Connect the dots

Part 1:  A new study by Martin Feldstein estimated that QE2 created an extra $2.5 trillion in stock market wealth for Americans.  It should be noted that foreign markets also rose sharply in anticipation of QE2, so my $5 trillion estimate from last year for world gains may be on the low side.  (US stock wealth is about $17 trillion; world stock wealth is closer to $50 trillion.)  

To be sure, there is no proof that QE2 led to the stock-market rise, or that the stock-market rise caused the increase in consumer spending. But the timing of the stock-market rise, and the lack of any other reason for a sharp rise in consumer spending, makes that chain of events look very plausible.

The magnitude of the relationship between the stock-market rise and the jump in consumer spending also fits the data. Since share ownership (including mutual funds) of American households totals approximately $17 trillion, a 15% rise in share prices increased household wealth by about $2.5 trillion.

I conservatively assumed a 10% gain on $50 trillion, whereas Feldstein assumed 15% on $17 trillion.  Either way, the world gained a lot of wealth.

Part 2:  In August (right before rumors of QE2) Paul Krugman argued that pressure from outside pundits was one of the only ways to move that stubborn mule called the Fed:

So why am I even slightly encouraged? Because the critics did, at least, succeed in moving the focal point. Not long ago gradual Fed tightening was the default strategy; but as I said, at this point the Fed realized that continuing on that path would have unleashed both a firestorm of criticism and a severe negative reaction in the markets.

What we need to do now is keep up the pressure, so that at the next FOMC meeting the members are once again confronted by the reality that not changing course would be seen as dereliction of duty. And so on, from meeting to meeting, until the Fed actually does what it should.

I know: it’s a heck of a way to make policy. In a better world, the Fed would look at the state of the economy and do what was right, not the minimum necessary. But wishing for that kind of world is like wishing that Ben Bernanke were running the place.

And it worked!

Part 3:  Last month Ryan Avent published the following observation over at The Economist.com:

I SEE that Scott Sumner is taking a victory lap of sorts—not unearned—over the fact that views of monetary policy have come full circle since the years before the crisis. Once upon a time, the Fed was viewed as having near-absolute power over the path of the economy. Then crisis struck and many argued that the Fed had run out of ammunition and fiscal policy was required. Eventually people began arguing that the Fed could do more and should do more, thanks largely to the efforts of Mr Sumner himself.

“So what you’re saying is . . .”

I’m not saying anything, just reporting news from the blogosphere. 

Part 4:  Off topic, but I am complete burned out, and have been for months.  I’ve blogged an average of eight hours a day, seven days a week, for over two years.  I’ve only kept going in recent months out of a sense of obligation to keep pushing these issues.  But now that lots of other people are saying the exact same thing, it’s time for me to take a break.  So I’ll stop blogging for a few months, unless there is some huge news story like QE3, in which case I’ll add a couple posts.  Or if someone does a hit job on my marshmallow post, I may need to briefly respond.  Otherwise I’m done for now, and will return sometime this summer.

I hoped my school would give me some support for blogging, but that’s not how things work in the real world.  Perhaps I could find a way to make some money and buy out a few courses.  I was thinking about ideas like writing a macro version of Freakonomics, or doing speaking engagements, or perhaps even consulting. 

Please don’t tell me that so and so does even more blogging than me while teaching; I’m not so and so.   Here are a few reasons I’m taking a break:

1.  Like corrupt politicians resigning under pressure, I need to “spend more time with my family.”  Indeed I might want to spend a few minutes with my 11 year old before she graduates from high school.  And then there is my long-suffering wife.

2.  More time to actually read a few books for pleasure, or see some films.

3.  I do have a job.

4.  The blog has spun off a lot of activities that you don’t see.  I read lots of papers that people send me, do more speaking than before, conferences, etc.  I hope to get my book out this year.  Maybe I can write some papers.

I thought about cutting back, but blogging is like a drug addiction for me—it won’t work.  Better to go cold turkey for a while.

Of course all the other quasi-monetarists (Rowe, Beckworth, Woolsey, Hendrickson, Kantoos, etc) will continue to cover the same sort of topics that I discuss.  On the progressive side, Yglesias is very good on money.  Don’t overlook Marcus Nunes, who contributed greatly to my blog, and also has his own blog now.  His views on monetary policy are quite close to mine. 

I suppose I naively thought that if my blog was successful then support would magically turn up somewhere.  But let’s face facts, most people outside the blogosphere view what we do as a cute hobby, like growing miniature Bonsai trees, or raising chinchillas for fun and profit.  For all you young academics out there, the “Wisconsin Idea” is dead; it’s all about the pubs.  But do it anyway; it’s the right thing to do.

PS.  You’re probably thinking Avent exaggerated this blog’s importance by a factor of 100, because he’s a nice guy.  I agree.  So go redo the math and tell me what I’m worth.

PPS.   I’ll occasionally look at the comment section.   Long-time commenters can always ask me questions about current events, and I’ll try to give a quick reaction.

PPPS.  Christina Romer is now my official spokesperson on all matters relating to monetary policy and payroll taxes.


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219 Responses to “Connect the dots”

  1. Gravatar of marcus nunes marcus nunes
    26. March 2011 at 09:43

    Scott
    I hope thar “retirement” doesn´t suit you and that shortly you´ll be itching to get back to the fray!

  2. Gravatar of Policy Wank Policy Wank
    26. March 2011 at 10:11

    Scott, thanks so much for putting in the effort these last few years. I never would have thought that so much conventional economic wisdom was wrong or that monetary policy could be so interesting and your writing style is very entertaining as well. I had no idea quite the level of effort this was requiring you. I sort of assumed that you were one of those people that could generate tons of content in relatively modest periods of time, but no, you’re just very hard working.

  3. Gravatar of Andy Andy
    26. March 2011 at 10:33

    Yeah, that’s a crazy time commitment. I’ve learned a lot, and still hope you consider doing an ebook or a “real” book on monetary economics. Consumer and producer surplus to be had.

  4. Gravatar of Rafael Rafael
    26. March 2011 at 10:35

    What do you think about this?

    A special report on the future of the state – The Economist

    http://www.economist.com/node/18359896

  5. Gravatar of Adam Ozimek Adam Ozimek
    26. March 2011 at 10:47

    Cold turkey is the way to go. Not sure how long my longest break was but after learning to live without the daily fix for maybe a couple of weeks I’ve been able to blog whenever I want, sometimes only once or twice a week, without the compulsion to do so every day. It’s liberating.

  6. Gravatar of OneEyedMan OneEyedMan
    26. March 2011 at 10:52

    Your presence will be sorely missed. Even if others can be relied upon to mention the same ideas, you are the only one creating good community with your comments section by engaging commentators. Somehow your community manages to have both a serious volume of comments, good insight and little nastiness.

    Cowen, Kling, Romer, and others rarely seriously engage their commentators.

  7. Gravatar of The Window Washer The Window Washer
    26. March 2011 at 11:07

    Thanks for the ride. You’ve done a great job.
    Get your fix every once in a while with a movie post. I miss those.

  8. Gravatar of Kevin Dick Kevin Dick
    26. March 2011 at 11:07

    I think a lot of us would agree that reading your blog is also an addiction. So we’ll by jonesing together :-)

    In any case, you’ve certainly greatly improved my opinion of macro by presenting a consistent explanation that seems to match the evidence.

  9. Gravatar of Adam Ozimek Adam Ozimek
    26. March 2011 at 11:07

    I should also mention that I now get the fix that daily blogging used to provide from twitter. Same immediacy, same if not more debate, and it takes much less of your time.

  10. Gravatar of JTapp JTapp
    26. March 2011 at 11:11

    Your blogging helped me become a better teacher of macro and money & banking, and I’m indebted. Thanks for your hard work. Please make sure your publisher does a Kindle version of your book(s).

  11. Gravatar of Gene Callahan Gene Callahan
    26. March 2011 at 11:11

    A rise in the stock market does not “create wealth.” Machlup was very good on this point here. (http://mises.org/daily/916/How-to-Think-About-Losses)

  12. Gravatar of Andy Andy
    26. March 2011 at 11:20

    I would add that we have RSS feeds, so once you can escape the feeling that you are obligated to post regularly, post once in a while and your readers will still be there.

  13. Gravatar of marcus nunes marcus nunes
    26. March 2011 at 11:22

    Scott
    I think most of the “group of SS fans” would agree with me when asking to…
    http://www.facebook.com/video/video.php?v=189999116873

  14. Gravatar of Benjamin Cole Benjamin Cole
    26. March 2011 at 11:33

    Scott–Please keep blogging perhaps once a week, and don’t feel compelled to answer every comment.

  15. Gravatar of Alex Godofsky Alex Godofsky
    26. March 2011 at 11:34

    Well, I guess it’s time for me to finish reading the archives.

  16. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2011 at 11:36

    You bastard! You get back here and blog this damn minute!

    —–

    Sorry to see you hang up the spurs there cowboy.

    Perhaps you just need to do a twice monthly round up of the theory in practice.

    Either way, FOCUS on making money at it. It’s definitely worth money.

  17. Gravatar of Brett Brett
    26. March 2011 at 11:39

    I would add that we have RSS feeds, so once you can escape the feeling that you are obligated to post regularly, post once in a while and your readers will still be there.

    I’ll second that. I won’t take The Money Illusion out of my Google Feed, just in case you decide to post now and then. That’s one of the things I love about RSS – you can have blogs where the content is amazing yet extremely sporadic (I have one blog that posts basically an amazing post every 8-9 months, if that), and let the posts come when they come.

    I will miss your commentary, though. It was interesting to have a contrast with all the Matt Yglesias-style progressives in my feed.

  18. Gravatar of W. Peden W. Peden
    26. March 2011 at 11:39

    Sounds fair enough to me. I don’t think anything better than QE2 is coming along anytime soon and really we should be waiting until at least the summer before we start analysing the effect of The Great Federal Reserve U-Turn of 2010 in any detail.

    Here’s the big test, though: is Robert P. Murphy still willing to defend THIS post-

    http://consultingbyrpm.com/blog/2009/07/invasion-of-the-purchasing-power-snatchers.html

    - in which he follows narrow money on the well-trodden Road to Absurdity?

  19. Gravatar of Megan McArdle Megan McArdle
    26. March 2011 at 11:40

    1) You will be missed

    2) Speaking as an old timer, burnout is an intermittently recurring feature of the genre. Before I went pro, I found that the best solution was not to swear off, but to give myself permission not to blog whenever I didn’t feel like it. The end result was that the blogging I did do didn’t burn me out so fast.

    3) You will still, for the rest of your life, find it tempting to procrastinate by blogging. There is no cure for this.

  20. Gravatar of OGT OGT
    26. March 2011 at 11:43

    Understandable. On the other hand, addictions aren’t that easy to quit, even cold turkey so I’ll check back occasionally. BTW, very much on topic here’s James Bullard (who I think is classified as a Fed moderate):

    http://www.businessweek.com/news/2011-03-26/fed-policy-makers-should-review-qe2-strategy-bullard-says.html

  21. Gravatar of W. Peden W. Peden
    26. March 2011 at 11:55

    On a final note, the British government looks like it’s abolishing payroll taxes by integrating them into the existing income tax system. That means, by 2015, we should have-

    1. A welfare system largely reduced to a kind of negative income tax (the “universal credit”).

    2. A decisive shift in university funding from the state to those students who can pay and more scope for price differentiation amongst universities.

    3. A major decentralisation of the control of the NHS to doctors and a vast expansion of the role of the private sector in NHS provision.

    4. A movement to a Swedish-style “Free Schools” system.

    5. Reductions in taxes on production and much more taxation on consumption, with some of the lowest corporation taxes in Europe.

    6. No more National Insurance (a tax on employment like Social Security).

    7. A vast cutback of the police state, with an end to the Michael Myers-esque (as soon as an argument for it was killed, another popped up) national ID cards system.

    8. An end to child detention in the immigration system.

    9. Pension reform.

    10. Cutbacks of government spending (up to 20% in some departments) with the aim of getting the structural deficit under control in a matter of years.

    All this with a coalition government. If this is what proportional representation would always produce, it might not be so bad: the UK Liberal Democrats keep an eye on the Conservatives on civil liberties and nanny state issues, while the Conservatives have put forward some serious market and localist reforms. There has even been serious talk of introducing gay marriage.

  22. Gravatar of W. Peden W. Peden
    26. March 2011 at 11:57

    Also, the denationalisation of the postal services.

    (So much for the death of neoliberalism and 2007 as a “Berlin Wall” moment. I don’t remember any major nationalisations in Eastern Europe in 1993.)

  23. Gravatar of Left Outside Left Outside
    26. March 2011 at 12:08

    Just want to say thank you very much.

    You’ve made me a more educated (if more “batshit crazy”) person.

    Do write a book, I’d definitely buy it.

    Like Alex Godofsky, I’m gonna hit the archives to get my Sumner fix until you’re back.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2011 at 12:16

    Scott:

    Part 1)
    If I remember correctly Feldstein was skeptical about the benefits of QE a year ago. It’s good to have him on board now, as his opinion carries weight.

    Part 2)
    Bloggers have effects on readers/commenters. Readers/commenters have effects on friends, family, students and other bloggers. It’s a ripple effect.

    Part 3)
    If anything, Avent understated this blog’s importance

    Part 4)
    You wrote:
    “I thought about cutting back, but blogging is like a drug addiction for me—it won’t work. Better to go cold turkey for a while.”

    On days when you don’t blog I get a lot more done. It’s an addiction for me too.

    You wrote:
    “For all you young academics out there, the “Wisconsin Idea” is dead; it’s all about the pubs. But do it anyway; it’s the right thing to do.”

    Funny, I was describing to a department secretary my view of economics and it relates to this statement. For me it’s all about public policy. Your break from blogging may mean I actually finish my dissertation this spring, and make my own contribution.

    You wrote:
    “PPPS. Christina Romer is now my official spokesperson on all matters relating to monetary policy and payroll taxes.”

    I have a sneaking suspicion, given her recent comments, that she reads The Money Illusion.

    P.S. You’ll be back (when the time is right), and so will I.

  25. Gravatar of Alexander Hudson Alexander Hudson
    26. March 2011 at 12:31

    Scott, I don’t know what to say other than “thank you.” Your blog has been a Godsend. It’s incredible how much I’ve learned from reading it, and how many other great blogs I’ve started reading because you mentioned them. As a fairly liberal Democrat, your critiques have been crucial in shaping my own views on public policy, and in sharpening my arguments.

    Well done, sir.

  26. Gravatar of Ram Ram
    26. March 2011 at 12:32

    Cheers, Prof. Sumner. I hope you’ll return to blogging soon enough. Maybe you should get some like-minded colleagues to fill in for you in your absence. The world needs a constant supply of quasi-monetarist crankery!

  27. Gravatar of Eli Eli
    26. March 2011 at 12:48

    I agree with Adam Ozimek: give Twitter a try!

  28. Gravatar of TravisA TravisA
    26. March 2011 at 12:56

    You really need to hire an assistant to organize all your past posts thematically and put them in an e-book, maybe interspersed with some retrospective content to further motivate people to get the e-book. You could add a few graphs of the markets and ngdp as timelines to go alone with the posts.

    You might want to look at http://www.kickstarter.com as a way to finance that project. I would definitely give some money in advance in order to get a copy. Kickstarter would be a good way to gauge consumer interest in the project risk-free.

    Your posts really are of such high quality that it’s a shame not to disseminate them even more widely. I know that you have the depression book that you want to finish, but you’d probably be able to finish Kickstarter in a few months with the help of an assistant and the same amount of time that you put into blogging. Use Kickstarter to gauge the market’s interest. You can set a funding goal for your project and if it doesn’t reach that goal, you don’t need to do anything.

  29. Gravatar of Greg Ransom Greg Ransom
    26. March 2011 at 13:03

    Thanks Scott.

  30. Gravatar of Greg Ransom Greg Ransom
    26. March 2011 at 13:04

    When does your book come out?

  31. Gravatar of Floccina Floccina
    26. March 2011 at 13:38

    Thank you Scott.

  32. Gravatar of edeast edeast
    26. March 2011 at 14:04

    Thank you. It has been a fantastic time, and you’ve given me real guidance.

  33. Gravatar of John Hall John Hall
    26. March 2011 at 14:12

    I look forward to your full-time return, but I can’t say I didn’t warn you that you would get burned out.

    I would definitely buy a book on nominal GDP targeting… or really whatever book you write.

  34. Gravatar of libfree libfree
    26. March 2011 at 14:36

    For once I’m glad that addicts always say they are quiting but never do. Hope you rest up over the weekend. Maybe you should try shorter posts like Tyler. If you write a book every time you post your going to get burned out.

  35. Gravatar of Philo Philo
    26. March 2011 at 14:45

    “So I’ll stop blogging for a few months, unless there is some huge news story like QE3, in which case I’ll add a couple posts. Or if someone does a hit job on my marshmallow post, I may need to briefly respond.” You have certainly earned a break, but I’m hoping you’ll find the habit of blogging too hard to break–that along the way lots of news stories will strike you as “huge,” and a lot of criticisms directed at you will look like “hit jobs.” Even if not, let me join the chorus of thanks for the job you’ve done. There may be no money in it, but you have made a lot of friends and done a lot of good.

    I also want to echo Mark Sadowsky: “On days when you don’t blog I get a lot more done. It’s an addiction for me too.” (Well, “I get a lot more done” might be an exaggeration; at least, I have to occupy my time otherwise, and nothing quite fills the bill!)

  36. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. March 2011 at 15:01

    Thank you so much for your blogging. When I did first year economics, the first half of the year was Ian Harper teaching microeconomics. I marveled at the wonderful engine of analysis being laid out before me. The second half of the year was macroeconomics: my reaction was “what is this ad hoc crap?” I continued to sneer at macro for years.

