The Money Confusion

I believe there’s a popular line in Hollywood that “nobody knows anything,” meaning that it’s really hard to predict which films will do well.

When I started blogging I felt the same way about monetary economics.  It seemed like almost everything I read was not just wrong, but nearly 180 degrees from the truth.

And I’m afraid to say that things really aren’t much better today.  Here’s Matt Yglesias:

If you read a lot of economics coverage on the Internet, you’ll be struck by the amazing success of “dovish” monetary policy views. I’ve been pushing them here at Slate, Ryan Avent pushes them at the Economist, Matt O’Brien pushes them at The Atlantic, Tim Fernholz and Miles Kimball push them at Quartz, Josh Barro and the Stevenson/Wolfers team push them at Bloomberg, Ramesh Ponnuru pushes them at National Review, Ezra Klein pushes them on Wonkblog, Paul Krugman and Tyler Cowen have both pushed them in the New York Times, etc. It’s not like an overwhelming consensus or anything, but normally a political stance with this much representation in the media could find at least one significant politician to stand up for it. But while we have Obama’s former Council of Economic Advisors Chair and the chief economist at Goldman Sachs on our side, we seem to have zero members of congress.

It’s even worse.  There are people at the Fed who want to do more.  Indeed there are people at the most conservative part of the Fed (the regional banks) who want to do more.  But still no outside pressure.

When I started blogging in early 2009 almost no one realized that the Fed was running a tight money policy, that they could do much more, and that the recession would be much milder if they did much more.  And that’s still true today.

Yes, the list Yglesias provides looks impressive, but the real tragedy is that it’s damn near comprehensive.  In contrast, the list of people not on Yglesias’s list (over 7,000,000,000 people) is far more impressive.  Go on any political or financial news show and talk about how the recovery is slow because money’s too tight and they will look at you like you are a lunatic.

Things have changed since 2009, but only among the tiny number of people who pay attention to the monetary policy debate in the blogosphere.  And by the way, that excludes the economics profession.  Polls show they are just as clueless as the general public.  The percentage who say money’s too tight is close to zero.  (Memo to my conservative friends:  Not that hawkishness makes you clueless–but if there was general awareness of monetary economics out there then at least the liberals would support more stimulus.)

What’s interesting to me is just how influential the blogosphere is.  Even though Obama knows nothing about monetary policy, even though Congress knows nothing, even though most of the media know nothing, even though most economists know nothing, the tiny list identified by Yglesias (and perhaps market monetarists as well?) have succeeded in changing the debate where it really matters.  There is a sudden groundswell of talk about radical monetary initiatives everywhere from Japan to Britain.  The Fed is gradually changing its communication strategy.

Monetary policy is an issue unlike any other.  It’s an important issue where ideas matter.  And yet unlike virtually all other political issues there is no sizable bloc of political operatives on either side of the debate who understand the issue at all.  Even a tiny bit.  We might as well be debating the Copenhagen Interpretation vs. the Many Worlds Theory, for all Congress and the media know.

No wonder Krugman was inspired by Hari Seldon.

PS.  I’m falling way behind on stuff people send me.  Peter Laan sent me an article quoting the BoE’s Paul Tucker suggesting negative IOR.

Here’s another great Matt Yglesias post, pointing out that NGDP targeting is the best way to pressure countries to adopt sound pro-growth economic policies—including “economic reforms that promote competition and labor supply expansion” (aka the Nordic neoliberal model.)

Here I’ll disagree slightly with Matt:

Today Grillo ruled that out, meaning the only workable coalition would be a “grand coalition” between the Democrats and Silvio Berlusconi’s party.

That seems exceedingly unlikely, as the basic state of Italian politics is that the Democrats view Berlusconi as a criminal.

Meanwhile, Peer Steinbrueck, who leads Germany’s opposition Social Democrats, declared himself ”appalled that two clowns have won” the election .  .  . —referring to Berlusconi and Grillo.* That’s a reminder that though Italy is certainly still a democratic republic whose voters can elect whomever they want, the only choices actually acceptable to Germany are the left-wing-but-committed-to-austerity Democrats and Mario Monti.

I wouldn’t say the Democrats “view” him as a criminal, but rather they “are aware that” Berlusconi is a criminal.  And the interesting thing about the Steinbrueck comment is not what it says about Germany’s attitude toward Italy, but that it doesn’t involve any hyperbole at all.  Indeed it’s a slight at the clown community.  Obviously Italy (one of my favorite countries by the way–perhaps the best country in the world) has had a dysfunctional political system for years.  But one has to wonder if the structure of the EU, and especially the eurozone, are making it even more dysfunctional.  Responsibility without power breeds cynicism.  The fascist and communist parties in Greece are also polling quite well.

