The vacuum on the right

A year ago I did a post called “Two untimely deaths.”  Here’s an excerpt:

Milton Friedman died on November 16, 2006, one year before the sub-prime crisis.  I’d like to suggest that his death was the closest equivalent to the death of Strong in 1928.  In 1998 Friedman pointed out that the ultra low interest rates were a sign that Japanese monetary policy was very contractionary, at a time when most people characterized the policy as highly expansionary.

There is little doubt that Friedman would have recognized the low interest rates of late 2008 were a sign of economic weakness, not easy money.  But what about the big increase in the monetary base?  First of all, the base also rose by a lot in Japan, and in the US during the Great Contraction.  Second, Friedman would have clearly understood the importance of the interest on reserves policy, which was very similar in impact to the Fed’s decision to double reserve requirements in 1936-37.  And in his later years he became more open to non-traditional policy approaches, for instance he endorsed Hetzel’s 1989 proposal to target inflation expectations via the TIPS spreads.  Note that the TIPS markets showed inflation expectations actually turning negative in late 2008.

Why was Friedman so important?  I see him as having played the same role among right-wing economists that Ronald Reagan did among conservatives.  Reagan was really the only conservative that all sides respected; social conservatives, economic conservatives, and foreign policy (or neo-) conservatives.  After he left the scene, the conservative movement cracked-up.  

Friedman was respected by libertarians, monetarists, new classicals, etc.  Last year I criticized Anna Schwartzfor adopting the sort of neo-Austrian view that she and Friedman had strongly criticized in their Monetary History.  If Friedman was still alive, and strongly insisting that money was actually far too tight, then I doubt very much that Schwartz would have gone off in another direction.  It would be like Brad DeLongdisagreeing with Paul Krugman on macroeconomic policy.  Once in a blue moon.

Today there is no real leadership among right wing economists. 

[BTW, I kind of regret the shot at DeLong---I'm increasingly impressed by his brilliance, despite the fact that we often disagree.]

Now this issue is resurfacing.  Here’s Will Wilkinson:

TIM LEE asks an important question: why are conservatives and libertarians so uniformly hawkish about inflation? Mr Lee (a friend and former colleague) notes that this regularity is far from inevitable. Milton Friedman, a revered figure in right-of-centre circles, famously pinned the severity of the Great Depression on contractionary monetary policy. Scott Sumner, a professor of economics at Bentley University who identifies himself as a “neo-monetarist”, has argued that Friedman would have supported monetary stimulus. And he has argued, on neo-Friedmanite grounds, that tight monetary policy both precipitated and exacerbated our recent recession. I happen to think Mr Sumner is correct, but his expansionary prescription remains anathema on the right. Why?

.   .   .

Milton Friedman was one of the 20th century’s great economists as well as one its most formidable debaters. This made him a powerful check on the influence of anarcho-capitalist Austrians, obviously much to the chagrin of Rothbard. “As in many other spheres,” Rothbard wrote, “[Friedman] has functioned not as an opponent of statism and advocate of the free market, but as a technician advising the State on how to be more efficient in going about its evil work.” Rothbard’s fulminations notwithstanding, Mr Friedman died a beloved figure of the free-market right. Yet it does seem that his influence on the subject of his greatest technical competence, monetary theory, immediately and significantly waned after his death. This suggests to me that Friedman’s monetary views were more tolerated than embraced by the free-market rank and file, and that his departure from the scene gave the longstanding suspicion that central banking is an essentially illegitimate criminal enterprise freer rein.

I’d add a couple points here.  During his period of greatest influence he was known as somewhat of an inflation hawk, as high inflation was the big problem and the old Keynesian model didn’t have good answers.  The right was happy with that monetarist critique of Keynesianism.  And second, the most important section of Friedman and Schwartz’s Monetary History of the United States was the chapter on the Depression, where they were highly critical of the Fed’s deflationary policies.  Even inflation hawks don’t think rapid deflation is a good idea.  But the subtext of their monetary history was even more important.  The Great Depression had discredited capitalism in the eyes of most intellectuals.  By showing that the problem was tight money, not laissez-faire policy, Friedman and Schwartz opened the door to the neoliberalrevolution.  The New Keynesian technocrats who ran the world economy from 1983 to 2007 are much more comfortable with laissez-faire than their old Keynesian predecessors.

And here’s Tim Lee:

This has gotten me thinking about the broader connection between peoples’ views on monetary policy and their broader ideological worldviews. With the lonely exception of Scott Sumner, virtually every libertarian or conservative who has expressed a strong opinion about monetary policy has come down on the side of the inflation hawks. Over the last three years, a wide variety of fiscally conservative Republican politicians have attacked the Federal Reserve for its unduly expansionary monetary policy. I can’t think of a single Republican on the other side.

Yet it’s not obvious why this should be. There’s a coherent ideological argument for abandoning central banking altogether in favor of a gold standard or free banking. In a nutshell, the argument is that no single institution will have the knowledge necessary to “steer” monetary policy, and so we should prefer a monetary system that decentralizes control over the supply of money.

But whether you like it or not, we do have a central bank and it’s important that it function effectively. Logically, it seems like libertarians should be equally worried about both the threat of too much inflation and the threat of too little. After all, one of Milton Friedman’s most famous books argued that the Depression was worsened by the Federal Reserve’s unduly contractionary monetary policy. Yet (again, aside from Sumner) no free-market thinkers or politicians made this argument even in the depths of the 2009 contraction.

So why is right-of-center opinion so lopsided? I can think of two possible explanations. One is that we’re still having the monetary policy debates of the 1970s, when right-of-center thinkers, following Milton Friedman, argued that the era’s persistently high inflation was the fault of unduly expansionary monetary policy. They were right about this, and a whole generation of free-market intellectuals has been on guard against the threat of inflation ever since. And this is obviously reinforced by the reciprocal trend on the left: because most of the inflation doves are on the left, people who are in the habit of disagreeing with left-wingers are discouraged from adopting their arguments on this issue.

Those are good points, but I’ll add a few more:

1. I t makes me uncomfortable to level this charge (as there is nothing I hate more than others questioning my motives) but it’s a bit awkward when you have conservative bastions like the Wall Street Journal bashing the Fed’s tight money policies in 1984, when inflation was 4% (and Reagan was in office) and making the opposite change when inflation is even lower, and Obama is in office.  I actually have a fairly positive view of the motives of most intellectuals on both the left and the right.  I assume they are well-intentioned.  But if a person strongly opposes a set of policies and hopes a new government will soon reverse them, it may at least subconsciously affect that person’s enthusiasm for monetary stimulus that would make the economy look much better, almost assuring the incumbents re-election.

2.  However I don’t believe even subconscious bias is the main issue.  The current policy stance looks much more expansionary than it really is (due to low rates and the hugely bloated monetary base.)  So there are certainly worrisome indicators that even the best macroeconomists could point to, especially given the (overrated) worry about “long and variable lags.”  It’s not all populism.  I was at a conference last year full of conservatives who knew just as much monetary economics as I do and they were almost all were opposed to QE2.  And conservatives weren’t criticizing the Fed in September 2008, when easier money might have helped McCain.

3.  I have very mixed feelings about seeing my name mentioned in both pieces.  Naturally I’m happy that people are paying attention to my ideas.  But I also worry about a world where I’m the name people mention when looking for someone who will carry on the tradition of Milton Friedman.  And this isn’t just false modesty.  No matter how highly I regard my own views, or those of similar bloggers like David Beckworth (who also could have been cited), the hard reality is that we don’t have the sort of credentials that carry a lot of weight among the elites.  (BTW, this doesn’t apply to Nick Rowe, who is probably has a much higher profile in Canada than we quasi-monetarists have in America.) 