    Your blog has made macroeconomics — and, wonder of wonders, monetary economics — fascinating and engaging to me. Money is still a bit baffling — I am not sure the information/signalling role of money is properly captured in analysis: after all rGDP needs NGDP to happen — but at least I have a framing in which macroeconomics makes much more sense to me.

    Do finish writing your book, so we can all buy it.

    Thank you again.

  37. Gravatar of Cameron Cameron
    26. March 2011 at 15:04

    You’ve made me almost infinitely smarter since I started reading you two years ago. I remember when I first started reading your blog — every post blew my mind and completely changed the way I thought about macro and monetary policy.

    I agree with others, a short ebook would be a good way to convince others without burning yourself out. Plus I’d be happy to throw a few dollars your way for the work you’ve done.

  38. Gravatar of Richard W Richard W
    26. March 2011 at 15:08

    Sorry to see you go Prof. Sumner. I stumbled across your blog within a week of your first post and I must confess I had never heard your name before reading the blog. However, lots of people have heard your compelling arguments now. You deserve a break and more reward for the time and effort you have put into your blog. The engagement with commenters must be very time consuming but is one of the really good features of this blog. You have done a splendid job in educating people about the importance of monetary policy and tight money caused the Great Recession. I look forward to your return.

  39. Gravatar of Lorenzo from Oz Lorenzo from Oz
    26. March 2011 at 15:10

    Just bye-the-bye, Australia has apparently been rated number 1 on a new fiscal responsibility index. (Thanks to the previous, not the current, federal Government.) Japan’s debt has been downgraded by Moody’s.

    Also, a comment that may amuse you and seems apposite:
    Scott Sumner, who writes blog posts faster than you can read them.

    We can now catch up on our reading :)

  40. Gravatar of effem effem
    26. March 2011 at 15:15

    A victory lap?! Oh my.

    All the Fed has proven is that they can temporarily lower the discount rate underlying all financial assets. In effect, they can crudely target asset prices in units of USD.

    That works out well for the 10% of the country that own most of the financial assets. The other 90% get higher inflation, no new jobs, and declining real wages.

    Consider:
    - Current nonfarm payroll employment: 129m. Prior 24 month average: 130m. Pre-crisis level: 137m.
    - Current U of Michigan Consumer Sentiment Index: 67.5. “Crisis period” average: 65. Pre-crisis level: 90.

    So the Fed can re-liquify banks, create the wrong type of inflation (commodity prices), and make the rich richer. The other 90% become poorer and less happy in the process. The Fed has also proven itself powerless to create the right type of inflation (wages, home prices).

    To me, economics is all about utility – not GDP, not even employment (those are simply proxies for utility). Utility is stagnant if not falling.

    In my opinion the Fed’s actions are destabilizing the country. We have added to the record inequality gap and replaced a sense of fairness with a sense that those on the right side of Fed/government policy receive enormous hidden subsidies (which is true of course). I believe it’s only a matter of time until minor spats over budget cuts become large scale social unrest – probably triggered by $150 oil (which the Fed will conveniently blame on the current events du jour).

  41. Gravatar of Matrim Matrim
    26. March 2011 at 15:17

    I hope you enjoy your break Prof. Sumner. I’ve been following your blog for the past year and I’ve really enjoyed reading your blog entries. I’m not a econ major so at times I found it hard to follow, but I think it would be neat if you wrote a macro version of Freakonomics for amateurs such as myself.

    Thank you Prof. Sumner!

  42. Gravatar of effem effem
    26. March 2011 at 15:20

    Here is one more fact to consider:

    Case-Shiller home price index: Current – 130.4. Crisis low – 129.2. Pre-crisis – 175

  43. Gravatar of Dustin Dustin
    26. March 2011 at 15:24

    I’m with Benjamin (yet again).

    Post once a week. And stop answering all the comments. That’s a very cool part of this blog, but maybe that’s what burned you out?

    But thanks anyway. This blog re-ignited my interest in economics.

  44. Gravatar of Scott Sumner is retiring! « Thought du Jour Scott Sumner is retiring! « Thought du Jour
    26. March 2011 at 15:26

    [...] Sumner, “Connect the dots“, The Money Illusion, 26 March [...]

  45. Gravatar of Tom Tom
    26. March 2011 at 15:56

    Thanks, Scott.
    As a long-time quantity theorist, I’ve enjoyed your blog as much for its literary quality as for its economic content. Few other blogs are as enjoyable and edifying.
    I don’t see this as your swan song. You still have too much to say. It’s hard to keep an original and creative monetary theorist down.

  46. Gravatar of Doc Merlin Doc Merlin
    26. March 2011 at 15:56

    How much of that was real wealth and how much of it was arbitrage from expectation of falling currencies?

  47. Gravatar of William William
    26. March 2011 at 16:00

    Oh no!

    Still, thanks for everything. Macro has made a lot more sense since you started blogging about it.

  48. Gravatar of Tom P Tom P
    26. March 2011 at 16:27

    Scott, I’ve been reading your blog every day since it started. I don’t know how to say thank you for the tremendous amount I’ve learned from your work. Best of luck and I hope you return to blogging soon.

  49. Gravatar of e e
    26. March 2011 at 16:28

    Thanks, and I hope you come back. Any chance we can settle on an equilibrium where you blog but don’t answer every question? Or one where you join a blog with other people so you don’t have pressure to keep the volume up? Or both?

    Whatever you decide, I really enjoyed the blog.

  50. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. March 2011 at 17:08

    e,
    You wrote:
    “Or one where you join a blog with other people so you don’t have pressure to keep the volume up? Or both?”

    That’s a provocative suggestion that the Quasimonetarist bloggers should pause and give serious thought to. Can you imagine what a Sumner, Rowe, Beckworth, Woolsey, Hendrickson, Kantoos, Nunes superblog would be like? (Yes, I know I’m dreaming, but it would attract attention.)

    Sumner would just have to find some way of containing his maniacal urge to write more than the other six combined and to respond to each and every comment.

  51. Gravatar of steve steve
    26. March 2011 at 17:26

    Thanks Scott. Do some podcasts.

    Steve

  52. Gravatar of Jon Jon
    26. March 2011 at 18:30

    Scott,

    Step one: leave the comment section alone. Getting a blog going involves taking your commenters on in discussion. Once you have an established blog, it’s best to not engage the comments directly. Thats a big part of burnout.

    Step two: get some co-bloggers. A blog will wither without regular posts. I think some small but sophisticated bloggers would be happy to reach your audience.

  53. Gravatar of Scott Sumner Scott Sumner
    26. March 2011 at 18:33

    Everyone, Thanks for all the support. I’ll definitely be back this summer at some point.

    Rafael, That’s a very good article. The stuff on Shenzhen is more interesting that most of what I read about Western policy issues.

    Gene, But QE2 did some good things that did create wealth.

    W. Peden, Those reforms sound very promising.

    effem, You said;

    “The other 90% get higher inflation, no new jobs, and declining real wages.”

    I have no idea where things will go over the next year, but in the period since QE was announced in November the unemployment rate has fallen from 9.8% to 8.9%. That’s better than a punch in the nose.

    The goal is to reduce real hourly wages so that real annual wages will rise.

    You said;

    “The Fed has also proven itself powerless to create the right type of inflation (wages, home prices).”

    The Fed can only create one type of inflation; the market determines shifts in relative prices. If there is a problem there, don’t look to the Fed for solutions.

    Everyone; I’ll check back on this comment section occasionally, so that I don’t lose touch with long-time commenters. Let me know if you see any really interesting, must-read articles.

  54. Gravatar of Ralph Musgrave Ralph Musgrave
    26. March 2011 at 20:20

    QE works, but we should not forget how distortionary it is: it works only via stock holders, i.e. the wealthy. In contrast, fiscal NEEDN’T be distortionary. Of course fiscal often is distortionary, e.g. because individual politicians lobby for their favourite and bizarre bits of pork. But a fiscal measure SPECIFICALLY DISIGNED for stimulus, e.g. a payroll tax reduction, works via a broad cross section of the population.

  55. Gravatar of Ralph Musgrave Ralph Musgrave
    26. March 2011 at 20:40

    Forgot to say . . . what I meant by “fiscal” is something like a payroll tax cut NOT covered by increased borrowing or extra tax anywhere. That amounts to “fiscal in a monetarily neutral” environment, or put another way, it amounts to fiscal and monetary policy combined.

    The problem with e.g. a payroll tax reduction funded by borrowing is that the interest rate increase stemming from the borrowing is distortionary: it hits those who are heavily reliant on borrowing.

  56. Gravatar of Mike Sandifer Mike Sandifer
    26. March 2011 at 21:21

    Mirroring some other comments, including my own in the past, I’d pre-order any book about economics you write.

    I’d especially like to see one on the Great Recession, on general monetary policy, or on bubbles and EMH. I think you actually might be able to write a book on Freakomacroeconomics.

    Obviously the opinions of a regular blog reader needn’t encourage you much, but I wouldn’t be surprised if your books would get reviewed in well-read publications such as The Economist, Financial Times, etc., in addition to other economics blogs.

    I just hope you strike while the iron’s hot, because without blogging it can obviously cool off very quickly.

  57. Gravatar of Mike Sandifer Mike Sandifer
    26. March 2011 at 21:24

    That reminds me, is your university still unaware of how widely read your blog is and the influence it’s had on economic policy debates? If not, we should all make them aware of it.

  58. Gravatar of Dan Dan
    27. March 2011 at 00:50

    I don’t believe I’ve ever commented on your blog before, but I hope in earnest that you return to blogging. I always, always learn something or gain some new insight when I visit here.

  59. Gravatar of Sean Sean
    27. March 2011 at 03:25

    Your decision is a wise one, but you will be much missed. I love this blog.

  60. Gravatar of Seán K Seán K
    27. March 2011 at 04:10

    Learned so much from this blog about the role of money, the power of ideas, epistemology within economics. Your perspective will be sadly missed.

  61. Gravatar of David Pearson David Pearson
    27. March 2011 at 06:54

    Scott,

    A well deserved break. Responding to all the comments seemed like a herculean task, and it was much appreciated. Your posts were a running classroom on monetary policy linked to the real time experiment of current Fed policy. You can’t ask for more from a blog.

  62. Gravatar of shocking21 shocking21
    27. March 2011 at 07:32

    Professor Sumner,

    I just wanted to thank you for all that you have given to the econ blogosphere and all that you have done to put policy back on a sensible path. Even if I don’t hold your political beliefs, I have an immense amount of respect for what you do at TMI and I’ve greatly enjoyed reading your work. Please feel free to post about non-economic topics if you feel so inclined. Enjoy your rest, it’s well deserved.

  63. Gravatar of mbk mbk
    27. March 2011 at 08:53

    Scott,

    take a good break and pace yourself in the future. I’ve been wondering for a while how you managed to produce this kind of volume and sophistication at the same time. Thanks for all the good stuff. I learned a lot. And I still do appreciate how you engage in the comments. It really makes a huge difference when someone defends his opinion rather than just throwing them out to the public.

  64. Gravatar of johnleemk johnleemk
    27. March 2011 at 10:38

    Scott,

    I’m still in denial; I’d rather give up reading all the other econ blogs I read than to see you go. You’re the only writer I’ve ever encountered who makes macro fun and insightful (I’m exaggerating yes but not by much).

    A quasi-monetarist super-blog sounds like a lot of fun. I think that would be a great idea.

    I love your engagement with us commenters and I realise it must take a heavy toll. I hope you have a good rest, and that you’ll be back soon!

  65. Gravatar of Sam Sam
    27. March 2011 at 11:01

    Long time lurker, I’ve really enjoyed this blog, sorry to see you go and looking forward to your eventual return.

  66. Gravatar of wm tanksley wm tanksley
    27. March 2011 at 12:07

    Great job, Scott. Thank you.

    Like corrupt politicians resigning under pressure, I need to “spend more time with my family.”

    Comedy gold :-).

    BTW, you’ve convinced me that Austrian economics (my favorite, in general) is missing a part; I’d say that it’s missing how fiat currencies actually stay alive. If you read Mises carefully, you’ll see that all he has is a guess that maybe people like to be fooled.

    -Wm

  67. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. March 2011 at 13:07

    ‘The theory of money is like a Japanese garden: simple on the surface, but filled with subtleties that emerge after prolonged contemplation.’–Milton Friedman

    Your green thumb will be missed, Scott.

  68. Gravatar of Dave G Dave G
    27. March 2011 at 13:12

    Scott-

    Bentley’s loss–and ours–that they didn’t support you.

    Please blog again before the Fed Challenge.

    Dave

  69. Gravatar of Doc Merlin Doc Merlin
    27. March 2011 at 14:59

    @WM tanksley:

    “you’ve convinced me that Austrian economics (my favorite, in general) is missing a part; I’d say that it’s missing how fiat currencies actually stay alive. If you read Mises carefully, you’ll see that all he has is a guess that maybe people like to be fooled.”

    Well, its illegal for non fiat currencies to compete. Their creators are generally jailed. In the US we only need to look at the liberty dollar trial to see what I mean. Jailed for terrorism and counterfeiting for making silver coins that look nothing like dollars.

  70. Gravatar of Doc Merlin Doc Merlin
    27. March 2011 at 15:01

    @WM tanksley:

    Also, as Greenspan explained earlier in his career, the reason fiat money stays is because it has real value due to taxes only being payable in fiat currency.

  71. Gravatar of StatsGuy StatsGuy
    27. March 2011 at 15:17

    BRETT FAVRE !!!

    ————
    “not unearned”

    Because no one in academia can say “well earned”, which it is.

    ————

    Ah well, now I will have to go badger Nick Rowe. Poor Nick. I suppose your work is mostly done – right now, the locus of need is shifting back to structural policies, and I am sadly unimpressed with the current admin/congress.

    Regarding credit, the sad truth is that you will probably not get the credit you deserve. I’ve watched ideas move through the blogosphere, and the source rarely gets the credit. Probably, responding to comments was not the economically most efficient use of your time, but thanks anyway. Learned much.

    I hope you get paid well for speaking. When you do write up an article, write the most aggressive, sharp, assertive, unyielding, extreme version of your ideas. Keep it short and sweet. That will guarantee you lots of citations. I kid you not. The one thing no one in grad school ever taught me was the importance of marketing your ideas; for many years I thought ideas would win on their own merits. Let the paper serve as the extreme archetype of your views, so that “NGDP targeting can forever end demand crises” becomes synonymous with the “Sumnerist View”.

    So now I’ve lost you and Pettis… It became obvious a few months back that comments were eating too much time. Next time, pace yourself.

    Peace.

  72. Gravatar of dtoh dtoh
    27. March 2011 at 15:27

    Thanks for all the wisdom you have imparted. Come back soon!

  73. Gravatar of johnleemk johnleemk
    27. March 2011 at 16:18

    On another note, that idea about a Freakonomics of macro is a brilliant one — and with a good editor, Scott is the best person I can think of to write it.

  74. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. March 2011 at 16:31

    johnleemk,
    It should be the “Freakonomics of Money”. I only say that because I live each and every day in the company of nudges who honestly believe money is nonsense. The world of macro is populated by a lot of well educated (and unfortunately powerful) idiots.

  75. Gravatar of HispanicPundit HispanicPundit
    27. March 2011 at 16:58

    Enjoy the break Scott! Maybe when you return, you will take my suggestion (via email, months ago) more seriously! Nothing wrong with making money doing something you love!

  76. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. March 2011 at 17:12

    Let me clarify.

    When I say “nudges” I mean “nudzi” (that would be “po polsku” or “in Polish”). In english (p’angelski) it translates as a “bore”.

    When I say “money” I mean monetary policy. Economists (I hope) will know what I mean.

  77. Gravatar of Scott Sumner Scott Sumner
    27. March 2011 at 17:13

    Ralph, QE affects all sorts of asset prices. The people who gain the most from QE are the unemployed.

    It’s not a question of whether QE should or should not be done at any given time. THE FED SHOULD TARGET EXPECTED NGDP 100% OF THE TIME. QE is just a tactic, and far from the best one.

    Mike, They’ve been told–probably best if people didn’t contact them. I didn’t mean to suggest my blog has zero value at Bentley, just not enough to make a big difference. In any case it’s hard to explain to a non-economist why these issues are so important.

    Dan and Sean, I’ll be back before too long.

    wm tanksley, Yes, they miss the fact that a medium of exchange is a REALLY USEFUL THING. Thus even paper money can have great value to society, if handled well. It’s like lottery tickets. Perhaps not as good as private lotteries, but still better than a complete ban of gambling.

    Patrick, Love the Friedman quotation.

    Dave, Don’t worry, I plan to return sometime during the summer.

    Statsguy, Thanks for the great advice. The Brett Favre reference went over my head–was it a reference to him being washed up? Or constantly coming out of retirement? In the later case I’d prefer a Michael Jordan reference. :)

    Mark, It should be “The Money Illusion,” but an obscure economist named Irving Fisher already stole that title.

    Everyone, I should clarify that Bentley probably has behaved exactly as any other school would have. I doubt any blogger gets a reduced course load. From a strictly self-interest perspective my time commitment made no sense. Thanks again for the support.

  78. Gravatar of W. Peden W. Peden
    27. March 2011 at 17:50

    wm tanksley,

    Of course, Austrians needn’t go very far. I think that, had Von Mises worked at the Regression Theorem for a few more years, he could have worked out why fiat money has value. He had all the analytic tools to understand this fact, but for one reason or another he never applied them to money in a fiat system.

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. March 2011 at 18:34

    Scott,
    Nobody’s blaming Bentley. But Bentley surely realizes that the only reason anyone has ever heard of their GD institution is you.

    I know, I’m angry, I’m venting. But there must be a way of generating income to support this venture.