PPS.  Has anyone ever done a sociological study explaining why there is almost no interest in classical liberal ideas in the Mediterranean countries (including France–which gave us the term “laissez-faire”?)  I understand they have traditionally had a powerful left wing party.  What interests me more is the complete lack of any party promoting small government ideas on either the left or the right.  Why?

PPPS.  I don’t know if Greece has a party that calls itself communist—so call it the “party far to the left of the socialists” if you prefer.



47 Responses to “The Money Confusion”

  1. Gravatar of Geoff Geoff
    27. February 2013 at 18:15

    This entire blogpost could have been written in one sentence, and would have contained an equal amount of analysis, thought, curiosity, and rigorousness:

    “Anyone who disagrees with NGDPLT is a stupid moron, and anyone who believes that less than NGDPLT is “loose money” is a stupid moron.”

    There, that would have saved you lots of time, and typing.

  2. Gravatar of ant1900 ant1900
    27. February 2013 at 18:16

    Meanwhile the Nikkei continues to dominate and Abe *still has not yet even picked his BOJ chairman.* The new BOJ easy money policies haven’t even been implemented really. The rally is all on the ‘speculation’ that Abe would win, then the speculation that Abe would make good on his promises to nominate a dove to the BOJ, the speculation that the new BOJ will seek higher inflation, etc. Is the Nikkei performance over the last few months not a great illustration of EMF and the power of MM?

  3. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    27. February 2013 at 18:30

    Portugal has a Communist Party. Almost completely unreformed: they still periodically (in their party journal) laud the Soviet Union (including praise for Stalin) or blame the Jews for the follies of the stock market. They are and always were nationalists and euro-skeptics. They are polling at 12%.

    Then there is the other extreme-left party, the Left Block, a mix of the BoBo left, trotskyists, and rejects from the Communist party. Used to be very focused on social issues, but now it won them all (gay marriage was approved in 2010). Its focus is now on anti-austerity. They used to be vaguely pro-Europe, now are vaguely (but increasingly) euro-skeptic nationalists. They poll at 8%.

    So, the extreme-left gets 20%.

    This is up from 8%/6% in 2005 (still surprisingly high in a non-crisis setting: that a completely unreformed “the Gulag never happened, it’s capitalist propaganda” communist party gets 8% in an EU state, no?)


    There is a right-wing party where a few self-identified libertarians roam. They are even part of the current coalition in power (as the minor element).

    However, the party is mostly Catholic “compassionate conservatives” and Nationalists (although more pro-european than the communists). It is now the only party that is still vocal against gay marriage or abortion-on-demand (the centre-right was not for gay marriage, but is now not against it; same wrt abortion).

    They get 9% (which is probably 8.9% for the catholics and 0.1% for the libertarians).

  4. Gravatar of ssumner ssumner
    27. February 2013 at 18:57

    Geoff, I guess you didn’t get the “memo” Try reading it again, and this time with comprehension.

    ant1900, Yes, expectations are very important. But so is credibility–let’s hope Abe is serious.

    Luis, Thanks for the info. When I was in Greece I saw communist graffiti on the walls all over the place–before the crisis. I doubt you see that in “socialist” Denmark.

  5. Gravatar of maynardGkeynes maynardGkeynes
    27. February 2013 at 19:07

    I think the problem is that economists pay no attention whatsoever to the allocative effects of monetary policy, whereas the general pubic thinks of little else.

  6. Gravatar of Greg Ransom Greg Ransom
    27. February 2013 at 19:49

    “why there is almost no interest in classical liberal ideas in the Mediterranean countries (including France–”

    There is interest. My sense is that the interest is especially strong in Spain. You can find classical liberal academics and intellectuals in all of the Mediterranian countries outside of Africa.

  7. Gravatar of guest guest
    27. February 2013 at 19:53

    To answer your question, classical liberalism in Italy is popularly associated with Mr. Berlusconi, who has been campaigning on “lower taxes”, “smaller government” and “slashing red tape” for close to 20 years. Needless to say, he never delivered on these promises.

    On the left, the Democrat party is controlled by incumbents; their main political constituencies seem to be organized labor and public employees. A primary election was contested some time ago, but the rules were changed at the last minute in order to hinder the main challenger (Matteo Renzi) who was running on a neo-liberal platform and appealing to moderate and centrist voters, while favoring more organized, pro-incumbent voters.

    Besides Mr. Monti’s effort (which however was not strongly associated with classical liberal ideas, due to a series of political compromises), a small classical liberal party (called “Act to Stop the Decline) also contested the election. It was predicted to poll around 3% or so, with some chance of beating the 4% threshold for the lower house. However, its president and most prominent figure was involved in a scandal as he had been faking his educational credentials, so the party lost most of its appeal and polled well below 2%.

  8. Gravatar of maynardGkeynes maynardGkeynes
    27. February 2013 at 20:11

    re my post of 19:07: Meant to say …distributive effects of monetary policy….. Of course, the distributive effects are also highly allocative.