Cryptic prediction:  Before 12 moons have passed, a star will arise in the East to lead Milton’s scattered tribe into the promised land of respectability.

PS.  Thus far we’ve been called “quasi-monetarists.”  I would have preferred “new monetarists,” but Stephen Williamson’s already grabbed that name.  Will calls us neo-monetarists.  I’m growing increasing fond of ‘post-monetarist’—particularly for the futures targeting idea.  Weren’t post-modernists like Foucault skeptical of central authority?  And is it just me, or does “quasi” have a slightly negative connotation?


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87 Responses to “The vacuum on the right”

  1. Gravatar of Dustin Dustin
    23. July 2011 at 15:33

    Okay, I’m good with “post-monetarist”. It’s easier to type out.

    I always spell quasi “qusai” and have to go back and change it.

    post-monetarist post-monetarist

    rolls right off the keyboard

  2. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 15:43

    God damn it Scott. I have two bones to pick with you:

    1. Of course you can pick up where Friedman left off, BUT you are going to have to GO ALL IN on Sumner 2.0.

    2. How dare you not specifically answer my far clearer explanation through all of this in this post

    The REALITY is that Uncle Milty HATED GOVERNMENT – that was who and what he was – the smaller the better! the smaller the better! the smaller the better!

    Ok, watch the logic:

    1. Friedman advocated monetary BECAUSE at that moment, it served the purpose of creating smaller government.

    In modern terms this means you are tasked with pulling Summers, DeKrugam and Matty types, (there aren’t many of them) the true “government spending” fiscal stimulus into admitting that Monetary trumps Fiscal – every time!

    You are doing just fine at this. It is a long slog, but facts are on your side – on this you get to geek out on AD curves, you get get to use jargon.

    2. BUT WHEN it comes times to advocate policy in the here and now, you must ask yourself what Milton would ask himself before he helped make a Democrat strong, “have I really converted the sinners of #1?”

    Are they true believers? Don’t kid yourself, Friedman hated government enough to couch his advice based on who and what cause it served in the end.

    See Greenspan, he GAVE Clinton the rates he needed to grow the economy, but he did it AFTER Clinton got small government religion and SACRIFICED FISCAL on the alter.

    Republicans / Conservatives can 100% accept periods where Democrats get to be in charge IF THEY DON’T THINK THEY CAN DO FISCAL STIMULUS.

    As I have said here 100 times: Clinton did DADT as his first policy because it was the ONLY FREE thing he could deliver his base…. because he wasn’t gong to get to “invest” in ANYTHING.

    —-

    Scott, you are not bigger than Friedman and you are not bigger than Greenspan – and BOTH great men knew you do not get to wash your hands of the political effects of your positive outcomes.

    When a man runs up to you and asks for a gun, some men you give the gun, and some men – well, you have to shoot them yourself.

    My narrative is bigger than yours.

    Economists are not kings on the political chess board, at best they are rooks, and rooks get sacrificed for the great good all the time.

  3. Gravatar of Nick Rowe Nick Rowe
    23. July 2011 at 16:13

    “(BTW, this doesn’t apply to Nick Rowe, who is probably has a much higher profile in Canada than we quasi-monetarists have in America.)”

    I have a lower profile in Canada than you do in the US. My credentials are less than yours. “Washed-up burned-out ex-low-level-university administrator” would be at least partially true.

    Brad DeLong is a very impressive thinker. Especially the sheer range of subjects he can get his head around. (I am also impressed by his anti-communism, and general willingness to take on lefties when he thinks it’s needed). Sometimes I wonder about the … whatever-it-is of small differences. Brad DeLong is much closer to quasi-monetarism than most.

  4. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 16:22

    Nick,

    DeKrugman is only close to “quasi-monetarism” when:

    1. he views it as a way to tax savers – the rentiers.
    2. he can’t get some government spending.

    Far preferable is someone who chooses monetary over fiscal (because it really can help), EVEN IF they ask you to save your powder until they are in power.

  5. Gravatar of happyjuggler0 happyjuggler0
    23. July 2011 at 16:49

    I’m quasi-sure that I invented the term post-monetarist here at money illusion. Therefore I am “happy” that you are growing fond of the term.

    Aside from the cute alliteration, there is the fact that the name is accurate suggestive of what you believe, or at least don’t believe. The fact that it is prefix-monetarist is strongly suggestive that your position derives from monetarism, but rejects its defects, and has gone on from there.

    Anyway, that’s my thought, and I am glad you are blogging again, even though it means I now have to allocate more time per day to reading you blog. It is worth it.

  6. Gravatar of Scott Sumner Scott Sumner
    23. July 2011 at 17:46

    Dustin, There are certain words I mistype every single time, and then have to retype. Once you get in a habit, it’s hard to break.

    Morgan, How dare I ???? I was about to ask you that question.

    You said:

    “Scott, you are not bigger than Friedman and you are not bigger than Greenspan – and BOTH great men knew you do not get to wash your hands of the political effects of your positive outcomes.

    When a man runs up to you and asks for a gun, some men you give the gun, and some men – well, you have to shoot them yourself.

    My narrative is bigger than yours.

    Economists are not kings on the political chess board, at best they are rooks, and rooks get sacrificed for the great good all the time.”

    Whenever I start feeling good about myself, I can count on you bringing me back to earth.

    Nick, Someone pointed out that DeLong showed that “Modern Monetary Theory was actually “Ancient Fiscal Tautology” Never in a million years could I come up with anything that clever.

    I figured you must be famous up there because you’re the best Canadian macroeconomist I know (with the possible exception of Laidler. Oh yeah, and Mundell.) Anyway, you should be famous. As far as me, I’m only well known in the macro blogosphere. At the major universities in Boston I’m almost unknown.

    happyjuggler0, Thanks, I’ll try to remember it was your idea, although alas, my memory is awful. In a few months I might think it was happyjuggler4, or happyjuggler7, who thought it up.

    I suppose my views on inflation being a social construct, etc, make me post-modern as well. And believing that all that matters is whether the EMH is useful, not whether it is true. And then’s there’s Nick’s stuff on how central bank signaling is socially constructed.

  7. Gravatar of david david
    23. July 2011 at 18:32

    You wouldn’t actually endorse using monetary policy to hold the fiscal policy authority hostage, would you?

  8. Gravatar of Benjamin Cole Benjamin Cole
    23. July 2011 at 18:40

    Brilliant post, superb. All econ bloggers: Please re-post this blog in your spot.

    BTW, Jonathan Chait is also asking why the GOP is ranting about tight money.

    This is why I asked about if there was right-wing money behind the Cochranes and Taylors. Not, not C-notes in a paper bag. Not even $350 bottles of wine. It has to be more with $25k speeches, and special paid-for white papers, and funding for the University of Chicago or Stanford.

    Taylor for sure was bragging about QE program for Japan in 2006–gushing about it! Now he says QE is an instrument of the devil.

    Why?

    The want Obama to lose.

    I have no qualms with people choosing one political party oo the other, or wanting Obama to lose. If the GOP comes up with a good candidate in 2012, then I want Obama to lose too.

    But should respected economists of standing take positions that purport to be in the national interest, when they might be compromised by partisan interests?

    Really, don’t these guys just want Obama to fail?

    Really, if Bush jr. declares war and the economy is slipping, do any of these right-wing economists call for tight money? None did when Bush jr started spending big in 2001, as Chait points out.

