We’re not even a contender

Here’s a recent post by Raghuram Rajan:

With the world’s industrial democracies in crisis, two competing narratives of its sources – and appropriate remedies – are emerging.

The first, better-known diagnosis is that demand has collapsed because of high debt accumulated prior to the crisis. Households (and countries) that were most prone to spend cannot borrow any more. To revive growth, others must be encouraged to spend – governments that can still borrow should run larger deficits and rock-bottom interest rates should discourage thrifty households from saving.

Under these circumstances, budgetary recklessness is a virtue, at least in the short term. In the medium term, once growth revives, debt can be paid down and the financial sector curbed so that it does not inflict another crisis on the world.

This narrative – the standard Keynesian line, modified for a debt crisis – is the one to which most government officials, central bankers and Wall Street economists have subscribed, and needs little elaboration. Its virtue is that it gives policymakers something clear to do, with promised returns that match the political cycle.

Unfortunately, despite past stimulus, growth is still tepid, and it is increasingly difficult to find sensible new spending that can pay off in the short run.

THE SECOND NARRATIVE

Attention is therefore shifting to the second narrative, which suggests that the advanced economies’ fundamental capacity to grow by making useful things has been declining for decades, a trend that was masked by debt-fuelled spending. More such spending will not return these countries to a sustainable growth path. Instead, they must improve the environment for growth.

That’s pretty depressing reading if you are a market monetarist.  The first “competing narrative” is simply inexplicable to me.  The recession was not caused by too much debt, and if it was the solution would not be more “budgetary recklessness.”

The second is slightly closer to the truth.  Growth has slowed slightly in recent decades, and my hunch is that it will slow further in future decades.  But this growth slowdown was certainly not “masked by debt-fueled-spending.”  Either we have the capacity to produce houses, or we don’t.  Whether those houses are purchased for cash or with mortgages tells us NOTHING about an economy’s PPF.  It’s impossible for an economy to produce more than it’s owners and workers can afford.  (But it certainly can consume more than its citizen’s can afford.)

There is a different argument that Rajan could have made, which would be slightly more plausible (although wrong.)  He could have argued that the slowdown in growth was masked by policies that boosted AD, pushing the economy’s output beyond the LRAS curve (i.e. above the ‘natural rate’ of output.)  But there are very good reasons why he didn’t make that argument.  It would imply that inflation should have been accelerating in recent decades, and it has actually been decelerating in recent decades.

It’s discouraging that the most plausible narrative, the one consistent with elite macro theory over the past 25 years, isn’t even a contender.  I’m referring of course to a monetary policy that let NGDP fall 9% below trend between mid-2008 and mid-2009, and which since then has grown at an agonizingly slow pace.  That’s the obvious explanation, and according to Rajan it’s not even one of the competing narratives. 

We’ve got lots more work to do.

HT:  Tyler Cowen


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53 Responses to “We’re not even a contender”

  1. Gravatar of Mike Sax Mike Sax
    31. January 2012 at 12:26

    Speaking of work, thanks Lars Christensen for the good work you did on today’s post

    Lars Christensen writes a post about me http://diaryofarepublicanhater.blogspot.com/2012/01/lars-chistensen-writes-post-about-me.html

  2. Gravatar of JJA JJA
    31. January 2012 at 12:37

    Scott, I have enjoyed reading your blog. As a practitioner (firm level decisions regarding export related efforts) I find you (and other market monetarists, especially Christensen and Nunes) very understandable and convincing. But… But I find Krugman and DeLong very understandable and convincing also… From my micro-level point of view it seems to be the case that both sides are right, but something is missing in-between.

    Well, I am not an economist, but I think that I see NGDP as the ultimate aim in order to manage stable and prosperous economy. At the same time I see the importance of fiscal activity (from the state or whatever public body), and that is at the same time when I think that the monetary policy is the most important part of the situation. But I feel that monetary policy alone is not enough in order to achieve good results in a reasonable time. Therefore fiscal.

    From my practical point of view, both market monetarists and old-style keynesians seem to be right at the same time. It may be that I am mad or something vital is missing from our understanding of economics.

    But in any case, I just make decisions in practice. By the way, I am from the Eurozone (unfortunately).

  3. Gravatar of Bill Woolsey Bill Woolsey
    31. January 2012 at 13:20

    Our narrative is like the first one except “excessive debt” does not have any direct implication about nominal expenditure on output. Or, it would be, because of high debt, using monetary policy to generate a gradual series of modest decreases in short term interest rates was unable to keep nominal spending on output on a stable growth path. Contrary to theory, promising very short term interest rates in the future, along with promises to keep inflation from rising too high, were not able to raise nominal expenditure.

    Obviously, the problem can’t be that the policy approach was wrong. It is the economies fault–too much debt. If only people hadn’t borrowed so much, then modest periodic decreases in short term interest rates would have maintained nominal expenditure.

    Never forget…

    It is _never_ the Fed’s fault. It is the economy’s fault.

