How to tell who was right and who was wrong

David Glasner has a post that sharply criticizes Allan Meltzer’s recent WSJ op ed. Like Glasner, I greatly respect Meltzer’s work on monetary economics. But I’m afraid that David is correct in taking Meltzer to task for the editorial–it’s very disappointing. (However I wish he hadn’t used the term ‘corrupt,’ which is obviously not the issue here.)

David points out that Meltzer equates ultra-low interest rates with easy money, whereas Milton Friedman frequently pointed out that it actually means money has been tight. And he’s also correct in suggesting that rejecting the low rates = easy money equation is virtually the definition of being a monetarist. But I’d like to focus on a different part of Meltzer’s column:

Consider also how, in the summer of 2010, the Fed allowed itself to be spooked by cries about a double-dip recession and deflation. It added $600 billion to banks’ reserves by buying up federal Treasurys and mortgage-backed securities. Today, $500 billion of those reserves remain on bank balance sheets, and most of the rest of the dollars are held by foreign central banks. Not much help to the U.S. economy. By early autumn 2010, it had become clear that fears of a double-dip recession and deflation were just short-term hysteria.

Glasner criticizes the economics here, but this is also a basic failure of logic. If someone says “I’m really concerned about X happening, and therefore I will do Y to prevent it.” And then they do Y, and X does not happen, then the policy has been a success, not a failure. I see people make this logical error all the time, but I’m surprised to see it made by someone as bright as Meltzer.

And it’s even worse.  Back in 2009 Paul Krugman and I were highly critical of Meltzer’s claim that Fed policies would lead to high inflation. Here’s something I wrote in 2009:

One of the things I find most frustrating about this crisis is the way my intellectual allies on the right keep shooting themselves in the foot, and thus unwittingly tend to discredit their otherwise defensible ideologies.  More specifically they continue to warn of high inflation, which is about the last thing we need to worry about right now.  In my previous post I tried to provide a psychological theory for these bad forecasts.  But whatever the reason, when these predictions don’t come true it will (unjustly) tend to discredit both the good and bad parts of their theoretical apparatus.

A few weeks ago it was Allan Meltzer, now it is Arthur Laffer.

Obviously Krugman and I were right and they were wrong. But that’s not what concerns me now. If the field of economics is to have any credibility at all, then when two contrasting hypotheses are clearly tested by a policy experiment, the loser needs to admit that they lost. In mid-2010 the core rate of inflation had fallen to 0.6%.  At that point the Fed sent out signals that it was going to do QE2. The Fed claimed that QE2 would prevent deflation, but not result in high inflation. Meltzer and many others on the right warned of high inflation.

The Fed policy signals in late 2010 clearly boosted TIPS spreads, and thus we moved closer to the Fed’s inflation target. Yet both actual and expected inflation have remained low. Bernanke was unambiguously proved right—we avoided deflation without suffering from high inflation—and Meltzer was wrong. And the bond market says inflation is likely to remain low over the next 30 years.

It seems to me that old-style monetarism has reached a dead end. In the op-ed Meltzer sarcastically dismisses the stock market’s obvious preference for monetary stimulus in the period since AD crashed. I’d expect that sort of dismissal of important market information to come from the left, not from a school of thought that supposedly believes markets are much more efficient than government. When the markets disagree with the monetarists, the markets are usually right. When the markets disagree with the Keynesians, the markets are usually right. When the markets disagree with me, the markets are usually right. When the markets disagree with you (the reader), the markets are usually right. When the markets disagree with God . . . then it’s probably about 50-50.

What will replace old-style monetarism? Will it be Williamson’s “new monetarism,” or will it be “market monetarism?”


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55 Responses to “How to tell who was right and who was wrong”

  1. Gravatar of foosion foosion
    15. July 2012 at 07:59

    It’s amazing how little evidence appears to matter in debates about economics

    When your model disagrees with the market, you really should examine the model much more closely. The odds are the problem is with your model, not the market.

  2. Gravatar of dwb dwb
    15. July 2012 at 08:02

    yep, good post. even worse, Meltzer et. al. dont seem to account for the significant shift in IOR policy that is designed to prevent exactly the sort of inflation he predicts (SF president Williams has a nice recent post on this if you have not seen it). when the housing and construction market comes back will people mark there beliefs to market then? doubtful. when the world does not end on the date you predict, then you shift the date and the explanation.

    http://weeklyworldnews.com/headlines/26946/end-of-world-may-21-2011/

  3. Gravatar of ssumner ssumner
    15. July 2012 at 08:37

    foosion, I agree.

    dwb, Good point.

  4. Gravatar of Saturos Saturos
    15. July 2012 at 09:09

    If you had written that last big paragraph with “free market” instead of “markets”, you would have sounded exactly like Friedman (sometimes he sounded like he was delivering a homily from the Church of Capitalism).