  9. Gravatar of marcus nunes marcus nunes
    23. July 2011 at 19:10

    Scott
    Great post! There´s surely a vacuum on the right. A little over 2 years ago, none less than Metzler called the US “Inflation Nation”.
    http://thefaintofheart.wordpress.com/2011/07/23/a-trip-down-memory-lane/
    But there´s also a vacuum on the left. Actually there´s a stupid divide along “party lines”. In a post today Krugman tries to convince his readers that the rights obsession with inflation is only due to a Democrat in the White House. I tried to show that he missed a great chance of putting responsibility smack at the door of the Fed.
    http://thefaintofheart.wordpress.com/2011/07/23/%E2%80%9Cit%C2%B4s-not-political-at-all%E2%80%9D/
    While the debate stays at such low level nothing will be gained.

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. July 2011 at 19:10

    Scott,
    You wrote:
    “Last year I criticized Anna Schwartzfor adopting the sort of neo-Austrian view that she and Friedman had strongly criticized in their Monetary History. If Friedman was still alive, and strongly insisting that money was actually far too tight, then I doubt very much that Schwartz would have gone off in another direction.”

    I remember that post and I remember being shocked when she said those things. She wouldn’t have dared if Friedman were still alive. He would have given her the smackdown.

    Will Wllkinson wrote:
    “Yet it does seem that his influence on the subject of his greatest technical competence, monetary theory, immediately and significantly waned after his death. This suggests to me that Friedman’s monetary views were more tolerated than embraced by the free-market rank and file, and that his departure from the scene gave the longstanding suspicion that central banking is an essentially illegitimate criminal enterprise freer rein.”

    I think this is an important insight. I sensed the same thing. It seemed that with Friedman out of the way belief in monetarism was given permission to die along with him on the right wing.

    Tim Lee wrote:
    “And this is obviously reinforced by the reciprocal trend on the left: because most of the inflation doves are on the left, people who are in the habit of disagreeing with left-wingers are discouraged from adopting their arguments on this issue.”

    You can’t ever agree with the left even when they’re right (pun intended) because that’s a badge of dishonor. You’ll end up as lonely as poor Bruce Bartlett.

    Scott wrote:
    “No matter how highly I regard my own views, or those of similar bloggers like David Beckworth (who also could have been cited), the hard reality is that we don’t have the sort of credentials that carry a lot of weight among the elites.”

    Maybe not, but if not you (and David) then who? You’ve been fairly successful in articulating your viewpoint, to the point that it is now actually mentioned occasionally in the MSM. If an idea is worth fighting for then it is worth fighting for.

    Nick wrote:
    “I have a lower profile in Canada than you do in the US. My credentials are less than yours. “Washed-up burned-out ex-low-level-university administrator” would be at least partially true.”

    Nick’s excessive modesty fills me with shame sometimes.

    And Nick wrote:
    “Brad DeLong is a very impressive thinker. Especially the sheer range of subjects he can get his head around. (I am also impressed by his anti-communism, and general willingness to take on lefties when he thinks it’s needed).”

    Yes he’s well versed, as he knows more about economic history than most. But he also can be very “political” at times and that bugs me. And his Rubin-esque Neoliberalism sometimes gives me the creeps. I’ve greater faith in monetary policy than him but other than that I’d actually say he’s to the right of me on many issues.

    Scott wrote:
    “Nick, Someone pointed out that DeLong showed that “Modern Monetary Theory was actually “Ancient Fiscal Tautology” Never in a million years could I come up with anything that clever.”

    While we are on the subject of whether or not happyjuggler0 coined the term Quasi-Monetarist or not I should point out it was really I, with inspiration from Brad DeLong that coined the term “Ancient Fiscal Tautology”. DeLong’s original post relating to this matter is here:

    http://delong.typepad.com/sdj/2011/04/is-modern-monetary-theory-modern-or-monetary-or-a-theory.html

    As you can see, most of the ideas were his but I distilled it and made it 90 proof. This is what often happens in blogdom. People steal each others ideas until a it’s hard to tell who really deserves the credit.

    And while we’re on the subject of what to call our beliefs I still vote for “Monetarism”. All the Neo/New/Quasi etc. prefixes are unnecessary. In the final analysis when it comes to mainstream macro there is short run versus long run (Growth Theory). And IMO short run mainstream macro is divided into Classicists, Keynesians and Monetarists. There’s no need to complicate this further with prefixes.

  11. Gravatar of B B
    23. July 2011 at 19:12

    “No matter how highly I regard my own views, or those of similar bloggers like David Beckworth (who also could have been cited), the hard reality is that we don’t have the sort of credentials that carry a lot of weight among the elites. (BTW, this doesn’t apply to Nick Rowe, who is probably has a much higher profile in Canada than we quasi-monetarists have in America.)”

    Elite economists or elite policy makers? It would be very unfortunate if you needed credentials to be taken seriously be elite economists.

    For my money, Nike Rowe might be my favorite unsung macroeconomist. Scott’s blog is fantastic (better than Nick’s), but Nick’s gift for illustrative models is phenomenal.

  12. Gravatar of Eric Dennis Eric Dennis
    23. July 2011 at 19:13

    I think you missed the primary reason why many free market types who haven’t started thinking in terms of nominal income stabilization might err on the side of tight monetary policy: they rightly see a fiscal tsunami on the horizon in the form of massive entitlement promises, and they recognize debt monetization as the historically predominant means by which profligate governments have dealt with such problems.

    I happen to think you err the other way in your appraisal of the Fed’s stance in the early 2000s (and probably also its current stance), for which I have less sympathy since the fiscal tsunami is in fact the overwhelming issue in the long term.

  13. Gravatar of Greg Ransom Greg Ransom
    23. July 2011 at 19:39

    We can’t do enough to discredit this bogus system of “elites” and “credentials”.

    As Thomas Sowell repeatedly points out in his many books, the track record of the “elites” and those with “credentials” (but poor education & little understanding) has been appalling — and immune to evidence.

    Hayek also had some useful thing to say on the topic.

    And note well, you have a much better economic education than did Keynes … which never stopped Keynes from writing as if he were making pronouncements from Mt. Olympus.

    Scott writes,

    “the hard reality is that we don’t have the sort of credentials that carry a lot of weight among the elites.”

  14. Gravatar of Greg Ransom Greg Ransom
    23. July 2011 at 19:44

    One problem with you post-bust approach, Scott, is at the evidence comes in too late.

    Better to prevent the original unsustainable boom pre-figuring the unavoidable bust …

    If your economics can’t help avoid the unsustainable boom / unavoidable bust, what good is it really?

    A band aid on a massive open woound from a car wreck is not much compared to putting on safe tires allowing one to hold the road.

  15. Gravatar of John John
    23. July 2011 at 20:02

    I see the intellectual break down as the “aggregate demanders” vs. The Austrians. Austrians believe that correct price signals are necessary to dovetail an enormous, heterogeneous variety of projects with consumer preferences. With correct price signals, entrepreneurs can create sustainable economic growth. Aggregate demanders believe that simple spending drives an economy and when spending decreases it’s just a matter of throwing money at the problem. Needless to say, Friedman was an aggregate demander so while his views on healthcare, regulation, etc are great. His views on money are unfortunate and incompatible with a free-market

  16. Gravatar of Lee Kelly Lee Kelly
    23. July 2011 at 20:33

    I vote for “Monetarism.”

    The so-called “Quasi-monetarists” have no fundamental theoretical disagreements with exemplars of monetarism like Milton Friedman. For example, if velocity was stable, then quasi-monetarists would probably be content with expanding the money supply 2 percent each year. The apparent disagreement turns merely on the non-theoretical question of whether velocity is actually stable. Indeed, many of Friedman’s later writings look at lot like the those of the quasi-monetarists.

