and add and expectations operator to make E[X]. If it can be expected, it can come out of market monetarism.
Lol... this is another fun post Jason.
ReplyDeleteQuestions:
"Green Lantern"... from the comic books? Does it spell "glib" by design? Clever.
In your discussion of Scott's analysis of the RBC counterfactual, you write:
"An RBC economists would say that if NGDP and RGDP had kept growing at roughly the same rate as it had before."
But it's not clear to me that Scott is saying this from the paragraph you quote. It sounds like he's saying that for NGDP but not for RGDP to me. He clearly states that NGDP continues growing at a stable 5%/year in 2008/2009. Where in that paragraph does he state or imply that RGDP grows at at stable 5%/year too? It sounds to me like he's implying that RGDP is dropping (at ~5%/year?) in this RBC counterfactual. Actually that paragraph from Scott (out of context) makes sense to me:
1: RBC says nominal shocks don't have real effects. [Is this incorrect? Does RBC say something else?]
2: There was a nominal shock in 2008/2009 [as evidenced by a drop in NGDP]
3: There were also real effects in 2008/2009 [a drop in RGDP]
4: By 1, RBC theory must by necessity hold that 2 and 3 have nothing whatsoever to do with one another.
5: Thus if we examine (assuming RBC theory is true) the counterfactual that instead of 2, NGDP continued to grow at 5% a year (say because of different Fed actions), RGDP would have continued to fall as if nothing was different due to 1. In order to reconcile this continued decline in RGDP with the rising NGDP under this counterfactual, we must assume that inflation would have been 10%. The unemployment rate under RBC would have risen from 5% to 10% anyway (counterfactual or not counterfactual) since under RBC the nominal has nothing at all to do with the real.
That's the way I read Scott. Where did I go wrong? Where did he go wrong? The only place that it seems to me he could have gone wrong is with 1: i.e. his assumption that RBC says that the nominal has nothing whatsoever to do with the real. Is that a mischaracterization of RBC in your view?
Hi Tom,
DeleteYes the acronym was intentional and yes from the comic books. It's also a phrase used where some pundits say the president should "show leadership" but not say what concrete steps should be taken. Basically willpower can solve global warming or Syria.
Sumner believes in Okuns law so if unemployment doesn't rise, then RGDP doesn't fall. He notes that it might fall a bit "for supply side reasons" in the quote. But if unemployment only rises a percent then RGDP growth would change by less than half a percent.
In effect he is saying RGDP barely budges.
RBC economists have no problem with real shocks having nominal effects. They'd see 2008 as a real shock that caused nominal effects.
Thanks Jason. BTW, Sumner updated the counterfactual in a response to your comment, and asked you about that.
DeleteI agree exactly with Tom Brown's (first) comment. I think Tom understands exactly what Scott was trying to say. I do not understand how Jason's response addresses Tom's points. There are lots of reasonable ways to respond to Scott's thought experiment, but "Scott doesn't understand RBC" is not one of them.
DeleteI find Scott a lot easier to understand than I find Jason. I suppose it should not surprise me that Jason has trouble understanding Scott. To my eye, both Scott and Jason have brilliant ideas and have seen farther than others. It's a shame that so little effort is spent on mutual understanding.
-Ken
Scott says that RGDP slows "slightly"; that to me suggests a fall from say 3% growth to 2.5%. If RGDP growth fell 5%, by Okuns law that implies unemployment going up by 5-10%.
DeleteHowever this is the MM counterfactual of NGDP targeting and Sumner thinks unemployment is a better indicator of a recession. He believes Okun's law. So since he thinks NGDP targeting can avoid a recession, he a fortiori thinks RGDP must stay on its path (or only deviate "slightly").
(And thanks for the compliment... )
Sorry for terse replies ... I'm on travel so limited internet time ...
The only way for RGDP and NGDP to stay close to trend path in RBC theory is for there not to be a recession.
DeleteThis comment has been removed by the author.
DeleteJason, you write:
Delete"The only way for RGDP and NGDP to stay close to trend path in RBC theory is for there not to be a recession."
So you're saying that RBC theory dictates that if RGDP falls then NGDP must also fall, regardless of what the CB does to try to keep NGDP on trend. Is that correct?