  5. Gravatar of Greg Ransom Greg Ransom
    15. July 2012 at 09:10

    These aren’t genuine hypotheses — they aren’t two variable laws as you get in an a junior high physics textbook or baby Galilean mechanics.

    “hypotheses are clearly tested by a policy experiment”

    And nothing is ever “clearly tested” and there are no genuine “experiments” with fixed, isolated and limited two variable initial conditions.

    I thought we were going to stick with the up-and-up, Scott, and not do any BSing of people with stuff that is clearly BS.

  6. Gravatar of David Glasner David Glasner
    15. July 2012 at 09:16

    Scott, Thanks for your comment on my post about Meltzer. You may be right that “corrupt” was a bad choice of words on my part. A couple of commenters on my blog also chastised me for accusing Meltzer of asserting that a conspiracy of day traders was working with Charles Evans of the Chicago Fed to influence FOMC policy. I may have been too hard on Meltzer, but only as a result of indulging a bit too freely in my taste for irony, always a risky tactic. The “word” corrupt appears only in the title of my post which was (I thought obviously) just a word play on Acton’s saying “power tends to corrupt.” My only reference to Murdoch in the post itself comes at the very end where I wrote:

    “But I cannot help wonder why Professor Meltzer is so heedless of his reputation that he would allow his name to be attached to a piece of work so far below not just his own formerly high standards, but even below a standard of minimal competence. My only conjecture is that Rupert Murdoch is somehow responsible. Perhaps Murdoch has cast a demonic spell on Professor Meltzer. That seems as good an explanation as any.”

    I thought that what I wrote was written with my tongue firmly planted in my cheek.

    As for attributing to Meltzer a theory that the Fed was being controlled by conspiracy of day traders in cahoots with Charles Evans, that was just my way of mocking the first sentence of Meltzer’s op-ed in which he charged that the Fed was allowing its monetary policy to be influenced by elected politicians and speculators, and then proceeded to support that charge not with evidence but with his own assertion that after the latest disappointing job figures were announced day traders and speculators clamored for further easing by the Fed and had been joined by in that clamor by the president of the Chicago Fed. That seemed to me a ridiculous non-sequitur, and that is why I attributed to Meltzer a conspiracy theory involving day traders. But perhaps I should have resisted the temptation to mock Meltzer for that bit of silliness.

  7. Gravatar of Full Employment Hawk Full Employment Hawk
    15. July 2012 at 09:26

    Clearly Meltzer should now be descrived as a FORMER monetarist.

    He is one of a number of ideological conservatives who have turned their back on their previous work in order to promote the conservative party line that it is uncertainty about future tax rates, health-care costs, and the regulatory burden that are keeping the economy depressed.

    Many ideological conservatives see the current depression as a golden opportunity to get rid of things they do not like, such as taxes, health care reform, and regulations, by blaming these for the fact that we are currently mired in the depression. Accepting that the Fed has the ablility to end the depression and that its failure to do so is what keeps us in this depression undermines this strategy. This explains why market monetarism is getting little traction among conservatives.

  8. Gravatar of Full Employment Hawk Full Employment Hawk
    15. July 2012 at 09:30

    Scott, don’t apologize. Your post was right on.

  9. Gravatar of Full Employment Hawk Full Employment Hawk
    15. July 2012 at 09:31

    OOps:

    That should have been “David don’t apologize, your post was right on. Once again my failure to carefully proofread my posts has embarrased me.

  10. Gravatar of Full Employment Hawk Full Employment Hawk
    15. July 2012 at 09:51

    Meltzer’s argument that

    “By allowing its monetary policy to be influenced by elected politicians and market speculators, the Federal Reserve is putting its independence at risk.”

    is correct. But the reality is that to the extent that the Fed has let itself be influenced by politicians, it is that it has let itself be intimidated by Republicans, criticising it for doing too much and causing inflation, into not complying with its congressional mandate to achieve maximum employment.

  11. Gravatar of Major_Freedom Major_Freedom
    15. July 2012 at 10:11

    David points out that Meltzer equates ultra-low interest rates with easy money, whereas Milton Friedman frequently pointed out that it actually means money has been tight.

    When does this talking point become instances of fallacy of authority? I keep reading “Milton Friedman said”, “Milton Friedman said”, and yet I see no actual theoretical argument for why low interest rates means “money has been tight.” Nor is there any explanation on how far back in time one is supposed to look to see when money “has been” so tight.

  12. Gravatar of ssumner ssumner
    15. July 2012 at 10:15

    Saturos, Good point.

    Greg, When one guy says doing X will result in Y, and the other guy says doing X won’t result in Y. And you do X and get Y. They one guy was wrong. But then I haven’t studied as much philosophy as you have, so what do I know.

    David, I did sort of suspect that there was some tongue in cheek, but I think many people put a lot of weight on words in the title. I got in trouble for putting ‘ignorant’ and ‘Krugman’ into the same title once. Even though in the body of the post the pointed out that he was ignorant of conservative thought.