    Unless the fundamental research program is being overhauled, I don’t see the need to start changing the name — “monetarism” should be sufficiently vague enough not to dictate every position a monetarist must hold. I also don’t like the proliferation of “post-this” and “neo-that,” especially when we all know there will be a “post-post-this” and a “neo-neo-that.”

  17. Gravatar of Morgan Warstler Morgan Warstler
    23. July 2011 at 21:14

    lee, I agree with you – but let’s just say Monetarist – after all good artists borrow, great artists steal.

    john, of course you are right. but we need to get personal on them, the REASON macro economists like to talk aggregates is the same reason celebrities are all liberal.

    bear with me, after 12 years in hollywood – I’ll explain.

    celebs are driven to be liberal because they are pretty, and since they KNOW it. they sense they haven’t truly earned what they have and kills them – so they need is to convince themselves NO ON ELSE earned it either… they do that by not thinking that THEY OWE, but that EVERYONE owes as much as them.

    The guy who does 110 hours a week growing his landscape biz? he is NO DIFFERENT than jeremy piven who happens to be awake 110 hours a week! work is work! and jeremy is always working!

    That’s bullshit, and piven KNOWS IT, but isn’t big enough to admit it – so he votes Obama.

    A real man, would say “i don’t really work, I’m just a celeb!” and then vote HOWEVER the SMB owner tells him to vote.

    —-

    In the same way, macro egghead professors like to talk aggregates because then their work product gets lumped in aggregate style with the guys who are REALLY delivering the productivity goods.

    those who talk aggregates DO NOT WANT to favor the top 20% who deliver the 80% of goods in any 80/20 distro.

    those who talk micro, KNOW and ADMIT the giant 80% population swath that only brings 20% gains to the table – don’t matter.

  18. Gravatar of onliberty onliberty
    23. July 2011 at 21:37

    “Thus far we’ve been called ‘quasi-monetarists. I would have preferred ‘new monetarists,’ but Stephen Williamson’s already grabbed that name.”

    How about “Modern Monetarist?” lol.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. July 2011 at 21:57

    Morgan wrote:
    “those who talk aggregates DO NOT WANT to favor the top 20% who deliver the 80% of goods in any 80/20 distro.

    those who talk micro, KNOW and ADMIT the giant 80% population swath that only brings 20% gains to the table – don’t matter.”

    80/20? As in the Pareto Principle? As in Joseph M. Juran? As in the Six Sigmas?

    Which pillar are you working on right now? Is it Teamwork, Insight, Brutality, Male Enhancement, Hand Shakefullness, or Play Hard?

    http://gawker.com/5138017/the-creepy-corporate-cult-behind-last-nights-30-rock

    Dude, you’ve spent way too much time in Hollywood. It’s melted your brain.

  20. Gravatar of Mattias Mattias
    24. July 2011 at 01:42

    How about nominal monetarist – or perhaps just nometarist?

  21. Gravatar of Lars Christensen Lars Christensen
    24. July 2011 at 04:24

    I am with Lee Kelly here! Scott, your economics view are 100% monetarist in my book and I find myself in agreement with 95% of the time – and I am certainly a monetarist. No New, Neo or Post here…

    I think it is important to see Monetarism as a broader school – which include not only Friedman, but also economists like Laidler, Brunner, Meltzer, Yeager, Warburton – and of course Scott himself. However, Bob Lucas another New Classical economists are in NOT monetarists if you ask me.

    These economist are in fundamental agreement on the importance of money the economy. They cover different areas of research, but fundamentally they are all Monetarists and they call(ed) themselves Monetarists.

  22. Gravatar of flow5 flow5
    24. July 2011 at 04:49

    “given the (overrated) worry about “long and variable lags” ”

    Any trader knows that.

  23. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 05:26

    David, No.

    Thanks Ben and Marcus.

    Mark, OK, Then a linear combination of you and Brad are more clever than I could ever imagine being.

    B, I meant both elite economists and elite policymakers. But my other problem is you first must show your theoretical chops (using math) before you get taken seriously.

    I agree about Nick.

    Eric, This is a very important point. If a fiscal tsunami is on the way, the last thing we need is tight money. Our current round of tight money has pushed the net national debt from 40% to 70% of GDP. That means very low inflation right now makes future hyperinflation much more likely. If you are opposed the future monetizing the debt, and hyperinflation, you should support 5% NGDP growth since 2008. That would have meant far smaller budget deficits.

    Greg, I agree about the elites.

    The Hayek/Sumner plan can stop unsustainable booms and busts.

    John, You said;

    “I see the intellectual break down as the “aggregate demanders” vs. The Austrians.”

    I don’t. Hayek and I both favored targeting AD.

    Onliberty. Yeah, modern monetarist theory—and what’s the acronym?
    mattias, I don’t like that one for some reason.

    Lee and Lars, You make a good argument for “monetarism.”

    Morgan, Good observation about actors.

    flow5, I agree.

  24. Gravatar of flow5 flow5
    24. July 2011 at 06:14

    You give Friedman too much credit. Money matters period. Otherwise he’s as competent as any MMT’er.

  25. Gravatar of John John
    24. July 2011 at 06:38

    Scott,

    Hayek was a compromiser who Austrians have very mixed feelings about. The point I made about production processes needing to dovetail with consumer preferences was Hayek’s way of looking at the problem. But if you want to read the real deal read The Theory of Money and Credit or (the best Econ book ever ;)) Human Action. Where exactly does Hayek talk about AD, ive read at least 3 passages where he called AD theories unscientific.

  26. Gravatar of John John
    24. July 2011 at 06:42

    In any case, Sumner and Krugman, Delong, etc are usually on the same side of economic issue. The aggregate demand, throw many at the problem solution ignores the heterogeneity of capital and labor and distorts the price signals that are necessay to set up sustainable patterns of exchange.

  27. Gravatar of John John
    24. July 2011 at 06:47

    @ Morgan

    I take it you’ve read your Ayn Rand?

  28. Gravatar of John John
    24. July 2011 at 07:43

    Scott,

    I’ve read 3 books by Hayek: the constitution of liberty, a tiger by the tail, and prices and production. Not one mention of AD

  29. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 08:45

    John,

    Hayek’s rough equivalent of nominal expenditures, NGDP or aggregate nominal demand (take your pick) is the “money stream.” Here is a relevant passage from Prices and Production:

    “The second effect of this assumption of separate “stages” of production of equal length was that it imposed upon me a somewhat one-sided treatment of the problem of the velocity of circulation of money. It implied more or less than money passed through the successive stages at a constant rate which corresponded to the rate at which goods advanced through the process of production, and in any case excluded considerations of the changes in velocity of circulation or the cash balances held in the different stages. The impossibility of dealing expressly with changes in the velocity of circulation so long as this assumption was maintained served to strengthen the misleading impression that the phenomena I was discussing would be caused only by actual changes in the quality (sic) of money and not by every change in the money stream, which in the real world are probably caused at least as frequently, if not more frequently, by changes in the velocity of circulation than by canges in the actual quantity. It has been put to me that any treatment of monetary problems which neglected in this way the phenomenon of changes in the desire to hold money balances could not possibly say anything worthwhile. While in my opinion this is a somewhat exaggerated view, I should like to emphasize in this connection how small a section of the whole field of monetary theory is actually treated in this book.” – Page 195, my emphasis

    So Hayek is quite explicit: the phenomena discussed in these lectures are caused by “every change” in nominal expenditures. For the purpose of illustration, Hayek assumes the velocity of circulation is constant so that nominal expenditures can only be disturbed by changes in the money supply. However, he acknowledges that in reality, these changes are caused “at least as frequently, if not more frequently, by changes in the velocity of circulation.”