It sounds like Scott thinks this is not true of RBC theory. It sounds like he thinks that absent CB intervention, falling RGDP may indeed cause NGDP to fall, but that there's nothing in RBC theory to exclude a CB from intervening to keep NGDP on trend... as long as RGDP's fall (caused by real factors) is not affected by this intervention.
I am not saying "RBC stipulates if RGDP falls then NGDP falls". This is not true of RBC theory. RBC theory stipulates that NGDP is irrelevant to the path of RGDP (and therefore recessions) because inflation can take on any value. Nominal changes do not have any effects except on nominal variables in RBC.
DeleteScott says in the quote above NGDP growing at 5% (because of CB) implies RGDP "would have kept growing (although ... slowed slightly)".
Unless Scott is giving up Okun's law (maybe he is?), RGDP growth means unemployment does not fall.
What do we call a situation where NGDP keeps growing, RGDP keeps growing and unemployment doesn't rise? Well, it's definitely not a recession!
Now RBC says when you don't have a recession, there couldn't have been any real factors that would have caused a recession (otherwise those real factors would have caused RGDP to fall and unemployment to rise, ie a recession).
Scott seems to want to create a situation where there is a difference between NGDP growth at 5% (and RGDP growth of 3%) in normal times and NGDP growth at 5% (and RGDP growth of 3%) that is avoiding a recession.
But how do we know we have avoided a recession if it leaves no trace on RGDP, NGDP or unemployment?
Are we avoiding a recession right now? Were we avoiding a recession in 1996?
There is no difference between a time that is "avoiding a recession" and a time that is not having a recession ... at least in terms of macro variables.
NGDP-dot = 5%
RGDP-dot = 3%
W-dot = 4%
unrate = 5%
Are those the macro parameters of an economy avoiding a recession or one not in a recession?
Should have said: "RGDP growth means unemployment does not rise" or "RGDP growth means employment does not fall" above ... typo.
DeleteJason, thanks for your reply! You write:
Delete"Scott says in the quote above NGDP growing at 5% (because of CB) implies RGDP "would have kept growing (although ... slowed slightly)"."
But I read that as Scott's MM counterfactual. I didn't think that had anything to do with his idea of an RBC counterfactual wrt RGDP. To turn that into an RBC counterfactual (in the following sentences) he lets RGDP continue to drop as if it was the non-counterfactual case. I can see having a problem with that as an RBC counterfactual, but I don't get that sense from your response above... it sounds to me like you're saying that bit you quoted is Scott's idea of an RBC counterfactual rather than an MM counterfactual.
Let me summarize how I read Scott in a table:
Pre-2008 (no recession):
NGDP-dot = 5%
RGDP-dot = 3%
Inflation rate = 2%
Unemployment rate = 5%
Post-2008 (recession: i.e. what actually happened w/ made up #s):
NGDP-dot = -5%
RGDP-dot = -7%
Inflation rate = 2%
Unemployment rate = 10%
Post-2008 Counterfactual according to Scott under MM:
NGDP-dot = 5% (Fed acts to keep this on trend which has real effects)
RGDP-dot = 2.5% (slight drop due to "supply-side reasons")
Inflation rate = 2.5% (slight increase)
Unemployment-rate = 5.25% (slight rise due to "supply-side reasons")
Post-2008 Counterfactual according to Scott under RBC, but with MMist constrolling the Fed to keep NGDP on trend:
NGDP-dot = 5% (MMist Fed is keeping this on trend)
RGDP-dot = -7% (unaffected by MMist Fed)
inflation rate = 12% (this should have been 10% to match Scott, oh well)
Unemployment rate = 10% (unaffected by MMist Fed)
OK, where did I go wrong?
BTW, I read your "unrate" as the unemployment rate, but I wasn't sure, so I spelled mine out. Also I'm embarrassed to say I don't know what "W-dot" is, so I skipped that.
DeleteW-dot is wage growth.
Delete"RBC" counterfactual assumes the Fed can keep NGDP on target (i.e. Assumes market monetarist model).
That is to say RBC has specific inflation responses to productivity shocks and supply shocks. You can't say RGDP = X and NGDP = Y without working the model out.
DeleteThe solution with NGDP on trend is either nothing happens or some specific combination of supply and productivity shocks.
Another way to say it is that Scott's RBC model isn't calibrated.
This comment has been removed by the author.
