Larry Summers is unqualified to be Fed chair

My commenters let me down.  My previous Summers “bleg” was unable to turn up a single instance of Summers criticizing policy as being too tight over the past 5 years.  He seems to think the slowest NGDP growth since Herbert Hoover was president is just fine.  Or else the Fed can do nothing about it.  I’m not sure which view would be worse.

In this column Summers falls into the trap of thinking low interest rates mean easy money, so what’s the point of doing more?  That view has been discredited by Friedman, Mishkin, Bernanke, and many other monetary economists.  How does Summers not know this?  The entire piece is an exercise in reasoning from a price change.

Even worse, in an Ezra Klein column he suggests they couldn’t do more stimulus even if they wanted to:

But the policymakers who would have needed to create that inflation aren’t so sure. “It’s difficult, if not impossible, to create persistent inflation without demand exceeding potential supply over an extended period,” says Donald L. Kohn, who served as vice chairman of the Federal Reserve Board until 2010. “Yes, changing expectations might push inflation higher, but why would expectations change materially and persistently under current circumstances?”

.  .  .

Summers, who had the inside track to chair the central bank if the Obama administration decided against renominating Bernanke, echoes Kohn’s skepticism. “In the model I understand,” he says, “inflation is mostly driven by demand, and when you increase demand, you increase inflation. And if you don’t increase demand, you don’t increase inflation. But if you’ve solved demand, you’ve solved your problem.”

Update:  The original post left out the comment from Summers–my apologies.

Um, maybe because the Fed promised a more expansionary policy in the future?  I wonder why Summers thinks the Japanese markets responded so strongly to the increase in their inflation target?  Why does he think Bernanke keeps saying the Fed can do more?

BTW, don’t assume things are getting any better just because Summers has left the Obama administration.  Treasury Secretary Jack Lew has a memo to the G20 urging faster growth in AD.  So far so good.  But the discussion is all fiscal policy.  He doesn’t even criticize the ECB, which raised interest rates several times in 2011 (so this isn’t just about the zero bound.)  Here’s his only comment on the Fed:

The Federal Reserve has provided the US economy with vital support tied to its dual mandate of full employment and price stability.

That’s like saying Captain Schettino of the Concordia provided the passengers with vital support in their endeavor to reach port safely.

Obama’s defenders often tell me that the economy is not Obama’s fault, as he doesn’t control monetary policy.  And yet he appointed 6 of the 7 members of the Board, and there is no indication that the Fed’s policy is at all different from what the Obama administration prefers.

Some have asked me who I favor for Fed chair.  I don’t really have strong views, but I certainly would prefer Yellen over Summers.  Here are a few names that would be even better than Yellen, in no particular order:

Lars Svensson, Mark Carney, Michael Woodford, Christina Romer, Robert Hetzel, Nick Rowe, anyone from the Reserve Bank of Australia, even the janitor.

Greg Mankiw has kept quiet recently, but I suspect he’d be good.  I suppose I could even add Krugman, but (like me) he probably doesn’t have the right personality.


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33 Responses to “Larry Summers is unqualified to be Fed chair”

  1. Gravatar of Noah Smith Noah Smith
    21. July 2013 at 07:47

    Yup. I am convinced. No Summers.

  2. Gravatar of ssumner ssumner
    21. July 2013 at 07:48

    Thanks Noah.

  3. Gravatar of PD PD
    21. July 2013 at 08:17

    Bob Hetzel? Can you elaborate?

  4. Gravatar of J J
    21. July 2013 at 08:34

    I would be interested in seeing the non-economist world finally exposed to the genius that is Michael Woodford.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. July 2013 at 08:43

    If I were POTUS, I’d nominate Krugman, and make it clear it was on the basis of his writings from the 90s. It would be good for him to have a graceful way off the NYT Op-ed page, would probably boost sales of Krugman & Wells textbook, and might sober him up; make him an economist with real responsibilities.

  6. Gravatar of ssumner ssumner
    21. July 2013 at 09:49

    PD, Read his book “The Great Recession.”