  4. Gravatar of Scott B. Scott B.
    31. January 2012 at 13:27

    Seconding JJA here, I read Krugman and Delong as well, and I have to say that the distance between you, Scott, and them seems pretty shallow to me, since both of them have repeatedly stated that they’d be happy with helicopter-drop Ben (i.e., essentially private-sector stimulus) if he’d just do it already, but until that Ben Bernanke arrives, the Fed as constructed is stuck at the zero-lower-bound. The old maxim of academia certainly comes to mind as part of this (Sayre’s law, “the politics are so bitter because the stakes are so low”) that probably has something to do with the New Keynesian vs. market monetarists split. But, the seeming refutation of Milton Friedman by current freshwater economists and dabbling in Austrianism would seem to put you and Krugman and Delong a lot closer together. It seems like you are all arguing over details about how to spend, but not the main issue of the day which is that neither the fiscal nor monetary authorities are willing to actually implement any of the spending.

    Getting back to JJA’s point, I also am frustrated by the repeated references to “structural” problems when lack of spending, due to tight money by the Fed and insufficient fiscal spending, is staring us all right in the face. It’s the whole Yglesias “crisis we should be having” versus crisis we are having issue. There force-multiplier on knowing trigonometry seems to have grown considerably over the past several decades, with those with solid high-school math having advanced machining jobs and those without working in minimum-wage service jobs, but that’s NOT what’s causing 8% unemployment. It may change the upper bound on how much we can make and trade with other nations (and who gets to buy all the cool stuff), but it’s not what is making people unemployed.

  5. Gravatar of Luis Enrique Luis Enrique
    31. January 2012 at 13:29

    No such thing as a credit-fuelled expansion?

  6. Gravatar of Lars Christensen Lars Christensen
    31. January 2012 at 13:31

    Bill, you are so very right…

  7. Gravatar of Major_Freedom Major_Freedom
    31. January 2012 at 13:35

    “It’s discouraging that the most plausible narrative, the one consistent with elite macro theory over the past 25 years, isn’t even a contender. I’m referring of course to a monetary policy that let NGDP fall 9% below trend between mid-2008 and mid-2009, and which since then has grown at an agonizingly slow pace.”

    How can printing and spending money on bridges in New York, fix the unemployment and structural problems in the housing market in Nevada? That would boost NGDP but it wouldn’t boost “the economy.”

    The most plausible narrative is not NGDP, but recalculation.

  8. Gravatar of Mike Sax Mike Sax
    31. January 2012 at 13:40

    Ok one last folowup on the latest developments it’s heady stuff I promise Lars Christensen admits I know something about economics http://diaryofarepublicanhater.blogspot.com/2012/01/lars-christensen-admits-i-know.html

  9. Gravatar of JJA JJA
    31. January 2012 at 13:46

    Ah, this is nice. Having people I respect (Christensen in this case) to come together in the blogospehere. An even being able to participate in the discussion. Nice.

    But to the business. My background comes from sales and management, but that may be the reason why it seems to me that both the market monetarists and the old-style keynesians are fixing the same machine but with a bit different tools. Due to being heavily incfluenced by engineers I tend to think in their ways with machines. You can fix practically everything with one set of tools until you cannot. Then you have to change your tools. In order to have you machinery up and running without a glitch you should be using those tools you favour and those you do not like.

    The discusion (or non-discussion) between market monetarists and people like Krugman and DeLong (are they old-style-keynesians, whatever, they write very convincing things) is something like the discussion of software and hardware people in the field of embedded systems when the machinery is broken. You can do wonders from one side only, but you cannot do everything. You need both the software and the hardware.

    I am not saying that the economy is a machine, what I am saying is that the economy may require different tools at different times. In that sense the distinction between Krugman, DeLong, and you market monetarists seem to be somewhat artificial to me.

    Could it be that some tools produce useful results in different situations and with a different time-lag?

  10. Gravatar of Jeremy Goodridge Jeremy Goodridge
    31. January 2012 at 13:51

    Scott:

    I think the first explanation is actually closer to yours than the 2nd one in that it is a demand side theory and that’s really the critical thing. WHY demand fell isn’t really as critical to the differences. You think that fed policy can deal with a demand shortfall WHATEVER the source. And the Keynesians think that Fed policy works through interest rates, and so there is something fundamentally more challenging when you hit a zero bound. BUT, even Krugman/DeLong believe that Fed policy can do it — they just think that it requires lowering real interest rates by increasing inflation expectations. The structuralists think that one must do things on the supply side, and that theory IS really different because NO fed policy is a possible solution.

  11. Gravatar of Lars Christensen Lars Christensen
    31. January 2012 at 14:21

    JJA, first of all thanks for the positive comments. Second, I do fundamentally think that Keynesians and Market Monetarist (and old style Monetarists) are quite far away from each other theoretically.

    I have three posts that my clarify this:

    http://marketmonetarist.com/2011/12/23/how-i-would-like-teach-econ-101/

    http://marketmonetarist.com/2012/01/18/there-is-no-such-thing-as-fiscal-policy/

    http://marketmonetarist.com/page/2/?s=keynesian+stimulus

    This three post should make it clear what our theoretical differences are.