  9. Gravatar of Mike Sax Mike Sax
    27. February 2013 at 21:00

    Greece has a party that calls itself Communist that did reasonably well in the last election-everyone did well accept the two establsihment parties-the Pasok Socialist party and th conservative Free Democrats.

    In fact the Communist party is the oldest party in Greece.

  10. Gravatar of Benjamin Cole Benjamin Cole
    27. February 2013 at 21:11

    Low interest rates equals easy money. That is what the profession and the public knows (or thinks it knows).

    I do find I can get people to lift their heads by this: “If we have easy money now, how is it the CPI is down or flat in seven of the last nine monthly readings?”

    Ask if deflation is consistent with easy money. This is how Bernanke should have retorted to Senator Corker’s incredibly asinine questioning.

  11. Gravatar of Benjamin Cole Benjamin Cole
    27. February 2013 at 21:12

    Low interest rates equals easy money. That is what the profession and the public knows (or thinks it knows).

    I do find I can get people to lift their heads by this: “If we have easy money now, how is it the CPI is down or flat in seven of the last nine monthly readings?”

    Ask if deflation is consistent with easy money. This is how Bernanke should have retorted to Senator Corker’s incredibly asinine questioning.

  12. Gravatar of doug m doug m
    27. February 2013 at 23:35

    “Has anyone ever done a sociological study explaining why there is almost no interest in classical liberal ideas in the Mediterranean countries (including France–which gave us the term “laissez-faire”?) ”

    Mediterranean cultures like authority, but don’t like rules.

    Angol-Saxon cultures like files, but don’t trust authority.

  13. Gravatar of TravisV TravisV
    27. February 2013 at 23:54

    Great quote by Bernanke!

    “One of the paradoxes is that the best way to get interest rates up is to have low interest rates, because that promotes a stronger growing economy, and that causes interest rates to rise. In some ways, the fact that interest rates have gone up a bit, and it happens on the real and not the inflation side, is actually indicative of a stronger economy, which is, again, suggests that maybe this is having some benefit.”

  14. Gravatar of Rien Huizer Rien Huizer
    27. February 2013 at 23:56

    Scott, the weakness of liberalism (I guess you mean an ideology descending from Mill cs ) in continental Europe (exceptions for maybe Holland and Denmark) may well have simple historical roots. When the enlightenment flourished the Industrial Revolution was going on in the UK. That produced new forms of social mobility (up and down) while on the continent the conditions were completely different, especially after the brief modernizing episode of Napoleon. By the time Europe woke up from the Restauration, romantic nationalism/political christianity and socialism had become the competing ideas, not conservatism and liberalism. Industrialisation was driven by governments. Big government probably had its roots in the Napoleontic era, improved upon by Bismarck. Europeans have had much less distrust in government than anglo saxons, probably for historical reasons, because sociological studies dealing with cross country variations in trust (Trompenaars)

    I guess in present day Europe, you will find Liberal parties that practise old style liberalism and are small, elitist or Libs that have morphed into populism. In Holland the venerable, smallish Liberal party has become the largest party on the back of an implosion of the Christian Democrats and acquired a constituency that is conservative and distinctly different from the educated professionals that used to vote for it. They govern in a coalition with the social democrats (who have moved to the centre but campaigned brilliantly) and have an agenda of supply side reforms (mainly aiming at labor market reforms and reducing mortgage interest deductability) combined with (imo) excessive fiscal austerity (though not quite compliant with EU standards). Economically speaking, in a small open economy there is little room for economic ideas that deviate from your trading partners and competitors and the one political argument that always succeeds in Holland is that we have to be competitive (the same as Singapore ) and since the mid-eighties that is economic liberalism, sometimes camouflaged to appeal to socialist-leaning voters.

    There is also a fairly large party that calls itself Socialist and descends from a maoist movement from the 1970s. Their constituency is largely quasi public sector workers concerned about rolling back the welfare state. They are anti-reform and sceptical about the EU/EUR. Finally there is a “party” founded by a political entrepreneur (he is the only member and does not disclose his donors), Wilders, a former Liberal who has stand-up comedian skills and is against Islam, the EU and any form of intervention in pensions and welfare. He must be doing very well (financially) , with donations from various US groups and a heavy speaking schedule abroad, but his political influence is waning.

    I guess for many voters in Europe (and maybe elsewhere), politics is just another reality show where people “deserve” to stay in the game as long as they are not boring or overstay.

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    28. February 2013 at 01:03

    On Mediterranean countries and liberal politics, neither Catholicism or Orthodoxy encourages a liberal outlook. The Danubian monarchy produced “Austrian” economics because it was a rational response to a polyglot state. But Mediterranean countries tend not to be terribly ethnically diverse. So, monoculturalism + Catholicism/Orthodoxy = not much political space for classical liberal politics. Before WWI there was such space, but that is a general phenomenon. War-socialism (which all countries engaged in to some extent) and the discrediting of the old liberal elites led to rather more confessional non-Left politics.