  80. Gravatar of CA CA
    27. March 2011 at 19:26

    Professor, I’ve been a fan of your blog for well over a year, and I eagerly await your return this Summer. In the past you’ve mentioned that you were going to read and post your thoughts on Amity Shlaes’ book “The Forgotten Man.” Perhaps you already did and I missed it? If not, maybe now would be a great time to do this as you sleep in late and generally waste away the day without a care in the world….

    Joking aside, I’m curious to hear what you have to say about that book. Enjoy your time off!

  81. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. March 2011 at 19:35

    CA,
    You wrote:
    “If not, maybe now would be a great time to do this as you sleep in late and generally waste away the day without a care in the world….”

    Yes he’ll only work a 70 hour week instead of a 130 hour week. But thanks anyway.

  82. Gravatar of StatsGuy StatsGuy
    27. March 2011 at 19:58

    Constantly coming out of retirement!

    I should have said Jordan, but I never knew he played for the Packers…

    As a model for your Xtreme view, may I suggest Fukuyama, the End of History? 7000 citations or so.

    Short, sweet, and absolutely absolute.

    http://www.scribd.com/doc/12764389/Fukuyama-The-End-of-History

    Indeed, you can even call it “The End of Macroeconomics”. If that doesn’t tick off your profession, nothing will.

  83. Gravatar of Brian Brian
    27. March 2011 at 20:15

    StatsGuy said, “Indeed, you can even call it “The End of Macroeconomics”. If that doesn’t tick off your profession, nothing will.”

    I like that title a lot. Damn that’s provocative.

  84. Gravatar of Liberal Roman Liberal Roman
    27. March 2011 at 20:30

    Nooooooooooooooooo……..

    The best economics blog on the internet gone!? What will I do??

    In all seriousness Scott. You deserve a lot of credit. Even if you are not getting too much of it. Enjoy your time off and come back strong in the summer.

  85. Gravatar of johnleemk johnleemk
    27. March 2011 at 22:17

    Count me in for The End of Macroeconomics as a title. As an avid library user, I’m rather averse to buying any book I could read for free, but I’d gladly pre-order the first hardcover edition of anything Scott writes. My demand function is that high.

  86. Gravatar of stickman stickman
    28. March 2011 at 03:23

    To add to the plaudits… Thanks Scott. I’ll be making my way through your back catalogue.

    Small request: Any chance you feel up to highlighting a Sumner “Top Ten” for easy reference?

    Time out deserved, and I’ll echo those looking forward to your book.

  87. Gravatar of Humble microeconomist Humble microeconomist
    28. March 2011 at 03:48

    Please do not start consulting! I’ll buy your book — or get my library to do so. And thanks for the blog while it lasted.

  88. Gravatar of malavel malavel
    28. March 2011 at 03:53

    Thanks a lot Scott!

    Hey, maybe you’ll have time to watch some Joss Whedon stuff now. I’ll be waiting for your return post in the summer where you admit that Joss Whedon is your master. =)

  89. Gravatar of Cliff Cliff
    28. March 2011 at 04:57

    Scott, is stock market wealth a real recovery? Is asset price appreciation due to aggressive monetary policy sustainable without real income growth? Can a recovery be sustainable without real income growth?

    Which would lead to real GDP growth?

    a. Price inflation and real income deflation

    b. Price deflation and real income growth

    To have full employment right now, where does CPI need to be?

    How do you propose to get there?

    Thanks, Cliff

  90. Gravatar of Left Outside Left Outside
    28. March 2011 at 05:58

    I will buy “The End of Macroeconomics” if it comes out.

    BTW if you’re doing any talks in the UK do publicise them, its a small place so I’ll try and get along.

  91. Gravatar of Rien Huizer Rien Huizer
    28. March 2011 at 08:44

    Scott,

    What a pity! But you should at least demonstrate your elixir for curing business cycle ills before you go.

  92. Gravatar of marcus nunes marcus nunes
    28. March 2011 at 09:29

    Scott
    What with you taking a “breather” and Beckworth being “lazy” about blogging (last post one week ago), the field is wide open for the invasion of the “infidels”:
    http://mises.org/daily/5155/Where-Is-QE2-Taking-Us

  93. Gravatar of coray coray
    28. March 2011 at 09:32

    Are you writing a book?

  94. Gravatar of Philo Philo
    28. March 2011 at 10:19

    Like the standard hero, you can say: “My work here is done.” Time to turn to your next heroic project!

  95. Gravatar of Philo Philo
    28. March 2011 at 10:21

    Feel the love, baby! In effect, we are giving you A-plusses on your student evaluations.

  96. Gravatar of Doc Merlin Doc Merlin
    28. March 2011 at 11:16

    This is fallacious, as pricing is at the margin not the average. When the price of some object increases your wealth doesn’t increase unless you actually sell the object for a net profit.
    This fallacy is imo at the heart of the financial crisis. People believed that their wealth had increased when in fact it had not.

    Here is an example: If you have an object priced at 100, and it its price goes to 200. You don’t actually have 200 in wealth unless you sell the object, because you do not know what the price will be /when you actually sell it/. Mortgage backed securities had this problem, they were “marked to market,” but when the banks tried to actually sell them, they found the price they could get for that object was different than the “market price” they thought it was.
    In short, selling an object that one is holding affects the market price for that object, and the fallacy of assuming that “market price” changes real value of an object is in part based on assuming infinite liquidity for all time.

  97. Gravatar of Scheibenkleister! | Die Welt da draußen Scheibenkleister! | Die Welt da draußen
    28. March 2011 at 12:09

    [...] Scott Sumner hört auf zu bloggen. Off topic, but I am complete burned out, and have been for months.  I’ve blogged an average of eight hours a day, seven days a week, for over two years.  I’ve only kept going in recent months out of a sense of obligation to keep pushing these issues.  But now that lots of other people are saying the exact same thing, it’s time for me to take a break. Dieser Beitrag wurde unter Allgemein veröffentlicht. Setze ein Lesezeichen auf den Permalink. ← Was, wer bist du denn?! [...]

  98. Gravatar of The Rage The Rage
    28. March 2011 at 12:17

    Agree. Anything that creates “wealth” in asset prices is fictional. It isn’t like wealth created by infrastructure spending that is so derided.

    We are in debt deflation. Anything that cuts wages causes more debt and reduces demand, which means prices have to fall even further to meet the debt. Which reduces demand even farther.

    The FED cannot offset that. They are powerless. All they do is help fuel natural speculation in financial markets.

    Whether monetary or hard currency libertarians want to admit it or not, a massive fiscal expansion and redistribution of spending priorities are needed. The whole economy is rotted out and needs rebuilt. The FED cannot do that. It is powerless. We can borrow more now and pay less later or borrow less now and pay much more later with the return of the peasants.

  99. Gravatar of Doc Merlin Doc Merlin
    28. March 2011 at 15:38

    @The Rage
    “Whether monetary or hard currency libertarians want to admit it or not, a massive fiscal expansion and redistribution of spending priorities are needed. The whole economy is rotted out and needs rebuilt. The FED cannot do that. It is powerless. We can borrow more now and pay less later or borrow less now and pay much more later with the return of the peasants.”

    Nonsense wrt fiscal stimulus. Fiscal stimulus ruins economies imo.
    WRT the FED I agree, at this point its too late for them to do much useful.

  100. Gravatar of biL. biL.
    28. March 2011 at 15:43

    There is much gratefulness for the wisdom and insight which you have shared.

    In addition to your other achievements, you have also been successful in getting at least one person out to see a showing of Vertigo on the big screen.

    Cheers.

  101. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. March 2011 at 17:50

    Doc wrote:
    “WRT the FED I agree, at this point its too late for them to do much useful.”

    Nonsense. The untapped human capacity for work is still there. The value of our physical capital is still there. All we need is the nominal expenditures.

    Bring it on!

  102. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. March 2011 at 17:55

    BTW, I could have said “nonsense on stilts” if I wanted to be Sumnerian.

  103. Gravatar of JimP JimP
    28. March 2011 at 18:05

    Well Scott – all good things end I guess.

    But that Romer quote really got me. The whole time she knew – she knew – but didn’t do anything – or Summer didn’t let her. But she should shout this out now.

    The whole thing remains sickening to me.

    And Krugman is beneath contempt – in my opinion. He uses your work, in a general way, but never says so. I am real sure he is a regular reader of this blog and will never say so.

  104. Gravatar of Timothy Timothy
    28. March 2011 at 18:52

    I’m another one who was largely converted from Austrian to quasi-monetarist views by The Money Illusion. Thanks for all your effort Scott; it was so refreshing to read a blog which didn’t conform to my pre-existing biases and be convinced by well reasoned and supported arguments.

  105. Gravatar of CA CA
    28. March 2011 at 20:49

    Timothy you just summed up my experience as well. I was a die-hard Austrian before I started reading The Money Illusion. Now when I read a post from and Austrian economist I’m left feeling unconvinced and unfulfilled. I still remain a huge fan of Hayek’s general socio-economic philosophy, but Austrian capital theory is just far too simplistic and, dare I say, elementary?

  106. Gravatar of Lorenzo from Oz Lorenzo from Oz
    28. March 2011 at 23:34

    CA: I took this post of Scott’s to be his (implicit) comment on The Forgotten Man

  107. Gravatar of Lorenzo from Oz Lorenzo from Oz
    29. March 2011 at 04:36

    I see Senate partisan politics are bedevilling the Fed vacancy nomination process. Sen. Shelby, the ranking Republican on the Banking Committee thinks Diamond’s support for QE2 is a reason to block him.

  108. Gravatar of Robert Robert
    29. March 2011 at 09:30

    One issue I have not seen discussed is the increased capital requirements for the commercial banks. The real deflationary pressure on the economy was not because of the supply of money, but the supply of money provided to small businesses. The reason the economy went into recession is because the banks called the loans of a large number of businesses even as the Federal Reserve provided the commercial banks with money because their capital requirements were increased. There was no way to increase their equity stake. Instead of reducing their exposure to real estate, i.e. forclose on large number of deliquent homeowners, they reduced their exposure to manufacturing and other industries.

    Printing money will reduce the real value of debts owed, but it will also reduce the real value of the saving of a large percentage of the population that should be preparing to retirement.

    It seems that macro-economists do not factor into the capital requirements into velocity of money in the economy. Isn’t this an area where the Fed should be involved and made a mistake during the crisis, which spilled over into the rest of the economy?

  109. Gravatar of Gregory Barr Gregory Barr
    29. March 2011 at 10:26

    Thanks for the excellent blogging!

  110. Gravatar of james in london james in london
    29. March 2011 at 10:55

    As usual I have been unable to keep up with your blog and am now late in adding my best wishes. You are too prolific, if that is possible. My job and family keeps interfering with the real, intellectual, pleasure of challenging my fixed ideas.

    You have altered my “sceptical Austrian” view of money. Perhaps the Fed did need to something in Sept 2009 as a quick and dirty fix for all else that had gone wrong. While modern Austrians like George Selgin and others knew this, I was not convinced by them, thinking (like less modern Austrians like Peter Boettke) that they had “sold out” somehow. Thanks to you I now see the modern Austrians are right on this point. Like classical Austrians (Robert Murphy and the folks at mises.org) I still fear the failure to reform your government finances leaves us with a significant, and therefore too big, tail risk of hyperinflation.

    Like all Austrians I still think government is the problem and not the solution: that “market failure” is a fallacy, often confused with very necessary and regular “failure in the market”.

    I am sure you understand all this, and probably agree. The effort you have undertaken just to get the right monetary policy has been immense, to get the right economic policies looks beyond anyone.

  111. Gravatar of Jared Rifenbary Jared Rifenbary
    29. March 2011 at 11:23

    Professor Sumner,

    I’ve never commented on your site but have enjoyed checking in from time to time.

    I was a student of yours back in 09′ and I always appreciated your openness and guidance.

    With the extra time you now have, please watch a 51 minute presentation I recently gave. It goes over the evolution of money as well as the history of our monetary system and how it has evolved over the course of the 20th century into its current form, and consequently why its breaking down.

    http://www.youtube.com/watch?v=mlmwBRv5RBo&feature=channel_video_title

    Thanks,
    Jared Rifenbary

  112. Gravatar of Scott Sumner Scott Sumner
    29. March 2011 at 16:58

    CA, I did read The Common Man, but never got around to doing a post. It’s a pretty good book, and far less right wing than one would have assumed from the reviews. Indeed I think the coverage of FDR was more favorable than Hoover.

    There’s not much on money–maybe that’s why I didn’t do a review.

    Statsguy and Brian and Johnleemk, Yes, an excellent title, but perhaps a bit presumptuous?

    Liberal Roman, I’ll be baaahk

    stickman, I was thinking of doing a top ten in May, once school is out. I’d like to organize my earlier posts so that they are more accessible.

    Cliff, You asked;

    “Scott, is stock market wealth a real recovery? Is asset price appreciation due to aggressive monetary policy sustainable without real income growth? Can a recovery be sustainable without real income growth?
    Which would lead to real GDP growth?”

    No. Yes. No. Faster nominal GDP growth would lead to faster RGDP growth.

    Left Outside, I’ll let you know if I visit the UK.

    Rien, My magic elixer is more NGDP.

    Marcus, I’m counting on you to fill the gap.

    Coray, It would be more accurate to say I am trying to get a book that is already written published, and also thinking about a short book on the crisis.

    Thanks Philo, but until we get faster NGDP growth I can’t feel too satisfied. But at least my ideas are being discussed. I couldn’t even say that in late 2008 (with a few exceptions among the quasi-monetarists)

    Doc Merlin. You said;

    “This is fallacious, as pricing is at the margin not the average. When the price of some object increases your wealth doesn’t increase unless you actually sell the object for a net profit.”

    That’s a common misconception. The IRS thinks that way, but it implies that if you sold your stock, and bought it back 5 minutes later, this would cause your wealth to plunge at the point of repurchase.

    The Rage, There is no macro model where monetary policy is powerless to boost AD, but can somehow boost asset prices. At least no model I have ever seen. Has anyone else come across such a model? If so, what is it called?

    bil, You said;

    “In addition to your other achievements, you have also been successful in getting at least one person out to see a showing of Vertigo on the big screen.”

    At least the blog has done one useful thing.

    Mark, Yes, I’d call that nonsense on stilts.

    JimP. But Krugman says there aren’t any conservative blogs worth reading regularly.

    Timothy and CA, Thanks, and I agree that Hayek’s non-macro stuff is excellent.

    Lorenzo, No, that post wasn’t aimed at her book. The book wasn’t really about the causes of the Great Depression, but rather it focused on the New Deal. And the New Deal really did delay the recovery.

    Shelby is foolish, Obama should have done a recess appointment. Of course his main mistake was waiting far too long to appoint anyone.

    Robert, The main cause of the recession was the Fed’s ultra-tight monetary policy in late 2008.

    Thanks Gregory,

    James, That’s a very nice note–I appreciate it. I agree about all the other problems in the fiscal area. I’ve always felt the best argument against wasteful and massive fiscal deficits is to use monetary policy to address any nominal spending shortfalls.

    Thanks Jared, But there is one error in one of the videos. You claim the 1920s was inflationary, but it was actually a deflationary decade, with prices in 1929 well below 1920 levels.

  113. Gravatar of Declan Trott Declan Trott
    29. March 2011 at 21:43

    Thanks for all the great work, let us know when the book comes out, and if you make a comeback, don’t feel compelled to answer all our (my) pedantic comments!

  114. Gravatar of Doc Merlin Doc Merlin
    30. March 2011 at 05:16

    @Scott:
    ‘“This is fallacious, as pricing is at the margin not the average. When the price of some object increases your wealth doesn’t increase unless you actually sell the object for a net profit.”

    That’s a common misconception. The IRS thinks that way, but it implies that if you sold your stock, and bought it back 5 minutes later, this would cause your wealth to plunge at the point of repurchase.’

    I should have said, “will sell the object for a net profit.” Anyway, prices don’t really exist except at the point of the exchange, or when the agreement for an exchange is carried out/initiated.

    Beyond prices, value is even worse to measure due to its subjective nature. If I have a house that is “valued” at 200k, its not really worth 200k. Its worth whatever I would be willing to exchange for it. If I would require 300k to give it up, then that is how much its worth /to me/.

  115. Gravatar of Brian Brian
    30. March 2011 at 05:44

    I just wanted to thank Scott for the effort he has put into this blog. It has really enlightened my understanding of macro.

    I have a question. (Not necessarily for Dr Sumner since I want him to get started on his R&R so he can get back to blogging sooner.) I recently read Robert Reich’s book Aftershock, where he blames all the economy’s problems on the income gap. I was thouroughly disgusted with the way he took anecdotal evidence and based his whole premise on it. However, I really don’t know what the effect of the income gap has on the economy. Can anybody give me the a real economist’s view of this with as little ideology as possible? Or if not, a reference? Thanks.

  116. Gravatar of Doc Merlin Doc Merlin
    30. March 2011 at 09:36

    @Scott:
    ‘The Rage, There is no macro model where monetary policy is powerless to boost AD, but can somehow boost asset prices. At least no model I have ever seen. Has anyone else come across such a model? If so, what is it called?’

    The PK’s have such models.

    Also, you can also make such a model in a micro-ish general equilibrium if you allow high substitutability between money and assets but not between money and consumer goods, and the time effects are determined solely by interest rates. You end up with fewer consumer goods being bought, very little saving, and more asset purchases, but aggregate price level doesn’t change much, as most financial assets aren’t included in price aggregates. This however only works if the assets are very disconnected from consumer goods, or if their high price helps fiance expansion in consumer good production. However, if the assets are part of the cost to make consumer goods then, eventually you /will/ get aggregate price inflation, regardless the real interest rate.

    The key is that price aggregates don’t include many types of asset prices.

