How did Don Luskin get so smart?

Josh Hendrickson sent me this Youtube video on Don Luskin defending QE2.  I won’t say; “I couldn’t have put it better myself,” the fact is that I couldn’t even have put it as well myself.  If you are not interested in his defense of supply-side economics, skip ahead to the 5 minute point.

Luskin nails one point after another:

1.  QE2 was needed as the economy showed all sorts of signs of sluggishness in the summer.

2.  QE2 is working because asset prices (stocks, TIPS spreads) responded strongly to rumors of QE2 that began in late summer.

3.  The rise is interest rates is actually a good sign, indicating that inflation expectations are moving closer to an appropriate level, and real growth expectations are increasing.

4.  Money was actually too tight during the summer, despite near zero rates.

5.  Milton Friedman pointed out that nominal rates were an unreliable indicator of the stance of monetary policy.

6.  Luskin said you must look at other indicators, and they all showed money was too tight.

7.  QE2 is very consistent with laissez-faire economics, as we don’t want the Fed to maintain a steady interest rate or money supply, but rather to provide enough money to generate a stable macro environment (dare I say NGDP) for companies to operate in.

Back in late 2008 I never heard that sort of talk on TV.  Indeed that’s the main reason I got into blogging; frustration over the conversation of pundits, which seemed to be ignoring the elephant in the room.  If I knew pundits were going to get so smart I might have stayed out of blogging.  It turns out I wasn’t needed.

PS.  It took me one year to figure out how to post graphs on my blog.  Perhaps in another year I’ll learn how to directly post YouTube videos.

PPS.  Tyler Cowen has a very generous post on my NGDP targeting talk.  I will definitely comment at some point, but am too busy with grading right now to give it the attention it deserves.  Meanwhile, help me think up titles;  “Wittgenstein and me”?  I will also eventually comment on his recent inequality article, but that may take even longer.

PPPS.  Luskin also supports the “tax cut.”  I get annoyed by progressives always talking about how the Clinton-era top rate (39.6%) was fine.  Maybe so, but then why don’t they support this “tax cut,” which will return the top rate to 38.8%, once the health care tax kicks in?

Tags: ,


32 Responses to “How did Don Luskin get so smart?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    20. December 2010 at 09:03

    I sense the tide is turning on QE2, and in Sumner’s favor. Onward to NGDP.

  2. Gravatar of Wonks Anonymous Wonks Anonymous
    20. December 2010 at 09:21

    A tax cut without corresponding spending cuts isn’t a tax cut at all. It’s just pretending we don’t have to pay for it while increasing the bill down the road.

  3. Gravatar of W. Peden W. Peden
    20. December 2010 at 09:24

    Prof. Sumner,

    I imagine this is how monetarists felt back in the 1970s when people finally started talking about controlling inflation by bringing the money supply under control, after all that rubbish about price controls. Fiscal stimulus today is like price controls in the 1970s: a powerful myth that, at best, is a bad way of accomplishing what can be done with less effort and much less harm through other means.

    Oddly enough, during certain weeks of my final year of undergraduate philosophy, you (and those on your blog) were the only serious thinker other than Wittgenstein who was allowed to occupy my thoughts.

    The more I think about NGDP targeting/QE2/etc. and try to explain it to people whom I know, the more I think that “rebalancing the growth of money and the economy” is the best way of putting it. That’s way that I can get my head around things like an increase in the money supply leading to stablisation (because it follows such a contractions) so if it can get an ivory-tower philosophy student with the mathematical skills of a two-ball abbacus to comprehend NGDP targeting et al, then it can get anyone to do so.

    To encourage you a little re: youtube videos, my mother has worked out how to embed them on her blog. Just saying. Then again, I think I prefer your habit of embedding links in text, because it means that I can focus on your post first and then any links/videos/side dishes/etc. if I’m interested and have the time.

  4. Gravatar of W. Peden W. Peden
    20. December 2010 at 09:31

    Wonks Anonymous,

    It might not be a net tax cut, but since taxation-by-inflation is a flat tax (like a flat sales tax) it does mean a reduction in taxes for some.

    However I agree, as a normative point, that so-called tax cuts should always be accompanied by spending cuts or by explicit taxes elsewhere. In the case of most countries in the West, I would tend to favour cutting spending with no overall tax cuts; just some redistribution from taxes on enterprise, employment and investment (corporation taxes, payroll taxes and capital gains taxes) to taxes on consumption and pollution.