DeleteWithout that specific solution, you can't say what the RBC counterfactual is.
DeleteOK, I understand. Thanks!
DeleteBTW, I was thinking that "Feynman Integrity" is a handy way to describe a set of ideas... regardless of whether or not Feynman himself possessed this integrity (which I don't know for a fact that he did). Is there a better way (in your opinion) to describe the same concept?
ReplyDeleteYes; it's called being scientific.
DeleteRight. And the scientific attitude should be taught in middle school. I debated a creationist once, for want of a biologist. The creationist was very smart, but he thought that science was like politics. So do climate change deniers. Sure, there is politics in science. "Science marches on, funeral by funeral." But most people have no idea of the austere rigor of science.
DeleteLol... yes, that's easier.
Delete"Scott Sumner (how many times have I started a post off with that?)" ... without counting, I'd guess 30. Still you'd fall short of the number of times Mike Sax has started off that way ... any maybe even short of the number of times Bob Murphy has. It's a popular way to begin a macro post... not as popular as "Paul Krugman" but up there.
ReplyDeleteThanks for posting this again... every time I read that it really makes me laugh... the humorous blog post par excellence. I missed the terra cotta army thing entirely before.
ReplyDeleteIt's one I read again any time I'm feeling a bit uppity to help put me back in my place.
DeleteI've searched for quoted snippets of phrases under his "Uncategorizable" ... just to confirm who I think that is, but I've never found them. I assume they must have been deleted by Noah. However, I think the background image here serves as confirmation of my suspicions... Lol... I assume he picked that based on Noah's post.
Delete"troll the left-econoblogosphere"
ReplyDeleteIt'd be great fun to travel back in time 25 years and see if anybody could decipher that phrase from the near future.
Jason,
ReplyDeleteFiscal policy is effective even outside the so-called liquidity trap. Take a look at this paper (pretty mainstream, not heterodox): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2045192
Srini
I don't mean to exclude the possibility of it being effective outside a liquidity trap, just that the generic "Keynesian" view of the majority of academic economists (even those that aren't Keynesian) is that outside a liquidity trap, monetary policy is optimal for demand management.
DeleteMany feel that fiscal policy does work outside a trap, it's just not optimal.
Not sure about that! I think the dominant view is that fiscal policy is completely offset by monetary policy--forcefully stated by Nick Rowe and Sumner, but implicit in most NK models and policy analysis.
DeleteThere is no reason for a central bank to offset a rise in AD if AD is below trend.
DeleteFor example:
Central bank targets 2% inflation. Inflation falls to 1%, and a stimulus package is put in place that raises inflation to 2%.
The central bank can only offset that if it lowers its target to 1%.
Yes, monetary policy moves last, but that a theory. It doesn't have to hold in all theories.
Note that this is what MM's claim about the EU... It lowered its inflation target in response to fiscal stimulus by member states.
Doesn't make much sense to me.
A very interesting paper from Srini. As a natural scientist, one would assume that experimental results such as this should be assessed first prior to making toy models of economic theories. If these models don't reproduce these sorts of results, they ought to be discarded. Economics in general seems to be a bit late to think about things in this manner.
DeleteIf the mainstream view is that fiscal policy is ineffective away from the zero lower bound because the central bark offsets it by monetary policy, that is an admission that fiscal policy would be effective if the central bank did not interfere with it. Or, as economists like to say, fiscal policy is effective, ceteris paribus.
DeleteYep, Bill. That seems like the gist of it. At least when e.g. inflation is below target. If inflation was on target, then moves fiscal policy would be countered by monetary policy automatically in the AD-AS model framework. Since monetary policy is defined by a target (in this picture), it's can't "not interfere" if fiscal policy were to increase inflation by 1%. The central bank would have to adjust its target to 3% (assuming 2% target originally) to let fiscal policy not be offset.
Delete"If the mainstream view is that fiscal policy is ineffective away from the zero lower bound because the central bark offsets it by monetary policy, that is an admission that fiscal policy would be effective if the central bank did not interfere with it. Or, as economists like to say, fiscal policy is effective, ceteris paribus."
DeleteYes. Government consumption has real effects in mainstream (RBC and NK) models. The whole monetary offset argument assumes that central banks care about reversing the real (or supply-side, if you like that better) effects of fiscal policy. The models that they refer to suggest that the central bank would not want to interfere because fiscal policy is actually changing flexible price output which is what the central bank is supposedly targeting.