  13. Gravatar of Bill Ellis Bill Ellis
    15. July 2012 at 10:22

    If ignoring facts and sending your own work down the “memory hole” to support a world view held by the elite, “your side” and your employer is not corrupt then I don’t know what is.

  14. Gravatar of Full Employment Hawk Full Employment Hawk
    15. July 2012 at 10:27

    “I keep reading “Milton Friedman said”, “Milton Friedman said”, and yet I see no actual theoretical argument for why low interest rates means “money has been tight.”

    Read Milton Friedman’s research if you want to see the actual theoretical arguments. This site assumes that the people on it are familiar with Friedman’s research and his arguments for why low interest rates means “money has been tight.”

  15. Gravatar of Bill Ellis Bill Ellis
    15. July 2012 at 10:42

    Full Employment Hawk says…

    But the reality is that to the extent that the Fed has let itself be influenced by politicians, it is that it has let itself be intimidated by Republicans, criticising it for doing too much and causing inflation, into not complying with its congressional mandate to achieve maximum employment.

    I have come to the conclusion that is is more than that. I think Fed inaction, along with the European and American fetish for austerity is a result of stubborn elite group think. The elite convinced themselves that they were masters of the universe… that they had it all figured out…that more and more liberty for the elite and more and more punishment for the weak was the road to economic utopia.

    Now when all the facts point to the reality that too much liberty in the hands of the elite corrupts them, and that no matter how much the weak are punished thy will not be granted the wisdom to jump barriers…Cognitive Dissonance cripples their rationality.

    This crippling cognitive dissonance is everywhere among the establishment, infecting a majority …but it is almost universal on the establishment right.

  16. Gravatar of James in London James in London
    15. July 2012 at 11:35

    It’s hard to know where we will end up with this situation. There is widespread fear of there is widespread fear of the hugely increased central bank balance sheets. Instead of threatening to increase them further until confidence returns, in the UK, we are now going towards increased state control of the commercial banks via directives to increase lending. Not very free market, that.

    The fear of these large central bank balance sheets was expressed to me recently as a almost a “dam theory” of money. It looks safe now under the dam, but at some point a trickle, and then a burst and we will be swamped by hyperinflation. This is what Meltzer and MF and the ECB seem to fear.

    However, what I am beginning to fear government actions in desperately no or negative growth environments. Scott’s point that fear of the 1920s gave rise to the 1930s, both economically via the depression but in most countries politically as in hugely increased state control (and at worst, Facism and it’s ugly sister Stalinsim) should cause some real fear amongst free marketeers.

  17. Gravatar of marcus nunes marcus nunes
    15. July 2012 at 11:47

    Scott
    Even the famous Geoger Shultz falls into the ‘trap’:
    http://thefaintofheart.wordpress.com/2012/07/15/even-the-towering-george-shultz-gets-it-wrong/

  18. Gravatar of Major_Freedom Major_Freedom
    15. July 2012 at 12:19

    ssumner:

    Glasner criticizes the economics here, but this is also a basic failure of logic. If someone says “I’m really concerned about X happening, and therefore I will do Y to prevent it.” And then they do Y, and X does not happen, then the policy has been a success, not a failure. I see people make this logical error all the time, but I’m surprised to see it made by someone as bright as Meltzer.

    Speaking of failures of basic logic, Sumner just made an assertion that violates basic logic. He committed the logical fallacy called affirming the consequent.

    The fallacy has the following form:

    1. If P, then Q.

    2. Q.

    3. Therefore P.

    Sumner is claiming:

    1. If Y = money printing, then X = disaster avoided.

    2. X = disaster avoided.

    3. Therefore Y = money printing.

    The reason it is a fallacy, in short, is because there could be another cause for Q (and X), other than P (and Y), that was neglected.

    ————–

    Indeed, it is even possible that Y could have inhibited the actual working cause for why X was averted, in which cause “success” would have been even greater had Y never occurred at all.

    For example, if I said “I’m really concerned about “X = depression” happening, and therefore I will do “Y = mislead investors by printing money” to prevent it, then should X not occur, I cannot conclude that Y was a success. It could very well be the case that money printing inhibited recovery, and is why we are stagnating instead of in healthy prosperous growth that begins afresh after mass liquidations of malinvestment. But because money printing did take place, those malinvestments were not liquidated, and instead of a deep correction and quicker recovery, we have a stagnating “recovery.”

    ————-

    I don’t know what’s worse. The attitude Sumner adopts against anyone who even hints at skepticism against government “stimulus” in the form of money printing, due to blinders he has put on himself, or his blatant disregard for basic logic and thus hypocrisy of accusing those same people of committing logical errors.

  19. Gravatar of Bonnie Bonnie
    15. July 2012 at 13:07

    Certainly Meltzer should have provided reasoning behind his claim. But because he didn’t, he opens the door to speculation about why he might be going against his own scholarship. Unless he speaks up about it, it is doubtful we will ever know why, but I don’t fault David Glasner for making fun of such contradiction. I would expect nothing less than that regarding such baseless tripping around the bounds of reason by a respected intellectual from his peers. I do have one quibble with the use of the word “corruption,” however. I think that actually there is something bitter in the water and everyone, save for a few holdouts, has just gone stark, raving mad.