    That said, for the US and the euro zone Market Monetarists and New Keynesians (at least Krugman, DeLong and Romer) agree that monetary easing is warranted and that this could be done with in the framework of NGDP level targeting. That said, Market Monetarists do not want to “fix” the economy and unlike keynesians we do not think that the problems are real, but rather nominal. The crisis is a result of a monetary policy mistakes rather than a “market failure”.

    If you have questions in this regard feel free to comment on my blog – or drop me a mail (lacsen@gmail.com)

  12. Gravatar of Lars Christensen Lars Christensen
    31. January 2012 at 14:28

    In regard to fiscal policy I might add that MMers probably is less concerned about the general fiscal troubles in the US and the euro zone than many “establishment” economists (and particularly European policy makers). We agree that the present fiscal path is unsound in both the US and the euro zone, but if we get monetary policy right (target the NGDP level of the pre-crisis trend) then that would reduce the fiscal stress very significantly – not to speaking of banking problems. Get monetary policy right and then European and US banking and fiscal policy problems will become manageable (on an overall level).

    That said, MMers do in general not think that fiscal policy on its own can increase nominal spending in the economy so even though we think that fiscal policy should not be a concern if monetary policy is “right” also don’t think it is useful to spend a lot of time trying to “stimulate” spending with fiscal policy (as suggested by Krugman etc.)

    Scott, sorry for taking over part of your blog;-)

  13. Gravatar of ssumner ssumner
    31. January 2012 at 14:33

    JJA, Thanks for the note. You said:

    “But I feel . . . ”

    That’s your mistake. Your comment suggests you are basing you views on common sense intuition. In my view that’s the wrong way to approach macro. You need to be ruthlessly logical. I agree that the Keynesian approach makes sense from a common sense perspective. But on closer examination it doesn’t hold up.

    Bill, It doesn’t seem at all like the first one, in terms of cause or solution (unless I’m missing something.)

    ScottB. We certainly agree that more monetary stimulus would be desirable. But we did not agree on that point back in 2009 when I started my blog. I criticized DeLong for saying monetary stimulus wouldn’t work, and Krugman criticized me for saying it would work.

    Luis, I agree that credit can help people buy certain types of output, but it can’t produce “unsustainable growth.” Only excessive AD can do that, and obviously that doesn’t explain growth in recent decades.

    Major Freedom, Once again, I’m not advocating printing money and spening it on bridges. I’m advocating NGDP targeting.

    JJA, We only need one tool to control NGDP, and that’s monetary policy. Fiscal policy is like a fifth wheel on a car. Superfluous.

    Jeremy, God help us if market monetarists ever get associated with the view that the “mess” was caused by too much debt, and the solution is more debt. We’d be the laughing stock of the economic profession.

  14. Gravatar of ssumner ssumner
    31. January 2012 at 14:35

    Lars, I agree with those views. If fiscal policy works at all, it’s only by unintentionmally doing what monetary policy should be and could be doing much more cheaply.

  15. Gravatar of JJA JJA
    31. January 2012 at 14:40

    Lars (and Scott :D),

    What I am thinking that it might be the case that in the case of sudden shocks the effect of monetary policy may require a too long time to have an effect. In some cases the first level of counter-shock initiative could be done by fiscal action. Then the fiscal action would be gradually lessened and when the monetary effect will have its course.

    That is how I think as a practitioner. From time to time you need the first level of adjustment action (defence) and then you can mount your counteractions. Could it be that the fiscal side is the first line of defence in order to make it sure that things do not get too bad during the first round, and the monetary policy will take care of the actual stabilizing actions?

    As I wrote, that is not saying that you are not right (I think that you are), but it is to say that people like Krugman and DeLong may also be right (I think that they are). A dilemma, really.

    In any case, I see the distance between market monetarists and people like Krugman and DeLong much smaller than someone would expect from your attitudes (but brothers fight the fiercest battles, you both believe that central banks can handle things… :P).

  16. Gravatar of JJA JJA
    31. January 2012 at 14:52

    Scott,

    >“But I feel . . . ”
    >That’s your mistake. Your comment suggests you are basing you
    >views on common sense intuition. In my view that’s the wrong way
    >to approach macro. You need to be ruthlessly logical. I agree
    >that the Keynesian approach makes sense from a common sense
    >perspective. But on closer examination it doesn’t hold up.

    Yes, I agree. My main issue is not that you should no not be logical. Yes, you should be. My point is that from my experience (yes, not scientific data in itself) people tend to trust a government that says that they will handle things. Everything is even merrier if they have a central bank that says the same thing.

    From time to time you have to pay respect to peoples “common sense”. By saying something that “we will refurbish the major bridges and run for the 5% NGDP growth” will make things easier. Some people understand the bridges and the others understand the easier money.