"Central bank targets 2% inflation. Inflation falls to 1%, and a stimulus package is put in place that raises inflation to 2%.
The central bank can only offset that if it lowers its target to 1%."
That argument seems to come up a lot. Fiscal stimulus has no nominal effects in RBC and NK models. Really, what's happening in monetary offset is 1. the government increases spending 2. The wealth effect and the labor-leisure trade-off make the household work more and consume less (so the multiplier is less than one) 3. the central bank doesn't like this (because it's stupid and doesn't want to keep output at its flexible price level - its sole goal) and tightens monetary policy so that consumption falls (which is not consistent with a competitive equilibrium).
"the generic "Keynesian" view of the majority of academic economists (even those that aren't Keynesian) is that outside a liquidity trap, monetary policy is optimal for demand management."
The reason is because, in NK and RBC models, changing the government spending to private consumption ratio from its optimal level (which is determined by setting the marginal utility of consumption equal to the marginal utility of government spending) reduces utility. Interestingly enough, RBC models suggest pro-cyclical fiscal policy; not because it stabilizes output, but because it helps maximize utility.
Jason, what is it about Scott that makes you go off of your normally straight-and-logical rails? You commit your own inferential errors above, BTW.
ReplyDeleteMonetary policy = NGDP is not falsifiable. It is a tautology. Just like GDP=C+I+G+(X-M) is a tautology. It illuminates, establishes the language, and systematizes. I have no problem with this, and neither should you.
Instead, he leaves (bright young things like you) the glorious job of developing causal theory. Exactly what about the Fed's control over the monetary base generates NGDP? What are the vectors? Can you measure and illustrate them? You do a great job with NGDP/base to interest rates. What then? Can you solve base to rates = NGDP? Is it causal?
He's clearly less systematic than you'd like, but he's contributed an immense amount of value to the monetary debate. Consider laying off of Scott, as it does nothing for your stature or the quality of your analysis. Take on Krugman or Noah instead. They are begging for it every day.
"Monetary policy = NGDP" is not a tautology; it's a definition. And definitions can either be useful or not. However, to me that definition adds as much clarity as saying "phlogiston = fire". The central bank creates or destroys outputiston and that causes NGDP to go up or down.
DeleteSumner also goes back and forth between saying that is a definition and saying it is a causal relationship.
I wouldn't really care about Sumner's unfalsifiable "theory" ... except that it has been looked into by Ben Bernanke and the Fed and warped Matt Yglesias's mind. If the Fed (or the ECB, or the BoJ) can't meet an inflation target, why the heck should we believe it (they) can meet an NGDP target?Green Lantern-esque willpower? Then why not use it for the inflation target?
I'm also a bit upset that I was almost taken in by it until I realized expectations that aren't summed up with a discount factor to infinity can make your model do anything. If the Fed "really wanted" to make NGDP growth 18% next year, it could in Market Monetarism. Just take E[NGDPt+1] - NGDPt = 18%. There you go!
It seems like a theory made up solely for the purpose of justifying not doing any fiscal stimulus. It has very little use besides that purpose (if you can name a use for MM besides justifying not doing fiscal stimulus, let me know).
Also, let me know my inferential errors and I will correct them!
FYI, I do take on Noah Smith every once in awhile ...e.g. here:
http://informationtransfereconomics.blogspot.com/2015/05/im-not-sure-noah-smith-understands.html
http://informationtransfereconomics.blogspot.com/2015/02/why-do-macroeconomists-think-they-know.html
However 1) Paul Krugman is always right, and 2) if you think Paul Krugman is wrong, refer to back to 1).
Actually both Smith and Krugman use fairly standard models in their writing. These models may be wrong, but they are usually fairly explicit and not unfalsifiable.
"I realized expectations that aren't summed up with a discount factor to infinity can make your model do anything. If the Fed "really wanted" to make NGDP growth 18% next year, it could in Market Monetarism. Just take E[NGDPt+1] - NGDPt = 18%. There you go!"
DeleteNick Rowe criticizes those who do not believe in expectations as denizens of the Concrete Steppes. But it is one thing to believe in expectations and quite another to believe that expectations have just exactly the value that your theory needs to work. Then expectations become a fudge factor.