  117. Gravatar of Luis H Arroyo Luis H Arroyo
    30. March 2011 at 11:13

    Sorry very much Scott.
    I,m also flirting with the idea of not blogging more. But I have lost the reason meny years ago.
    I´m very grateful to you for so many tings I learned here. I hope you will return soon.

  118. Gravatar of Morgan Warstler Morgan Warstler
    30. March 2011 at 20:27

    If Bill Simon is right.. and there’s no reason to think he’s not – you can’t quit Scott.

    http://www.usatoday.com/money/industries/retail/2011-03-30-wal-mart-ceo-expects-inflation_N.htm

  119. Gravatar of Ian Rae Ian Rae
    31. March 2011 at 02:54

    Thanks. You have a great ability at describing how issues are seen by various economic viewpoints. And linking to some other great economics blogs, like Nick Rowe.

  120. Gravatar of Scott Sumner Scott Sumner
    31. March 2011 at 06:42

    Thanks Declan, Luis, and Ian.

    Doc Merlin, I don’t agree. When Bill Gates had $50,000,000,000 in Microsoft stock he was wealthy. Period. End of story.

    Morgan, I don’t care about inflation.

    Doc Merlin, If there is a liquidity trap then temporary monetary injections won’t affect asset prices. If money and assets are not prefect substitutes, then more money will boost NGDP. I think that’s true in all models, and I can’t imagine the PK model would be different.

    Brian, Singapore has arguably the best performing economy in the world, and a huge income gap. Income gaps are not the issue. In addition, government income distribution data is so flawed as to be essentially worthless. It combines wage income and capital income, which is double counting.

  121. Gravatar of Philo Philo
    31. March 2011 at 17:41

    Your monetary program requires a precise concept of GDP, but the concept, at least in most people’s minds, is rather fuzzy. Take, for example, this remark by Mike Mandel: “Consider the . . . question . . . whether R&D should be treated as business investment or as intermediate inputs. Currently, R&D is treated as an intermediate input, but the BEA has calculated that treating R&D as investment would boost real GDP growth.”

    Is this decision (how to account for R&D) arbitrary? Might it make a difference for monetary policy, or does it suffice if the monetary authority makes an arbitrary choice among the many possible precise concepts of GDP and *sticks with it* consistently?

  122. Gravatar of George Selgin George Selgin
    31. March 2011 at 19:09

    “Austrian capital theory is just far too simplistic and, dare I say, elementary?”

    Wow: I’ve heard many adjectives used to describe Austrian (and particularly Hayekian) capital theory, but “simplistic” is a new one! I mean, have you tried to work through Pure Theory of Capital? I have: and if it;s simplistic, I for one don’t want to know what sophisticated capital theory looks like!

    Oh, yeah: I love you to, Scott.

  123. Gravatar of CA CA
    31. March 2011 at 21:43

    Capital theory as practiced by fresh and saltwater theorists tends to be much more reliant on data and empirical analysis. Is it an exact science? No. But it’s much closer to science than Austrianism, which, perhaps, could be more accurately described as a religion of economics, as its proponents seem to ask its followers to accept its tenets on faith, rather than rigorous empirical scrutiny. The Austrian story just doesn’t fit the data.

    Just read through the many exchanges Scott has had with Bob Murphy. Professor Sumner, and others like him who’ve dedicated their lives to the “dismal science,” routinely display a superior ability to integrate data into their theories than do Austrians. I think Peter Boettke implicitly acknowledges this in this post.
    http://www.coordinationproblem.org/2011/01/call-all-economists-lets-answer-a-serious-question.html

    These are my opinions not Professor Sumner’s. Perhaps he would vehemently disagree with me.

  124. Gravatar of Doc Merlin Doc Merlin
    31. March 2011 at 22:29

    @CA:
    Yes, Austrians would agree with you, in that Austrian capital theory isn’t science. However they would disagree when you call non-austrian capital theory science. Hayek, Boteke, Israel Kirzner, etc would argue that non-austrian capital theory isn’t science either, its cargo cult science… its dressed up in the language of science without actually being scientific.

  125. Gravatar of Doc Merlin Doc Merlin
    31. March 2011 at 22:33

    @Scott Sumner:
    When long term capital management had many many ‘billions in assets’ where they actually that wealthy? No, of course not. When they tried to sell their assets they found out that they were not worth what they thought they were and LTCM went bankrupt.

  126. Gravatar of Doc Merlin Doc Merlin
    31. March 2011 at 22:41

    For those who haven’t tried to work through pure theory of capital:
    Here is the PDF:
    http://mises.org/books/puretheory.pdf

  127. Gravatar of CA CA
    31. March 2011 at 23:21

    Fair enough Doc, though I did make it clear I don’t believe mainstream economics to be an “exact science.” However, I do think it’s closer to science than Austrianism.

    I probably shouldn’t have opened my mouth about Austrian economics. Now every loyal Austrian in the blogosphere is going to flock to this thread to tell me how stupid I am.

    My apologies to all.

  128. Gravatar of Kevin Bob Riste Kevin Bob Riste
    31. March 2011 at 23:56

    Scott,

    Please keep blogging. Or tweeting. Or something. No one else has ever captured how i think about things like you do. You are like arnold kling meets matt yglesias. Your posts are my favorite of my eight or ten rss feeds. Non economics blogs are hard for me to read. i will give you every penny i can spare,whichisabout 100 dollars per week, to keep blogging. I will also find a way to make it profitable. I resect your desirefor family time but ypu can do both just ask matt yglesias for advice. anyway, please, scott, give it some thought.

    Kevin bob riste
    Appleton wi
    Vikings fan,
    Quasi monetarist
    Right wing liberal

    Ps email,me abouy the money im serious.

  129. Gravatar of George Selgin George Selgin
    1. April 2011 at 03:44

    CA, I’m not talking about Bob Murphy and the Mises Institute crowd. I’m talking about Hayek (mainly), who you referred to in your post; and I didn’t say more than that his theory certainly isn’t “simplistic.” It’s clear you haven’t read Pure Theory of Capital, or you’d know that’s is complicated to the point of being (to many) unreadable.

    You also are unjust to great Austrian economists like Hayek (whatever the merits of his capital theory) when you equate the whole school to the cult-like group of followers of Rothbard that infests the web (of whom Bob Mur[hy, I hasten to say, is among the least offensive). They are an insular bunch, to be sure, and for them to dismiss the work of economists of other schools of thought is of course proof that they aren’t true scholars. But when you dismiss the entire Austrian school, and especially do so in a manner that suggests you haven’t even glanced at some of the work you’re dismissing, you are taking a leaf from their book!

    And by the way, you can’t tar me with that “loyal Austrian” brush: Though I’m proud to be a fellow traveler I haven’t worn the label since I was a grad student a quarter-century ago.

  130. Gravatar of Doc Merlin Doc Merlin
    1. April 2011 at 04:59

    @George Selgin:

    You use too broad a brush here. Not all the Mises Institute guys are crazy wide-eyed Rothbardians nowadays, like they were when Hayek was still alive and MI members were calling him a socialist.

  131. Gravatar of CA CA
    1. April 2011 at 07:07

    Professor Selgin, I can only tell you that the critiques of Austrian capital theory that I’ve read from Sumner, Cowen, Krugman, Delong, etc, have been much more compelling and scientific(in my opinion) than the defenses I’ve read at Coordination Problem, Cafe Hayek, Mises.org, and ThinkMarkets.

    Perhaps my initial rhetoric was a bit over the top. For that I apologize.

  132. Gravatar of Scott Sumner Scott Sumner
    1. April 2011 at 07:56

    Philo, They really just need to be consistent, as it is rates of change that matter. In any case, NGDP isn’t even the optimal target, average hourly wage rate would be better (but isn’t really feasible.) George Selgin has some other related ideas.

    George. Thanks, I feel the same way about you. Maybe you should start a blog. :)

    CA, Of course it’s hard to generalize about all Austrians. I prefer the Hayekian Austrians to the more extreme pop Austrians that you see a lot on the internet.

    Doc Merlin, You said;

    When long term capital management had many many ‘billions in assets’ where they actually that wealthy? No, of course not. When they tried to sell their assets they found out that they were not worth what they thought they were and LTCM went bankrupt.

    I don’t agree with this. The problem did not arise when they decided to sell their assets, the problem arose when the market value of their assets fell. I have no doubt that if I wanted to sell my assets at the going market price, I could do so.

    Kevin, Your heartfelt message almost got me back into blogging, until I read this:

    “Appleton wi
    Vikings fan,”

    That’s treasonous! Seriously, if you can afford only $100/month I don’t want to take your money. You need it more than me. On the other hand I’m not too proud to take a few bucks from any billionaire readers. I wonder if Warren Buffett reads my blog . . .

    Don’t worry, I’ll be back in a few months.

    Everyone, Last fall I said QE2 would do some good, but more was needed. After today’s employment report it sure looks like it did some good, but more is needed. (1st quarter GDP may be disppointing due to all the recent shocks.) As I recall last summer the sluggish growth was leading to predictions that unemployment would be close to 10% this year.

    I still don’t have a good handle on what’s going on, other than that things have improved modestly since QE2 was first rumored.

  133. Gravatar of Doc Merlin Doc Merlin
    1. April 2011 at 07:57

    @CA:
    Sumner, Cowen, Krugman, Delong
    Of those 4, only Cowen has even half a clue what Austrian capital theory is, and even Cowen is a bit hazy on it.

    May I ask what you mean by scientific?
    Note, I am not an Austrian, but I think austrian capital theory is a lot better than other capital theories I have seen.

  134. Gravatar of Matrim Matrim
    1. April 2011 at 08:41

    Scott(or anyone):

    Going back to the income distribution discussion for a minute, what’s the relevance of income inequality graphs? I see a lot of them popping up on the internet(particularly from people like Klein,etc…), but the significance is never explained and they often leave out things like total compensation and consumption patterns to make a point(usually about higher taxes,etc..).

    Would anyone be willing to give me a link to the entries involving Austrian capital theory?

  135. Gravatar of Liberal Roman Liberal Roman
    1. April 2011 at 09:45

    Has anyone been following the latest developments on the Fedspeak circuit lately.

    A lot of regional bank governors getting a lot more hawkish as of late. This morning they had Lacker on CNBC and he was talking about possible rate hikes THIS YEAR! And yet the market is still powering higher.

    This makes me think that the market doesn’t believe tightening will happen unless Bernanke caves in. And if he does…watch out.

  136. Gravatar of Mark C Mark C
    1. April 2011 at 09:53

    Prof Sumner,

    I have been following your blog all the way back to 2009 and I really love your blog. Almost every morning, one of the first things I do when arrive at office is to read your blog. As a fixed income portfolio manager, I have always find your comments on the current US macroeconomic conditions more fun and make more sense than the average ‘economic analysis’ churned out by many of the wall street/ canary wharf economists.

    The only thing is, I seldomly comment on your blog, but I’ve learnt a lot from you and would like to thank you for all the time you spent. Last but not least, like you I would love to see an NGDP futures market, it would be interesting to trade NGDP, who knows may be an entire ‘NGDP swaps’ market could be created out of this.

  137. Gravatar of ssumner ssumner
    1. April 2011 at 09:59

    Kevin, On reflection, I think I might have worded my response poorly–I didn’t mean the monetary offer was low–indeed it was extremely generous. I meant that it sounded like you would have to struggle to pay that much, in which case I didn’t want to take your money.

    Matrim, There’s an old saying; garbage in–garbage out. Income distribution figures are so distorted that they are almost useless. Consumption inequality is a far better way of measuring “economic inequality.”

    Liberal Roman, I’m puzzled by the stock market, but assume it is being driven by hefty earnings on foreign operations/exports, etc. Does anyone have data?

    If the economy recovers more quickly, rates will rise sooner. That would be good. If the Fed raises rates before the economy is ready for higher rates, that would be bad. I think the market believes Bernanke will be able to hold the line until rate increases can occur due to a strengthening economy, not a premature tightening. It will be a big test for Bernanke.

  138. Gravatar of Liberal Roman Liberal Roman
    1. April 2011 at 12:14

    “I have always find your comments on the current US macroeconomic conditions more fun and make more sense than the average ‘economic analysis’ churned out by many of the wall street/ canary wharf economists.”

    The biggest reason I doubt that a big financial sector is necessary is because of the presence of SO MANY financial “experts” and professionals who seriously don’t have a clue. Is there any other industry or professional where a majority of people have no clue about how their field works?

  139. Gravatar of Larry Larry
    1. April 2011 at 17:05

    Scott –

    Your blogging work is done. You saved the day. Can’t wait to read the book.

    Thanks!

  140. Gravatar of Doc Merlin Doc Merlin
    2. April 2011 at 01:38

    @Scott:
    “I don’t agree with this. The problem did not arise when they decided to sell their assets, the problem arose when the market value of their assets fell. I have no doubt that if I wanted to sell my assets at the going market price, I could do so.”

    Thats just it, there is no such thing as a “market price.” There is a price for things that are selling now, but you have no guarantee that when you try to sell your assets, you will be able to find a buyer willing to buy them at the price everyone is selling at right now, even trading across assets that are otherwise identical. This is what happened to LTCM, they had to sell their considerable assets at a period of low market liquidity which caused massive losses. (The story with the dual listed Royal Dutch Shell and Shell.)

    Price is something that exists when an exchange is agreed upon; it is an event, not a property of an item

    P.S.: Thanks for the blog, its a great one.

  141. Gravatar of Scott Sumner Scott Sumner
    2. April 2011 at 05:05

    Thanks Larry.

    DocM Merlin, You seem to be describing a situation where the action of trying to sell forces the price much lower. That is theoretically possible, but I don’t believe that was the problem faced by LTCM. I believe they bought assets that were declining in price in the marketplace, whether they sold them or not.

    I don’t doubt that if Bill Gates had immediately sold all his Microsoft stock, the price might have fallen a few percentage points, but in general the current market price of an asset is pretty close to what it can be sold for RIGHT NOW. Of course if you wait a year to sell it, the price could be higher or lower.

  142. Gravatar of Scott Sumner Scott Sumner
    2. April 2011 at 05:18

    Thanks Mark, I also hope we get a NGDP market. But it’s also important that the government subsidize trading to create adequate liquidity.

  143. Gravatar of The Scott Sumner Stock Sell Signal | Brucetheeconomist's Blog The Scott Sumner Stock Sell Signal | Brucetheeconomist's Blog
    2. April 2011 at 12:59

    [...] Well Scott Sumner has hung up the keyboard. In his “I’m not really serious but actually I am” kind of way, he takes credit for [...]

  144. Gravatar of Shane Shane
    2. April 2011 at 23:57

    Yay Professor Sumner! Take a well deserved break! I’ve always been floored by your devotion to your commenters. I actually started to feel a little guilty writing comments, knowing that you cannot but respond to everyone. But I’m still glad that I did, as I learned so much from the blog.

    After I started commenting, I developed a new appreciation for my own academic specialty: eighteenth-century moral philosophy and literature (Swift, Burke, Hutcheson, Smith, Hume, Behn, Defoe, etc.). In the process, I feel like my dissertation writing improved in terms of its ability to connect with concerns that still persist in contemporary political dialogue. This, in turn, led to increased ability to define my project in an ordinary language way and thus in cover letters, producing greater success in the job market. So reading “The Money Illusion” helped me get a job, I think. I realized that my own interest in “progressive conservatism” (my term) dovetailed nicely with the project of right-wing liberalism.

    I won’t have much power as a lowly assistant professor, but I’ll be teaching at a liberal arts college (Furman) that at least nominally values interdisciplinary scholarship. If the econ department ever needs cross-department support for a conference/seminar/symposium, I’ll be there 110%. I’m genuinely interested in economists like you, Cowen, and others who can frame economic ideas in humanistic terms.

    Have fun with your temporary retirement!

  145. Gravatar of Matt Parker Matt Parker
    3. April 2011 at 11:48

    Scott, I know you believe monetary stimulus is more effective than fiscal stimulus, but it looks to me that federal fiscal stimulus is often offset by reductions in state and local expenditures, so how can we be sure it is ineffective if it is never really attempted?

  146. Gravatar of Doc Merlin Doc Merlin
    3. April 2011 at 14:12

    @Scott:
    “I don’t doubt that if Bill Gates had immediately sold all his Microsoft stock, the price might have fallen a few percentage points, but in general the current market price of an asset is pretty close to what it can be sold for RIGHT NOW. Of course if you wait a year to sell it, the price could be higher or lower.”

    This is true during periods of high market entropy. During periods of low market entropy it really isn’t true.

  147. Gravatar of Ajay Ajay
    4. April 2011 at 02:35

    I’m no expert on the LTCM situation, but I believe Doc Merlin has it right. I’ve heard it described that LTCM actually would have been fine or would have had minimal losses if they had been allowed to hold their position to maturity. So their problem was apparently liquidity and having to sell into a down market with the resulting vicious cycle of price declines, exactly as Doc Merlin says.

    The reason I came here to comment though, is to link to this excellent WSJ article from today, about the human cost of the Fed’s moves that Scott is so gung-ho about. Those like Scott who keep pushing for Fed activism ignore the fact that all you’re really doing by pushing rates down is stealing from savers to give to borrowers, which is particularly unconscionable considering the former are often retirees and the latter were spendthrifts who splurged during the housing boom. What’s crazy is that article notes that retirees are now doubling down on stocks in order to make up for the money they don’t have. People often talk about QE in sterile and vague terms, as though the Fed can magically fix the economy, but the fact is all the Fed’s doing with QE is stealing from those retirees to give their money to people it favors. As with all govt moves, it’s merely redistribution in another form.