    Communism tended to be much stronger in Catholic/Orthodox Europe than Protestant Europe. A related phenomenon. (So, of course, were various militant right politics; but as that required a threatening Left, the two features are not unconnected. If the local Left significantly bought into confiscation of land, that gave the militant right a mass base; if it did not, not.)

  16. Gravatar of Petar Petar
    28. February 2013 at 01:03

    Ha ha ha, love the PPS. Coming from an ex communist country – Croatia, I can confirm there are really no “small government” parties. Even the “liberal” (in European sense) party is called “Social Liberal Party”. Now I dont know much about other mediterranean countries (sociologically) but from my perspective, in Croatia, people just remember government-created industries (or what it nationalized), a lot of people employed, high growth rates etc. They dont like to recall the 80s when everything started to fall apart, they forget about inflation, empty shelves etc. Todays currency substitution in Croatia is a result of people still not having confidence in domestic currency, so 80% of savings are foreign or in form of houses. Also, people never ask if a government factory with 2000 workers ever made sense (or profit). Other thing is that these factories in Yugoslavia were “worker owned” so people themselves felt as owners in a way (though they had no idea about business, sales etc) which was conducted by high ranking communist party members. The main observation is that protectionism, government intervention, home production are the reasons of Yugoslav growth, and not the fact that there was a catch up, and that growth stopped as soon as reallocating people from agriculture to industry was over. Unfortunately most of croatian politicians still have the same ideas as the people (or at least claim so in the public). Since the criminal privatizations of the 90s most of the people consider all entrepreneurs to be bloodsucking capitalists. They dont trust politicians but still wait for some angles who will solve all their problems! Also regarding the mindset, when I was in Germany two years ago I read a story that would perfectly give a picture how people think (at least the part of us living on the coast). I found it involving mexican/american, but its the same here on Adriatic , just that we dont fish anymore, but have huge villas where we rent apartments to tourists :D

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    28. February 2013 at 01:10

    On the disconnect of politics and popular commentary from monetary sense, that is hardly new. I am currently reading Ferguson’s “When Money Dies”, and the lack of perception that the massive, and accelerating, expansion of the money supply might have something to do with the spiralling price level is striking. Politics and popular commentary on the Depression was hardly more informed.

    A major factor in causing the Depression was, of course, the searing fear of inflation, both the German/Austrian/Hungarian hyperinflations but also the serious bout of inflation in France after WWI–a country that had had “sound money” since Napoleon, due to the searing experience of Revolutionary inflation.

    Fear of inflation leading to disastrously tight monetary policy that most folk did not get was disastrously tight. Gee, doesn’t that sound familiar? Some economist knowledgeable in the economic history of the Depression should get right onto that :)

  18. Gravatar of Lorenzo from Oz Lorenzo from Oz
    28. February 2013 at 01:12

    On depressing intent to repeat the mistakes of the past, just read the Amazon blurb on Ferguson’s book.

  19. Gravatar of The Money Confusion | Fifth Estate The Money Confusion | Fifth Estate
    28. February 2013 at 03:42

    [...] See full story on [...]

  20. Gravatar of Michael Michael
    28. February 2013 at 04:08

    OK, here’s the question. Does corporate America prefer a tighter money policy?

    Corporate interests often support laws, regulations, and policies that seem to go against their interests… if such policies hurt their competitors even more. For example, large corporations have, at times, supported minimum wage increases on the rationale that they can more easily afford the added costs than smaller competitors.

    Right now, corporate profits are strong. The labor market is weak. Since most employees are “at will”, the key leverage that employees have to better their employment situation is to be able to walk away. Leaving for a better job is the reason why most employees quit, and JOLTS data suggests that quits have been way down since the start of the crisis. So, the employee/employer balance is tipped in favor of employers, and the balance between established companies and upstarts is tipped in favor of the big companies (those with big cash stockpiles).

    So maybe we aren’t seeing more movement towards NGDPLT because those as the top of the pyramid are fine with things as they are.

  21. Gravatar of Geoff Geoff
    28. February 2013 at 04:31


    “OK, here’s the question. Does corporate America prefer a tighter money policy?”

    Most of corporate America (if you mean owners of companies) prefer looser money, because it makes their revenues, profits, EPS, and other such numbers go up, and these numbers going up is good, when high consumer price inflation is not on their minds.

  22. Gravatar of Geoff Geoff
    28. February 2013 at 04:32

    Dr. Sumner:

    “Geoff, I guess you didn’t get the “memo” Try reading it again, and this time with comprehension.”

    I was comprehension that lead to me saying what I said. I’ve read the post three times in full, and I am coming away with the exact same conclusion every single time. I don’t think it’s a coincidence.