  20. Gravatar of TallDave TallDave
    15. July 2012 at 16:56

    “David points out that Meltzer equates ultra-low interest rates with easy money, whereas Milton Friedman frequently pointed out that it actually means money has been tight.”

    This has to be the most pervasive and insidious misunderstanding out there. I see it half a dozen times a week.

  21. Gravatar of TallDave TallDave
    15. July 2012 at 17:01

    BTW I thought I should add, as a right-leaning libertarian I tend to have some good-natured disagreements with conservatives on some things, and in my experience market-based arguments are intuitively attractive to conservatives:

    “I’d expect that sort of dismissal of important market information to come from the left, not from a school of thought that supposedly believes markets are much more efficient than government.”

    Not everyone will entirely agree with this kind of reasoning of course, but it tends to move the needle a bit.

  22. Gravatar of Marcus Mann Marcus Mann
    15. July 2012 at 17:13

    My view of the economy is that Keynes had it right (government – including the Fed. – can have a role in smoothing business cycles) – most of the time. But, there have be a few times where the changes in the economy are out of the norm. For example, government spending could not help the recession that was caused by OPEC pulling the plug on oil and causing the stagflation of the early 1980’s. I believe that this is one of those times. In most recessions, most of the unemployment is cyclical – related to the business cycle – in this case I believe that the unemployment is structural – that is the basic structure of the economy and of work has changed. There have been two previous times when the we have had to adjust to changes – in the early 1800’s when we improved farming to the point that rather than needing 75% of the people farming to support western societies, we moved to needing only three percent. The shift took a long time, but displaced farmers had to move to the factories and that took time. The next shift in the mid to late 1900’s (and still going on) – automation moved people out of the factories into service jobs. Now the third wave is happening very fast, computers are replacing people in the service industries (how many mid level accountants do we need any more…).

    The bottom line, I wouldn’t bet the farm on the effects of monetary policy when the cause of the recession is atypical. And, I would suggest that your “policy experiment” carried out during that atypical recovery will not yield valid results. Finally, once the economy works through the structural unemployment, we may very well return to a time when monetary policy returns the expected results.

  23. Gravatar of D.Gibson D.Gibson
    15. July 2012 at 17:35

    Dear Markus Mann,

    You seem to assert that Monetary Policy (specifically NGDPLT) can prevent business cycles. I don’t believe that advocates assert that. Instead, it is asserted that NGDPLT will produce optimal growth throughout any business cycle. It maybe be negative, but it will be the least negative compared with other policies.

  24. Gravatar of Major_Freedom Major_Freedom
    15. July 2012 at 18:12

    Marcus Mann:

    My view of the economy is that Keynes had it right (government – including the Fed. – can have a role in smoothing business cycles) – most of the time.

    What evidence is there for a free market that showed persistent unemployment and depressed output? Wouldn’t you need to observe a free market first before you can claim it needs government to “smooth” it? How do you know it is not government that is responsible for the business cycle?

  25. Gravatar of Benjamin Cole Benjamin Cole
    15. July 2012 at 18:15

    I hope it is Market Monetarism that prevails.

    Inflation is just not that important. If it is 2, or 3 or 4 or 5 matters little if real output keeps growing.

    As for suboptimal allocation of resources due to inflation–oh please.

    This is what we are afraid of?

    Nearly every good or service is highly differentiated by sellers anyway.

    I can’t tell if a $28k Ford is better or worse than a $25k Honda, and as for buying a house, medical services and insurance, lawyers bills, accountants bills, my new computer etc etc etc comparing by price is impossible. Auto repair anybody?

    Oddly, the few items I can compare by price —fruits, vegetables etc—vacillate in price quite a bit. Somehow I manage.

  26. Gravatar of ssumner ssumner
    15. July 2012 at 18:27

    James, Good point on that state control of lending; I was every critical of that a few weeks back.

    Marcus Nunes. It’s amazing how NOBODY understands monetary policy. (Except of course you and me and my other commenters. 🙂

    Bonnie, I agree that almost everyone has gone stark raving mad.

    TallDave, Good point.

    Marcus Mann, No the structural view has been discredited, it simply doesn’t fit the facts. The biggest part of the housing construction crash occurred between January 2006 and April 2008, and the unemployment rate was almost unchanged. You can’t get a business cycle like this out of industry-specific problem, you need the biggest NGDP crash since the 1930s–and we had it.

  27. Gravatar of Jacob AG Jacob AG
    15. July 2012 at 19:04

    “I see people make this logical error all the time, but I’m surprised to see it made by someone as bright as Meltzer.”

