The Economist has an excellent new article on heterodox economics in the blogosphere. Lars Christensen should be proud; he created the name “market monetarist” just a few months ago, and now it has the official imprimatur of The Economist.
The article discusses three heterodox schools; neochartalism (MMT), market monetarism and Austrianism. The Economist is careful avoid any suggestion that the three are comparable in all respects:
These three schools of macroeconomic thought differ in their pedigree, in their beliefs, in their persuasiveness and in their prospects.
Market monetarism has recently been the most successful in garnering high level endorsements. The Austrian school has probably gained the greatest number of adherents (think about the Ron Paul phenomenon.) As for neo-chartalism, I always thought of them as being a bit wacky, and thus was surprised that Warren Mosler was cited more than any other individual, indeed 4 times as often as the Austrian representative (Lawrence White.) I might have reversed that ratio had I written the article. In any case, I see this article as a big win for both MMT and market monetarism, as Austrianism was already pretty well-established.
I don’t have any significant issues with the article, but will provide a slightly different take on a couple issues. Most of the market monetarism discussion focused on NGDP targeting, which of course is only one aspect of our model. But I think that was a wise move by The Economist, as you can’t possible explain all the theoretical nuances in a magazine article. And NGDP is where the attention is focused right now. Here’s their comment on the political feasibility of NGDP targeting:
The market monetarists argue that fiscal stimulus should be redundant, because a central bank can always revive spending—if it sets its mind to it. If the Fed’s efforts have disappointed, it is not because market monetarism is wrong, but because the Fed is not sufficiently committed to the cause.
This is probably true. But it makes it hard for the market monetarists to clinch their case. Until a central bank truly commits to their policy, they cannot prove their point. But until they prove their case, central banks will be reluctant to commit to their policy
As with almost all discussion of monetary policy these days, this mixes the issue of feasibility and desirability in a rather ambiguous fashion. NGDP targeting is actually not all that different from the Taylor Rule, or some other version of the Fed’s dual mandate. And Bernanke continually insists that the Fed doesn’t have to worry about running out of ammunition. So they can certainly boost NGDP if they want to. The question is; do they want to? Or perhaps I should say; is their desire to do so strong enough to overcome the perceived risks?
When I point this out to other economists they are inclined to smile politely, and say; “Well of course Bernanke would say that, imagine the market panic if he said they were out of ammunition.”
I point out that Bernanke held these views as an academic, when he had no reason to lie. Some argue that he changed his views after joining the Fed, for some mysterious unspecified reason. So although he’s always said the Fed never runs out of ammo, and he used to really believe it, now he’s lying. I have a two word response. Occam’s Razor.
Here The Economist exaggerates the amount of “activism” in market monetarism:
The market monetarists do not fret about the side effects of the activism they seek, which can misdirect capital, inflate bubbles and seduce people into over-borrowing.
I think they are confusing “activism” with “different policy.” We want the Fed to adopt a different policy, but the NGDP targeting regime would certainly be less “activist” than current policy, even if it didn’t involve the futures targeting regime that Woolsey and I have advocated. The current dual mandate/dual target approach allows for all sorts of activism. NGDP targeting has a single target, and would result in far less activism, and almost certainly far less of the bubble phenomena that are associated with dramatic changes in NGDP growth rates.
Tyler Cowen had this to say about the article:
I know that Scott would insist he is not heterodox macro at all, but I can report I found it striking to be cited in this article as a more or less establishment source, rather than heterodox myself. In both cases the journalist is probably correct.
Because Tyler anticipated me making a mistake before I actually made it, I must of course try to frustrate his expectations. Here’s the reply I left in his comment section:
I was an orthodox economist in 2007, completely heterodox by early 2009, and am now becoming slightly more orthodox. Interestingly, my views haven’t changed at all during that 4 year span.
Seriously, Tyler has been the biggest factor in the success of my blog. I’m constantly getting invitations, and then am told that Tyler Cowen recommended they contact me. Next to Tyler, Ryan Avent has probably been the most helpful. Note that Ryan works for The Economist (although he’s probably not the author of this particular article) and also note the title of the article: “Marginal Revolutionaries.”
Update: Here’s Arnold Kling:
Krugman’s liquidity trap analysis is a blogosphere phenomenon; in the professional journals, it has little credence. One can make a good case that Scott Sumner, portrayed as heterodox in the article, is more mainstream than Krugman.
So Tyler, Arnold, and I offer 3 different perspectives, all of which are valid. There is no “fact of the matter.” (Just as there is no fact of the matter as to whether China is larger than the US, or whether the Ryan plan would abolish Medicare.) In response to a comment below, I replied:
I suspect there is no “orthodox” view of monetary economics, as many economists lack coherent views. The same economist might believe in liquidity traps, or not, depending on how the question is worded.
PS. Any thoughts on the artwork? At first I thought that was Bob Murphy chasing Krugman. But Bob’s not mentioned, and in any case he’s much more handsome than the cartoon character. I’m also not quite sure what to make of the Goya etching reference, which I believe is entitled something like “The sleep of reason produces nightmares.”
Update: Oh dear, I didn’t realize what I was getting into when I agreed to debate Bob Murphy.
PPS. Because of the holidays I won’t be able to catch up on comments for a few more days.
PPPS. I did see the story about the two Fed appointees, but have no comment because the press told us nothing about the only thing that matters—their views on monetary policy. A sad comment on our press, unless they don’t have any monetary policy views. In which case a sad comment on our political system.