  5. Gravatar of Donald Marron Donald Marron
    20. December 2010 at 09:49

    Scott – Belated congratulations on your successful blog; you’ve really lifted the debate on monetary policy.

    One small correction on your PPPS. The recent health legislation lifted the Medicare tax from 2.9% to 3.8%. So the apples-to-apples comparison you are looking for is: 39.6% + 2.9% = 42.5% in the Clinton years versus 35% + 3.8% = 38.8% in a couple years (assuming that the top ordinary rate stays at 35% after 2012). That’s still a notable gap. (The recent health legislation also extended the Medicare tax to other types of income, including capital gains and dividends, but that’s a topic for another day.)

  6. Gravatar of Benjamin Cole Benjamin Cole
    20. December 2010 at 12:09

    OT, but worth being scared about. From Bloomberg, investors expect Japan deflation to last at least eight more years…

    “The Bank of Japan’s forecast for an end to deflation in 2011 and 35 trillion yen ($416.9 billion) of spending have done little to change the thinking in the bond market, where investors see eight more years of falling prices.

    Bonds designed to protect investors against inflation show that money managers in Japan anticipate prices will decline at an average 0.6 percent pace over the next five years and 0.4 percent annually through 2018. Japan is the only country where bonds linked to price changes show entrenched deflation expectations, according to data compiled by Bloomberg.”

    The pro-QE2 crowd should talk about Japan a lot. A whole lot. Tell people not that the Fed wants inflation, tell people the Fed wants to stop your house from falling in value for the next 20 years, and your stocks too…

    If the expectations are borne out, Japan will go through 30 years of deflation…what would 30 years of declining asset values do to your portfolio?

  7. Gravatar of Lord Lord
    20. December 2010 at 12:27

    On posting video, just hit the embed button below the video, and copy the code into the html for the post, then resize to fit the column width.

  8. Gravatar of Ram Ram
    20. December 2010 at 12:32

    The Luskin clip is brilliant. Given how much of a wingnut Luskin usually is, this worries me that I, too, have become a wingnut.

  9. Gravatar of marcus nunes marcus nunes
    20. December 2010 at 13:11

    From RA at Free Exchange:

  10. Gravatar of Catherine Catherine
    20. December 2010 at 14:10

    Love, love, love your blog.

    Embedding a YouTube video on Blogger is simple & is probably the same on WordPress.

    1. Go to YouTube video you want to embed:

    2. Underneath the video you will see a series of buttons: “Like,” “Add to,” “Share,” “Embed.”

    3. Click on “Embed.”

    4. Window opens up inside of which is a bunch of URL code.

    5. Copy the code into the ‘posting’ window on your blog.

    NOTE: Blogger gives me a choice of two windows, one of which is labeled ‘html.’ I paste the code from YouTube into that window.

    Here are the directions that turn up on YouTube after you click on “Embed”:

    “After making your selection, copy and paste the embed code above. The code changes based on your selection.”

    Good luck!

  11. Gravatar of rob rob
    20. December 2010 at 14:17

    Unfortunately I believe you will have to continue blogging as I suspect Luskin would not have made his crisp points without the existence of your blog.

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. December 2010 at 14:31

    ‘I get annoyed by progressives always talking about how the Clinton-era top rate (39.6%) was fine.’

    Actually, they seem to think Moses brought it down on tablets from the mountain top.

  13. Gravatar of Morgan Warstler Morgan Warstler
    20. December 2010 at 14:35

    “A tax cut without corresponding spending cuts isn’t a tax cut at all.”

    A tax cut is a tax cut.

    The bigger debt just means that in the future we’ll be cutting more spending, after all taxes being cut is obviously a good thing – that’s why we did it.

    The reality is this: we’re just making sure when the first public employee pensions run out of funds, there’s no way to borrow to help them.

    That’s the decision we just made.

  14. Gravatar of Scott Sumner Scott Sumner
    20. December 2010 at 14:56

    Thanks Benjamin. And the Japan data is scary.

    Wonks Anonymous, Yes, but if you cut taxes, it probably reduces future spending by some fraction of the tax cut. That’s because it presents future policymakers with a bigger budget deficit. They may react to that bigger budget deficit with a one for one increase in taxes in the future. But the way our political system works it’s more likely to be a mixture of higher taxes and lower spending (check out the recent deficit commission.) This every $1 in tax cuts today might lead to another 60 cents in future taxes, and 40 cents (present value of course) in future spending cuts. It’s an open question.