    It’s called “post hoc ergo propter hoc”: http://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc

  28. Gravatar of Major_Freedom Major_Freedom
    15. July 2012 at 22:10

    ssumner:

    Marcus Nunes. It’s amazing how NOBODY understands monetary policy. (Except of course you and me and my other commenters.

    It’s amazing how you don’t actually understand monetary policy but you feel compelled to believe you understand it anyway and thus contradicting your claim that you don’t believe any economic theory “is true.”

    I know you don’t understand the effects of monetary policy on economic calculation. It’s why you became attracted to and are still attracted to monetarist ideas. Those who understand monetary policy would not in a million years devote their intellectual lives in promoting it.

    Bonnie, I agree that almost everyone has gone stark raving mad.

    Yes, much like how slaves go stark raving mad for daring to tell the slave owners to stay away, even if it means the slaves having to adjust to freedom and actually experience the effects of their voluntary actions, instead of being controlled from cradle to grave and not learning the connections between actions and results.

    If any slave flounders in new found freedom, it’s allegedly justification for enslaving them right back up as soon as possible, because all pain is bad pain.

    Monetarism (and Keynesianism) are philosophical worldviews of children who don’t understand how to distinguish between good pain and bad pain, and whine to mommy and daddy at the first sign of growing pains.

  29. Gravatar of Major_Freedom Major_Freedom
    15. July 2012 at 22:43

    ssumner:

    Marcus Mann, No the structural view has been discredited, it simply doesn’t fit the facts.

    The structural view has not been discredited. It has simply been misunderstood and/or ignored. Case in point, your response to Marcus Mann.

    The biggest part of the housing construction crash occurred between January 2006 and April 2008, and the unemployment rate was almost unchanged.

    The structural view does not claim that the housing crash “caused” the recession! Goodness! The structural view is far more encompassing. It actually claims that the housing crash was but one symptom among many symptoms (including car company problems, construction problems, and durable goods problems) that was caused by prior money printing and the consequent misleading of investors.

    The reason we’re here talking about a housing bubble is because the Fed reinflated quickly enough to stave off large collapses in other sectors. If the Fed acted like they did in 1920, in 2008, then we would have been here talking about a housing bubble, a car bubble, a commercial real estate bubble, an education bubble, an automotive bubble, and all sorts of other bubbles.

    But because the Fed reinflated, shallow positivist intellectuals who attack the structuralist view have mistakenly concluded that the problems were isolated to housing.

    You can’t get a business cycle like this out of industry-specific problem

    The structuralists don’t claim the recession was caused by problems in housing only!

    It would help things if you did your homework regarding the structural view because you choose to attack it. You know, the same advice you constantly give to attackers of NGDP theory and additional monetary stimulus?

    you need the biggest NGDP crash since the 1930s-and we had it.

    That’s the NGDP theory that doesn’t fit economic science.

    NGDP crashed for the same reason housing corrected, for the same reason construction corrected, for the same reason durable goods corrected, for the same reason employment across the economy corrected.

    You are inferring causality where there isn’t any. The market collapsed NGDP, NGDP declining did not collapse the market. The state didn’t force people to reduce their spending and seek higher cash balances. The market process decided this.

    NGDP collapsed because the market deemed it was too high. Why did the market deem NGDP to be too high? Because the market realized there were too many errors in investment and thus in production to justify higher spending.

    If I suddenly realized that my investments are a wasteful pile of junk, then who would be so crazy to claim that my choosing to hold more money and spend less money, is somehow the failure of the Fed? Should the Fed have bought my investments too? Did the Fed “fail” because they failed to buy my investments at necessarily higher than open market prices? Or is it just the junk investments of the primary dealers that the Fed can “fail” to buy?

    —————-

    You market monetarists have it all wrong. You just don’t monetary policy because you don’t grasp economic calculation, and you don’t grasp economic calculation because you don’t understand the praxeological foundation of money and spending. So you end up making absurdly contradictory claims all the time.

  30. Gravatar of Major_Freedom Major_Freedom
    15. July 2012 at 22:49

    ssumner:

    James, Good point on that state control of lending; I was every critical of that a few weeks back.

    God I hate ideologues. The UK has some state control of lending, deal with it. You should work with what you have, not practice scorched Earth and put all those workers dependent on state control of lending out of work.

    Too bad you’re not very critical of state control of money production.

  31. Gravatar of Saturos Saturos
    15. July 2012 at 23:30

    Jacob AG, more like post hoc ergo non propter hoc.

    Scott, MF’s actually got you there. Of course what you meant to say was that although this alone doesn’t prove the policy was successful (the proof is in the entire blog), it’s still the case that Meltzer’s reasoning was terrible.

  32. Gravatar of Major_Freedom Major_Freedom
    16. July 2012 at 00:33

    Saturos:

    Scott, MF’s actually got you there. Of course what you meant to say was that although this alone doesn’t prove the policy was successful (the proof is in the entire blog), it’s still the case that Meltzer’s reasoning was terrible.

    Don’t you mean “should have said” instead of “meant to say”?