  148. Gravatar of David Pearson David Pearson
    4. April 2011 at 05:32

    Scott,

    Looks like the FDIC just lowered the IOR. No, that was not a typo. They just expanded the deposit premium assessment base to include bank cash (i.e. ERs). That means an effective charge of 10bp on ER’s that was not there before. For commentary on this, see this article (towards the middle):

    http://www.ritholtz.com/blog/2011/04/perigee-moon-us-stocks-muniland-news-fdic-fomc-hmmm/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

    Will effectively cutting the IOR from 25bps to 15bps result in more velocity?

  149. Gravatar of Scott Sumner Scott Sumner
    4. April 2011 at 10:36

    Shane, Thanks, I appreciate that.

    Matt, I don’t agree with your premise that it was never tried. State and local governments have cut back, but not by $800 billion. More importantly, even if you are right it is actually an argument against fiscal stimulus. Initially we were told we needed 1.3 trillion is fiscal stimulus. If $800 billion did nothing, then we needed at least 2.1 trillion, a number far larger than Congress would ever contemplate spending. So your argument shows just how hard fiscal stimulus is, and why we need to rely on monetary stimulus, which is costless, indeed which actually reduces the budget deficit.

    BTW, I’ve never argued that fiscal stimulus cannot work–it probably boosted GDP in 1940-41.

    The main problem with fiscal stimulus is that it doesn’t work in theory. To work, it requires monetary policy incompetence. The Fed can be incompetent, but that’s a pretty weak assumption upon which to spend $800 billion.

    Ajay, You said;

    “I’m no expert on the LTCM situation, but I believe Doc Merlin has it right. I’ve heard it described that LTCM actually would have been fine or would have had minimal losses if they had been allowed to hold their position to maturity.”

    Maybe, but that wouldn’t make Doc’s assertion true. He was talking about the value if sold right now.

    You said;

    “Those like Scott who keep pushing for Fed activism ignore the fact that all you’re really doing by pushing rates down is stealing from savers to give to borrowers, which is particularly unconscionable considering the former are often retirees and the latter were spendthrifts who splurged during the housing boom.”

    You have things exactly backward. I oppose the low interest rate/tight money policies pursued by the US in the 1930s, or Japan since 1993, or the US since 2008. I want much faster expected NGDP growth, and much higher rates. Don’t assume low rates mean easy money, more often it’s just the opposite. Right now is one of those times.

    David, Interesting, but didn’t the article just speculate that there would be a 10 bp penalty? I may have misunderstood the article, but it doesn’t seem like they claimed what you indicated. Nevertheless, if you are right that is good. Much better would be if the Fed had done this instead of FDIC, as then it would have been a signal of future Fed policy intentions. And those sorts of signals are much more powerful than the purely mechanical aspects of policy.

    Ironically, I called on the Fed to cut the IOR by 10 bps just a few weeks ago. Is someone reading The Money Illusion?

  150. Gravatar of Jeff Jeff
    4. April 2011 at 10:54

    @David Pearson,

    The FDIC assessment is not equivalent to a reduction in interest on reserves. They used to assess against a particular kind of bank liability (deposits) and they have changed to assessing against all assets, of which reserves and vault cash are a subset.

    The thing that Scott doesn’t like about paying interest on excess reserves is that when the IOR rate is higher than the short-term risk-free rate, as it is now, banks respond by leaving their funds on deposit at the Fed rather than lending them out. The new FDIC assessment doesn’t change that calculation because it is levied against all bank assets, not just excess reserves. It effectively lowers the return on all bank assets, but does not affect their relative returns.

  151. Gravatar of Doc Merlin Doc Merlin
    4. April 2011 at 12:05

    @Scott:
    ‘Maybe, but that wouldn’t make Doc’s assertion true. He was talking about the value if sold right now.’
    I am talking about value if sold now due to anomalously low liquidity.
    Flash crashes and entropy clustering are another symptom of the phenomena I am describing.

    Liquidity fluctuates just like everything else, and if it (and/or entropy) happens to be very low when you happen to be making market orders, one large order can end up driving the entire market.

    You also see this when large pension funds decide to start moving into a stock. When a large pension fund decides to move into or out of a stock, you also see something a lot like this. As soon as its evident they are buying up the stock (it takes them days to charge a market position, because they are so huge) they actually change the price of the stock and it becomes increasingly more expensive for them to make their move.

  152. Gravatar of David Pearson David Pearson
    4. April 2011 at 12:07

    Jeff,

    This does affect the relative return of ER’s. Other bank assets previously had the 10bp levy; they are unaffected by the latest change. If a Bank Treasurer previously faced a 25bp IOR and a 4.9% lending rate (5% minus the 10bp levy), then today he faces a 15bp IOR and a 4.9% lending rate.

    The broader point is that, if the 25bp IOR was a key constraint on velocity, then we should see velocity spike now that the effective IOR has fallen by 40%.

  153. Gravatar of Scott Sumner Scott Sumner
    4. April 2011 at 14:02

    Doc Merlin, I don’t doubt that liquidity can have a small effect at the margin. But this all started with your assertion that assets don’t have value until sold. And that is wrong. If you stocks double in value, perhaps the actual increase is 99%, not 100%, as the price may drop a bit if you try to sell them quickly. But I stand by my claim that higher stock prices represent increased wealth.

    Jeff, I did a bit of investigation and I think David is right.

    David, Yes, a lower IOR will raise velocity, ceteris paribus. But the term ‘spike’ is misleading for two reasons:

    1. Velocity is measured quarterly.

    2. QE2 was expected to reduce base velocity by about 25%.

    So if higher IOR means that velocity only falls by 24.9% instead of 25% (i.e. NGDP grows a 1/10th point faster) there’s almost no way that’s going to be observed in the data (amidst all the noise.)

    Now if we had a NGDP futures market . . .

  154. Gravatar of Matt Parker Matt Parker
    4. April 2011 at 14:13

    Scott, I was thinking more along the lines of the New Deal:

    “…the New Deal was unsuccessful because it failed to increase the structural deficit. Indeed we see in Figure 7 that the ratio of government spending (Federal, state, and local) hardly changed during the years 1933‐39 and only began to take off in mid‐1940.”

    -http://www.nber.org/papers/w16380.pdf

  155. Gravatar of David Pearson David Pearson
    4. April 2011 at 15:26

    Scott,

    Velocity is in a way observable biweekly through the Fed’s H.3 report. ER’s must be converted to RR’s to have an impact on velocity; there is no place else for them to go. So if bank credit is as sensitive to the IOR as you have argued, a 40% reduction in the IOR should spur a spike in the level of Required Reserves. We’ll know in a few weeks when data for this week is out. Of course, this assumes the 10bp is the right number for the levy, which is as yet uncertain.

  156. Gravatar of StatsGuy StatsGuy
    5. April 2011 at 06:56

    ssumner:

    “But I stand by my claim that higher stock prices represent increased wealth.”

    Uh, heh. It took me two years to figure out that economists aren’t even sure what money is. They don’t agree on the definition of liquidity. And I don’t think they have actually defined wealth particularly well.

    I think a fair definition would be something like “net present value of risk adjusted expected future consumption, adjusted by risk-adjusted expected inflation”.

    But when economists say things like “global wealth dropped 10 trillion dollars”, I’m not even sure what that means.

  157. Gravatar of David Pearson David Pearson
    5. April 2011 at 08:41

    Scott,

    Here is an FT article on the deposit insurance charge:

    http://www.ft.com/cms/s/0/73142848-5f0d-11e0-a2d7-00144feab49a.html#ixzz1IdKU6fvc

  158. Gravatar of Scott Sumner Scott Sumner
    5. April 2011 at 09:18

    Matt, Yes, but my critique of fiscal stimulus doesn’t really apply to the Depression, because (except for 1933-34) we were on a gold standard, whereas we now have inflation targeting. It is inflation targeting that calls into question the effectiveness of fiscal stimulus.

    David; You said;

    “Velocity is in a way observable biweekly through the Fed’s H.3 report. ER’s must be converted to RR’s to have an impact on velocity; there is no place else for them to go. So if bank credit is as sensitive to the IOR as you have argued, a 40% reduction in the IOR should spur a spike in the level of Required Reserves.”

    I don’t ever recall arguing that bank credit is sensitive to IOR. I’ve always argued that if you reduce the benefit from holding reserves, you will reduce the demand for reserves. As you know I focus on the asset price channel as the primary transmission mechanism for monetary policy, not the (monetarist) monetary aggregates channel. I’m not saying the monetarist channel is wrong, there might be a change in RRs, but I could just as easily see a change in cash held by the public. Or the real level of ERs could fall through higher goods prices.

    I agree with that FT article, which supports a point I have often made–the effect of IOR on bank profits is tiny.

    Statsguy, Yes, the definition of wealth is a bit vague, but surely income is 100 times more obscure. Now if only we could get people to stop talking about income inequality.

  159. Gravatar of David Pearson David Pearson
    5. April 2011 at 10:53

    Scott,

    I believe you have argued that bank demand for ER’s is highly price-elastic (to the IOR rate). If you start out with trillions in ER’s, then, mechanically, a sudden drop in the IOR would result in immediate spikes in either currency or RR’s. There is no other place for ER’s to go. Should we expect to see one (or both) of these spikes in the next few weeks?

  160. Gravatar of Rien Huizer Rien Huizer
    5. April 2011 at 12:19

    Scott,

    I don’t like to be difficult on your farewell party but you said:

    “Brian, Singapore has arguably the best performing economy in the world, and a huge income gap. Income gaps are not the issue. In addition, government income distribution data is so flawed as to be essentially worthless. It combines wage income and capital income, which is double counting.”

    Whatever it is that you like about Singapore’s economy (numerical performance is performance), it is probably not what causes that performance. Is there a lesson for anyone? Like become a city state in a top location and run the place like an industrial park landlord would, human resources included at your request and price? Come on..

  161. Gravatar of Doc Merlin Doc Merlin
    5. April 2011 at 17:01

    @Statsguy:
    ‘I think a fair definition would be something like “net present value of risk adjusted expected future consumption, adjusted by risk-adjusted expected inflation”.’

    That doesn’t help either because we have known and unknown risks, and we also have the problem that actual value is completely subjective. The best we can know are inequalities about the value.
    For example: If someone trades for something then /he/ must value that object /more/ than he traded for it. It may be that no one else values it that much, in which case “market value” would be less than what paid for it.
    When we add time which necessarily for net present value, it gets even worse, since due to unknown risks, people use hyperbolic discounting, and every person has their OWN individual discount rates.

    When you speak of expected inflation its also a problem, because well… CPI inflation doesn’t measure inflation in financial assets and during periods of high productivity increases it doesn’t pick up PPI increases either.

    Your observations on the different definitions is a large part of the problem, and why people in economics often talk past each other. It gets worse when you start talking about different assumptions. PK’s for example assume that Fiscal stimulus is exogenous and beneficial, but that money is endogenous. The Chicago school economists see money as completely exogenous. This is why PK’s and Scott always seem to argue past each other.

  162. Gravatar of W. Peden W. Peden
    5. April 2011 at 18:14

    Rien Huizer,

    I think it’s the details of the running of the place that is important. Location is overrated. Djibouti is a small state in an extremely good location and it isn’t prosperous. New Zealand is about as far away from the hubs of commerce as you can get and it is prosperous.

    A good location is useful, but it’s policy that matters the most.

  163. Gravatar of Rien Huizer Rien Huizer
    6. April 2011 at 05:58

    W.Peden,

    Absolutely but before you can do Spore’s policies, you need a regime (=political system) that allows the government to design and adopt those policies and your average democratic market economy does not afford that kind of space.

    What most people do not understand (and Singapore does not broadcast) is that at its core, Singapore is a very large enterprise, controlled by a state structured like a business. Its main business activity is to attract, accomodate (gvt owns most of the land and all of the industrial estates) and staff (gvt controls single union and union operates like unions used to in centrally planned economies) foreign owned corporations and all of that within a portfolio approach (“clusters”). In addition, gvt is a very rich one and controls most of the wealth owned by the community of Singaporean citizens( who comprise between 55 and 70% (the exact figure is not public). Roughly 50% of GDP (by income) consists of corporate profits (including gvt owned companies, but probably mainly attributable to transnationals). Roughly half the workforce consists of guest workers (at the bottom) and highly paid expartiates (at the top). What makes this possible is a high level of social security, a high standard of living (but with very low personal consumption relative to GDP/C) for the citizens (especially compared to neighbouring countries -I would be surprised if any country in Asia had more space per urban resident, for instance- and a very high level of gvt credibility as to a limited, but highly synergetic with these policies, set of restrictions on civil liberty. All in all then, the business model of an industrial park/shopping centre, adopted by a UN member as national economic policy.

    Any idea how a market democratic gvt, even if it had the location and the lack of redundant land (like Holland for instance, which used a much less elaborate version immedialetly after WWII, for reconstruction)) would even propose to its people this type of government? Just to have a high GDP?

    Why is Singapore extremely interesting? As an extreme case in development studies: it shows why the economics are the easy part. It is the politics, not only the policies that count…And of course, initial conditions and endowments. I assume LKY would agree with this even though he may not like the top part of this excessively long post..Cheers

  164. Gravatar of W. Peden W. Peden
    6. April 2011 at 06:48

    Rien Huizer,

    Let’s say, for the sake of argument, that a Singapore-style set of policies is only possible with a Singapore-style political system, i.e. assume a priori that it could NEVER be the case that any country would go down that route through democratic choice.

    So what? That tells us absolutely nothing about whether these are good policies.

    Singapore’s government intervention seems largely to deal with its inherent disadvantages.

    The idea that Singapore’s “endowments” are important is utter humbug. Any resource (including a location) is only useful if the policies and technological development are right. Oil in Arabia was not a significant resource in 100 AD. Djibouti’s location is not a significant resource.

    That a country with no natural resources except access to the sea in a good area is regarded as having “good initial conditions” and “endowments” surely reveals that the old dogmas of development economics are still alive.

  165. Gravatar of David Pearson David Pearson
    6. April 2011 at 07:39

    Scott,

    It appears that this FDIC move is a monetary policy experiment in the making. We get to find out additional data points about the elasticity of ER’s with respect to the IOR, and about the importance of a cut in the IOR to the stock market. BofA’s take (below) is that so far the FDIC move has mainly depressed short term rates. IMO, we might also be seeing increased carry trade activity, such that maybe velocity and inflation expectations rise mainly as a result of a steeper dollar decline.

    From BofA:

    “In effect, the FDIC ruling change has to us created “easier” monetary policy and weakened the effect of IOER in sterilizing the excess liquidity created by the Fed’s expanded balance sheet. Unintended market consequences have thus far included some negative Treasury GC repo rate trading; specific Treasury issues trading at deeply negative rates in repo; an increase in failures to deliver certain repo collateral; and near-zero Treasury bill rates, which will likely be exacerbated in coming weeks by a seasonal decline in bill supply.”

  166. Gravatar of Scott Sumner Scott Sumner
    6. April 2011 at 08:16

    David, No I haven’t argued that demand for ERs is highly price elastic, and in any case it’s not clear that the price of ERs is changing very much. Certainly the demand for ERs is somewhat price elastic, indeed the demand for everything in the universe is somewhat price elastic.

    But you also have the identification problem. Suppose you put an extra 5 cent tax on gasoline. And suppose the quantity of gasoline purchased rose after the tax was imposed. Would that show that the demand for gas was upward sloping? No, it would show that the demand curve had shifted.

    For instance, suppose the move toward lower IOR led to faster expected NGDP growth. That might lead to higher currency velocity, which would tend to reduce currency in circulation (for any given NGDP growth rate.)

    Don’t get me wrong, I see it as marginally good news. But the effect would have been much greater (on the markets) if it had been an explicit Fed move, signalling more expansionary policy intentions. In that case I predicted that markets would have rallied on the news. I stand by that prediction. It’s unfortunate that the idea wasn’t tested in that clearcut fashion.

    Rein, You said;

    “Whatever it is that you like about Singapore’s economy (numerical performance is performance), it is probably not what causes that performance.”

    That’s a rather bizarre claim. I like the fact that Singapore has ultra-low taxes, especially on capital. I like their free trade and investment policies. You say that those have little to do with its success, even though Hong Kong is equally successful, and has similar tax and trade and investment policies. Yet, Hong Kong also lacks many of Singapore’s paternalistic/planning policies.

    I also don’t accept the idea that Singapore’s more successful policies cannot be adopted in a democracy. I see no evidence that Singapore’s policies are particularly unpopular in Singapore, or that the government is particularly unpopular. Singapore is not a free country, but neither is it so totalitarian that people have no way of voicing grievances. Many people vote agaisnt the government in the elections, for instance. If those policies were truly unpopular I’d expect even more “protest” votes.

    In addition, any policy was politically impossible, until it was actually done. A dictator in Chile adopted neoliberal policies in the 1970s. I am old enough to recall leftists saying “that could only be done under a dictatorship.” At the time that made sense, as other countries were moving toward more statist policies. Except that beginning in the 1980s almost every country in the world moved toward privatization, price deregulation, lower MTRs for the rich, etc. So it was suddenly politically possible, even in democracies like Britain. I’ve learned to never assume a policy was politically impossible. Milton Friedman’s school voucher idea seemed like a pipedream–now it been adopted in Sweden, of all places.

  167. Gravatar of Scott Sumner Scott Sumner
    6. April 2011 at 08:24

    David, I just saw your second reply. I hope you are right about the experiment being significant, but I’d warn you that these things are hard to measure. The most famous example is that an easy money policy can actually lead to a smaller money supply in the short run, and vice versa. For instance, suppose a central bank shifts from a 6% inflation rate to a 12% inflation rate. At the 12% rate the real demand for cash is much lower. Let’s say its 10% lower. If the policy shift is anticipated then the price level will rise 10% immediately, assuming M is unchanged. If the central bank wants inflation to rise from 0.5% a month to 1% a month (i.e. 12% inflation) they must actually pull some money out of ciculation at the point inflation expectations rise, to prevent rising velocity from causing an overshoot. Then the money supply starts growing at a faster rate, from that lower base.