Nice rant, Jason!
DeleteIt seems like a theory made up solely for the purpose of justifying not doing any fiscal stimulus
You have concretized exactly what bugs me about the cult of MMT.
Todd, "cult of MMT?" ... did you mean "cult of MM?" ... MMT is a different kind of cult wrt fiscal stimulus, isn't it? Like the polar opposite perhaps.
DeleteBill, I think Jason is a proud "denizen of the concrete steppes"... maybe we should have some T-shirts made or something. I have a bit of an artistic flair that's getting kind of rusty, so I'd sign up for the graphic design on that... ...in keeping with the theme, I'm thinking literality (new word?) is the key.
DeleteI recall a Mad Magazine article from when I was a kid that showed how kids imagined newspaper headlines in their heads... my favorite was "Guerrillas Attack on Plain of Jars" ... and the bubble above the kid's head literally showed an army of angry gorillas, armed with primitive clubs, running (as if attacking) across a plain of glass jars (like the kind you use for jam). So I'm thinking something like that.
OK, I'm thinking literal concrete steps leading everywhere... as far as the eye can see. Jason with a fur hat atop a horse front and center. A yurt made of concrete blocks in the background. What am I missing?
DeleteJason,
DeletePhlogiston could equal fire, so what? If the entire world was debating the current state of phlogiston, and speculating huge resources over the future of phlogiston, and listening to the Delphic priests of phlogiston; then I would welcome someone coming along and saying “It’s Fire.” He would be as Prometheus to the world.
Theory or definition? This is what you worry about? Consider perhaps that a foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall (that’s you, when you open a piece with “Scott Sumner”.)
Bernanke? Yglesias? Good, then. More, please.
Failure to hit inflation targets signifies central bank impotence? Wow. You have an institution that has 100% control over every unit of currency – the Fed is a monopoly, look it up – and yet you say that it cannot control the supply of said unit. I’d lightly suggest to you (so as to not disrupt this fragile state of reality) that this is incorrect. Indeed, the Fed could create any nominal price it wishes.
Jason, central banks control the supply of the numeraire, against which everything is valued in nominal terms. That’s the central bank’s entire porpoise. Consider that: simply because you cannot see vast powers does not mean that they do not exist. They simply are not revealed to you. Or, more likely, your perception is simply the reflection of that power: vast power defines reality "by definition".
So you’re a bit stuck. Does the Fed control the numeraire, or does it not?
On one hand, seven guys at the central bank could decide to buy every asset in existence, and hand out numeraire in exchange. On the other, if you’ve mobilized hundreds of thousands of voters, your team just possibly might get some sort of fiscal deficit. Which hand is more powerful, again?
I think that what Scott brushes up against in RBC is that there is nothing R about it: it’s all nominal in his world (if he had the boldness to say) and, charitably, I think that this is a very good and useful notion.
Krugman is a talented sophist, with little mini-me Smith grinning along. Epistemically closed, wrapped in tautology, and stinks after a few days. That’s why he is given space inside the NYT.
Tom,
DeleteI would love to have one of those t-shirts. Perhaps there should be something about the non-concrete-steppes people somewhere on the shirt too.
John, I appreciate your vote of confidence. I'm not making any guarantees, but I'll see what I can come up with. (c:
DeleteI'll think about your suggestion too.
"It seems like a theory made up solely for the purpose of justifying not doing any fiscal stimulus."
ReplyDeleteThat is the best explanation of Sumner's antics that I have ever read.
The problem is that Sumner refuses to explain why anyone should believe that central banks can control NGDP at the zero lower bound besides asserting that it can. I think I've asked him directly at least three times now and he hasn't even tried to give a reasonable answer yet.
Nick Rowe is a lot more reasonable most of the time, but I'm not sure how he justifies the ability of central banks to control NGDP at the zero lower bound (probably something about buying all the assets in the universe, now that I think about it, but, of course, that ignores the result of most monetary models where money demand is indeterminate when money and safe assets earn the same interest rate).
"Instead, he leaves (bright young things like you) the glorious job of developing causal theory."
So, in other words, Sumner has assumed a result he would like a model to have and tells everyone else to come up with the math to support it. Why doesn't anyone understand that this is exactly the opposite of science? A good scientist doesn't first come to a conclusion then try to find evidence to support his or her conclusion. Rather, a good scientist looks at the evidence and then arrives at a conclusion. I guess everyone has forgotten elementary level science (and sane epistemology).