    W. Peden, Good points, and thanks for the tip on youtube.

    Donald, I actually knew that. I sort of viewed the Medicare tax as a payroll tax until they added the tax on capital. Now it’s completely an income tax. But you’re right, I cheated a bit by not making that distinction.

    Thanks Lord.

    Ram, I’ve got a bit of supply-side craziness in me, but compared to people like Kudlow I’m practically a communist. I assume Luskin is similar to Kudlow. But you’re right, he presented his argument very well.

    Marcus, Thanks, I’ll try to do something on that tonight.

    Catherine. Thanks, I’ll try that next time.

    Ron, I was shamelessly fishing for that compliment, and finally I got it! My fragile ego needs those sorts of comments once a month. 🙂

    Patrick, I hear you.

    Morgan, See my reply above, I think you are partly right (and I think it’s a point many people miss.)

  15. Gravatar of rob rob
    20. December 2010 at 15:24

    Here’s a general inflation, money illusion, “long and variable lags” question from a non-economist. I understand, I think, your point that if I learned today that the money supply would double in a year I wouldn’t sell my house today for much less than double yesterday’s price. However, I might sell it for slightly less than double, say 3% less, since I would still have this idea in my head about the time-cost of money. But why would I think that? Isn’t the time-cost of money in general equal to inflation? Isn’t it because I am accustomed to 3% inflation that I would be willing to sell my house today for 3% less than I expect it to be worth in a year, regardless of (for the sake of argument) knowing exactly what the money supply will be in a year?

    Or is the time-cost of money a separate concept from inflation and instead equal to say, the so-called “risk free rate” on long term US bonds? If so, then doesn’t that demolish your argument regarding the unfairness on tax on capital gains — if we expect, on average, capital gains to be greater than the rate of inflation?

    I think I’ve answered my own question, but I’ll leave it out there in case I’ve said something very foolish you might care to correct.

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. December 2010 at 16:01

    ‘Isn’t the time-cost of money in general equal to inflation?’

    No. And, that fact doesn’t invalidate Scott’s argument against capital taxation.

  17. Gravatar of Brian Brian
    20. December 2010 at 19:22

    Did Don Luskin drop a “Q.E.D.” in casual conversation around the 6:40 mark? Classy.

  18. Gravatar of Bob Murphy Bob Murphy
    20. December 2010 at 21:16


    1) I really am pleasantly surprised that your views seem to be gaining traction, since they are correct if we concede the mainstream paradigm. (Of course, I think the mainstream paradigm is nuts and that’s why you are the most dangerous man in America.)

    2) Luskin was admittedly slick in this forum. I believe the young whippersnappers would say he pwned those guys, especially the part where he said, “I thought the Fed was buying more Treasuries than God?”

    3) Even so, Luskin was seriously a jerk. That will make him look all the worse if he (and you) turn out to be wrong, and the dollar crashes in 2012.

    4) Help me out about this “QE2 is free-market” idea you’ve been pushing. If the Fed only bought the bonds issued by, say, GM, then surely Ford could complain, right? And that would hardly be a free-market policy, because the Fed would be giving an unfair advantage to GM versus its competitors.

    So how can it be that giving an advantage to the U.S. federal government–making it easier for that organization to borrow money–is what a “neutral” Fed would do?

  19. Gravatar of Bob Murphy Bob Murphy
    20. December 2010 at 21:18


    There are lots of adjectives I could use to describe Luskin’s performance–many of them complimentary–but “classy” is not near the top of my list.

  20. Gravatar of Richard W Richard W
    20. December 2010 at 23:54

    It would only matter to Ford if the Fed was buying newly issued GM bonds in the primary market rather than the secondary market. If the Fed was buying GM or Ford bonds in the secondary market they are buying bonds that the companies have already issued. Although the Fed buying in the secondary market one company bonds but not the other could affect the pricing of future issues and place one at a disadvantage.

    ” So how can it be that giving an advantage to the U.S. federal government-making it easier for that organization to borrow money-is what a “neutral” Fed would do? ”

    Against whom are they gaining an advantage? Since the success of QE will be when yields start to rise what is the advantage?