  23. Gravatar of Bill Woolsey Bill Woolsey
    28. February 2013 at 04:34

    The nominal anchor is a pure public good. No one, not even politicians, have much reason to care about pure public goods. (OK, academic economists do.)

    Short term interest rates matter alot to banks and Wall Street. They want them stable.

    We are seeing some politics regarding interest rates. Low interest is hurting savers and benefiting real estate. There are special interests involved and so there is interest.

    Fiscal policy can provide special interest benefits. Isn’t it normal for public policy in a Democracy to be driven by benefits going to special interests justtified by appeals to the general interest?

    We need to build a bridge in Congressman Jones’ disctrict to create jobs because the government needs to do something to combat the terrible recession. Let’s do a tax bill that, among other things, fiddles with the tax code so Corporation X saves $500,000, because the government needs to do something to create jobs.

    In my view, supply-side reforms can lead to recovery both by raising the natural interest rate and so increasing aggregate demand, and also by increasing aggregate supply and so allowing more rapid growth in output and employment given the current target interest rate.

    If you want supply side reforms (which I do,) why not keep a monetary regime, (interest rate policy instrument and inflation target) that makes supply side improvements the only way to increase real output and employment?

    In my view, a massive expansion in the size of government financed by taxes on high-savers and debt could also lead to a recovery by raising the natural interest rate. It would raise aggregate demand. It won’t help with the inflation problem. If anything, it would reduce aggregate supply. Notice that the center left is interested in targeting higher inflation.

    Changing the monetary regime so that the red and blue team can battle over distributional and allocatinal issues at an overall higher level of nominal spending and real output seems to be of little interest. Maybe the arrow in the quiver of–adopt the policies we have always supported, and it will also solve the “jobs” problem, is useful to the politicians.

    Maybe the center right prefers that anti-business policies cause recession. Maybe the center left prefers that austerity causes recession.

    Maybe the center right prefers that a run up in oil prices requires improved supply side policies so that potential output deosn’t grow more slowly.

    Maybe the center left likes that a run up in oil prices requires that we introduce new green industries to create jobs while lowering oil demand.

  24. Gravatar of Michael Michael
    28. February 2013 at 05:55

    Geoff write:

    “Most of corporate America (if you mean owners of companies) prefer looser money, because it makes their revenues, profits, EPS, and other such numbers go up, and these numbers going up is good, when high consumer price inflation is not on their minds.”

    Was corporate America happy in the 1970s? Did they want Volcker to cut rates (looser policy) rather than raise them (tighter policy) in the early 80s?

    More generally, does corporate America want to see capital gains taxes increased or decreased? Loosening policy is a de facto increase in the long-term capital gains tax, tightening policy is a de facto cut in long-term capital gains tax.

  25. Gravatar of Becky Hargrove Becky Hargrove
    28. February 2013 at 06:32

    “The nominal anchor is a pure public good.” I really like that thought.

  26. Gravatar of mbk mbk
    28. February 2013 at 06:41


    “Obviously Italy (one of my favorite countries by the way–perhaps the best country in the world) has had a dysfunctional political system for years”

    One could say, since its inception. And yet they’re the Eurozone’s third largest economy, which leaves you with another puzzle, how much do functional politics matter at all for economics?

    On liberalism in continental Europe. Many other countries’ cases have been made, let me make the case for France. It does have classical liberal thought in spades in a consistent minority. The majority is statist of course, but down from Tocqueville and a number of other well known 19th century writers, Bastiat, Say, Molinari, etc, France probably has more “intellectuals” close to liberalism at any one time than, say, Germany. The closest to a classical liberal to hold public office was Raymond Barre, Prime Minister under Giscard D’Estaing in the 70s. The trouble in France is that the majority vote system works against the smaller parties and let’s face it, “true” classical liberalism is a minority view in every country.

  27. Gravatar of ssumner ssumner
    28. February 2013 at 06:49

    Maynard, Believe me, the public is very interested in the output effects of monetary policy. They get very unhappy when output falls sharply. So it’s not just the distributive effects.

    Guest, You said;

    “To answer your question, classical liberalism in Italy is popularly associated with Mr. Berlusconi, who has been campaigning on “lower taxes”, “smaller government” and “slashing red tape” for close to 20 years.”

    So it’s even worse than I thought? Are you saying that Italians don’t even know what classical liberalism is?

    Doug, Very interesting.

    Travis. Great quote.

    Rien, Good points, but there’s far more interest in classical liberalism all throughout northern Europe, as compared to the Mediterranean countries. Much of the German anger at Greece is based on their refusal to adopt liberal ideas, like flexible labor markets.

    Lorenzo and Petar, Good points.

    Michael, The owners of corporations (shareholders) obviously benefit from easier money right now, as it makes share prices rise strongly. Whether they know they benefit is another story. I can’t answer that.