    Hmm… I am not sure at all if I can express my thoughts in a clear way. But in any case it seems to me (as I wrote earlier) that market monetarists and keynesians like Krugman and DeLong promote very similar solutions. Coloring and packaging is different. It looks like that from the “not-that-wonkish-point-of-view”. In my actual job I would send you to talk to some people in our corporation and Krugman to talk to the others. The end result might not be very different…

  17. Gravatar of Benjamin Cole Benjamin Cole
    31. January 2012 at 14:54

    Oh, I can get you even more depressed.

    There is a long, long, long article in the Jan. 30 issue of The New Yorker by Ryan LIzza, very well-done on White House macroeconomic policy (mostly).

    Not one word about monetary policy. Nobody was even talking monetary policy in the White House, by the lights of this very long article.

    Sometimes I wish I had never even endeavored to understand our economy, or stumbled upon Scott Sumner’s blog.

    What’s the point in having these insights?

  18. Gravatar of D R D R
    31. January 2012 at 14:57

    … because, really, nothing screams “central bank independence” like the White House determining monetary policy.

  19. Gravatar of Market Monetarism vs Krugmanism « The Market Monetarist Market Monetarism vs Krugmanism « The Market Monetarist
    31. January 2012 at 15:04

    [...] is an interesting comment from ‘JJA’ over at Scott Sumner’s [...]

  20. Gravatar of Michael Tolbert Michael Tolbert
    31. January 2012 at 15:04

    Under the first narrative, I thought the problem was not “too much debt” but the fact that we had created a monstrous system of credit and financing that was built upon layers and layers and tranches and tranches of mortgages and loans, so that when the system collapsed it was like a sudden violent contraction in the money supply. In other words – not debt, but debt financed credit which was acting a source of money or its equivalent as a risk free asset.

    Also I thought the Keynesian would say, not all debt is created equal. Public debt is different from private and would allow private deleveraging to be smoother and less painful. Not saying I agree, but this seems to be the argument.

  21. Gravatar of Lars Christensen Lars Christensen
    31. January 2012 at 15:08

    Scott, I think you missed Bill’s irony above: “It is _never_ the Fed’s fault. It is the economy’s fault.”

  22. Gravatar of marcus nunes marcus nunes
    31. January 2012 at 16:24

    This is the link to the New Yorker piece Benjamin Cole reffered to. It´s depressing!
    http://www.newyorker.com/reporting/2012/01/30/120130fa_fact_lizza?currentPage=all

  23. Gravatar of Morgan Warstler Morgan Warstler
    31. January 2012 at 16:38

    Ya know eventually, you are going to wake up do what I keep telling you.

    Becoming the dominant narrative is easy if your narrative can be used by the A Power to shrink govt.

    Your plan MEANS:

    1. less inflation than in the past
    2. a Fed that has no human control
    3. smaller govt
    4. an end to public employee unions

    And there is a HUGE swath of people who want those things.

    But you won’t sell your plan on its relative merits, instead you want to win by arguing the other side is logically wrong.

    You are an anti-Keynesian.

    The Tea Party is anti-Keynesian.

    The reason the first one is a known narrative is because it serves the interest of leftists socialists – even though Keynes would never have let them raise public employee pay 1998-2008, precisely so we didn’t have to fire them in 2010.

    Now then, DeKrugman is smart enough to NEVER talk about that part of Keynes.

    But you Scott, you pee straight into the wind… you FOCUS EXCLUSIVELY on the “print money right now” part of your story… the weakest dumbest part.

    Drop you ego, and throw red meat to the radical right, let them see your plan for what it REALLY gets them.

  24. Gravatar of Major_Freedom Major_Freedom
    31. January 2012 at 16:59

    ssumner:

    “Major Freedom, Once again, I’m not advocating printing money and spening it on bridges. I’m advocating NGDP targeting.”

    There’s no difference in principle. Printing and spending money on bridges contributes towards NGDP.

    The principle is what is important. In order to boost NGDP, the government (central bank) has to print money and spent it on SOMETHING. Whatever that something is, it will be specific, it will not raise the demand of specific prices that are a product of economic calculation of subjective consumer values across the economy.

    The Fed can’t target all prices equally when it inflates. It is necessarily a system of boosting some prices before all other prices. No one individual in the economy buys total output. They buy specific things. If there is a problem of unemployment and partial relative over production of housing in Nevada, the Fed can’t solve this by buying assets, the owners of which don’t even value labor or unsold houses in Nevada and prefer to speculate, on derivatives say, using the cheap money.

    No seller sells into, and no investor invests into, either aggregate demand or NDGP.

  25. Gravatar of DonG DonG
    31. January 2012 at 17:11

    I agree that #1 is misstated as “too much debt”, when it is better summarized as a drastic swing in the savings rate from negative to positive. Thus I think #1 and #2 and #3 are *all* correct. Demand lessened and we have structural issues and our money supply is too tight. They are not incompatible.

    #1 doesn’t need fixing. It is reverting back to a healthy level.

    #3 is easy to fix, except for the politics.

    #2 is the challenge. I think the switch from a manufacturing society to a service society has caused a pause in our productivity growth. I say pause, because we are just now starting to figure out how to replace doctoring and lawyering with technology. Our education system is weak and we have a huge overhang of pension debt and govt. debt that will displace productive public investments.