    Patrick, And he could no longer advocate fiscal policy on the basis that the Fed was too conservative.

  7. Gravatar of Henry Henry
    21. July 2013 at 09:52

    How is Stanley Fischer not on the list??

  8. Gravatar of Geoff Geoff
    21. July 2013 at 10:30

    “He seems to think the slowest NGDP growth since Herbert Hoover was president is just fine.”

    In a free market, producers of money would be selling money according to its supply as well as the public’s demand for money, not how often a unit of money is to be spent by the public.

    In principle, the frequency of how often units of money are spent should be up to the free market, since it is a statistic that no individual plans their affairs, or sets their prices, or sets the ratio between consumer spending and investment spending. NGDP is not a good measure to gauge monetary policy. NGDP should rise and fall according to the public’s changing money holding times. This is the case for individual firms, cities, counties and states.

    If the businesses in a particular region are less competitive relative to business in other regions, then spending in the former region should fall while spending in the latter region should rise. That way, demand and prices would fall in the less competitive region, raising their competiveness, which will ultimately halt the outflow of money and spending. Vice versa for the more competitive regions. NGDP targeting destroys this inter-region balancing mechanism in the international market, because no matter how many errors a currency region contains, there is no profit and loss mechanism in place that would tell local investors and businessmen to change their ways. All they would have is slowly changing standards of living that are next to impossible to even plan around, since the counter-factual standard of living with a free market in money is unobservable. Profit and loss on the other hand are directly observable.

    Country level NGDP targeting destroys the beneficial international balancing mechanism of relative profit and loss between countries.

    “In this column Summers falls into the trap of thinking low interest rates mean easy money, so what’s the point of doing more? That view has been discredited by Friedman, Mishkin, Bernanke, and many other monetary economists.”

    Unconvincingly.

    “The entire piece is an exercise in reasoning from a price change.”

    MMs don’t actually believe there is anything wrong with “reasoning from a price change”, because reasoning from an NGDP change is ALSO reasoning from a price change. Specifically, the price between money holding and money spending, vis a vis real goods.

    A price is just an exchange ratio. The price relating to NGDP is the ratio between total money exchanged for total goods, and total goods exchanged for total money. Reasoning from an NGDP change is therefore reasoning from a price change.

    The reason why MMs are at least able to grasp why reasoning from a more traditional price change like asset prices or consumer prices is flawed, is because at some level there is an understanding that economics is really grounded in individual action, which changes, evolves, and most importantly of all, is not constant over time.

    Reasoning from statistics that are the outcome of actions, instead of action itself, is the reason why problems of analyses arise in the first place.

    In the hard sciences, we can observe behaviors of molecules, i.e. matter, and discover regularities in cause and effect, i.e. “laws”. However no such laws exist for entities that learn over time. Logically, they must be treated differently.

    Thus, looking at the NGDP statistic instead is not a solution to the problem at hand. It is merely replacing one problem for another problem.

    ——————

    Who should be chair of the FOMC? It really doesn’t matter, because the chair doesn’t have the actual power. The real power resides with the member banks. They decide when the central bank tightens and loosens. They decide when they are to be “bailed out”, when they can lend money to the Fed at interest, and a lot of times, even wars (It was revealed through FOIA post-2008 that the NY Fed from 2003-2008 sent $40 billion to Iraq to finance the war/imperialist reconstruction). The currency system is a global cabal, and they specifically designed for the US to be at war with terror forever, so that our liberties can be taken away one by one, until they can impose a single world currency system on everyone. MMs are unintentional public spokesmen for this. They, along with orthodox monetarists, provide the intellectual justification for continued central bank existence. Most of them are unaware of their role in the game.

    The Fed is not an academic institution. It is not value free. It is not an institution to help the unemployed, or make the economy better. It is an institution designed by the bankers, for the bankers, and they don’t care about anything else.

    If you really want the Fed to loosen or tighten, you’re going to have to show how it will benefit the banks. If you don’t, you’ll be continually frustrated at why they keep doing “the wrong thing”. In actual fact, they’re always doing the right thing, for themselves.