    A: “The world is flat.”

    What should B say:

    B: “Of course what A meant to say is that the world is an oblate spheroid.”

    or

    B: “Of course what A should have said is that the world is an oblate spheroid.”

    ???

  33. Gravatar of James in London James in London
    16. July 2012 at 04:37

    MF … please answer the question: what would you do if you were running a free market provider of money and there was a big demand or supply shock in the economy?

    Stop ranting about state control of money. Many of us here, me included, many modern Austrian economists, and also Scott in previous posts supports privatising money. It doesn’t change the question, though.

    What would you do if you were the main provider of money in an economy beset by a big demand or supply shock?

  34. Gravatar of Endrit Endrit
    16. July 2012 at 06:22

    @James in London,

    dude don’t feed the troll. There is a reason no one answers to the guy.

  35. Gravatar of James in London James in London
    16. July 2012 at 07:17

    Is this better? Zerohedge complaining about possible cuts in IOR moving markets (up).
    http://www.zerohedge.com/news/note-has-led-modest-if-transitory-bounce-market

    The move to zero IOR in Europe is leading to massive buying of 2yr bonds, Netherlands now joined Germany at -ve yields, France going same way.

  36. Gravatar of Greg Ransom Greg Ransom
    16. July 2012 at 07:49

    Scott, you’ve got to have “always and everywhere according to law X given the known initial conditions z and y and no others” to have a hypothesis subject to test.

    You don’t have that. You can’t have that.

    And it’s not even close.

  37. Gravatar of Greg Ransom Greg Ransom
    16. July 2012 at 08:22

    Getting clear on what the properties of testable, lawful claims must be is a problem internal to economic science — get that wrong, or bluff your way using language borrowed from other sciences or from logicians/philosophers and your ‘science’ is going to produce FAIL.

    Pretending that this topic is external to economic science won’t cut it, even if it is fun to make light of professional colleagues in other departments who’s work you have no genuine familiarity with, mostly do to matters of taste and professional monetary self interest in terms of time allocation.

    Being better from a scientific and explanatory perspective in your own field by having deeper competence in related fields simply has a negative cash reward within economics — producing better, more well founded science & better, more well founded explanations simply isn’t professionally or financially rewarded in economics.

    The game is to be clever developing the math “tool kit” — no matter that this is producing more epicycles on failed explanatory and ‘predictive’ strategies.

    That is what pays in terms of money and status, so that is what the profession produces — ever more higher piles of it.

    You can play Humpty-Dumpty all day, calling something which isn’t a “hypothesis”, and then claiming that only silly philosophers worry about using a sound & functional concept, rather than a pretend, incoherent concept with is incapable of doing the job it is pretended to be doing.

    Let’s not tell fairy tales, lets be accountable to fact.

    All sorts of events were taking place that make the ‘initial conditions’ of the recent episode unique, i.e. non-universal — the fiscal house of cards in Europe, the fiscal house of cards in city, state & local governments around the country, the fact that the Fed chose to pay interest on reserved. And that is just touching the surface.

    if every historical episode is packed with countless unique causal elements — and untold numbers that are unknown, unknowable, and related in uncountable and unknowable ways, and across a non-fixed, essentially unknowable time horizon. If you don’t have a fixed testable hypothesis involving two variables, a simple law, and a simple outcome.

  38. Gravatar of ssumner ssumner
    16. July 2012 at 09:31

    Jacob and Saturos, It’s been 40 years since I took Latin, so I’ll take your word for it.

    Greg, Do we need to show it works in all universes, or just this one?

  39. Gravatar of MkeC MkeC
    16. July 2012 at 12:38

    Scott,

    As a moderately left wing (and recently more sympathetic) reader of this blog. I think the frame of the discussion is a bit ‘off center.’ I feel most of the ‘left-wing’ economist would concede that values and incentives are very important (just look at Brad Delongs Weberian take on so many issues over the past 10 years). Its just that to a large extent there is some selection bias going on in what people are choosing to argue about (as Nick Rowe has recently blogged).

    I haven’t seem many spirited attempts recently by left wing economists to significantly discount the importance of values and culture per se, more so just in comparison to other macro factors.

    I think a certifiable left-wing economics would struggle with how economic inequality distorts the way incentives are distributed and how difference in values are rational responses to that kind of lumpiness in ‘incentive-space.’ I’m not seeing much of that in economics (anymore!?) but I’d be curious if you are.

  40. Gravatar of Federalism Under the Microscope | Politics In Vivo – Political and Cultural Commentary, and Whatever Else… Federalism Under the Microscope | Politics In Vivo - Political and Cultural Commentary, and Whatever Else...
    16. July 2012 at 13:12

    […] sky-high inflation after the Fed’s various monetary easing programs, economist Scott Sumner writes that it’s time for them to fess up: If the field of economics is to have any credibility at […]

  41. Gravatar of Major_Freedom Major_Freedom
    16. July 2012 at 17:20

    James In London:

    MF … please answer the question: what would you do if you were running a free market provider of money and there was a big demand or supply shock in the economy?