    So, keep pushing the monetary thing, but avoid the big-endian argument about Keynesian-monetarist causation.

  26. Gravatar of StatsGuy StatsGuy
    31. January 2012 at 17:34

    “I could have been a contender!!!”

    Actually, you are…

    http://www.ritholtz.com/blog/2012/01/cnbc-best-alternative-financial-blogs/

    #4 on the alternative blog list, just below zero hedge.

    Of course, you are ALSO #17… Go figure.

  27. Gravatar of Cassander Cassander
    31. January 2012 at 18:21

    > But this growth slowdown was certainly not “masked by debt-fueled-spending.” Either we have the capacity to produce houses, or we don’t. Whether those houses are purchased for cash or with mortgages tells us NOTHING about an economy’s PPF. It’s impossible for an economy to produce more than it’s owners and workers can afford.

    As we pile on more and more regulation, government spending, etc. our ability to grow has declined. A larger and larger share of our surplus is being used up doing or making things nobody wants. Under such a situation, debt CAN mask the decline, papering over the decline in productivity by transferring consumption from the future to now. It will work as long as everyone still believes in the future, but maybe that belief is finally eroding away.

  28. Gravatar of Luis Enrique Luis Enrique
    31. January 2012 at 18:43

    If all credit can do is enable the purchase of certain kinds of good, why this empirical regularity?

    http://www.VoxEU.org/index.php?q=node/7587

    http://blogs.ft.com/economistsforum/2009/11/credit-booms-gone-bust/#axzz1l5sV18D7

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    31. January 2012 at 19:24

    Scott,
    Forgive me totally off topic, but I think it has some relevance from an economics point of view.

    I just sat in a big room full of unemployed people today applying for UIB. Based on their math I qualify for $250 a week for six months. Had I not been fired I would have made about $350 a week for 3 more months. Not only that I would have had to spend about $80 a week gas and tolls (they just boosted the bridge tolls a third and the NJ turnpike tolls 50% and gas is ridiculous in my 1974 Buick Estate sucking up premium gas) and I would guess at least $35 a week on various taxes.

    In other words I’ll get paid more each week to stay at home than I would have if I worked and spent 4 hours a week commuting. And it lasts for six months instead of three.

    Now I paid roughly 2-3% in UIB taxes to get this benefit over the last 18 months. I was largely sitting around on my catatonic butt prior to that (my dissertation thesis had me all in knots) living on inherited wealth.

    In other words I paid much less than $900 into the system and am now pulling out $6000.

    So in short it’s a bonanza. Am I going to waste this bonanza? No! I’m going to finish and defend my dissertation and apply for real jobs in the meantime. I just finished updating my resume, and if I do say so myself I think it’s pretty impressive this recent firing not withstanding. (I have a very good references from my teaching this fall at Delaware).

    I’m lucky. The system really worked for me. And I intend to make the most of it. But for most people who lose their jobs, they aren’t so lucky. Typically it pays 60% of pay and there’s no creative opportunity waiting.

    UIB might raise the unemployment rate temporarily by discouraging job searches (I can’t see how that is really true) but in my case it has opened a door to future opportunities.

    P.S. Maybe I need to get discharged/terminated/fired more often.

  30. Gravatar of UnlearningEcon UnlearningEcon
    1. February 2012 at 02:23

    ‘The recession was not caused by too much debt’

    There is *such* a strong empirical link between private debt an growth.unemployment that I can’t believe you’re saying this.

    ‘It’s discouraging that the most plausible narrative, the one consistent with elite macro theory over the past 25 years, isn’t even a contender.’

    Have you EVER considered the possibility that your theories might be completely off base? I’m not trying to wind you up, I’m serious – has it ever entered your mind that they are flawed from the ground up?

  31. Gravatar of Says Theorem und die Krise « Aus dem Hollerbusch Says Theorem und die Krise « Aus dem Hollerbusch
    1. February 2012 at 08:03

    [...] Erkenntnis ist auch in der heutigen Wirtschaftskrise nicht unwesentlich, wie uns Scott Sumner erinnert: Either we have the capacity to produce houses, or we don’t. Whether those houses are purchased [...]

  32. Gravatar of ChacoKevy ChacoKevy
    1. February 2012 at 09:09

    @Statsguy: Thanks for that link. The original CNBC post is just a slideshow collection so it’s clearly just a list and not a ranking. There is no way that Calculated Risk would be either #11 or “alternative”.

  33. Gravatar of Major_Freedom Major_Freedom
    1. February 2012 at 09:31

    Unlearningecon:

    Sumner said: “The recession was not caused by too much debt”

    You replied: “There is *such* a strong empirical link between private debt an growth.unemployment that I can’t believe you’re saying this.”

    Correlation does not equal causation. I can’t believe this needs to be said to you.

    There is also a very high empirical correlation between consumption and wealth. Does that mean that the more we consume, the wealthier we can get? That consumption causes wealth generation?

