Other fields are taking notice

Some liberals seem to believe that all the good progressive monetarists are dead, and that the conservative movement is left with nothing but austerian neanderthals.  But in other fields the influence of market monetarism is increasingly noticed.  Here’s an example written by Jeremy W. Fox and published in a journal called Ideas in Ecology and Evolution:

The above list makes the case that blogs are useful. But it doesn’t really do justice to the full potential of blogs to transform how ecology is conducted and communicated. In order to illustrate that potential, I next turn to an example from economics: an obscure economics blogger may just have saved the entire US economy.

His name is Scott Sumner, he’s an economics professor at Bentley University, and since 2009 he’s written The Money Illusion blog. He’s a macroeconomist, which means he works on the economics of entire countries, as opposed to the “microeconomics” of individual households or businesses. Like many macroeconomists, he started blogging in the aftermath of the 2008 financial crisis and the ensuing “Great Recession”.  Macroeconomists were mostly blindsided by these events; the broad consensus in the field had been that we knew enough macroeconomics to prevent such serious recessions from ever occurring. In response, many macroeconomists began debating and soul-searching about what caused the crisis, how policymakers ought to respond, and whether the foundations of textbook macroeconomics needed rethinking.

One very important US economic policy-making institution is the Federal Reserve, the US central bank. Very roughly, the “Fed” manages the money supply. When the economy is struggling, it reduces interest rates, thereby injecting money into the economy and spurring consumers and businesses to spend. But what can the Fed do if, as is the currently the case, interest rates are already as low as they can go (interest rates can’t go negative)? Until recently, most economists would have answered “nothing” or “not much”. On his blog, Scott Sumner answered “a lot”. His idea is that the Fed, instead of targeting interest rates, should engage in “nominal gross domestic product (NGDP) targeting.”  Very briefly and loosely, NGDP targeting attempts to change, not current interest rates, but expectations of future interest rates, on the grounds that economic decisions in the present often reflect expectations about the future (see The Money Illusion blog for details).  At the time Scott Sumner began blogging about NGDP targeting, it was far outside the economic mainstream, although not totally unheard of or without antecedents.  But over time, NGDP targeting started winning adherents. First, other, more widely-read economics bloggers. Then, some prominent non-blogging academic economists, of various political persuasions and representing various opposing schools of macroeconomic thought. Then Paul Krugman, a Nobel Prize-winning economist, New York Times columnist, and blogger. Then, a senior Federal Reserve official. Then Mark Woodford, perhaps the most influential academic macroeconomist in the world. And in September 2012 the Federal Reserve itself announced, in a break with previous policy, its plan to attempt something fairly close to NGDP targeting (precisely how close is the subject of some debate). In summary: in three years, a radical macroeconomics idea proposed by an initially-unknown blogger has come close to being adopted as the official policy of perhaps the most important economics policymaking institution in the world. For more on this history, see recent articles in The Atlantic (http://www.theatlantic.com/business/archive/2012/09/the-blogger-who-savedthe-economy/262394/) and Business Insider (http://www.businessinsider.com/who-is-scott-sumner-2012-9).

Unless you follow economics, it might be difficult to appreciate just how remarkable all this is. Here’s an imperfect but useful ecological analogy. Imagine that Steve Hubbell’s Neutral Theory of Biodiversity (Hubbell 2001) had not previously been seriously explored in evolutionary biology when it was first proposed. Imagine further that that ecologist who first proposed it was not the already-prominent Steve Hubbell, but someone little known, at an obscure university. Imagine that that ecologist didn’t publish Neutral Theory in a Princeton Monograph or a Nature paper, but in a series of blog posts. And imagine that Neutral Theory didn’t merely become a “hot” research topic (as it has), but within three years was widely accepted by academic ecologists and policymakers as the appropriate basis for national and international conservation policymaking, our best chance to reduce historically-high rates of species loss, and preserve vital ecosystem services.