    A “demand shock” simply means that other people have decided to spend less money than they did in the past.

    What would I “do”? The same thing you do when it happens in our non-free market in money society: I deal with it.

    The question however is how will individuals in general deal with it. I don’t see why in a free market money standard everyone, or most people, will suddenly reduce their spending from what it was in the recent past. Even if they did, then just like there would be a process of adjustment in the case of a “shock” whereby people decide to spend more money and attempt to hold lower cash balances, so too there would be a process of adjustment in the case of a “shock” whereby people decided to spend less money.

    Where in the world is there justification for anyone, given a free market in money production exists, to point guns at people, so that money production becomes monopolized by the state?

    Stop ranting about state control of money. Many of us here, me included, many modern Austrian economists, and also Scott in previous posts supports privatising money.

    Stop ranting? I’ll stop ranting as soon as you guys all put your money where your mouths are, and stop paying lip service to free markets and become an intellectual fighter for them. Free markets won’t happen if everyone thought like you did.

    It doesn’t change the question, though.

    What if in a free market of food production, people suddenly reduced their food production by half? Should we rabble rouse and point guns at people to get the state to monopolize food production?

    What would you do if you were the main provider of money in an economy beset by a big demand or supply shock?

    I won’t know until it happens, because there will be other factors that will be present that could be used in my decision criteria. You’re asking me to play God and to give you answers here and now, before it happens. That isn’t fair.

    It would be like us living in a communist society, and then I proposed to you that maybe car production should be done in economic freedom according to private property rights. Then, you demand right there and then to have all your questions answered on how cars will be produced, who will produce them, where, what will I do if the production of iron and oil incur an unexpected reduction, and so on. I cannot possibly tell you what would happen. I will say “Let’s try freedom and see what happens!”

    Endrit:

    @James in London,

    dude don’t feed the troll.

    I am not a troll.

    There is a reason no one answers to the guy.

    Yes, and the reason is that you’re all following Sumner’s plea.

    I don’t care if nobody ever responds to me ever again on this blog. I am not here to convince dogmatists who can’t be convinced by reason. This is for the benefit of others such as James, who you are totally disrespecting his intelligence by you wanting him to take your troll assertion on faith.

  42. Gravatar of Razer Razer
    16. July 2012 at 22:37

    Would it be fair to say almost everyone on this blog is pro central economic planning? Given it’s terrible track record, can you tell me why? And why isn’t anyone but MF and a few others for allowing people to choose their own money freely?

  43. Gravatar of Major_Freedom Major_Freedom
    17. July 2012 at 05:13

    Would it be fair to say almost everyone on this blog is pro central economic planning?

    They’ll of course deny it, because they “only” apologize for central economic planning in money and interest rates. Yet they believe in central planning in principle.

    Given it’s terrible track record, can you tell me why?

    It’s because socialist-minded people (like all people) have an egoist drive. They believe that the track record has been abysmal because the wrong people were put in charge, and that only if “better” people were put in charge, it will finally work, or at least improve to a substantial enough degree to warrant the efforts of the socialists. And what makes a central planner a “better” central planner? Not surprisingly, they are someone who abides by the rules and orders set about by socialist-minded person themselves.

    And why isn’t anyone but MF and a few others for allowing people to choose their own money freely?

    Fundamentally, it is because they believe laissez-faire capitalism is immoral.

    Thus the left considers the free market as an unnatural uprising of elitists with sinister intentions who either steal wages or cut into the standard of living of the middle class, and thus smash caregiving. The right considers the free market as an unnatural uprising of low-class immoral anti-Americans who either steal jobs or cut into the high profits and status of established patriots, and thus smash order.

    Left. Right.

    Caregiving. Order.

    Mommy. Daddy.

    Without household central planners, nobody will take care of the children, and nobody will instill discipline in the children. The children will either die of starvation or become immoral savages.

    Socialist minded intellectuals are people who may have an adult’s body, but they have a child’s mind.

  44. Gravatar of James in London James in London
    17. July 2012 at 06:55

    MF
    I can look after myself. But I worry about you.

    You know you may actually agree with Scott, as you say it depends on the circumstances at the time that cause a shock to aggregate demand that would make you decide on your monetary policy. I think it is fair to ask that question, and that is exactly what is debated here, these circumstances now call for what action now?

    What I think you are really worrying about is the old question of whether it is a good tactic to help the state run better. Or whether, by improving the working of a state organisation, you may just entrench it. I think that is worth debating. But perhaps not here.

  45. Gravatar of Major_Freedom Major_Freedom
    17. July 2012 at 07:39

    James in London:

    I can look after myself. But I worry about you.

    Given what you said below, I think you’re really worrying about yourself through me.

    You know you may actually agree with Scott, as you say it depends on the circumstances at the time that cause a shock to aggregate demand that would make you decide on your monetary policy.