    Actually, don’t answer that, you might be a Keynesian.

  34. Gravatar of ssumner ssumner
    1. February 2012 at 11:43

    JJA, I don’t think there is much of a lag in monetary policy, especially if you do “level targeting.” Indeed in a sense there are LEADS, as in new Keynesian models it is expected future monetary policy that determines current AD.

    Ben and Marcus, Thanks, I’ll take a look.

    DR, The President picks the members of the Board of Governors–including Bernanke. He has showed almost no interest in getting new people on the board. Not all his choices were approved, but most were. Yet he often waited many months (18 months?) to even nominate people for empty seats.

    Michael, That may have been the narrative, but I don’t agree. The Fed is to blame for the fall in NGDP, it need not have happened if the Fed had been doing level targeting of NGDP (even if there was a big debt bubble.)

    Lars, Yeah I picked that up, but I was addressing the first part of his comment.

    Morgan, I do want to end public employee unions, but that’s a separate issue in my view.

    Major Freedom, If they buy T-bonds it’s basically neutral as far as prices are concerned.

    DonG, I also disagree with those who say more saving is a problem. It’s not. Money hoarding is a problem if the Fed doesn’t ofset it with increased supply of money.

    Statsguy, And I’m in red.

    Cassander, No, it’s true you can increase current consumption, but only at the expense of less current I+G. Encouraging consumption doesn’t boost total GDP (unless you boost AD), it changes the nature of GDP.

    Luis, Correlation doesn’t prove causation. I’m sure mink coat sales rise during booms, it doesn’t mean mink coats cause booms.

    Mark, Good comment. I agree.

    UnlearnedEcon, I do little else but think about how I might be wrong. But you haven’t answered the question of why the mainstream theory of the past 25 years was discarded at a time when it seemed to explain events quite well. Don’t just say I’m wrong, tell me why.

  35. Gravatar of Morgan Warstler Morgan Warstler
    1. February 2012 at 13:40

    Note to all: once again. Scott agrees with me but still wont focus on actually SELLING his plan the best way to sell it… he’ll just lament people don’t like it.

    When you REALLY want something you do what it takes to get it.

  36. Gravatar of JJA JJA
    1. February 2012 at 13:54

    >JJA, I don’t think there is much of a lag in monetary policy,
    >especially if you do “level targeting.” Indeed in a sense
    >there are LEADS, as in new Keynesian models it is expected
    >future monetary policy that determines current AD.

    Hmm… Could be. But is that a fact or an opinion? The reason why I am deliberately ignorant is that a good policy needs to be understandable and efficient (in theory). Efficient (in theory) is not enough.

    I still think that the actual recommendations of people like Krugman and DeLong and you market monetarists look surprisingly similar. Very interesting.

    Actually that is promising.

  37. Gravatar of Major_Freedom Major_Freedom
    1. February 2012 at 14:10

    ssumner:

    “Major Freedom, If they buy T-bonds it’s basically neutral as far as prices are concerned.”

    Those who would sell t-bonds to the Fed would be the primary dealers. The primary dealers are banks. The prices that banks affect are typically the prices of those things purchased and financed by (lower interest rate) loans, such as capital and durable consumer goods, as well stock, commodity, derivative, and real estate speculations.

    On the other side of the coin, the fact that the Fed is buying t-bonds with inflation, means the state is encouraged to borrow and spend more. Their spending would affect the prices of certain things first as well. For us, a huge chunk of federal spending is on social security, medicare/medicaid, war/defense, unemployment, and interest on debt.

    Quite a diverse spectrum above, but it’s nowhere near “neutral on prices.” Just consider the housing boom, or the Nasdaq boom, or the current bond bubble, to see that not all prices are affected equally.

  38. Gravatar of UnlearningEcon UnlearningEcon
    1. February 2012 at 16:21

    Major_Freedom I said robust empirical link. That means:

    a) Correlation

    b) One preceding the other by a roughly uniform period of time

    c) A robust, empirically verified theoretical link

  39. Gravatar of Major_Freedom Major_Freedom
    1. February 2012 at 18:50

    UnlearningEcon:

    Saying “robust” doesn’t alter anything.

    a) No need to repeat correlation does not equal causation.

    b) Events that are observed to have historically transpired sequentially over time, does not show causation. The month of February has always occurred after the Superbowl, in roughly the same uniform period of time every year, since the 1960s. But that doesn’t mean the Superbowl caused February to occur.

    c) Theoretical links cannot be established by observing empirical correlations. You have to explain the theory of why private debt causes unemployment, based on economic logic, not correlations or temporal patterns.

  40. Gravatar of UnlearningEcon UnlearningEcon
    2. February 2012 at 09:18

    OK you’ve missed my overall point spectacularly, and focused on the individual components without context. What we have for private debt and growth is:

    a) The empirically verified creation of new purchasing power out of nothing by private banks, suggesting private debt adds to AD.

    b) An empirically observed correlation between private debt and growth, with the growth of private debt preceding the changes in growth/employment. This link persists over time and between countries.