    I believe this quote strongly supports interpreting Hayek’s work through the lens of monetary equilibrium theory. On the next page, Hayek also claims that “it is the work of Professor Mises much more than that of Knut Wicksell which provides the framework” for his arguments, and he indicates no disagreement with Mises regarding changes in the “money stream.” I believe this lends a morsel of support for also interpreting Mises’s work through the lens of monetary equilibrium theory.

  30. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 08:50

    Another argument for the “monetarist” label is that monetary disequilibrium theory was originally presented as a monetarist theory. This can be clearly seen in the early works of Yeager: he practically assume they are just one in the same.

  31. Gravatar of StatsGuy StatsGuy
    24. July 2011 at 08:54

    Krugman seems to agree with you about the lack of consistency on the right. Vis a vis hwo conservative economists reacted to the GWB monetary response in 2004/2005ish and the Reagan fiscal action in the 80s, vs. their harsh critique of anything Obama. It’s not that Mankiw necessarily disagrees with the Sumnerist viewpoint, but you don’t exactly see him putting his sterling reputation at risk and strongly advocating more monetary expansion, do you? It would be nice to think that he would be reacting the exact same way if, for example, McCain was in office. But, somehow I think the world doesn’t work like that. (Nor do I think Krugman would be crying for more expansionary policies from the rooftops if a conservative was in power.)

    Here’s Krugman on conservative inconsistency:

    http://krugman.blogs.nytimes.com/2011/07/23/inflation-and-the-right-then-and-now/

    BTW, have been saying for a while that you and DeLong are not as opposite as you might think. Also, I will note that while you have been shifting closer to DeLong ever so slightly, he’s also been moving slightly closer to your position…

    Then…

    http://delong.typepad.com/sdj/2009/10/scott-sumner-simply-loses-his-mind.html

    Now…

    http://delong.typepad.com/sdj/2011/01/scott-sumner-does-the-lords-work.html

  32. Gravatar of StatsGuy StatsGuy
    24. July 2011 at 08:55

    comment in moderator limbo… The trigger seems to be including more than 1 link.

  33. Gravatar of morgan warstler morgan warstler
    24. July 2011 at 09:22

    Yes please scott fix comment limbo

  34. Gravatar of Greg Ransom Greg Ransom
    24. July 2011 at 10:16

    One problem is that the MSM won’t do what they did with Friedman — Newsweek _let_ him become famous and influential by giving Friedman the bully pulpit of a Newsweek column.

    The Left has increasingly locked out up and coming non-leftist. The NY Times has the mushy, spin-it-to-please non-libertarians Tyler Cowen — but bans him from the highly read op-ed page.

    The last major figure the left let in, George Will, is beyond retirement age — and he’s no economist.

    If the NY Times put Scott Sumner on it’s Op-Ed page, immediately Scott Sumner _would_ have the credentials to carry weight among the elites.

    Most elites get their conventional wisdom and talking point from the NY Times.

    The gatekeeper remains 60s leftist Pinch Sulzberger .. and it remains bizarre that a great nation is so much in the hands of such a lightweight.

  35. Gravatar of Lars Christensen Lars Christensen
    24. July 2011 at 10:16

    Again I am in total agreement with Lee. I think Yeager and Warburton are important – both stress(ed) monetary disequilibrium theory and call(ed) themselves monetarists. Similar views can be found among what I would call the Free Banking monetarists like George Selgin (and Bill Woolsey??).

    Maybe one could that Scott need to stress the importance of monetary disequilibrium theory a bit more – and the links to Yeager and Warburton? What do you say Scott?

  36. Gravatar of Greg Ransom Greg Ransom
    24. July 2011 at 10:20

    What here Keynes’ “credentials”?

    He didn’t have a Ph.D.

    He hadn’t studied more than one year of economics — limited exclusively to a text by Marshall.

    He botched most economics he discussed:

    He got Wicksell wrong.

    He got Say wrong.

    He got Pigou wrong.

    He got Bohm-Bawerk wrong.

    He got Hayek wrong.

    Basically, there wasn’t any economics that Keynes didn’t botch.

  37. Gravatar of Philo Philo
    24. July 2011 at 10:21

    “And this isn’t just false modesty.” No one would accuse Scott Sumner of false modesty. He is the Huckleberry Hound of economics bloggers: Humble and Lovable.

  38. Gravatar of Greg Ransom Greg Ransom
    24. July 2011 at 10:24

    The problem with “monetarism” is that Friedman basically defined it tautologically as the equation of exchange — which is a handy formula is microeconomically fallacious — it actually doesn’t tell us what is really going on.

    So what first needs be done it so detonate this formula:

    “Monetarism” = the equation of exchange.

    Good luck with that.

  39. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 10:42

    Greg,

    The equation of exchange is a tautology, but propositions about the equation of exchange need not be. This is subtle but important distinction. For example, is Newton’s “F = ma” a tautology? Well, yes. However, propositions about it may not be tautological, such as “Newton’s laws of motion describe the behaviour of all physical bodies in the universe.” This proposition is actually false, according to modern physicists, even though it is just about a bunch of tautologies.

    The apparent tautologicalness of the equation of exchange is innocuous and irrelevant — all mathematical equations or logical deductions are similarly tautological. The important things are the empirical questions we can ask about these tautologies, i.e. do the relations described by the equation or deduction correspond to the relations between empirical phenomena?

  40. Gravatar of Martin Martin
    24. July 2011 at 10:53

    @Lee,

    I have trouble with this (charitable) interpretation of Hayek’s work, are you sure you’re not reading more into it than you should due to the simple fact that you’re familiar with today’s economic theory?

    I mean I agree with you, but I have trouble squaring that with Friedman’s opinion of Hayek’s (macro-)economics. His position about the causes of the depression. His position about the cure for the depression etc. The whole context. Someone who was aware of this, someone who was familiar with American economic data, shouldn’t he have known this?

    Also, he, as did many others, identified low interest rates with easy monetary policy and predicted high interest rates as a result of a collapse of over-investment due to a shortage of investment. The most charitable interpretation I can therefore give is that he was aware, but did not make the necessary steps due to his focus on capital theory.

    Another interpretation I could give is that whenever he says high interest rates, he means ‘tight money’.

  41. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 10:59

    Martin,

    Check out this link.

    http://macromarketmusings.blogspot.com/2008/05/debunking-liquidationist-myth.html

  42. Gravatar of Lee Kelly Lee Kelly
    24. July 2011 at 11:06

    Martin,

    Another thing. There is nothing particular new about any of this monetary disequilibrium stuff; it’s been around since at least the 19th Century — a lot of it was just taken for granted by writers back then. It apparently took the Keynesian revolution for the economics profession to unlearn all these important insights. Modern monetarists and Austrians have some shared ancestry in those 19th Century writers, so it should not be surprising that monetary disequilibrium thinking appears in many Austrian writings. Unfortunately, the “Rothbardian revolution” among Austrians was apparently responsible for so many unlearning these important insights.

  43. Gravatar of flow5 flow5
    24. July 2011 at 11:10

    The formula doesn’t need blown up: different variables need substituted. I’ll take all bets with mine.

  44. Gravatar of Benjamin Cole Benjamin Cole
    24. July 2011 at 11:15

    OT, but relevant.

    Robert Shiller, who seems like a very nice and smart guy, wrote an op-ed in todays NYT to the effect we need more fiscal stimulus.

    Not one word about monetary policy. Not one syllable. Not one letter. Not even an period, or punctuation mark.