    If NGDP is to gain traction, the owners of the member banks have to be shown that NGDP targeting, which would allow for high consumer price inflation if need be, will enable them to retain a public image of social “helper” in the economy.

    In other words, to be a good lapdog, you’re going to have to convince the public that high consumer price inflation, given the fact that many worker’s wage incomes don’t keep up with total spending, let along garner a growing share of total spending, is nevertheless “good” for them. In other words, you’re going to have to convince them to sacrifice themselves. Not every worker loses their job during a recession remember, so for those who don’t lose their jobs, you’re going to have to convince them that having a lower standard of living is what they should support politically. With price targeting at least, for those who keep their jobs during a recession, their standard of living would otherwise be higher, as compared to NGDP targeting that would generate even higher consumer prices.

    So who is to lead the charge of self-sacrifice? Who is going to go on national television and declare that they want those with jobs during recessions, to have even lower standards of living for the sake of a global criminal cabal targeting yet another arbitrary statistic in order to maintain its legitimacy in the minds of the morally unscrupulous court intellectuals?

  9. Gravatar of Jon Jon
    21. July 2013 at 10:33

    Again, with Romers multiplier rubbish–failure to even articulate why the stimulus might not have the multiplier she said–clearly disqualified her.

    Why is Romers on your list?

  10. Gravatar of no more banksters no more banksters
    21. July 2013 at 10:45

    Maggie’s ghost: what is haunting Europe

    http://failedevolution.blogspot.gr/2013/07/maggies-ghost-what-is-haunting-europe.html

  11. Gravatar of Ashok Rao Ashok Rao
    21. July 2013 at 11:02

    Patrick, Scott –

    Exactly: http://ashokarao.com/2013/06/18/notes-on-how-to-falsify-fiscalism/

  12. Gravatar of Saturos Saturos
    21. July 2013 at 11:39

    Someone should really get in touch with that janitor. If only I was in Sydney…

  13. Gravatar of Jean Jean
    21. July 2013 at 13:04

    Better hope it’s not Yellen. There was a blurb in the WSJ last week – she believes that the quantity of base money is the most important thing, rather than the flow.

  14. Gravatar of Ashok Rao Ashok Rao
    21. July 2013 at 13:19

    Jean, isn’t that the opinion that Paul Krugman and Tyler Cowen – among many others – had. Perhaps it’s been revised by recent volatility over the “taper talk”, but it, per se, doesn’t seem to be a disqualifying factor.

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. July 2013 at 16:45

    anyone from the Reserve Bank of Australia, even the janitor. ROFL

    That comment made my day. Now, back to my conference paper on “what is medieval?”

  16. Gravatar of ChacoKevy ChacoKevy
    21. July 2013 at 20:15

    I think if we could feed him some MM talking points, Dick Cheney would be amazing at this job. When faced with questions about tightening at the first hint of decent economic news, he’s the guy we need to rip the hearts from the chests of those pesky reporters – Temple of Doom style!

  17. Gravatar of ssumner ssumner
    22. July 2013 at 04:08

    Henry, Maybe he should be, but didn’t he recently criticize NGDP targeting?

    Jon, Because of her views on monetary policy. I disagree with many of the people on the list about fiscal policy.

    No more Banksters, So Greece has the most statist economy of any developed country in the world, but the crisis shows the flaws in neoliberalism? Isn’t that kind of a stretch?

    Jean, I’ve never understood that debate.

  18. Gravatar of OhMy OhMy
    22. July 2013 at 12:25

    It is heartening that these guys start recognizing the preponderance of fiscal policy. Recent years showed it can beat monetary policy any time, it is independent of model assumptions, it fixes balance sheets.

  19. Gravatar of henry henry
    22. July 2013 at 13:35

    Scott, Stan Fischer opposing ngdp targeting is news to me.

  20. Gravatar of Jim Glass Jim Glass
    22. July 2013 at 18:32

    Why Larry Summers Should Not Be Permitted to Run Anything More Important than a Dog Pound

    I’ve been gobsmacked to see that not only is Larry Summers on various short lists of candidates to become the next Fed chairman, but that Summers is also supposedly closing in on the favorite, Janet Yellen….