    So we have in (a) an economic reason *why* private debt might drive growth and in (b) an observed link *between* private debt and growth that appears to corroborate this.

  41. Gravatar of UnlearningEcon UnlearningEcon
    2. February 2012 at 09:22

    Scott,

    I don’t see how mainstream economic theory is able to explain the events of the past 3 years very well. In mainstream theory private debt is ignored because ‘one person’s asset is another’s liability’, bubbles are not supposed to exist (at least in the version of the EMH you seem to be defending) and the inner workings of large financial institutions are ignored. There isn’t really a theory of fraud outside Akerlof, but he is compartmentalised as an anomaly.

  42. Gravatar of Federico S Federico S
    2. February 2012 at 10:38

    On the positive side, check out page #10 of the Kaufmann Survey on Economic Bloggers: http://www.kauffman.org/uploadedFiles/econ_bloggers_outlook_q1_2012.pdf

  43. Gravatar of Major_Freedom Major_Freedom
    2. February 2012 at 11:56

    UnlearningEcon:

    “OK you’ve missed my overall point spectacularly, and focused on the individual components without context.”

    You’re overall point was wrong, UnlearningEcon, I addressed it. You incorrectly claimed that the knowledge that private debt generates recessions is based on the correlation between the two.

    “What we have for private debt and growth is:”

    “a) The empirically verified creation of new purchasing power out of nothing by private banks, suggesting private debt adds to AD.”

    No, that proposition is not empirically “verified.” It is consistent with past empirical data. It is verified by understanding the concepts of credit expansion, money, spending, and aggregate demand. That is how we come to know credit expansion adds to AD.

    “b) An empirically observed correlation between private debt and growth, with the growth of private debt preceding the changes in growth/employment. This link persists over time and between countries.”

    You’re just repeating yourself. So I will repeat myself: Correlation, for the millionth time, does not equal causation. You can see changes in private debt and growth a hundred million times, and you will not be able to establish a causal link between the two by observing the correlations alone. You have to EXPLAIN how private debt changes causes growth changes. You cannot point to history and say you’re done.

    Again, if I told you that the Superbowl causes the month of February to occur, and I point you to the historical correlation between the two, then would it make any sense for me to say that I am right because there is an empirically observed correlation? Or would you question my claim on the basis that my EXPLANATION makes no sense?

    “So we have in (a) an economic reason *why* private debt might drive growth and in (b) an observed link *between* private debt and growth that appears to corroborate this.”

    LOL, you didn’t provide an economic reason for your original claim, which was that private debt causes recessions. You deftly switched to an entirely different claim, which is that private debt changes causes changes to AD.

    You are so stuck in the Keynesian worldview that you don’t even notice when you just assume the proposition “AD changes causes recoveries/recessions” is true. You have to explain how THAT proposition is true. And no, you cannot point to any historical correlations between “AD” and “economic recovery/recession” either, because you will again be mistaking correlation for causation.

    What is the explanation for AD growth causing economic growth?

  44. Gravatar of ssumner ssumner
    2. February 2012 at 12:27

    JJA, I’m tempted to say in econ that all “facts” are opinions. All I can do is give my best shot, and explain why I think so.

    Major Freedom, I’m told that lots of times the Fed buys from non-banks. And during normal times most of the new money doesn’t go to banks.

    UnlearnedEcon, I think conventional theory explains this recession well. It says that when monetary policy allows NGDP growth to plummet, you get a bad recession. It says when NGDP falls, you are also likely to get a debt crisis, or worsen an existing debt crisis.

    Federico, Yes, I was part of that survey.

  45. Gravatar of UnlearningEcon UnlearningEcon
    2. February 2012 at 13:13

    Major_Freedom,

    It is a verified economic fact that banks create credit out of thin air, and hence add to existing purchasing power. From this we can infer that an increase in private debt increases AD. To test this empirically, we need to look at the impact of private debt on growth.

    This is the scientific method. I haven’t said correlation equals causation. I have explained how private debt impacts growth.

    Your point about recessions is a bizarre red herring that will, no doubt, take us on a weird mystical rant about Austrian economics and the price mechanism. I’ve seen you on other blogs and I’m aware of how you can turn a minor point into a Rothbard seminar, so I’ll politely withdraw.

    Scott:

    But isn’t this based on the circular premise that monetary policy causes NGDP growth? (I.E. CB controls nominal spending so any drop in nominal spending is their fault).

  46. Gravatar of Major_Freedom Major_Freedom
    2. February 2012 at 14:44

    ssumner:

    “Major Freedom, I’m told that lots of times the Fed buys from non-banks. And during normal times most of the new money doesn’t go to banks.”

    Oh? This is interesting. Which other institutions besides banks does the Fed buy from? Other financial institutions that lend and invest, right? It still means some prices are affected more than others.

    UnlearningEcon:

    “It is a verified economic fact that banks create credit out of thin air, and hence add to existing purchasing power.”

    You mean it adds to existing nominal demand. Purchasing power declines.