    How can anyone wrote about today’s zero-bound, teetering into deflation, weak growth economy and not write about monetary policy? Monetary policy was not even worth dismissing. It never got to the dinner table.

    Please, NGDP’ers, start submitting op-eds to the NYT, WSJ and others.

  45. Gravatar of Jason Odegaard Jason Odegaard
    24. July 2011 at 13:52

    Scott, great post. I agree it would be interesting to see what Milton Friedman could do to influence the right’s tight money policies if he was still with us – and still possessing the vigor to debate.

    Not sure if you have seen this, but there is a video from 2000 where Milton Friedman supports monetary stimulus and disagrees with the idea of a liquidity trap:

    http://www.c-spanvideo.org/program/Depthw

    Hour:Minute –

    01:16 – He argues that the US government should sell off all the nation’s remaining gold (what a disappointment to Ron Paul).
    01:46 – Japan looks like a liquidity trap, but that was caused by Japan’s poor monetary policy
    02:44:25 – Answering a question about what Japan has done wrong, and he answers that they have “zero interest rate policy” but that is actually too restrictive. But he also mentions the Japanese banking sector, which reminds me of your “framing effects” post. But in the end he mentions the BOJ just needs to keep buying government securities to “increase their high-powered money.”

    I just wanted to point this out if you find it useful. If you have three hours, the entire video is very interesting, and most of the callers that ask good quality, respectful questions.

  46. Gravatar of Donald Pretari Donald Pretari
    24. July 2011 at 13:53

    Scott, Almost Every Policy Proposal I put forward comes from Hayek, Friedman, Knight, Simons, Viner, Fisher, Buchanan, Bagehot, Jevons, or Adam Smith. My Basic Philosophy comes from Burke & Oakeshott. I quote these people explicitly. I never bother about other people trying to explain away this or that position or tell me why this particular thinker actually thought this or that.

    I do think Keynes, Minsky, & Hicks are important, but they’re simply less useful to me. If Keynes says he’s a Classic Liberal, then I see him that way. The two recent philosophers I get the most from are Rorty & Nozick, and, as you know, I’m a follower of Pragmatism.

    It does seem to me that, although I can’t prove it, or, quite frankly, want to spend any time doing so, the only reason the Chicago Plan of 1933 is never referenced is because it’s seen as leftish by some, and has the taint of being put forward by Small Govt Types by others. It also amazes me that more people don’t reference James Buchanan, who is still around and as amazing as ever.

    In any case, Politics is an odd affair. The only political party that puts forward a Negative Income Tax/Guaranteed Income, is the Green Party in Canada. All I can say is Good Luck to Them.

    Just be yourself.

  47. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 14:31

    Benji, Shiller doesn’t want to see housing prices plummet. That’s his MO. Everything stems from that.

    —-

    And Scott WILL get a bigger voice, but it will be Sumner 2.0, who most consistently makes anti-government / small government arguments.

    The more he is known as an aggressive small government economist, the more compelling his thoughts on monetary will be.

    That was Uncle Milty’s formula.

    Scott knows it too. If you can’t see him bending you aren’t paying attention.

  48. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2011 at 14:35

    Donald,

    If Friedman was around today, he’d advocate my approach to a Negative Income tax:

    http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/

    An Internet auction of the unemployed, gets rid of most of the friction, saves the government the most $, gives labor the best signals about what skills are meaningful at the low end.

    The best part is it works WELL INTO a person’s 70′s.

  49. Gravatar of Martin Martin
    24. July 2011 at 15:08

    @Lee, thanks, I looked up the JMCB-article and it got me to some other interesting stuff: talk about your unintended consequences ;-)

  50. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 16:55

    John, You said;

    “Hayek was a compromiser who Austrians have very mixed feelings about.”

    Hayek was a pragamtist, and the greatest of the Austrians. If the movement has gone in other directions, it’s there loss.

    Statsguy, Mankiw seems like a cautious person, but that may be temperament. I don’t see him screaming against either party all that much.

    I agree about Krugman. I’ve moved a tiny bit in DeLong’s direction, as you say, and he’s moved a lot in my direction.

    Statsguy and Morgan, I can’t fix anything, but I’ll look into it. At least you know that I always ok the queue before replying, so it will go in the proper place when I reply.

    Greg, In the unlikely event the NYT put me on their op ed page, the NYT readers would have no idea what I’m talking about.

    Lars, I don’t know a lot about monetary disequilibrium theory. If I’m not mistaken, that’s more Nick Rowe’s area. I should probably do more reading on that subject. I met Yeager once, a real gentleman.

    Greg, Keynes’ weakness was abstract theory.

    Thanks Philo.

    Lee, I agree, Greg’s wrong when he says Friedman defined the QTM as a tautology.

    Benjamin, I agree that Shiller is a smart and nice guy, but as you say, that’s not enough. Summers had the same sort of interview recently, not one word about monetary policy.

    Jason, Thanks for the link. Unfortunately I don’t have three hours, but I appreciate the high points you mention. Anyone else should feel free to mention anything they find interesting.

    Donald, Glad to hear you are also a pragmatist–we need more of them–especially in Washington.

    Morgan, Believe it or not he just might agree with your plan–I like it better than the NIT.

  51. Gravatar of StatsGuy StatsGuy
    24. July 2011 at 17:12

    Scott, you think Mankiw is merely a quiet, non-political sort of person? He has, um, a fairly political history.

    Here was his 2008 view:

    http://www.nytimes.com/2008/11/30/business/economy/30view.html

    I take this as a reasonable proximity of his true feelings, but recognize that he was beaten up over this article.

    Also, have you seen round 2 of Keynes vs. Hayek?

    http://www.youtube.com/watch?v=GTQnarzmTOc

  52. Gravatar of StatsGuy StatsGuy
    24. July 2011 at 17:13

    Scott, you think Mankiw is merely a quiet, non-political sort of person? He has, um, a fairly political history.

    Here was his 2008 view:

    http://www.nytimes.com/2008/11/30/business/economy/30view.html

    I take this as a reasonable proximity of his true feelings, but recognize that he was beaten up over this article.

  53. Gravatar of StatsGuy StatsGuy
    24. July 2011 at 17:14

    Also, have you seen round 2 of Keynes vs. Hayek?

    http://www.youtube.com/watch?v=GTQnarzmTOc

  54. Gravatar of John John
    25. July 2011 at 03:39

    @ Lee Kelly

    I think you and Scott are missing what I’m saying about Hayek. His best insight was that recession result from a mismatch between production and consumer demand when accurate market prices aren’t there to guide entrepreneurs. Of course him and Mises acknowledged that people’s desire to hold cash balances could change. In the free market view, the changes in the “money stream” or increased money demand don’t pose any problem so long as prices adjust, and in a market system they do. Efforts of interventionists to provide liquidity, pass regulation, increase government spending, prop up wages, etc all just gum up the market process. HAYEK WAS NOT IN FAVOR OF CENTRAL BANK OR GOVERNMENT ACTION TO FIGHT RECESSIONS.

  55. Gravatar of Lee Kelly Lee Kelly
    25. July 2011 at 05:33

    John,

    Hayek was in favour of the government stabilising the money stream, i.e. nominal expenditures. That doesn’t mean he approved of central banking; neither do I approve of central banking. But while we have a central bank, there is a pragmatic problem of which central bank policy will do the least harm.

    Hayek said that policy was stabilising nominal expenditure, both to prevent malinvestment booms and secondary recessions. What is a “secondary recession”? It is a decline in nominal expenditure caused by an increased demand for money. In other words, Hayek’s prescriptions for the least bad policy central banks could follow were remarkably close to Sumner’s. Check out the link I gave to Martin for evidence.