Now, Scott Sumner’s example is an extreme case, and extreme cases are rare by definition. Most bloggers will never have that much influence, just as most scientists will never be extremely widely cited. It takes exactly the right combination of circumstances for an idea to go from blog post to Fed policy as quickly as NGDP targeting did. One of those circumstances is having lots of colleagues who blog. Blogging is central to how economists exchange ideas. Many dozens of economists, including many prominent senior economists, have blogs (see the compilation of economics blogs on Mark Thoma’s Economist’s View blog). Even economists who don’t blog themselves routinely read and comment on the blogs of others. It is this culture of blogging, not the remarkable influence of a single blogger, that really separates economics and ecology, and that would represent a fundamental transformation in how ecologists share ideas. So will this transformation ever happen? Will blogging ever become as central to the conduct of ecology as it now is to the conduct of economics?

Of course this greatly exaggerates my role and underrates the role of the other MMs.  They tend to be more modest individuals than I am.  For instance, we know from a footnote that Nick Rowe gave the author of this paper some advice, and yet he doesn’t really appear, despite the fact that he’s also been hugely influential in shaping the debate.  Canadians are not as self-promoting as us Americans.

PS.  I don’t want to discuss the specific content of the article.  He’s not an economist and obviously he isn’t expected to get all the nuances correct.  That’s not the point.

HT:  Peter Schwechheimer


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25 Responses to “Other fields are taking notice”

  1. Gravatar of marcus nunes marcus nunes
    13. August 2013 at 16:48

    “Even economists who don’t blog themselves routinely read and comment on the blogs of others. It is this culture of blogging, not the remarkable influence of a single blogger, that really separates economics and ecology, and that would represent a fundamental transformation in how ecologists share ideas. So will this transformation ever happen? Will blogging ever become as central to the conduct of ecology as it now is to the conduct of economics?”

    That was great! Ecologists wanting to emulate economists. And the economist´s ‘ecosystem’ is just, if not more, diverse!

  2. Gravatar of benjamin cole benjamin cole
    13. August 2013 at 17:21

    Kudos go Scott Sumner and all other MM”ers.
    One cavil: I didn’t know the Fed was onboard yet…

  3. Gravatar of OhMy OhMy
    13. August 2013 at 17:30

    How can you save the economy by not understanding that banks don’t lend reserves? Lack of understanding is rarely helpful, and even rarer it becomes salvation.

  4. Gravatar of TravisV TravisV
    13. August 2013 at 17:35

    Prof. Sumner,

    Hypothetical question: imagine if tomorrow, the Fed suddenly announced that it was committing to NGDPLT, an NGDP growth rate of 0% and it was subsidizing an NGDP futures market.

    Surely the unemployment rate would skyrocket in the short-term.

    But what would happen over the long-term. If the market absolutely believed the Fed’s commitment to the policy, would the U.S. economy reach full employment within ten years?

    And what would happen after that? Would the unemployment rate ever increase above 6% again? Why would it?

    I’m trying to get at the question of whether people would finally give up their resistance to nominal wage cuts if the Fed actually committed to 0% NGDP growth year after year after year.

  5. Gravatar of TravisV TravisV
    13. August 2013 at 17:36

    Obama to Senate Democrats: quit your lobbying, I’ll pick who I want as Fed chairman.

    http://online.wsj.com/article/SB10001424127887323446404579011190517262538.html

  6. Gravatar of Benoit Essiambre Benoit Essiambre
    13. August 2013 at 17:42

    I am a person of no importance but during my quest to get a general understanding of macroeconomics online, when I first encountered NGDP targeting I dismissed it as weird and silly. Then I read a few posts by Nick Rowe (I am Canadian) and you that were thoroughly convincing in making the case for it.

    I am now convinced that a monetary policy that would at least approach NGDP targeting would be the single most important thing the world could do to solve the problems of unemployment/underemployment (that we millennials are disproportionately facing) as well as many other economic and social ills.

    I feel like people should rise up to support it.

    Unfortunately I can’t seem to be able to spread the message as the reaction of most people who I manage not to bore too much with my wonkish tales is to be afraid of inflation and prices rising faster than their wages even if they are living with little money doing jobs that waste their skills and/or education.

    I really hope central banks figure it out by themselves because there is little hope for support from the general population.

  7. Gravatar of Greg Greg
    13. August 2013 at 18:09

    Scott, is your ego getting calloused from all that stroking. 😉

  8. Gravatar of Steve Steve
    13. August 2013 at 18:18

    TravisV,

    Obama to Plebeians: “I am Emperor!”