    Yes, it is a “verified economic fact” that credit expansion does this. My criticism however is HOW you think you came to know this. You said it’s by observing empirical correlations. I say that’s wrong, because correlations don’t show causation.

    “From this we can infer that an increase in private debt increases AD.”

    This is just a restatement of what you just said prior. You said proposition A is “verified”, then you said “from this we can infer” that proposition A is the case. I am criticizing your claim that you can come to know credit expansion causes an increase in AD by way of observing empirical correlation between credit expansion and AD.

    “To test this empirically, we need to look at the impact of private debt on growth.”

    You’re going in circles. First you said that the proposition that credit expansion increased AD is a “verified economic fact”, which to you means some sort of empirical correlation was observed, and now you’re saying we can “test” this empirical based proposition by engaging in an empirical investigation.

    You can’t know how private debt causes growth/recession unless you first establish an economic explanation.

    “This is the scientific method. I haven’t said correlation equals causation. I have explained how private debt impacts growth.”

    First, that is not “the” scientific method. That is the positivist method, and it is not the method of economic science. It is the method of physics and chemistry and the other physical sciences whose subject matter behaves according to constant causal operative factors. Humans don’t behave that way. We learn over time. There is constancy in relations for human behavior.

    Second, yes you did imply that correlation equals causation. That is exactly what you did when you said you know private debt causes growth/recession by way of observing a correlation between the two. It doesn’t matter if the correlation is lagged, it’s still inferring causation from correlation.

    You still haven’t shown how you came to know the proposition that private debt causes growth/recession. You keep referring to past correlations, but correlations don’t show causation. You can keep denying that you are implying correlation is equal to causation all you want, but that is exactly what you are doing.

    “Your point about recessions is a bizarre red herring that will, no doubt, take us on a weird mystical rant about Austrian economics and the price mechanism.”

    LOL, ironically it is you who is basing his conclusions on faith and mysticism. You have faith that human action behaves according to constant relations, and you have faith that this constant causality is verified by observing past historical correlations.

    I think you better check your axioms and premises.

    “I’ve seen you on other blogs and I’m aware of how you can turn a minor point into a Rothbard seminar, so I’ll politely withdraw.”

    What you call a “minor point” is so incredibly important it is what distinguishes a rationalist economist from a positivist wannabe economist astrologer who hides his prejudices behind a veil of “scientific” credence.

    You want to inject your prejudice that the free market in inherently unstable, a la Hyman Minsky, and then you want to incorrectly infer from past correlations that it shows a causal relationship, then you deny you are inferring causation from correlation, then you claim “this is science”, then you accuse me of holding a “mystical” view. Gosh can you get any more predictable? The only reason why you perceive mysticism in Austrian economics is because you are using the wrong method for establishing your convictions in various economic principles.

  47. Gravatar of Major_Freedom Major_Freedom
    2. February 2012 at 14:46

    Typo: There is NO constancy in relations for human behavior.

  48. Gravatar of ssumner ssumner
    3. February 2012 at 08:51

    UnlearningEcon, I don’t follow your question. Yes, conventional macro does assume monetary policy drives NGDP growth. I don’t see it as “circular.”

    Major Freedom, There may be a tiny direct impact on a few asset prices, but I don’t see any direct affect on goods and services prices. Of course there are powerful indirect effects.

  49. Gravatar of UnlearningEcon UnlearningEcon
    3. February 2012 at 09:23

    Scott: my only point is that if that assumption is wrong somehow, mainstream theory is flawed, as all of your conclusions derive from it.

  50. Gravatar of ssumner ssumner
    4. February 2012 at 06:31

    UnlearningEcon, OK, but I thought this started with you claim that modern econ can’t explain the recent crisis. I say it can, but I agree with you here that this explanation may be wrong. But it’s not like there is no explanation out there.

    BTW, Thanks for giving me an honorable mention a your blog.

  51. Gravatar of Guest blog: NGDP Targeting is NOT just for Central Banks! (David Eagle) « The Market Monetarist Guest blog: NGDP Targeting is NOT just for Central Banks! (David Eagle) « The Market Monetarist
    6. February 2012 at 10:57

    [...] vs Krugmanism,” I am interjecting a new topic into my guest blog series.  I agree with the comments from JJA and Scott B. on Scott Sumner’s blog.  While some of the market monetarists do not [...]

  52. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 23:26

    Major Freedom, There may be a tiny direct impact on a few asset prices, but I don’t see any direct affect on goods and services prices. Of course there are powerful indirect effects.

    It’s not tiny. Present value through discounting future cash flows of income producing assets, will be more affected by interest rates the longer the term of the asset.

    It’s across the asset board. Stocks, real estate, commodities, durable consumer goods typically financed through loans…

  53. Gravatar of A Word on Economic ‘Fallacies’ « Unlearning Economics A Word on Economic ‘Fallacies’ « Unlearning Economics
    14. April 2012 at 06:18

    [...] of course, is a fallacy, but this does not justify the mirror image delusion that correlation is meaningless. Often an observed correlation in the data has an implicit, intuitive causal link, such as [...]

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