  21. Gravatar of marcus nunes marcus nunes
    21. December 2010 at 03:31

    This must surely qualify as one of the great ironies in recent economic history. The quote is from Zingales essay on EMH:
    In a 1999 article with fellow economist Mark Gertler, Bernanke analyzed the impact of monetary policy when prices move away from fundamentals. That this contingency was the object of their analysis illustrates how the EMH was losing ground. Their conclusion, however, was that the Fed should not intervene, not only because it is difficult to identify the bubbles but also because “our reading of history is that asset price crashes have done sustained damage to the economy only in cases when monetary policy remained unresponsive or actively reinforced deflationary pressures.”
    He´s surely “The man who knew too much” but when the time came to apply his knowledge…he failed!

  22. Gravatar of scott sumner scott sumner
    21. December 2010 at 18:45

    rob, If all wages and prices were flexible then the interest rate might be 100% in your case, and prices would gradually rise at that rate. But of course in that case monetary shocks don’t have any real effects. In the real world lots of wages and prices are sticky, and flexible asset prices respond much more than the overall cost of living, and for that reason the nominal interest rate doesn’t go anywhere near 100%.

    I don’t see any implications for my ideas on taxes, which aren’t just mine, but are the standard model in economics.

    Bob, The Fed’s policies of the last three years have made things really hard for the federal government, as the Fed has caused inflation to fall to the lowest level in my lifetime, which is bad news for the world’s biggest borrower (Uncle Sam.) That’s why the US fiscal position is getting much worse–because of the Fed.

    BTW, I do plan to answer your recent post in the comment section, but just haven’t had time yet.

    Richard, I agree.

    Marcus. Yes, that’s a great line. I skimmed right over it and didn’t notice.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. December 2010 at 22:11

    In my opinion this marks the sole time Luskin has been right in his entire life. For his sake may he be so again.

  24. Gravatar of Full Employment Hawk Full Employment Hawk
    22. December 2010 at 00:16

    How did Ron Paul get so stupid?

    “PAUL I’m looking at a bigger picture””why I don’t think anybody should be doing central economic planning through monetary policy.”

  25. Gravatar of Full Employment Hawk Full Employment Hawk
    22. December 2010 at 00:18

    “You are a proponent of returning to the gold standard””a view that is outside the thinking of mainstream economists. Will you explore that issue? PAUL Absolutely. I think the markets are starting to demand it. When you hear people like [World Bank President Robert] Zoellick talking about using gold in a reform package, you are getting closer and closer. History is on my side.”



  26. Gravatar of scott sumner scott sumner
    22. December 2010 at 18:07

    Mark, I don’t know him, so I can’t comment.

    FEH, Yes, I am confused as to what Paul thinks the Fed should be doing.

  27. Gravatar of Full Employment Hawk Full Employment Hawk
    22. December 2010 at 23:07

    Ron Paul is opposed to the use of monetary policy, wants to abolish the Fed and tie money to a metallic standard, probably gold.

    I think you have a lot more in common with Paul Krugman than with Ron Paul.

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. December 2010 at 11:03

    Evidently you need to get out of the ivory tower once in a while. 😉

    Here’s my favorite article by Donald Luskin. Note both the content and the date:

    In his defense Luskin correctly called the gold market in the early 2000s. But given his track record on nearly everything else that’s not saying much.

  29. Gravatar of Scott Sumner Scott Sumner
    24. December 2010 at 17:14

    FEH, You are right about who I’m closer to on monetary policy–but not fiscal policy.

    Mark, Yeah, But I don’t get impressed even when people guess right. It’s all luck.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. December 2010 at 13:58

    I agree with you that correct predictions are mostly a matter of luck but on the other hand Luskin’s entire livelihood is based on making market predictions. Given his poor record its amazing that he still has a following.

    But I think the thing I found interesting about the WP article was, given Luskin was cheerleading just two days before Lehman’s went under, he seemed remarkably tone deaf. As the article itself points out polls showed a great majority of people thought the economy was on the verge of a major recession. The wisdom of masses.

  31. Gravatar of ssumner ssumner
    26. December 2010 at 21:15

    Mark, Good point; now if only the Fed had consulted the wisdom of the crowds. 🙂

  32. Gravatar of Not Everyone Saw the Recession Coming Not Everyone Saw the Recession Coming
    20. September 2013 at 09:57

    […] last thing: Now that you’ve read the above, just click on this. Come on now kids. Do you at least see why I continue on this thankless […]

Leave a Reply