  9. Gravatar of ssumner ssumner
    13. August 2013 at 18:43

    Ben, I didn’t know either.

    OhMy, Repeat after me:

    Ask the bank for a $10,000 loan.
    After getting the loan ask to withdraw the money in cash.

    There, that wasn’t so hard, was it?

    In fact, over 90% of the money injected by the Fed prior to 2008 went to currency, less than 10% to bank reserves, so it’s not a far-fetched example.

    If banks want people to hold more cash (in aggregate), they simply make it less attractive to have bank deposits.

    Travis, I don’t know, but it’s a moot point as the policy would be quickly abandoned.

    And I’m through making excuses for Obama.

    Benoit, Thanks for trying. Somehow people think if prices might rise faster than wages under NGDPLT, they magically would not rise faster than wages under price level targeting. It’s a struggle to educate people.

    Greg, Good my ego needs to be toughened up.

  10. Gravatar of TravisV TravisV
    13. August 2013 at 18:59

    Verrrry interesting……

    “Jackson Hole Agenda Leaked”

    http://blogs.wsj.com/economics/2013/08/13/jackson-hole-agenda-leaked

  11. Gravatar of TravisV TravisV
    13. August 2013 at 19:36

    Prof. Sumner,

    Here is another way of asking the question I asked above about 0% NGDPLT:

    Which is more important (urgently needed): confidence in future NGDP stability or confidence that NGDP growth will always be positive?

  12. Gravatar of Benjamin Cole Benjamin Cole
    13. August 2013 at 19:40

    Bloomberg-OT but news—
    Lockhart Says QE Taper Possible at Next Three Meetings
    By Steve Matthews – 2013-08-13T19:15:16Z
    Federal Reserve Bank of Atlanta President Dennis Lockhart, who has backed the Fed’s $85 billion in monthly bond purchases, said policy makers may start to slow buying at any of their next few meetings amid “uneven performance” by the economy.
    “The first adjustments to asset purchases, when they occur, should be the beginning of a process with steps that will be determined as later information arrives and certainty about the direction of the economy accumulates,” Lockhart, who doesn’t vote on monetary policy this year, said today in a speech in Atlanta. “A decision to proceed — whether it is in September, October, or December — ought to be thought of as a cautious first step.”

    —30—

    And historians today confirmed that the FOMC was actually designed by Rube Goldberg’s evil twin brother….

  13. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. August 2013 at 00:49

    Apparently, not only ecologists are taking note, but the US Congress as well.

    If the Centennial Monetary Commission Act becomes law, Scott Sumner will likely need to make his case to a bipartisan commission tasked to chart the way forward for the Federal Reserve as described by Congressman Kevin Brady, author of that bill:

    “Advocates of different monetary regimes””discretionary policy, inflation-rate-targeting, price-level-targeting, nominal GDP-targeting, a gold standard””would have an open forum in which to make their case based on empirical evidence. After a comprehensive review involving our best monetary economists, the commission would make recommendations to Congress, as was done before the Fed was established.”

    http://online.wsj.com/article/SB10001424127887323477604579003203280099282.html?mod=opinion_newsreel

  14. Gravatar of TravisV TravisV
    14. August 2013 at 04:41

    Massive inflation everywhere!

    “Producer Prices Miss Expectations, Come In Flat”

    http://www.businessinsider.com/july-producer-prices-2013-8

  15. Gravatar of TallDave TallDave
    14. August 2013 at 05:02

    Of course, as you’ve pointed out for years, much of the basis for MM goes back to Friedman decades before, and Fisher long before that. Those were good ideas just waiting for an effective advocate.

    Nice find Vivian.

  16. Gravatar of Coleton Stirman Coleton Stirman
    14. August 2013 at 05:23

    Benoit,

    As a Millennial in Dallas, Texas I completely understand what you are saying. It has been a long hard slog to convince the young people of our generation (regionally & globally) that there is actually answers to what ails us, and to perpetuate the intellectual helplessness that pervaded the “West” through most of the back half of the 20th century (post WWII-Hiroshima)is counter-productive.