    The story of Summers over-ruling the Harvard endowment’s expert, highly successful (and highly paid) money managers to lose $2 billion for it follows.

  21. Gravatar of Free Banking » Scott Sumner Has Got Me all Confused Free Banking » Scott Sumner Has Got Me all Confused
    23. July 2013 at 07:11

    [...] be specific, he confuses me by his response to Ezra Klein's column quoting former FRB vice chairman Donald Kohn's opinion that “It’s difficult, if not impossible, [...]

  22. Gravatar of ssumner ssumner
    23. July 2013 at 07:48

    Henry, Someone should double-check, I was relying on memory.

  23. Gravatar of Henry Henry
    23. July 2013 at 18:08

    Scott, okay so I think this is what you were referring to.
    http://www.boi.org.il/en/NewsAndPublications/PressReleases/Pages/4-6-2013-I.aspx

  24. Gravatar of Don’t send Summers to the Fed | Felix Salmon Don’t send Summers to the Fed | Felix Salmon
    24. July 2013 at 07:06

    [...] it’s worth looking at the anti-Summers pieces, especially from Scott Sumner, although Noam Scheiber is worth reading too. (And, if you want, you can disinter a bunch of my old [...]

  25. Gravatar of Don’t send Summers to the Fed Don’t send Summers to the Fed
    24. July 2013 at 10:37

    [...] it’s worth looking at the anti-Summers pieces, especially from Scott Sumner, although Noam Scheiber is worth reading too. (And, if you want, you can disinter a bunch of my old [...]

  26. Gravatar of progroliberal progroliberal
    25. July 2013 at 09:37

    “Summers falls into the trap of thinking low interest rates mean easy money”. Not to pick on one narrow aspect of your post but this statement is truly a misrepresentation of what Larry Summers said. He noted the low real interest rates not as a statement that monetary policy has been expansionary but rather as a call for fiscal stimulus (particularly in the form of public investment) during what we all recognize as a very weak economy. I’ve seen others make the same claim. I don’t know if they suffer from reading comprehension problems or if they are deliberately being unfair. But your post really did not require this misrepresentation to make its point.

  27. Gravatar of TheMoneyIllusion » Yes, a brilliant economist really can be that bad at monetary economics TheMoneyIllusion » Yes, a brilliant economist really can be that bad at monetary economics
    25. July 2013 at 18:13

    [...] Last weekend I argued that Larry Summers was unqualified to be Fed chair.  Lots of people pushed back, pointing to his obvious brilliance.  But that’s not enough.  In my post I pointed to this column by Summers: [...]

  28. Gravatar of Indicator Update: Preparing for Action! Indicator Update: Preparing for Action!
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    [...] Scott Sumner’s strong argument against Summers. [...]

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    [...] Scott Sumner’s strong argument against Summers. [...]

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    29. July 2013 at 11:58

    [...] as ever against Summers 2. Summers’s few statements on monetary policy indicate he’d be more hawkish than Yellen. 3. WSJ analysis showed that Yellen’s economic predictions have been correct more [...]

  31. Gravatar of Assorted Links Assorted Links
    7. August 2013 at 14:25

    [...] you that this is important.  So here is Dean Baker, Ezra Klein, Tyler Cowen (also here), Scott Sumner (also here, here, here, here, here, here, and here), Matt Yglesias (also here), John [...]

  32. Gravatar of Next Fed Chairman: Independence Is Paramount Next Fed Chairman: Independence Is Paramount
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    [...] Summers’s nomination met opposition for various reasons—his monetary policy views, his regulatory experience, and even his temperament—the real reason to be grateful for his [...]

  33. Gravatar of Next Fed Chairman: Independence Is Paramount | Tony Johnson Next Fed Chairman: Independence Is Paramount | Tony Johnson
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    [...] Summers’s nomination met opposition for various reasons—his monetary policy views, his regulatory experience, and even his temperament—the real reason to be grateful for his [...]

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