    Geoff, Read this three more times, maybe you’ll eventually understand:

    “Memo to my conservative friends: Not that hawkishness makes you clueless–but if there was general awareness of monetary economics out there then at least the liberals would support more stimulus.”

    Bill, Why wouldn’t Obama have benefited in 2010 and 2012 from a faster recovery?

  28. Gravatar of Brock Brock
    28. February 2013 at 06:50


    Perhaps you should do a course on Monetary Economics at MR University. I’m sure Tyler and Alex would love to host it. Then anyone in the world could take your quizzes to see if they really understand monetary economics or not.

    Be sure to post a Leaderboard somewhere.
    “bobama61 knows 0% about monetary economics.”
    “bbernanke knows 97% about monetary economics.”
    “tcowenMRU knows 87% about monetary economics.”

  29. Gravatar of ssumner ssumner
    28. February 2013 at 06:58

    mbk, I wasn’t clear enough on my question about classical liberalism. I understand there are liberal French intellectuals–my point was that there is no party that champians those ideas. The conservatives make scathing comments about the savage inequalities of Anglo-Saxon capitalism. Granted, the GOP and the UK conservatives are far from perfect classical liberlas, but they aren’t contemptuous of classical liberal ideas in the way the French conservatives are.

    You said;

    “And yet they’re the Eurozone’s third largest economy, which leaves you with another puzzle, how much do functional politics matter at all for economics?”

    I often quote Smith “There’s a great deal of ruin in a nation.” This is true, and explains why I think China will become a developed country, despite its many flaws. I’d add that although Italy is rich by global standards, it’s relatively poor off by Western European standards. So it does pay a price. On the other hand I agree that the price it pays is surprisingly low.

    BTW, to be 4th largest they’d have to be smaller than Spain, a country with only 44 milion people (Italy has 60 million.) So being third is actually not that great an achievement. But I see your point.

  30. Gravatar of Rademaker Rademaker
    28. February 2013 at 07:38

    My view on this is that the issue of whether money is loose or tight is entirely a relative one. It is probably tight relative to the extreme expansionary monetary activity going on in the private banking system in the last 15 years or so. The expansion was initially in the form of debt that people treat like money because it had the implicit backing of the Federal Reserve. Now a series of complex dynamics has given rise to a call to make this backing explicit. Should the Fed yield to such pressure? I don’t doubt the consequences of not doing so are severe, but that doesn’t make “paying the ransom” a painless and unproblematic move. I particularly suspect that the debt monetization this would involve will in various ways lead to implicit handouts being given to offshore entities, such as bond market front-runners, that will express any demand thus obtained in currencies other than the Dollar. In other words, much of the inflation will be of the cost-push variety that the Fed can not engineer a true “recovery” with.

  31. Gravatar of mpowell mpowell
    28. February 2013 at 08:01

    Very good observation on the influence of this small group of people (monetary doves). Now that you mention it, it’s kind of fascinating.

  32. Gravatar of Daniel Daniel
    28. February 2013 at 08:46

    It’s a very steep learning curve.

  33. Gravatar of Don Don
    28. February 2013 at 09:02

    In addition to being Fed Chair, Bernanke has the job of being chief educator of economics for the citizenry. If people don’t understand the difference between real and nominal interest rates, it his job is to teach, not tighten money until they are the same. He is failing in this too. Let’s look at Bernanke’s report card:

    * Growth mandate — F
    * Educating Congress — F
    * Educating citizens — F
    * Bank regulation — F
    * International monetary policy — D

  34. Gravatar of o. nate o. nate
    28. February 2013 at 09:09

    The ideas are starting to trickle out. I heard a guest on Bloomberg Radio yesterday talking about NGDP and Fed policy, he could have been reading directly from the Sumner playbook. I think they said he was an economist from MKM Partners, in which case it may have been the same person mentioned here:

  35. Gravatar of A.W. Carus A.W. Carus
    28. February 2013 at 11:59

    No interest in classical liberal ideas in Germany, either. The FDP calls itself “liberal” and is the only thing currently delaying minimum wages and even worse things, but they’re doing terribly in the polls and may not even make it back into parliament (i.e. get >5%) in Sept. However even in the FDP (whose constituency is mainly small businesses kept alive by market restrictions and occupational licensing) the “liberalism” isn’t exactly classical. It’s considerably less market-friendly than, say, the Liberals in the UK.

    Merkel was making very pro-market noises in the 2005 campaign, but unexpectedly didn’t get a clear majority and then had to govern a grand coalition with the SPD. My impression is that the CDU, usually considered “conservative,” has moved considerably to the left since then. It has always had strong social-democratic tendencies and pro-market people have always had a hard time there (much worse even than our Republicans). But its tight-money fanaticism is just like Republicans here.