    This is why I am skeptical of all monetarist attempts to make inferences about policy from changes in various quantities. Again, I’m not saying you are wrong, it’s just that lower IOR can have an effect without necessarily impacting the indicators in the way you described.

  168. Gravatar of Rien Huizer Rien Huizer
    6. April 2011 at 09:22

    Scott,

    Thanks for pitching in for W Peden, who did his bit himself, and with a healthy dose of sophism. Of course the statistics are great. In addition the people are quiet, well nourished and grumble basically only about things the average Asian would find utterly trivial.

    I liked the low taxes when I was living there too, so did my employer. Lots of other things made me like Singapore, to the extent that I made its political economy my chief intellectual pursuit. However, I am convinced very few people have had the opportunity, the interest and the freedom to look under the hood, and for me that resulted in discovering a business, rather than a state. Not a place saint Maggie would have liked -she would have been unable to govern it- but she might have liked it as a place to spend/invest her lottery winnings.

    Anyway, economic success is -and that is all I wanted to say- accidental. All of the Singaporean ingredients exist elsewhere but nowhere else have they combined to this effect. Is it sustainable? Maybe, but probably not. Is is democratic? In a peculiar way these people who run the place think it is, and it is far better than what the neighbours have. Ans in a different neighbourhood, its rulers would probably be much more libertarian. And there we are: what on earth is there for a libertarian in Singapore? Only economics, for the foreigners.

  169. Gravatar of Rien Huizer Rien Huizer
    6. April 2011 at 09:50

    W Peden.

    I hope my wayward and unfortunate comments have not given you the impression that what you write is actually what you should read in them. Of course locational advantages etc require expert exploitation to make then productive.
    My point was only that Singapore shows that development is easier under certain political conditions, and conversely, harder when democratic development is more advanced. Not to say that every dictatorship is ideal for development (it would probably be corrupt, for a variety of reasons) , or that democracies are inherently unsuited for rapid development. Development is an art that requires good conditions, talent and especially, perseverance. The relationship between political and economic development (i.e. towards an “atlantic” paradigm, is largely unexplored and no one would write off the democracies or blindly invest in authoritarianism. But in democratic market economies, the local/indigenous business sector would probably organize against pro-foreing investment policies like Singapore has (Singapore has no meaningful indigenous capitalists outside the state sector) and local property developers would try to capture the state to privatize attractive assets. Not to suggest that I would see an unambiguous path from prioritizing star foreign over ordinary local investment (with the gvt picking the winning foreigners and luring them with undisclosed subsidies). Singapore’s main endowments (apart from a peculiar initial labor endowment (too complicated to explain here) and a fantastic location for the container transport era, plus a traditional safe haven for ethnic Chinese from all over SE Asia) are usually underestimated (and would have been worthless in the hands of most of LKY’s contemporaries) were crucial for the PARTICULAR development strategy adopted. But the mix of economic and political factorts created by the gvt was of course dominant. I hope that you would at least agree that this case is very difficult to replicate under different conditions and with less predictable/credible government.

    Maybe a small illustration would help? I once woke up to my television-alarm showing a close up of Mr Lee (Harry or Kuan Yew) replying to a question from an election rally audience (the question unfortunately still during my sleep) who remarked: what do you want, democracy or good government?

    If you think that Singaporean policies (that belong in the category “developmental state” (pse visit Ben Fine’s site at LSE) are compatible with liberal democracy and especially level playing fields, you should take the time to check the facts, which is possible but not very easy. Besides, it is hard not to love Singapore..

  170. Gravatar of David Pearson David Pearson
    6. April 2011 at 13:33

    Scott,

    I would argue that Louis Woodhill certainly claimed that ER’s were “highly” price elastic to the IOR. From a piece he wrote contemporaneously with the IOR hike:

    “Given that the Fed has been offering banks an above-market return for sitting on their money, it is not surprising to find that this has been exactly what they have been doing. Bank lending has plunged. The velocity with which money circulates through the economy has also plunged, taking demand, output, and employment with it.”

    BTW, the effective IOR cut was a piece of signalling. That is, the Fed could easily have hiked the IOR 10bp to maintain the spread between it and the FFR, thus negating the effect of the FDIC move (presumably Shiela Bair gave them a heads up!). It chose not to. Why not? Probably because it did not want to send anything resembling a tightening signal to markets at this time. This tells markets something about the Fed’s true intentions towards exiting QE. It is no surprise that gold, after a five-month consolidation, finally broke out to new highs on the news.

  171. Gravatar of W. Peden W. Peden
    6. April 2011 at 21:22

    “Of course locational advantages etc require expert exploitation to make then productive.

    My point was only that Singapore shows that development is easier under certain political conditions, and conversely, harder when democratic development is more advanced.”

    Put that modestly, I have no disagreement with your line of argument. In fact, I’m not sure who would.

  172. Gravatar of Rien Huizer Rien Huizer
    7. April 2011 at 05:00

    W. Peden,

    Right: neither good policy nor “good government” -for lack of a better term nor matching endowments and initial conditions are by themselves sufficient conditions. All that Singapore shows is that an apparent lack of endowments and apparently appalling initial conditions can be matched with an appropriate combination of policy and power (appropriate including sufficient continuity potential to afford long term foreign investment) applied in a manner more typical of an enterprise than a state.

    My original point (and that might not be agreeable to you) was that this enterprise-like approach with its distinctive positioning of citizenship within the political structure (much stronger in Singapore than in Hong Kong, where the role played by the state is traditionally in the hands of large real estate and infrastructure oriented family conglomerates and also stronger than Taiwan under Chiang Sr and especially Junior which was much closer to a dictatorship) was/is that makes a certain economic policy repertoire feasible. Of course there cannot be empirical proof, for a variety of reasons.

    A mere intuition then, but imo strong enough to reject statements that Singapore’s outcomes are the result mainly of good policies (and) that can be applied elsewhere..A sui generis case. See if you can move your stance a little from the trivial argument summarized in your comment?

  173. Gravatar of Scott Sumner Scott Sumner
    7. April 2011 at 05:29

    Rien, I still think your mistake is to look at the totality of Singapore, and assume that:

    1. You know why it succeeded
    2. Those factors were not laissez-faire
    3. Those factors can’t be translated elsewhere

    Maybe the success was due to the same reasons Hong Kong was successful. (Rather than the more interventionist aspects of their policies.) And maybe those pro-market policies will gradually be adopted elsewhere (albeit not in exactly the same form.) Things have changed all over the world in the past 50 years, often in very surprising ways. Why assume they won’t continue to change, and perhaps move in the direction of the economic models that now look highly successful to outsiders? I’m told Singapore is the favorite model of the Chinese leadership.

    Also the issue is not so much whether a firm is government-owned, but rather whether it is forced to compete. I’m told that Singapore Air is government-owned, but also that it has been told it must compete w/o government subsidies. I’d argue that is market friendly, despite the government ownership.

    David, I’ve always taken an agnostic position on the size of the impact of IOR in late 2008. I’ve argued that it is possible the impact was large, and it is possible the impact was small, but the impact was probably contractionary–indeed the Fed publicly stated that it hoped the impact would be contractionary. (More specifically, they said the goal was to keep the Fed funds rate from falling below target.) The difficulty is the counterfactual–what would the Fed have done w/o IOR?

    Your comments about Bair are certainly interesting. I’d be very curious to know whether we know when this news hit the markets. Was it on a single day, or was there a growing realization of what’s going on? I’ve certainly been surprised by the recent strength of the markets (given Libya, Japan, Portugal, and recent disappointing data on consumer sales.) So I’m not at all ruling out your argument–it’s possible that this news led to higher growth/inflation expectations, which boosted stocks, gold, oil, etc.

    I still think it’d be hard to find evidence in velocity, but even there I would not rule out that something might occur.

    Off topic–Christina Romer continues to sound quasi-monetarist:

    http://finance.yahoo.com/blogs/daily-ticker/bring-qe3-t-afford-not-more-romer-says-20110407-045249-959.html?sec=topStories&pos=6&asset=&ccode=

  174. Gravatar of W. Peden W. Peden
    7. April 2011 at 06:01

    Rien Huizer,

    I don’t see how your points about political structure, even if true, lead at all to the conclusion that-

    “Singapore’s outcomes are (not) the result mainly of good policies (and) that can be applied elsewhere”

    As for matching endowments and initial conditions, I’d go further: I’d say that they are not even necessary conditions for a successful economy, unless we’re going to torture ‘initial conditions’ through wordplay. If you’re willing to lay out the necessary endowments for economic growth, feel free, but I’m almost willing to bet that exceptions can be found. Location? New Zealand’s location sucks. Culture? I don’t think anyone in the 19th century would claim that the Japanese culture was suitable for even a vaguely dynamic economy. Material resources? Obviously unnecessary. Direct access to the sea? Not true of Switzerland or Botswana.

    Of course, one might claim that there is a family resemblance (to use a Wittgensteinian term) in that there is a list of attributes and every successful economy has at least one. But this, I think, helps the “good policy” argument rather than vice versa: if what matters is exploiting the particular advantages that a country has, then there must be some factors that lead some countries to achieve this goal and some countries to fail in this goal. The natural explanation is policy.

    That deals with the first part of the conjunction quoted. The second part is simply irrelevant, since it does not touch the central neo-liberal claim about Singapore: “Here is a country that has got a number of things right; let’s apply whatever lessons we can learn from this country.” What is and is not applicable is unknown, since political impossibility is not something that humans are good at estimating.

    Of course, the claim that every country should try to become exactly like Singapore is indefensible, but since no-one is defending this claim its indefensibility isn’t very interesting…

  175. Gravatar of Rien Huizer Rien Huizer
    7. April 2011 at 07:56

    Scott,

    You are right that I assume a few things. As to Singapore’s laissez faire, that is exactly the point: it is highly selective. You may have noted that there were some oddities in the negotiations of the FTA with the US (residual exchange controls for instance and severe restrictions on domestic activity for foreign (also US) financial services firms). FDI is subject to charges and subsidies that are completely undisclosed. Local entrepreneurship is subject to very hard budget constraints (nu subsidies, draconian tax/regulatory audits). Anyway, I understand where you come from, and of course, my statements are conjectural but I am sure plausible for someone who is familiar with the local situation.

    And as to China’s interest in the Spore model: Zhu Rongzhi stated publicly that Singapore was very interesting but that its model could not be transplanted to China. He was referring to the differences between a small city state and China’s scale and complexity. LKY has been a regular visitor to the PRS and been generous with his advice (as with the notion that China wants to learn from him), and there are of course elements of Spore’s expertise in political-economic management that appeal to a dominant party regime looking for economics based legitimacy. It is the PAP’s longevity, rather than Singapore’s “neoliberal” approach that appears to intrigue the CCP leaders. Western economic management (and to a lesser extent “economics” has been taught at the postgraduate level to at least 5000 mainland Chinese who studied in the US and Europe, worked at international organizations etc. They do not need a glorified industrial park cum tax haven to teach them that. What the leadership find interesting is how to manage the social tensions of development without breaking the authoritarian mould, which Singapore has done admirably and much better than most pundits would have predicted 15 years ago.

    But a Communist China borrowing political economy concepts (not imitating everything) from Singapore is hardly proof that this “model” would work within a much more contested and competitive political structure. Certainly not that it is dominantly neoliberal.

    Of course that is my private opinion and nothing more than that, but I am in good company. In Chinese fashion, let’s come back 500 years from now and see what happened.

  176. Gravatar of Rien Huizer Rien Huizer
    7. April 2011 at 08:39

    W Peden,

    How can I get you off my back? I did not say that endowments&initial conditions (good ones that is) are a necessary condition, I said that those were not sufficient. When one looks at development experience, one looks with the benefit of hindsight. In hindsight, Singapore sat on a strong location advantage and exploited it. So did Botswana with its mineral endowments, small population and luck in staying away from frivolous political leaderships (a bit like Abu Dhabi).

    Would anyone be able to identify the relevant endowments for the future? probably not well enough. It is not quite like picking stocks, but very risky and noisy. I am tempted to elaborate on your poorly chosen examples (Japan, New Zealand, Switzerland, Botswana) by referring to distinctive elements in each of their their case histories that can be easily related to current success, and even to current/anticipated problems, but anyway)

    And far from me to claim that location was everything. Building a Singapore is more like building a Microsoft than running a large bank or public sector organization, something that can be taught, but requires a view on one’s opportunity set that leads to a specific kind of risky activity.

    And there we are:

    “if what matters is exploiting the particular advantages that a country has, then there must be some factors that lead some countries to achieve this goal and some countries to fail in this goal. The natural explanation is policy”.

    That policy is a critical success factor is hard to argue with. But “policy” depends on a gvt’s capacity to -a least- “taylor” policy or better “design” and its capacity to execute. Designing policy can be left to experts, execution requires governing and often involves politics. So, would you expect good policy to work in the presence of bad government? I guess not. If you mean to say that the only common factor across a variety of development experiences is a specific policy, or even a specific set of policy prescriptions, you might well be on the right track, but until that is proven, I stick to my simple , holistic explanation of Singapore’s success and my equally simple explanation of, for instance Myanmar’s lack of it (which would require a very long essay). And besides, what are those policies that would work under all circumstances?

  177. Gravatar of W. Peden W. Peden
    7. April 2011 at 16:25

    Rien Huizer,

    The point of the examples is that there is no one advantage or set of advantages that is necessary, which is something on which we agree.

    In fact, I think we largely agree on every issue of substance, especially if one distinguishes (as you have now done) between governance and policy. Where we apparently disagree is in how much we think there is to learn from the example of Singapore.

  178. Gravatar of mbk mbk
    7. April 2011 at 16:53

    Another vote of opinion on the Singapore model.

    Rien Huizer, you obviously know a lot about Singapore and you give a much deeper analysis of the way it works than the vast majority of the blogosphere, especially the libertarian kind. There is one thing to add though: SG’s policies have by no means been uniform since 1965. In a Sumnerian logic you could say SG just followed world trends (save for hippie-ism) over the times: massive public housing push in the 60′s-70′s, state directed population control and industries in the 70′s and 80′s, neoliberal reforms and move towards a modern management theory vision of the state in the 90′s, real estate driven economy in the later ‘naughts. In a way no surprise since the SG government consistently studies policies everywhere and then applies what is perceived to currently work. Like a corporation studying management and market trends. What the libertarian blogosphere does not seem to realize is that the SG economic model of today was only born in the later 90′s, when international access was liberalized, the financial sector was opened to some extent, government monopolies were partly privatized and internal competition was created, starting a company was vastly simplified and taxes and social contributions cut etc. All this only happened in the later 90′s. Therefore for a long period of its development SG did not follow all the policies that it is currently seen to embody.

    Scott btw , I don’t read in Rien Huizer’s posts that he thinks he knows why SG succeeded. I suppose he’d agree that SG shows precisely, that either the classic models of development all have exceptions or that we just don’t know what causes development. Just add China, Brazil these past 10 years, and say, Norway, to the mix. What unites these cases? Not much. In any case it’s not a single factor combination, many combinations seem to work. I used to think that rule of law and good institutions made a large part of it, the Singapore case, but with China’s mishmash of property rights or Brazil’s corruption and potential democratic instability we still get bouts of strong growth, so what gives? I used to think resource curses were fatal but look at Norway or Australia, commodity driven and working out. Peculiar combinations of factors probably give local optima in outcomes that can be quite similar to one another, and these optima can remain functional for longer than a generation.

    And leadership? If leadership mattered as much as it’s made out to, how come Italy ever developed at all? I really suspect in all of these cases we make fundamental errors of attribution. Complex causalities just don’t work like mandatory stoichiometric factor combinations in chemistry. It’s more like ecological niches, where different niches are filled with differently endowed organisms.

  179. Gravatar of MTD MTD
    8. April 2011 at 03:58

    Regarding the April 1 FDIC ruling/assessment (http://on.wsj.com/etc5dH) and its effect on the stance of monetary policy. Although we do not have many data points, it does look like expectations of future NGDP may have risen a bit since April 1 when this went into effect. To wit: long bond yields are up a bit, short yields are down (so the curve is steeper), credit spreads are down a bit, commodities are firm. Equities are marginally higher. So EFNGDP (expected future nominal GDP) seems to have risen a bit.

  180. Gravatar of Scott Sumner Scott Sumner
    8. April 2011 at 04:59

    Rien, I wouldn’t take anything the Chinese leadership says at face value. No Chinese leader would ever admit to slavishly following another country’s model, for obvious nationalistic reasons. I’d guess they are attracted by more than Singapore’s one party system. For instance, I’d guess they are attracted by Singapore’s high savings rate—and for good reasons. A high saving rate allows one to get by with a much more efficient (pro-growth) low tax rate environment, if one wishes to (not all high savers do.)

    mbk, Knowing a lot about Singapore doesn’t necessarily allow one to have an informed judgment about how laissez-faire their economic model is. For instance, suppose Singapore has 12,346 ways in which the government intervenes in the economy. Sounds interventionist, right? Now suppose the US has 87,329 ways we intervene in the economy. What do we make of that? The US is almost universally viewed as one of the more capitalist countries in the world, so if Singapore intervenes less then we do it might be even more capitalist. Obviously I pulled those numbers out of thin air. The point is that knowing a lot about how much a government intervenes is very different from knowing how capitalist the economy is. There are two major groups that rate economic freedom, both find Singapore number two in the world. I’m willing to assume they are somewhat wrong, but those rankings at least suggests they lean in the non-interventionist direction.

    Over the years many commenters have come on here and said the Singapore government does this or that. While I assume the comments are correct, none of those comments have led me to revise my view that Singapore is the second more laissez-faire economy. Why should they?