John,
DeleteJustifying? Appeal to motive is a low, low, form of argumentation. If you trust your team with the fiscal treasury, then you tend to view monetary policy as impotent and unnecessary. Vice versa. Let’s keep it clean.
ZLB? In some ways, the ZLB increases the degrees of freedom for a central bank – buy gold, say, at $10,000 an ounce, until NGDP wakes up (the Fed does carry gold on its balance sheet, you know).
Try hitting gold’s safe asset yield. Now that you’re thinking, has anybody ever really hit absolute zero? This word zero, you keep using this word. I do not think you know what it means.
Seriously, the problem is a pathological fetish for reifying interest rates. Interest rates are only prices. Consider that the Fed has a monopoly on the numeraire. That’s the only thing that matters. The Fed frets and toys with the interest rate. Know that rate setting is but a trivial and obscure sandbox play compared with the dreadful awesomeness of the Fed’s base money monopoly.
Assumed a model? No – somebody gives us a hypothetical identity, based on gedankenexperiment (say E=MC2), which explains the world nicely, given certain assumptions (interest rates are bad indicators of policy stance).
We tend talk of Fed policy and nominal GDP as if they were separate, like energy and mass were once separate. Assume rates are moot, just as the speed of light is constant, and they become equivalent: the monetary base becomes NGDP. Oh, it’s scientific, Jerry.
"Justifying? Appeal to motive is a low, low, form of argumentation. If you trust your team with the fiscal treasury, then you tend to view monetary policy as impotent and unnecessary. Vice versa. Let’s keep it clean."
DeleteYou fail to understand the use of 'justify' in context. I'll leave you to figure exactly why you're wildly, horribly wrong in your reading of my comment by paying attention to context clues.
"In some ways, the ZLB increases the degrees of freedom for a central bank"
I don't even know what you are trying to mean with this. I'll assume you're suggesting that the zero lower bound makes monetary policy more effective. The data clearly disagrees with you there. Look at the monetary base to price level ratio or the velocity of the monetary base, you'll find that monetary expansion has resulted in a much less than normal effect on inflation since the US hit the zero lower bound.
"This word zero, you keep using this word. I do not think you know what it means."
I use the word "zero" in conjunction with the words "lower" and "bound." I do not think you know what zero lower bound means, maybe you should read what Jason has written about it. Perhaps I should just start saying liquidity trap, then people would understand that the problem is that the interest rate on short term safe assets (e.g., 3-month treasury bills) is about equal to the interest rate that the central bank pays on reserves, not that the central bank's policy instrument is set exactly equal to zero.
"Seriously, the problem is a pathological fetish for reifying interest rates. Interest rates are only prices. Consider that the Fed has a monopoly on the numeraire. That’s the only thing that matters. The Fed frets and toys with the interest rate. Know that rate setting is but a trivial and obscure sandbox play compared with the dreadful awesomeness of the Fed’s base money monopoly."
This is irrelevant to my argument about the zero lower bound. It's not that rates can't be cut further, it's that increases in the monetary base at the zero lower bound (in a liquidity trap) are irrelevant. The Fed can increase the monetary base all it wants in a liquidity trap (think QE), but that increase shouldn't do much at all.
"We tend talk of Fed policy and nominal GDP as if they were separate, like energy and mass were once separate."
That's because they are separate things. In fact, (at least in non-liquidity trap conditions) it seems that nominal GDP is just a function of the monetary base and the nominal interest rate, but when money and bonds are perfect substitutes, monetary policy becomes exceptionally ineffective. Refer to the data and models of money demand (e.g., Money in the utility function or cash-in-advance) for evidence.
"interest rates are bad indicators of policy stance"
I agree. I suggest you wait until I actually suggest otherwise before you say anything. I suppose it's alright to assume that I fit directly into the 'New Keynesian party line' simply because I disagree with Nick Rowe and Scott Sumner on something, isn't it?
"Oh, it’s scientific, Jerry."
I suppose that, in saying this, you are trying to justify (look, there's that word used in a way that roughly means 'defend by means of argument' in this context) assuming the facts and modeling to conform to those assumptions. I don't quite think you understand the gravity of engaging in this type of "science."