    In his writings, Hayek was not addressing the same questions and problems which interest us today. Whether or not banks should stabilise nominal expenditures was not the controversy of the day, and so Hayek just took it for granted most of the time; this is why it is easy to read Hayek today and not realise that stabilising nominal expenditures was his preferred central bank policy.

    Hayek focused his attention on the inflationary boom and its consequent malinvestment. To the extent that recession is caused by such malinvestment, he argued the central bank and government cannot do anything. However, to the extent that recession is caused by a decline in nominal expenditures, Hayek did not advocate that the central banks do nothing.

    According to Hayek, the central bank can also “do something” about the malinvestment boom. I know it is customary among Austrians to blame all malinvestment on increases to the money supply, but Hayek explains, in the quote I provided earlier, that such malinvestment is caused “at least as frequently, if not more frequently, by changes in the velocity of circulation.” In other words, a malinvestment boom can be set in motion without any proactive,/i> expansionary monetary policy, but rather a failure to contract the money supply when money demand fell. In this case, no different from a secondary recession, Hayek held that the least bad policy of central banking is to stabilise the money stream.

  56. Gravatar of Lee Kelly Lee Kelly
    25. July 2011 at 05:34

    John,

    Hayek was in favour of the government stabilising the money stream, i.e. nominal expenditures. That doesn’t mean he approved of central banking; neither do I approve of central banking. But while we have a central bank, there is a pragmatic problem of which central bank policy will do the least harm.

    Hayek said that policy was stabilising nominal expenditure, both to prevent malinvestment booms and secondary recessions. What is a “secondary recession”? It is a decline in nominal expenditure caused by an increased demand for money. In other words, Hayek’s prescriptions for the least bad policy central banks could follow were remarkably close to Sumner’s. Check out the link I gave to Martin for evidence.

    In his writings, Hayek was not addressing the same questions and problems which interest us today. Whether or not banks should stabilise nominal expenditures was not the controversy of the day, and so Hayek just took it for granted most of the time; this is why it is easy to read Hayek today and not realise that stabilising nominal expenditures was his preferred central bank policy.

    Hayek focused his attention on the inflationary boom and its consequent malinvestment. To the extent that recession is caused by such malinvestment, he argued the central bank and government cannot do anything. However, to the extent that recession is caused by a decline in nominal expenditures, Hayek did not advocate that the central banks do nothing.

    According to Hayek, the central bank can also “do something” about the malinvestment boom. I know it is customary among Austrians to blame all malinvestment on increases to the money supply, but Hayek explains, in the quote I provided earlier, that such malinvestment is caused “at least as frequently, if not more frequently, by changes in the velocity of circulation.” In other words, a malinvestment boom can be set in motion without any proactive, expansionary monetary policy, but rather a failure to contract the money supply when money demand fell. In this case, no different from a secondary recession, Hayek held that the least bad policy of central banking is to stabilise the money stream.

  57. Gravatar of Steve Roth Steve Roth
    25. July 2011 at 05:57

    Because high inflation is profoundly contrary to the interests of creditors, a.k.a. holders of financial assets, relative to holders of real assets/debtors.

  58. Gravatar of Lee Kelly Lee Kelly
    25. July 2011 at 06:28

    Steve Roth,

    Then it is all ignorance then? Inflation is not always contrary to the interests of creditors.

    Creditors have some preferred combination of risk and return on their investments. A fall in nominal expenditures may increase the return, but it also increases the risk. It is not clear whether creditors are better off or not. The recent flight to safe and liquid assets like T-bills and, unhappily, money itself, seem to attest that creditors are not happy with the new levels of risk. In that case, policies which cause, as a side-effect, extra inflation may actually be a net benefit to creditors if it reduces risks.

  59. Gravatar of Dustin Dustin
    25. July 2011 at 07:01

    @ Lee Kelly

    yep, somebody has even come up with a “Hayek Rule” for Central Bank policy.. http://reason.org/files/federal_reserve_monetary_policy_hayek_rule.pdf

  60. Gravatar of Gordon Gordon
    25. July 2011 at 07:16

    Scott, I followed a link in the quoted text of your post above to your “The Real Problem was Nominal”. First, I openly confess that everything about macroeconomics has me confused, but, in particular, if the sub-prime crisis was not the casual trigger for the 2008 crash, then what was? I gather that, in your view, it was falling nominal income – but what caused *that*? (I included the confession in case all macro mavens know the answer, but if you can point to a post where you have addressed this, it would be much appreciated.)

  61. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 07:18

    Statsguy, Yes, I saw round two. And that article you sent me by Mankiw seems to support my point. It’s all fairly tame, reasonable, moderate suggestions, which have held up well. What is your take?

    John, It’s widely known that Hayek supported NGDP targeting and thought deflation was bad. You are going to lose this argument, give up before people start citing the Larry White article in JMCB.

  62. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 07:20

    Gordon, The Fed controls the path of NGDP. There were Fed errors of omission in 2008 that allowed NGDP to fall sharply. We are still paying the price.

  63. Gravatar of Lee Kelly Lee Kelly
    25. July 2011 at 07:37

    Dustin, thanks for the link! I hadn’t seen that before.

  64. Gravatar of Gabe Gabe
    25. July 2011 at 11:02

    “The gatekeeper remains 60s leftist Pinch Sulzberger .. and it remains bizarre that a great nation is so much in the hands of such a lightweight.”

    How can you be so sure of who controls Pinch Sulzberger?

  65. Gravatar of Donald Pretari Donald Pretari
    25. July 2011 at 12:44

    Morgan,

    Your idea seems too messy for me. It reminds me of UI & the problems that come with it. There’s going to have to be someone to referee disputes between workers & employers, for example. I think it’s simpler to let a few people sit on their ass. That doesn’t bother me ethically at all.

    As I said, I don’t care what people say about what Friedman would have said, especially when it mirrors their own position. It doesn’t tell me anything about Friedman, but it does tell me a lot about the person putting it forward. Nor would I blindly follow Friedman now. I’m simply pointing out the, to some people, unlikely source of my views.

    Your Plan stands on its own, & it does have merits. That’s all you need.

    Be well,

    Don

  66. Gravatar of Greg Ransom Greg Ransom
    25. July 2011 at 12:54

    Lee — I have an advanced degree in philosophy. I know all that stuff, and, of course, much, much,much, way too much more.

    I don’t have time or space to go over every in and out of the issues involved in the equation of exchanges and its cognitive value here.

  67. Gravatar of Greg Ransom Greg Ransom
    25. July 2011 at 12:57

    I said this:

    “The problem with “monetarism” is that Friedman basically defined it tautologically as the equation of exchange.”

    Basically leaves me a lot of room.

    Note: I did NOT say monetarism was built on an empty tautology OR that the equation of exchange was an empty tautology.

    That’s just poor reading skills.

  68. Gravatar of Greg Ransom Greg Ransom
    25. July 2011 at 13:01

    I even wrote the tautological definition down:

    “Monetarism” = the equation of exchange.

    Note well. This does NOT say that the equation of exchange is an empty tautology.

    It says that monetarism comes to a perverse dependence on a naive explanatory use of the equation of exchange.

    Sorry, I said it. Nobel Prize winners in economics have shared the same well considered opinion.

  69. Gravatar of Greg Ransom Greg Ransom
    25. July 2011 at 13:04

    Lee Kelly 25. July 2011 at 05:34

    Excellent.

  70. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 13:48

    Greg, You said;

    “That’s just poor reading skills.”