  36. Gravatar of TallDave TallDave
    28. February 2013 at 13:56

    Yep, sadly, even among libertarians it’s a tough sell, too many of them are in the “gold standard” camp. And conservatives generally want “sound money” and want to blame Obama for the lack of growth.

  37. Gravatar of TallDave TallDave
    28. February 2013 at 14:21

    the complete lack of any party promoting small government ideas on either the left or the right. Why?

    The media tends to be gov’t-run, and there is a long history of extractive institutions which means the argument tends to be about who gets to seize the wealth this time around.

    The existence of institutions that counterbalance the power of political elites radically changes the incentives. It’s why France had a very different revolution than the United States, and why virtually every new leader in Africa ends up looting the country, regardless of what they promised coming in.

  38. Gravatar of James in london James in london
    28. February 2013 at 15:03

    I think it’s a bit unfair to say there is little interest in classical liberalism in Europe vs the US. The US is only a bit smaller than Europe, but the sum total of influence of libertarianism in the US seems to me to be very sadly about as big as it is in Europe. A lot of us watched the Libertarian Party poll less than 1% of the vote in the US Presidential election. A tragedy, for sure, but barely noticed.

    Mrs Thatcher and Ronald Reagan talked it up a bit, and Mrs T did enact quite a lot of free market reforms, but a lot of their good work was reversed sooner or later, often by conservatives. Strangely, it was Clinton and Blair who followed up on some of the better ideas. We seem back to square one these days.

  39. Gravatar of ssumner ssumner
    28. February 2013 at 17:01

    Brock, Maybe I will.

    Rademaker, The private banking system doesn’t do monetary policy, it does finance.

    o. nate. That’s good to hear.

    A.W. Germany has far more interest in classical liberal ideas than the Mediterranean countries. Look at the sweeping labor market reforms of the early 2000s.

    James, Agreed, but at least Reagan and Thatcher said small government ideas are worth doing, and did in fact implement some reforms. That’s not true of southern Europe. Of course neoliberalism is alive and well in the nordic countries.

  40. Gravatar of Tom Tom
    28. February 2013 at 19:29

    Low interest rates equals easy money. That is what the profession and the public knows (or thinks it knows)

    Scott, Ben’s comment is key.
    Your own problem is defining what easy money is and why it’s good.
    Easy money is good to have higher NGDP; because we have low NGDP, we have tight money.

    You need to advocate a measurable control mechanism, like interest rates, or QE purchases, or (my favorite) loans to small businesses, which can be controlled or influenced by the Fed. Then this measured amount defines tight-loose.

    You don’t have some controllable rate, like interest, that can be measured to let folks (including economists) know if money is tight or loose.

  41. Gravatar of A.W. Carus A.W. Carus
    28. February 2013 at 22:57

    “Germany has far more interest in classical liberal ideas than the Mediterranean countries. Look at the sweeping labor market reforms of the early 2000s.”

    A very good example. First, Schröder’s first act on coming to power was to undo the (very timid) labor market reforms of his predecessor, Helmut Kohl. Second, it was only when unemployment rose to crisis levels on his watch that he panicked and put through the Hartz reforms — which were heavily disguised under all sorts of misleading rhetoric, opposed by the great majority of his party, and never appeared in any party platform. Nor was it ever acknowledged (perhaps because of the misleading rhetoric) that they in fact reduced unemployment; no one in the press nor among the (supine) German economics establishment has bothered to point this out with sufficient urgency, or warn against the likely effects of undoing them.

    While the Hartz reforms might be an example of what can happen when politicians are backed into a corner, at the dead of night, they certainly can’t be held up as an example of the influence of liberal or neoliberal or “small government” *ideas* in Germany. On the contrary, their huge significance in creating the current two-tier German labor mkt (the rigid, old-style one, where no one can be fired and everything is regulated by unions, and the new, low-wage, Hartz-style one) is almost completely unacknowledged in public discourse. Nor has anyone really addressed what’s going to happen when the latter is eliminated. Sure, there are a few pro-market, small-govt think tanks, as there are in France and Italy, but they’re held in contempt by the press and politicians as capitalist tools (as they are in France and Italy). Germany is more a communitarian than a capitalist country, and the vast majority of Germans really do like it that way.

  42. Gravatar of mbk mbk
    1. March 2013 at 05:58

    I’m with A.W. Carus on that one. I see little theoretical support for classical liberal ideas in Germany or for that matter, Austria, the home of Mises and Hayek and Bohm-Bawerk and, and, and. Austria is an even better example perhaps – the so called Freedom Party of the 70′s and 80s morphed into a populist party dangerously tinkering with ideas between socialism, xenophobia and national socialism. A more “truly” classical liberal party, the “Liberal Forum” was still talking up things like a guaranteed minimum income (negative income tax style) whether you worked or not. Nonetheless they too were eliminated in the later 2000′s from parliament altogether. In Germany, and Austria, large swathes of the public have not the faintest idea of how the economy works. What saves both countries economically is a) a certain amount of misleading political rhetoric that does the right thing behind closed doors once elections are over and b) pragmatism. But not any kind of reflection or deeper understanding.