    I’m puzzled as to why you consider Brazil and China to be successful economic models. China is far poorer than other East Asian countries with similar cultures (Japan, South Korea, Taiwan, HK, Singapore, etc.) China is poorer than Mexico. If China had good institutions it would be as rich as Taiwan, if not richer. And Brazil is just a normal middle income country. Chile would be the model, if we wanted a Latin American example. I presume Norway is rich due to oil plus non-corrupt governance.

    MTD, Thanks, I agree that expected NGDP growth has risen a bit in the last few days. Does anyone know if the markets actually learned of the FDIC decision on April 1? Was there T-bill market chatter (or an anomalous plunge in yield) that clearly shows the news became priced in on that day?

  181. Gravatar of johnleemk johnleemk
    8. April 2011 at 09:02

    Scott,

    This Singapore discussion reminded me of a post on EconLog about the phenomenon of overstating when doing comparative economics, because personal experience with one’s own economy leads to exaggeration: http://econlog.econlib.org/archives/2010/03/sumner_gets_blo.html

    And of course we have come full circle, because that EconLog post concluded with a quote from you about this very same phenomenon.

    FWIW, I have lived and been to Singapore many times, and I can’t dispute anything the others have been saying. In many ways, Singapore is terribly interventionist, from running government-owned hospitals and clinics to government ownership of much of the housing stock. But it is possible to be quite “socialist” in those areas while still maintaining a laissez-faire approach.

    The government of Singapore I think does not give any quarter to itself — there is no leniency or protection for a government body just because it is publicly-owned. Scott cited SIA as one example, and I think there is likewise substantial competition in Singaporean healthcare, even though the government owns a majority of the country’s healthcare facilities.

  182. Gravatar of Rien Huizer Rien Huizer
    8. April 2011 at 09:35

    mbk,

    Good to see a kindred spirit (and a fellow scholar of Singapore?), in the sense that development is pretty hard and that we know far too little about it to be able to select technologies or even processes. There is more involved than simply letting naturally existing economics run its course with government simply making sure that markets are not disturbed a by criminals or racketeers, contracts are enforced and governments keep their hands off the wealth-creating mechanism. At least, I have not seen any country that has practiced that and produced, say 20 years or more of steady 2.5 to 3 times population growth gdp growth while practising this model. HK is clearly not such a case (explanations provided upon request and subject to conditions).

    Anyway, I doubt anyone in his right mind would believe that, while there are so many laissez faire (in the strict sense) communities in the developing world (Somalia?, maybe pockets of), very few seem to aspire to the development result that we crave, and they seem to have no intention to develop into prosperous communities where most people participating in this blog would feel at home. That alone would make anyone responsible for actual development policy making (even as an advisor) tread carefully when the political/social/cultural conditions are likely to create negative effects.

    Scott,

    I do not know why all of a sudden controversies around Singapore colonized these final; moments of your blog. I enjoyed reading the arguments of someone who believes that he has a solution for an important problem and spend so much time to promote it. I hope that we will see steps towards a NGDP futures market soon, and especially one that allows your regular guests to trade early and often, to paraphrase a former mayor of Chicago (who would have appreciated the genius of LKY). All the best and may you return!

  183. Gravatar of johnleemk johnleemk
    8. April 2011 at 11:20

    Rien Huizer,

    I think to describe Somalia as laissez-faire is a stretch, to put it very lightly. Somalia is a good rejoinder to anarcho-libertarians, but most libertarians (and definitely most of the ones hanging out on The Money Illusion) wouldn’t see Somalia as a functional state of any form, which is necessary for markets to function, if only to protect basic rights to life and property. Perhaps Somaliland.

    You are quite right about the challenges of economic development. I think the more we learn about economic development, the more we realise there is more to learn.

  184. Gravatar of Rien Huizer Rien Huizer
    8. April 2011 at 11:53

    johnleemk,

    Right. I do not live in Spore (have done so, though and found it a profound challenge to our democratic capitalist model, much ore than China’s confused use of brute force (capital + financial repression) in economic development). Know the phenomenon you refer to but surely that is not at work here. I know a lot of trivia about a lot of countries and lived in the US, Asia and Australia and found a lot to like in all of them. As to Scott’s points you cited:

    “Scott cited SIA as one example, and I think there is likewise substantial competition in Singaporean healthcare, even though the government owns a majority of the country’s healthcare facilities.”

    SIA is a well run airline with a very low cost of capital and cost of capital is an important factor in an industry by excessive leverage. Why this low cost of capital? Maybe the Temasek link? Maybe mystique? Maybe whatever.It has no local competition (in the sense that other airlines can use Chiangi as a hub on equal terms). As to Spore’s healthcare: a very well designed system with a mix of gvt regulation, compulsion and mixed gvt/private provision. A bit similar to Holland and Switzerland. However, unlike Holland (but a bit like Switzerland) the private providers rely heavily on non-medisave custom (i.e. foreigners) to cover their cost. Do not expect your amah to get her medical at a Parkway facility. The consequence of Singapore’s location again..But, as said before, Singapore is run like a business and one thing a business does is trying to keep its mandatory staff fit enough at low cost to the shareholders. Besides, running hospitals efficiently (an industrial activity) is something that the Island City should be able to do well. Because of its specific institutional features. Very little to do with competition. More with benchmarking, discipline, the sort of things the Soviet Union could have done given different human resources and leadership. Scott, I am sorry to come close to echoing the evil Dr Krugman’s critique of Singapore, but I am not. He looked mainly at capital intensity (the flip side of suppressed consumption) and I think there is genuine public sector managerial excellence that make intervention less likely to fail. The system does not pick winners (it tried to in the past), but is creates the conditions that winners gravitate towards for locating the sort of things Singapore likes to host (hence my industrial park/shopping centre analogy). HK’s facilities are privately owned, by a small, entrenched group of “tycoons” Singapore’s are gvt owned and managed by a very special kind of bureacrat (compensated at least as well as the private sector would). These bureaucrats have gone to the same business schools as, say exxon managers and use interventionist approaches that would work as well within Exxon as within a country, as long as the country wanted to be treated by its gvt like Exxon staff and customers are treated by its management. And, I guess, many people would not mind being a citizen of Exxon, even prefer it to being a citizen of the US. Even at the cost of losing some libertarian space.

  185. Gravatar of mbk mbk
    8. April 2011 at 18:21

    Scott, China and Brazil currently score high in their rate of growth, and that means, development (the act of developing), that’s all. In the absolute of course I agree, they are middle income at best, and development is very uneven within.

    On the way Singapore works, I’m throwing in the towel. Rien Huizer especially, and others, have gone a long way to describe the peculiarities of the model, which has many features for which the West has nothing comparable. And maybe this is why this special case of a mixed economy is hard to understand. You can brush the many examples that have been described aside and say “but it’s easy to start a small business and that makes it laissez-faire” but you’re then left with a small part of the whole. I feel a bit like we live in parallel universes. But I will let it go on that subject matter now, obviously I failed to explain it.

    As for the economic indexes, remember they were nicely deconstructed by Statsguy some time ago in that “economic freedom” should often read “good governance” instead, and SG scores highly here indeed.

    Rien, I live in SG (10 years now), and not on an expat package, so that makes me not a student but a practitioner of SG I suppose. I’m a bit more sanguine on the merits of true laissez-faire. It creates more autochthonous diversity and innovation than the planned approach, and more sense of participation, empowerment. That’s what’s great in the US, the individual feels like he could achieve anything, at least in principle.

  186. Gravatar of marcus nunes marcus nunes
    9. April 2011 at 11:29

    DeLong has come out of the closet as a Quasi Monetarist!
    http://thefaintofheart.wordpress.com/2011/04/09/delong-asks-the-right-question/

  187. Gravatar of Mike Sandifer Mike Sandifer
    10. April 2011 at 03:58

    Scott, in case you haven’t seen this:

    http://www.cnbc.com/id/42512136

    and:

    “JAN 8, 2011
    Fed’s Yellen defends QE2, says creating 3 mln jobs

    DENVER, Jan 8 (Reuters) – U.S. Federal Reserve Vice Chair Janet Yellen on Saturday defended the central bank’s controversial program to buy assets in order to stimulate the economy, citing an internal study showing the full program will result in a gain of 3 million jobs.

    “It will not be a panacea, but I believe it will be effective in fostering maximum employment and price stability,” Yellen said while participating on a panel at an economics conference.

    The Fed’s latest plan to buy assets announced in early November — dubbed QE2 because it is the Fed’s second round of quantitative easing — had sparked sharp criticism domestically, internationally, and even within the Fed itself, for weakening the dollar and risking dangerous inflation.

    Yellen, whose defense appeared aimed at mollifying all of those critics, said a simulation approximating the most recent asset-buying program was shown to generate about 700,000 new jobs.”

    This is another example of a liberal who at least may have flexible enough thinking to support a policy that by all the data I’ve seen is at least very consistent with QE being highly effective.

    I think it’s safe to say it’s Obama who’s fallen down on the job, demonstrating an almost complete lack of understanding of economics and seemingly missing a backbone as well.

    I’ve read consistently, from people like yourself, Robert Reich, Mike Norman, and Krugman that payroll tax cuts would be decent approaches to stimulating job growth, at least via fiscal policy.

    But we have a Republican party hellbent on sucking the life out of this fragile recovery in the name of vintage 1929 economic thought and due to shameless pandering to extremist elements they feed to win office.

    This has all made me a hyper-partisan, whereas I used to just shake my head at both parties, thinking Republicans to be crazy and selfish, but sometimes willing to loosen regulations where needed. Democrats, on the other hand, were more economically naive in some ways, but were dead on about the need for more social programs, suboptimal or not.

    Friedman’s negative income tax idea is more appealing to me than the manifold approach we take, given that it may result in less warpage and more freedom for recipients. I’m unimpressed by the mere EIC.

    So, support of the lesser of evils has never been more important in my life in my view, considering that we have a party that wants to take us back to pre-Teddy Roosevelt social and economic attitudes.

  188. Gravatar of Scott Sumner Scott Sumner
    10. April 2011 at 06:27

    johnleemk, I agree.

    Rien, You said;

    “Anyway, I doubt anyone in his right mind would believe that, while there are so many laissez-faire (in the strict sense) communities in the developing world (Somalia?”

    Do the Somali warlords “leave people alone?” Now I see why we disagree so strongly on Singapore. Perhaps we should stop talking about “laissez-faire.” I favor policy regimes that score high on all the various indices of “economic freedom” compiled by think tanks all over the world. Call them communist if you wish, in that case it’s communism that I favor.

    What does America have to do to get more like communist Singapore? End taxes on capital. Free trade. Health savings accounts. Private social security accounts. Top tax rate below 20%. If Somalia is laissez-faire, then it’s Singapore’s communism that I favor.

    You said;

    “HK’s facilities are privately-owned, by a small, entrenched group of “tycoons””

    “Tycoons?” And this means Hong Kong is not capitalist?

    I’m a pragmatic libertarian, so I have no objection to those non-laissez-faire aspects of Singapore than help explain its success (Environmental regs, social insurance, etc), and think the other non-libertarian policies are a waste of time and don’t contribute to their success.

    mbk, You said;

    “Scott, China and Brazil currently score high in their rate of growth, and that means, development”

    Sorry but growth rates don’t tell us if a model is successful, just if its getting slightly less awful (as in the case of China.) Even Bangladesh grows faster than America.

    You said;

    “On the way Singapore works, I’m throwing in the towel. Rien Huizer especially, and others, have gone a long way to describe the peculiarities of the model, which has many features for which the West has nothing comparable. And maybe this is why this special case of a mixed economy is hard to understand. You can brush the many examples that have been described aside and say “but it’s easy to start a small business and that makes it laissez-faire” but you’re then left with a small part of the whole. I feel a bit like we live in parallel universes. But I will let it go on that subject matter now, obviously I failed to explain it.”

    First of all the quotation you provide is something that I never said or even implied. Second, neither you nor Rien have addressed my argument at all, so it seems a bit odd to say you are “throwing in the towel.” I claimed that the US, universally regarded as one of the more capitalist countries in the world, probably has many more regulations than Singapore. So why should I be impressed with a list of ways that Singapore intervenes in the economy, when it’s possible to put together a much longer list for America? Rien said Singapore own hospitals. You could write an entire book on ways our government intervenes and distorts health care. Our government spends 8% of GDP of health care, their government spends 1.2% of GDP on health care. And I’m supposed to be impressed by the fact that they own a few hospitals?? We have government-owned hospitals here.

    Regarding Statsguy’s critique, Singapore doesn’t just score high on the good government category (low corruption), but also on the various small government categories (taxes and spending as a share of GDP, etc.)

    Marcus, Thanks, I left a comment. A couple years ago (in “The Economists’ Voice”) DeLong was one of those saying the Fed was out of ammunition. Then I publish a short paper criticizing his argument in the same journal. Now he’s changed his tune. Cause and effect?

    Mike, Thanks. In mid-2009 I did a post with scathing criticism of Yellen. She claimed the Fed was out of ammunition. I think the interview you link to is an implied admission that I was right and she was wrong. If QE2 will create that many jobs (which I doubt) then why wasn’t it adopted two years earlier!!

  189. Gravatar of Mike Sandifer Mike Sandifer
    10. April 2011 at 09:32

    Yes Scott, and the good thing about liberals is that at least some of us examine our beliefs and are open to changing our minds. Who was better at this than Keynes?

  190. Gravatar of mbk mbk
    10. April 2011 at 10:19

    Scott I start to understand that we just don’t use the vocabulary “laissez-faire” the same way. To me (and probably to Rien) it is about the way the government does or does not interfere with the way businesses are set up and run in the economy, and especially whether it influences what kind of businesses are being set up. But you use the same word entirely in reference to issues that may currently plague the US but which are essentially about how high the taxes are and about how well government manages large social programs (health, pensions etc) – not about my meaning of “laissez-faire” (“to let them do”). BTW as you know health and pensions in SG are of course government managed too – you pay into a government vehicle which invests your money somewhere and pays you interest. It just happens that this system is more to your personal liking than the US counterpart.

    Taxes don’t directly have anything to do with the “laissez-faire” aspect. High taxes just mean expensive government (and mind you some of those taxes in France or Sweden do come back to you as services). You can have Scandinavian countries with high taxes and run them in a pretty laissez-faire way. And you can have low tax Singapore where government creates entire economic sectors from scratch from time to time. Take a recent example – government invited detailed tenders for casino and conference resorts, decided on winners, negotiated with the investors, helped them over the financial crisis woes, and then had them built by these private companies to government specifications, on government land. Now, the casino resorts have proven wildly successful. But they did not come out of “laissez-faire”. Neither did the setup of the world’s 3rd largest refinery in Jurong, the world’s busiest container port, or one of the world’ busiest and highest ranking airports, it alone worth some 3 or 4% of the country’s GDP if memory serves.

    You said I and Rien only gave examples of Singapore policies and didn’t compare them to the US. In terms of business regulations it’s hard to blanket compare, I just don’t have the texts of the relevant laws side by side, but neither do you, you also go by conjecture. Usually Singapore takes its SOPs and regulations pretty closely from current Western norms and standards, the building codes are very tight for instance and so it is with every other sector too. One tidbit per way of example, you need a license to be a street musician. What Singapore doesn’t have is America’s litigation mess that creates huge economic losses in the US, direct or preventive (unnecessary actions taken to prevent lawsuits). Another advantage is that there is pretty much only one layer of government – no major federal, state, city, community overlaps.

    In terms of industrial policies I already said that very often the US doesn’t even have comparable policy vehicles. Let’s take the case of these casino resorts. The equivalent in the US would have been, the US Federal Government reclaims land from the Atlantic ocean the size of Florida, invites FDI from say, China to the tune of 300 billion dollars, and picks companies to build, say, one massive Disneyland there, targeting customers from Asia. Run by these government chosen private Chinese companies, creating about 2 million local jobs, but set up and organized and monitored by the Feds. These are the orders of magnitude had the Singapore casino resorts been built in the US. Now you tell me whether the US Federal Government routinely has any such comparable programs (military don’t count – just “ordinary” economic sectors typically serviced by private companies).

  191. Gravatar of Shane Shane
    10. April 2011 at 14:40

    Hi Professor Sumner,

    Wanna share your thoughts on the recent events surrounding the budget and the related Ryan proposal?

    I wanna suggest a left-wing Sumnerian reading and say that we are seeing a case of an NGDP targeting congress attempting to counteract the effects of an inflation targeting central bank. The congress understands that the fed currently wants 1-2% core inflation (wasn’t 2-3% the historic norm before the crisis?). They understand they have wiggle room within those parameters. And they’d prefer to see the lowest rate of NGDP growth consistent with those targets for ideological reasons (limiting the growth of federal spending to deliver tax cuts to their constituents) and political reasons (lower NGDP growth hurts the party in power in the White House).

    Thoughts?

  192. Gravatar of Full Employment Hawk Full Employment Hawk
    10. April 2011 at 16:14

    Christian Romer would be an excellent choice for filling the new vacancy on the Board of Governors, but the Republicans who have become anti-monetarist would never let her take this position.

  193. Gravatar of Shane Shane
    10. April 2011 at 19:46

    BTW, note the comment section of the Christina Romer interview Prof. Sumner posted on April 7. “Yahoo!” comments are always particularly vituperative for whatever reason, but notice the almost complete lack of positive support for Romer’s position. It’s nasty even for “Yahoo!” Also notice the continual conflation of monetary and fiscal stimulus. Politically, at least, to be for one is essentially to be for the other.