    Not in this case. I read exactly what you wrote, and it’s flat out wrong. Friedman QT has little or nothing to do with the equation of exchange. The equation of exchange is basically a definition of velocity, nothing more. Theories use definitions, but Friedman didn’t “define” monetarism as a definition. Monetarism is a theory.

    You said;

    “Sorry, I said it. Nobel Prize winners in economics have shared the same well considered opinion.”

    I’d guess at least one half of Nobel Prize winners have little idea what monetarism is.

    Again the Equation of Exchange says. “Let velocity be defined as the ratio of nominal GDP to money.” That’s the equation written out in words. Does that equation look like monetarism? Similarly, one can say “GDP is composed of consumption, investment, government and net exports.” Does that equation describe Keynesianism?

  71. Gravatar of Eric Dennis Eric Dennis
    25. July 2011 at 15:57

    Scott, FWIW, regarding debt monetization fears, I was attempting an explanation of the tight money bias, not an exculpation, even if I have some disagreements about which policy periods that bias manifested itself in.

  72. Gravatar of Gordon Gordon
    25. July 2011 at 15:58

    Scott, thanks much for trying to explain, but I am no closer to understanding what you think created the real-world situation in which the Fed’s sins were so dramatic in their effect. Or is it the case that the natural state is one of potential catastrophes on all sides, from which we are usually saved by the Fed’s virtuous actions?

  73. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2011 at 20:42

    Don, not me.

    I think about entrepreneurs keeping profits off of the low cost labor of 16M people and I get excited.

    I think about cheaper daycare, personal chefs, massages, housecleaning and I get REALLY excited.

    I think about 16M unemployed all getting KILLER SIGNALS about whats worth $3 vs. $5 per hour early on, and getting in the habit of personal improvement, and I become smug.

    There’s more, but that’s enough to convince you., that’s enough to convince anyone.

  74. Gravatar of Scott Sumner Scott Sumner
    26. July 2011 at 06:49

    Eric, OK.

    Gordon, You said;

    “Or is it the case that the natural state is one of potential catastrophes on all sides, from which we are usually saved by the Fed’s virtuous actions?”

    Given the Fed exists, the answer is yes. If the Fed did nothing, that could easily create a major depression. That’s because recessions tend to increase money demand. If you don’t respond the recession gets deeper and money demand rises even more.

    All it takes is NGDP falling 3% to create the severe recession we saw (RGDP falling about 4% and prices rising about 1%.) All it takes is a small mistake in monetary policy to make NGDP fall 3%. It doesn’t happen often because the markets have confidence that if the Fed begins to make a mistake, they will quickly reverse. October 2008 was the first time in my life the Fed stopped doing that. I still have no reason why, but I don’t see how anyone could dispute they were passive. Otherwise explain to me why the Fed didn’t cut rates to zero in October 2008? Why didn’t they do QE2 in November 2008?

  75. Gravatar of StatsGuy StatsGuy
    26. July 2011 at 08:32

    I think deep inside, Mankiw remains a classical monetarist (Friedman style) and probably agrees 80% with your position, and that letter to the NYT exhibits this… but he’s been cowed. Honestly, if you had the the #1 selling macro textbook in america, would you be interested in attracting negative press?

  76. Gravatar of Greg Ransom Greg Ransom
    26. July 2011 at 22:11

    Soctt, you’ve changed your story. You’ve dropped the false “tautology” claim you tried to pin on me.

    But you are still “WINNING” by inventing a new straw man.

    “Basically” leaves LOTS of room for fleshing out multiple dimensions and complexities and connections.

    I’m happy to be wrong — but your invention of a straw man I haven’t advanced doesn’t make me wrong.

    And Friedman didn’t put QT on his license plate. He put:

    M V = P Q

  77. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 07:50

    Statsguy, It must be pretty deep inside, as Mankiw named his dog Keynes. He seems very Keynesian to me.

    Greg; You said;

    “The problem with “monetarism” is that Friedman basically defined it tautologically as the equation of exchange.”

    “The problem with “monetarism” is that Friedman basically defined it tautologically as the equation of exchange.”

    “The problem with “monetarism” is that Friedman basically defined it tautologically as the equation of exchange.”

    Repeat it as much as you like, and you’re still 100% wrong. And I didn’t mischaracterize you in the slightest, as anyone who reads my comments can easily see.

  78. Gravatar of Greg Ransom Greg Ransom
    27. July 2011 at 08:29

    Scott, if I had more confidence in your understanding of all the various empirical, theoretical, causal & explanatory role “definitions” and equations can play in science, I might pursue this conversation farther.

    But I don’t have that confidence.

  79. Gravatar of Greg Ransom Greg Ransom
    27. July 2011 at 08:51

    In the format of a mere off hand comment on a mere blog post, the following kind of thing is clearly written as an exaggeration intended to flag people in a particular direction:

    ““The problem with “monetarism” is that Friedman basically defined it tautologically as the equation of exchange.”

    It’s humorless & a failure to pick up on social clues and context to pretend otherwise. But then, you yourself very openly have repeatedly characterized yourself as on the “autistic” side of the “emotional intelligence” scale. I increasingly get a sense that this implicates how you interact with the written word.

  80. Gravatar of Greg Ransom Greg Ransom
    27. July 2011 at 08:53

    “In [Friedman's "The Quantity Theory of Money"], he laid out a demand for money function in which the real quantity of money demanded was a function of a vector of returns on alternatives to holding money – bonds, equities, physical goods, and human capital – of real income and of what Friedman termed a “portmanteau variable,” a variable reflecting factors affecting the tastes and preferences of individuals and institutional factors like the payment practices of businesses. Transformed, this equation applied to velocity and hence could be used to express the usual quantity theory relation.”

    “The Quantity Theory was first developed by Irving Fisher in the inter-war years as is a basic theoretical explanation for the link between money and the general price level. The quantity theory rests on what is sometimes known as the Fisher identity or the equation of exchange.”

  81. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 06:11

    Greg, Next time put smiley faces next to your jokes, so us autistic people can understand. I get so many comments here that seem like jokes, but aren’t, that I need to be careful.

    I hope your last comment about Fisher is a joke, as it’s obviously not true.

  82. Gravatar of Greg Ransom Greg Ransom
    29. July 2011 at 13:09

    ;-) Thanks for the reminder.

    It wasn’t a joke, but it was something_between_ a joke and a 500 page book on the topic.

    This is a blog, right?

    The “last comments” aren’t mine. They are written by others.

    Is there a good history of economic thought book on Fisher or the quantity theory?

    The history of the “Chicago” view of monetarism and the quantity theory as pulled out of his hat by Friedman is such a mess it makes my head hurt.

    All I know of history of thought stuff on Friedman is articles and very narrow books.

    Anyone working on a major opus?

    These thing as they move through history are massively complex — and contemporary theorists usually have the history massively wrong, or so scholarship frequently shows us.

  83. Gravatar of ssumner ssumner
    29. July 2011 at 18:10

    Greg, Someone did a history of Fisher, but I forget who. I’ve read Fisher himself. He’s a very clear writer and the best way to get his ideas is to read his stuff.

  84. Gravatar of Greg Ransom Greg Ransom
    29. July 2011 at 22:30

    Scott, I’ve been reading my Fisher, working through all of it. Several books are free in E-pub format.

    But you can’t beat good history of econ thought.

  85. Gravatar of Scott Sumner Scott Sumner
    30. July 2011 at 11:16

    I think Robert Dimand did a nice study of Fisher. Did you read that?

  86. Gravatar of Skepticlawyer » Postmodern Conservatism – guest post by Lorenzo Skepticlawyer » Postmodern Conservatism – guest post by Lorenzo
    11. August 2011 at 05:29

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