  43. Gravatar of Bob Bob
    1. March 2013 at 10:47

    The issue with liberalism in latin politics is an issue of trust. Liberalism does not provide great value when people are more likely to hire their second cousin than someone off the street, because they’d rather hire the incompetent than someone that they do not trust.

    This strengthens some kinds of social bonds and weakens others, which makes ideas that would win in an anglo world lose spectacularly. Just look at, say, the idea of bribery. In some countries, you throw money at an official, and you get what you want, because he wants more money. Bribery in Spain doesn’t work like that: Most officials will not take a bribe from a stranger. However, they’ll do extreme rules bending for a friend of a family member, or someone that they golf with. So the Spanish way of bribing involves first building a relationship (which can cost money), then asking for favors, and then throw more money back in as a form of gratitude.

    With those set of rules, people you do not know are networking to put you at a disadvantage. If you do not believe you’ll ever get an even playing field, why be a liberal?

  44. Gravatar of ssumner ssumner
    1. March 2013 at 18:23

    Tom, None of those proposed indicators are reliable. I still think (expected) NGDP is best. The Fed can certainly control NGDP expectations, so that’s how I prefer to define easy and tight money.

    AW and mbk, Obviously you two know more about it than I do. But I’m genuinely confused. The Germans are trying to force the Greeks to do all sorts of neoliberal reforms. Do the Germans actually believe these will harm the Greek economy? Is that why they are being proposed–because they hate the Greeks and want to destroy the economy through neoliberalism? I know this sounds sarcastic, but I’m genuinely mystified, and would like to hear your thoughts on the motives of the Germans.

    Bob, Become a liberal so that bribes no longer have to be paid!! The bribes are caused by too much government regulation, by a lack of neoliberalism. If anyone is free to start a business, no bribes need be paid.

    I don’t follow your logic. Are you saying liberalism won’t work because the economy has already been screwed up by statism? Then try something else.

  45. Gravatar of mbk mbk
    1. March 2013 at 19:26


    let’s just say there’s no such thing as “the Germans”. A small fraction (biz owners, some politicians) knows very well how stuff works, and in some phases of history they have a window of opportunity to make things right as in the Hartz labor market reforms (even in Italy, witness Monti, limited time offer only!). The German reforms too, were only passed in the 2000′s after prolonged German decline, and I very well remember that Germany was called the “sick man of Europe”. That was just over a decade ago. Sic transit gloria… And as was pointed out above, against strong resistance, street demonstrations, and with a fair amount of political deception. Now that it’s someone else’s turn to get the stick, I mean, the painful reforms, you need not fear demonstrations in Germany on behalf of the Greeks of course! It’s an easy sell (to the German people), and you get self righteous gloating as a bonus, especially since people who underwent some kind of pain often support inflicting that same pain on others.

  46. Gravatar of ssumner ssumner
    2. March 2013 at 15:33

    mbk, There’s a German word for that enjoyment, isn’t there? :)

    OK, so deep down the experts know neoliberalism is best. But most Germans don’t. I’ll go with that.

    Would you agree that the actual government policies throughout northern Europe are much more neoliberal (welfare state plus free markets) than in the south?

  47. Gravatar of mbk mbk
    2. March 2013 at 19:58


    I agree on your point two. I suspect the Mediterranean / latin cultures rebel more openly on the streets so the governments have more troubles getting sensible policies done.

    But I still consider Germany and Austria’s economic success as some kind of deep mystery. The amount of red tape, official harrassment, overwrought occupational licensing, punishing taxation, that businesses face there, it’s a miracle there is an economy at all. Actually I know why there is: the rules are also widely ignored with a wink and there is a lot of “helpful” corruption (officials will ignore inane regulations for small niceties every once in a while, like, air tickets for Malta holidays etc).

    Let me give you two gems from Austria just for laughs:

    1) Landlords have to pay VAT on the rent they collect, and income tax on the rental receipts. In Vienna, rental receipts are severely limited by massive rent control. But be warned. If you don’t make taxable profits for several years in a row (thanks to rent control), you will be arbitrarily assessed for a “hobby tax”. The state will consider your loss making enterprise a “hobby” and your losses on the property will be taxed as luxury consumption.

    2) Restaurants are so overtaxed that everyone cheats. The state knows this. So the tax man went from income tax assessments, to assessments through consumption of supplies. That led to hilarious stories of beer deliveries in the dead of the night so you’d escape that tax man’s eye. Well the tax man has now gone over to just guesstimate the profits you surely must be making in a certain neighborhood and restaurant floor area.

    I rest my case. And that’s Austria, currently, umm, one of the most, if not the most, successful Eurozone economy.

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