    And — like Mr. Sumner, I have problems with all this fatalism (although I think Scott’s is a more specific fatalism than the more general cultural “malaise” I’m speaking of; along the same road though) that runs rampant after extreme global events that we feel are out of our control, especially when the fed could have pulled 1 lever in their September 2008 meeting and mitigated the chaos.

  17. Gravatar of ssumner ssumner
    14. August 2013 at 05:31

    Travis, That’s hard to answer without knowing the alternatives. How much instability is the alternative? How low is NGDP growth? Etc.

    Everyone, Thanks for all the links.

  18. Gravatar of nickik nickik
    14. August 2013 at 05:37

    @TravisV

    I am somebody that in the long run would faver 0% target. But I think it would be horrible in the short term, that kind of shock therapy might be a bit to hard.

    My idea would be to have mathematical function of GDP growth, meaing something like we will grow 5% at first and every couple of years reduce the growth rate in a predefined way until it faltens out to 0%. Then just keep it 0% for ever. Then fire most of the people that work for the fed :)

    PS: Good idea for SciFi movie, this is is in place for a very long time and all knowlage of money leaves this world because of some collaps socity. People still use the money but dont know anything about NGDPLT. An then the computers who run this system shut down one ofter another and people are going creazy.

    Of course Isaac Asimov wrote that story but with nuclear reacters instead of a montary system. Still its a fun idea.

  19. Gravatar of Benoit Essiambre Benoit Essiambre
    14. August 2013 at 07:29

    >Thanks for trying. Somehow people think if prices might rise faster than wages under NGDPLT, they magically would not rise faster than wages under price level targeting. It’s a struggle to educate people.

    I don’t think that the problem is that people think NGDPLT would inherently make wages not rise fast enough, they don’t understand the difference enough to make that assertion. I think it’s that even though NGDPLT doesn’t call for inflation to be higher in the long run than price level targeting, it does call for more variability in inflation which would mean we need higher inflation in specific circumstances such as now. When I tell them that, it makes me seem to support price increases above what they are comfortable with and makes them afraid wages will have difficulty to follow.

    People get way too much comfort from prices never being allowed to rise very much and can’t seem to trust that real wages would eventually rise more than with price level targeting. In a way, I can understand. When a group spent a good amount of efforts negotiating their last contract, pulling the rug under their feet by devaluing the currency can be frustrating.

    I might be wrong but in my mind inflation when there is high cyclical unemployment shouldn’t be used to lower people’s buying power (unlike when trying to fix some kind of import/export imbalance) it should be used to prevent people, banks and businesses from hoarding cash and get them to put their savings into productive investments. Good inflation should be targeted towards eliminating money hoarders not suppressing real wages. What I want in the current situation is slightly higher inflation paired with upwards wage renegotiations.

  20. Gravatar of Steven Kopits Steven Kopits
    14. August 2013 at 09:00

    What a nice article by Jeremy Fox. There’s so much criticism in the blogosphere, and it’s refreshing to read something complimentary.

    I think some of the praise is actually deserved.

  21. Gravatar of ssumner ssumner
    14. August 2013 at 16:44

    Benoit, As Nick Rowe recently pointed out, the average inflation rate might well be lower under NGDPLT than IT.

    Steve, I agree.

  22. Gravatar of Brian Donohue Brian Donohue
    15. August 2013 at 05:16

    Obscure? Ouch.

    I want to second Benoit’s comment. Blogging has been very good for the economics profession. The back-and-forth produces progress in bringing the arguments to educated laypeople. It’s helped me get on board with giving this NGDPLT thing a shot.

    I’m a Friedman guy from way back. the term ‘MM’ threw me at first. More recently, you’ve been clearer about asserting your view as Friedmanesque. Anyone who doubts this need only read the great man’s 1968 paper.

  23. Gravatar of Scott Sumner Scott Sumner
    15. August 2013 at 10:48

    Thanks Brian.

  24. Gravatar of Bill Bradbrooke Bill Bradbrooke
    16. August 2013 at 07:49

    Funny, I had the same thought that Jeremy Fox had as I began to read TheMoneyIllusion last year. I recognize that many have contributed to MMism; nonetheless, many thanks, Scott.

  25. Gravatar of ssumner ssumner
    16. August 2013 at 21:37

    Thanks Bill.

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