    The highly ambiguous mandate of “full employment consistent with price stability” can mean a lot of things. When Bernanke begs for further fiscal stimulus, I think he is indicating that he can get the Fed to go on offense when inflation falls below 1%, but that he can also restrain it from intervening if it heads toward 3%, even if he can’t push it there on his own. In other words, the FOMC is extremely sensitive to the prevailing political appetite for stimulus *as such*, measured by the level of fiscal stimulus currently being pursued.

    If further Republican bullying is successful, I can even imagine the Fed letting inflation fall below 1%. I really, really hope I’m wrong, but I can’t see a QE3 taking place in this environment. That means that the economy will slow again in the crucial 16 months or so before the fall election. If Obama won’t stick his neck out for stimulus of whatever flavor in this environment, I doubt that Bernanke–who is a Republican, after all–will.

  194. Gravatar of Rien Huizer Rien Huizer
    11. April 2011 at 01:51

    Scott,

    This blog simply refuses to end. We do have several communication problems, apparently. Different vocabularies, different ideological sensitivities.

    I completely share your wish list of improvements in the US and yes, at l;east in areas where I have direct, comparative expertise (financial regulation), the US is generally far more bureaucratic (and has strong Stiglerian pathologies ) than Singapore. I think I know why that is the case: Singapore tries to attract foreign investment in the financial services sector (the state-as-an-industrial-park model, remember), the US (gvt) does not and hence there is space in the US for this type of politics, resulting in more efficiency losses there than probably necessary if best practices were used. Just look at the monstrosity that survived the recent period of cyclical turbulence governing US financial services. In Singapore’s political economy that could not exist for the simple reason that there would only be a minuscule local industry to regulate (and that portion is almost as perversely regulated as the US, but with a different focus: the US regulation serves the interests of the industry (de facto, not de jure of course), in Singapore it serves the interests of the state’s business and operates behind serious exchange controls.

    I guess our discussion is meaningless (but someway entertaining, otherwise we would not be going on, long after the farewell party crowds have left (you really should reconsider your decision) because in your world certain things do not matter and in someone else’s world they do and your things do not.

    There is no evidence that Singaporean interventionism (defined as the gvt usurping the role of local private sector capital providers and using typically gvt associated resources (the power to regulate, legislate, subsidize, tax, mobilize to achive business-like outcomes for the community it governs, and be open about that in the state-controlled media) leads to better GDP outcomes than would be the case in a similar country without that interventionism. However the gvt itself claims it does (during its election campaigns) and even the opposition would probably not be different in the unlikely event of it coming to power. As to think tank comparisons of “freedom”: garbage in garbage out. But the Spore gvt is always grateful when they score highly.

    So, lots of people who take an interest in this country do so for the political ideosyncrasies and most of those people simply assume that if you have a politics that lets economists run the economy like engineers, undistrubed by the risks and inefficiencies of democracy, you will get GDP growth, but not necessarily widespread prosperity (compared to other large urban seaboard areas, like, say the western part of Holland, the Bay Area. Flanders, etc These areas have higher GDP/capita and especially much higher levels of private consumption.

    So, we use different vocabularies and we are concerned with different things. Lots of things that work in Singapore deserve copying, but most of these things are politically impossible (like health care, public housing, public pensions, traffic, etc) in most outher countries (NIMBY, regulatory capture, lack of credibility due to uncertainty about gvt longevity, etc). I hope that you will continue yopur retirement from blogging for as long time so that we will run this into the 10K comments, mainly devoted to Singapore… Cheers again. I hope someone puts you in charge of an important gvt function in the US with dictatorial powers. With a practical libertarian at the helm, we would do well.

  195. Gravatar of Full Employment Hawk Full Employment Hawk
    11. April 2011 at 07:57

    According to Kocherlakota:

    “Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.”

    http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4525#_ftnref2

    This once again shows why people largely chosen by bankers, rather than the elected representatives of the people should not be allowed a disproportionate voice in making monetary policy.

  196. Gravatar of Full Employment Hawk Full Employment Hawk
    11. April 2011 at 08:05

    Scott:

    You could greatly reduce the time that you spend on this blog if you did not individually reply to all the commentators. For example, Brad DeLong on his blog only rarely replies to a commentator, doing so only when somebody says something that really gets his attention. I have occasionally made a post that has gotten an individual reply, but only rarely. While we all appreciate your replies to our individual posts, that is very time intensive.

    With people like Kocherlakota pushing such a fallacious view, your comments are badly needed.

    People supporting expansionary monetary policy and people supporting expansionary fiscal policy (like, for example, Krugman, have a common cause here in opposing the view that most of the unemployment is structural and that expansionary economic policy can do little to bring it down.

  197. Gravatar of marcus nunes marcus nunes
    11. April 2011 at 19:01

    @FEH
    Take a look at this from Kocherlakota:
    http://thefaintofheart.wordpress.com/2011/04/01/the-inflation-obsessed/

  198. Gravatar of Mike Sandifer Mike Sandifer
    11. April 2011 at 19:52

    Scott,

    I mirror the opinion of Full Employment Hawk. No matter your intentions, if the blog continues to grow, you’d have to become more selective with the comments you answer anyway.

    You could always address common comments in blog posts and/or refer to previous posts or link to info elsewhere.

  199. Gravatar of Ajay Ajay
    11. April 2011 at 20:10

    Scott, you claim to “oppose the low interest rate/tight money policies pursued by the US in the 1930s, or Japan since 1993, or the US since 2008″ and “want much faster expected NGDP growth, and much higher rates.” I don’t see how you square the two, you want high rates and easy money? I’m not a regular reader of your blog, but I did listen to your EconTalk podcast and the impression I got is that you wanted to inflate your way towards keeping NGDP trends going. I don’t “assume low rates mean easy money,” but the Fed artificially holding rates down does redistribute income from savers to borrowers regardless. I just don’t see what magic policy combo you propose the Fed implement that wouldn’t be fairly inflationary. I actually think Bernanke initially did a good job flooding the banks with liquidity, but increasingly has been taking too many risks by buying $1 trillion of Fannie and Freddie’s mortgage-backed securities and now QE2. This is fiscal policy in monetary guise and it has the potential to end badly. If you could point me at a blog post that lays out exactly what your Fed policy stance is and how it differs from the Fed, I’d appreciate it.

  200. Gravatar of Scott Sumner Scott Sumner
    12. April 2011 at 05:16

    Mike, Good point.

    mbk, You said;

    “Scott I start to understand that we just don’t use the vocabulary “laissez-faire” the same way. To me (and probably to Rien) it is about the way the government does or does not interfere with the way businesses are set up and run in the economy, and especially whether it influences what kind of businesses are being set up. But you use the same word entirely in reference to issues that may currently plague the US but which are essentially about how high the taxes are and about how well government manages large social programs (health, pensions etc) – not about my meaning of “laissez-faire” (“to let them do”).”

    Not true, I use laissez-faire in many different ways, as do the various groups that compile economic freedom indices. It’s about MTRs, tax complexity, regulation of price and market entry, occupational licensure, litigation, subsides, trade, freedom from corruption, etc.

    BTW, the US government heavily interferes in the way businesses are set up and run. So if that’s the criteria then the US is not very capitalist.

    You said;

    “Taxes don’t directly have anything to do with the “laissez-faire” aspect. High taxes just mean expensive government (and mind you some of those taxes in France or Sweden do come back to you as services). You can have Scandinavian countries with high taxes and run them in a pretty laissez-faire way.”

    I’ve made a similar point many times. Denmark is more economically free than the US, according to the Heritage Foundation. Taxes are just one factor, and MTRs are the most important factor for taxes.

    You said;

    “In terms of industrial policies I already said that very often the US doesn’t even have comparable policy vehicles. Let’s take the case of these casino resorts. The equivalent in the US would have been, the US Federal Government reclaims land from the Atlantic ocean the size of Florida, invites FDI from say, China to the tune of 300 billion dollars, and picks companies to build, say, one massive Disneyland there, targeting customers from Asia. Run by these government chosen private Chinese companies, creating about 2 million local jobs, but set up and organized and monitored by the Feds. These are the orders of magnitude had the Singapore casino resorts been built in the US. Now you tell me whether the US Federal Government routinely has any such comparable programs (military don’t count – just “ordinary” economic sectors typically serviced by private companies).”

    Casinos in America are very heavily regulated. Massachusetts (where I live), doesn’t even allow casinos. I hardly call the US economically free in the casino area, if in most states only Indian reservations are allowed to have casinos, and those negotiate sweetheart deals with the state government.

    In addition, I could name lots of areas where Singapore is far more market-oriented than the US. You mentioned litigation. I’d add taxes, where the US has a far more complex system with much higher MTRs. Trade is another, we have lots of tariffs. Our government spends 8% of GDP on health care, Singapore spends 1.2%. We subsidize our airlines, and block out foreign competition. They don’t. I’m sure there are 1000s of other examples.

    Shane, I doubt that most Congressman even understand the NGDP argument you just laid out.

    I haven’t studied the Ryan plan. I favor a system of HSAs, not medical “insurance.” I have read that his plan relies on private medical insurance. If so, I’m not a fan, although it may be better than the current Medicare system because it has cost controls.

    Full Employment Hawk, Yes, but why not do a recess appointment of Romer (or Diamond) to the Fed?

    Shane, I don’t think politics is the main problem at the Fed. They pursued much more expansionary policies in 2006-07 with almost no criticism from the GOP. I believe the biggest problem has been ignorance. Most people, including most liberals, thought the Fed was out of ammunition in late 2008. If they had understood the Fed could do more, the Fed would have done more.

    Rien, I mostly agree with those comments, but would caution you that the “politically impossible” policies of one generation often become the conventional wisdom of the next.

    When I was in grad school the top MTR was 70%, if I suggested cutting it into the 30s, everyone would have said that’s politically impossible.

    Marcus and Full Employment Hawk, I can never seem to understand where Kocherlakota is coming from when I read him. I just scratch my head.

    FEH, I hope to contribute in different ways.

    Mike, I’ll think about it.

    Ajay, You said;

    “I actually think Bernanke initially did a good job flooding the banks with liquidity, but increasingly has been taking too many risks by buying $1 trillion of Fannie and Freddie’s mortgage-backed securities and now QE2. This is fiscal policy in monetary guise and it has the potential to end badly. If you could point me at a blog post that lays out exactly what your Fed policy stance is and how it differs from the Fed, I’d appreciate it.”

    The Fed has recently been buying Treasury notes, which is not very risky. Google my post called an open letter to Paul Krugman. The Fed was way too contractionary in late 2008, as it let NGDP expectations fall sharply. If NGDP grows at 4% to 5% in the long run, then we won’t have to worry about 1970s-style inflation.

  201. Gravatar of Full Employment Hawk Full Employment Hawk
    12. April 2011 at 20:26

    “Full Employment Hawk, Yes, but why not do a recess appointment of Romer (or Diamond) to the Fed?”

    A recess appointment for Romer for the other vacant slot on the BOG the next time Congress recesses would be an excellent idea. She would be an excellent voice to counter the views of people like Plosser. She would be much more suitable for this than Diamond. But the House Republicans may keep the House in session permanently to prevent Obama from doing this.

  202. Gravatar of Full Employment Hawk Full Employment Hawk
    12. April 2011 at 20:30

    “Shane, I doubt that most Congressman even understand the NGDP argument you just laid out.”

    Why not present it as a modification of the Friedman rule? During most of his career, Friedman advocated having M grow at a fixed rate. (I realize he eventually abandoned it.) The modified Friedman rule is to have MV grow at a fixed rate.

  203. Gravatar of ssumner ssumner
    13. April 2011 at 17:48

    FEH, I wonder if Friedman ever had anything to say about the NGDP targeting idea. He did discuss NGDP quite often in his work, and clearly hoped that velocity would be stable with a money supply rule. If one advocates a money supply rule, and hopes that velocity will be stable, isn’t that pretty much the same as hoping that NGDP growth will be stable?

  204. Gravatar of Full Employment Hawk Full Employment Hawk
    13. April 2011 at 20:27

    “If one advocates a money supply rule, and hopes that velocity will be stable, isn’t that pretty much the same as hoping that NGDP growth will be stable?”

    Yes. In the MV equation, if V remains constant, a constant rate of growth in M leads to a constant rate of growth in
    MV = NGDP. That is why offsetting changes in V when it is not constant so that MV still grows at a constant rate is a generalization of the Friedman rule to an economy in which V is not constant.

  205. Gravatar of Full Employment Hawk Full Employment Hawk
    13. April 2011 at 20:30

    “A recess appointment for Romer for the other vacant slot on the BOG the next time Congress recesses would be an excellent idea.”

    Second thoughts on that. If he recessed Romer without even first nominating her and getting resistance, this would provoke a very negative reaction in Congress. Therefore if Diamond still is not confirmed by the time Congress recesses, he should recess appoint him.

    Right now half of the FOMC consists of people chosen primarily by bankers. This is an intolerable situation.

  206. Gravatar of ssumner ssumner
    14. April 2011 at 08:10

    FEH, That’s also how I view the M*V issue. It would be interesting to know whether Friedman ever commented on NGDP targeting.

    I agree on Diamond.

  207. Gravatar of marcus nunes marcus nunes
    14. April 2011 at 10:04

    Scott: I don´t think Friedman ever used the expression “NGDP Targeting” (I think he had strong aversion to the word “targeting”). But if you read his 1971 JPE “A monetary theory of nominal income” together with the more recent “Thermostat analogy”, that´s exactly what he´s proposing!
    http://faculty.hacc.edu/erandolph/Take_%20Home/Thermostat_2.pdf

  208. Gravatar of Scott Sumner Scott Sumner
    16. April 2011 at 07:51

    Marcus, But in the post you link to he explicitly endorses inflation targeting.

  209. Gravatar of marcus nunes marcus nunes
    16. April 2011 at 09:30

    Scott:
    Friedman mentions IT, but says that what really mattered was the goal of “Price Stability” that CB´s adopted during the 1980´s. And the key, according to him, was:
    “The MV=Py key to a good thermostat was there all along”. To me (plus his 1971 JPE paper) this means he´s talking about “stabilizing nominal spending”.
    For example, Steve Williamson has commented on one of your posts that “NGDP targeting” is a special case of IT. I think it´s the other way around: IT is a positive offshoot of NGDPT IF you succeed in keeping NGDP stable. Otherwise IT, like at present, gets you into BIG trouble!

  210. Gravatar of marcus nunes marcus nunes
    16. April 2011 at 09:39

    If NGDP is stabilized, IT becomes just a communication/expectation anchoring device. All the stability, be it of prices or RGDP derives directly from stabilizing NGDP

  211. Gravatar of Doc Merlin Doc Merlin
    17. April 2011 at 05:11

    @full employment hawk:

    “But the House Republicans may keep the House in session permanently to prevent Obama from doing this.”

    1. The house doesn’t have any effect on appointments. Thats the senate you are thinking of, which is controlled by the Dems.

    2. If Obama appointed her, enough Republicans would even vote in her favor. There is a significant percent of Republican senators that believe that the president should be able to chose whoever he wants, so except for very very egregious choices they will allow him to just go ahead and pick appointments.

  212. Gravatar of Scott Sumner Scott Sumner
    17. April 2011 at 07:12

    Marcus, Friedman said:

    “To keep prices stable, the Fed must see to it that the quantity of money changes in
    such a way as to offset movements in velocity and output. Velocity is ordinarily
    very stable, fluctuating only mildly and rather randomly around a mild long-term
    trend from year to year. So long as that is the case, changes in prices (inflation or
    deflation) are dominated by what happens to the quantity of money per unit of output.”

    That’s a pretty explicit rejection of NGDP targeting, and endorsement of price level or inflation targeting.

    Doc Merlin, Can you or anyone else explain to me why someone like Senator Shelby can put a hold on Diamond, but can’t put a hold on an Obama Supreme Court nomination. I’ve never understood how that works.

  213. Gravatar of Full Employment Hawk Full Employment Hawk
    17. April 2011 at 14:05

    “The house doesn’t have any effect on appointments.”

    I am aware of that, but it is my impression that if EITHER house is in session the President cannot make recess appointments, but I may have that wrong.

    “If Obama appointed her, enough Republicans would even vote in her favor. There is a significant percent of Republican senators that believe that the president should be able to chose whoever he wants, so except for very very egregious choices they will allow him to just go ahead and pick appointments.”

    That sure is not what is happening with respect to Diamond.

  214. Gravatar of Full Employment Hawk Full Employment Hawk
    17. April 2011 at 14:15

    One additional problem with appointing Romer to the BOG would be that since she was chair of the Council of Economic advisors during the first two Obama years, the hearings for her appointment would result in an extended debate about the merits and demerits of the stimulus and the other parts of the Obama economic policies.

    If I were on the Senate Committee, the first question I would ask her is why the two vacancies on the BOG were left vacant so long.

  215. Gravatar of Scott Sumner Scott Sumner
    19. April 2011 at 08:12

    FEH, I agree.

  216. Gravatar of Othon Othon
    29. April 2011 at 10:19

    http://consultingbyrpm.com/blog/2011/04/the-scott-sumner-stock-sell-signal.html

  217. Gravatar of Scott Sumner Scott Sumner
    1. May 2011 at 05:33

    Othon, Yes, I left a comment.

  218. Gravatar of Scott Sumner, the Unbeatable Foe Scott Sumner, the Unbeatable Foe
    9. September 2011 at 04:39

    [...] last we left, in March our anti-hero Scott Sumner was hanging up the keyboard, having taken credit for getting Bernanke to inflate more, and thereby creating several trillion [...]

  219. Gravatar of TheMoneyIllusion » Gavyn Davies on the Fed meeting TheMoneyIllusion » Gavyn Davies on the Fed meeting
    31. October 2011 at 15:46

    [...] one person who was cited or linked to in all three statements.  I’m tempted to resurrect my connecting the dots post, but can’t really do so in good faith.  Davies is right; NGDP targeting is not going to be [...]

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