    Actually no, because I am certain about the folly and immorality of pointing guns at innocent people so that they are no longer “allowed” to produce their own money. I am certain about the folly and immorality of central planning.

    When I said I would consider the circumstances at the time, I didn’t mean all options are on the table anything goes. I recognize constraints, both logical and ethical, which filter out what I consider to be nonsense. Within those constraints, I will take into account the circumstances. Just like I don’t go out and murder passerby for not buying what I am selling. I will deal with the circumstances of having a reduced sales in a market oriented way.

    I think it is fair to ask that question, and that is exactly what is debated here, these circumstances now call for what action now?

    Abolish the Fed, advance to a free market in money production. That is within the constraints I mentioned above.

    What I think you are really worrying about is the old question of whether it is a good tactic to help the state run better.

    “Better” according to what standard?

    Or whether, by improving the working of a state organisation, you may just entrench it.

    “Improve” according to what standard?

    Discussing such a standard is typically not done, because it tends to lead to discomfort in how a person thinks of themselves, and how the person thinks others think of them, due to the beliefs they have come to expect are right.

    “Pragmatists” are just those who are too embarrassed to come right out and say “I support gang G pointing their guns at you and all others I don’t sanction, to threaten to throw you in a cage, and if you resist, even to kill you, so that only the state can manage the money supply and interest rates.”

    ————–

    What I am actually worried about is the belief that the state can make me and every other individual better off if only it changed how many times it presses CTRL-P on their primary dealer account PC screens, according to some arbitrary rule cooked up by armchair wannabe central planners who have nothing else better to do than work for said people, intellectually, emotionally, and financially.

    I don’t have any of the secret embarrassing “Oh my God now what do I do, the state is more efficient!” kind of mentality you’re inferring. Far from it. In fact, I actually have a secret embarrassing “Yes, please try to make the state run “better” according to some arbitrary standard, as it will only hasten its demise.”

  46. Gravatar of Major_Freedom Major_Freedom
    17. July 2012 at 07:41

    By “pragmatists”, I of course refer to those on this blog.

  47. Gravatar of Jason Odegaard Jason Odegaard
    17. July 2012 at 14:19

    Does a free market in money require the absence of a state?

  48. Gravatar of Sina Motamedi Sina Motamedi
    17. July 2012 at 16:38

    “When the markets disagree with God . . . then it’s probably about 50-50.”

    I’m going to start using that in daily conversations.

  49. Gravatar of ssumner ssumner
    17. July 2012 at 16:59

    MkeC, As I tried to emphasize, these are a matter of degree, not an either/or situation.

    Razer, I hope for your sake that’s a joke. We already have one MF around here.

  50. Gravatar of Olivier Braun Olivier Braun
    18. July 2012 at 01:57

    Dear Prof. Sumner,

    You faulted Allan Meltzer’s logic when you wrote “Glasner criticizes the economics here, but this is also a basic failure of logic. If someone says “I’m really concerned about X happening, and therefore I will do Y to prevent it.” And then they do Y, and X does not happen, then the policy has been a success, not a failure”.

    But what A. Meltzer meant (I think, according to the quote you provided) was that to avoid a deflation, the Fed “added $600 billion to banks’ reserves by buying up federal Treasurys and mortgage-backed securities”, but that that policy was not the reason why the deflation was avoided, so he could think that the “fears of a double-dip recession and deflation were just short-term hysteria”. His explanation for the fact that the deflation fear was hysteria is that the new money was not spent but (“$500 billion of those reserves remain on bank balance sheets, and most of the rest of the dollars are held by foreign central banks”.) hoarded. That means it didn’t avoid the deflation (the policy was in that sense not a success as you wrote) the fear of which he could label as hysterical.

    I don’t think his logic is faulty. I mean, considering the quality of Allan Meltzer, I would interpret him the best way possible. Don’t forget also that it was an op-ed with limited space to take pain to explain his points. That is also in substance what I wanted to say in commenting Dr Glasner’s post on the subject. By the way, in a response to a comment of mine he advised me to read you blog to see a real work-alcoholic.

  51. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. July 2012 at 03:28

    JL, Yes, that comes closer to the original intent, I think. The full quote was:

    “Der Menschenfreund kann den Unterschied von Politik und Nichtpolitik ueberhaupt nicht anerkennen. Es gibt keine Nichtpolitik. Alles is Politik.”

    In other words, even if there would be a difference between “politics” and “non-politics”, as a practical matter we are unable to draw that line (unless perhaps one excludes non-philanthropes from “we”, but I don’t think that was the point).

    That’s at least what Mann’s character Settembrini seemed to think, (which is not necessarily what Mann thought). I suspect Settembrini, and perhaps even Mann, would argue that “I’m a pragmatist” is, in itself, a political statement.

    But, the main point of my comment was that economics is political—no, economics is *very* political and more so today than ever— whether one believes *everything* is political, or not. When you frame the issue, as here, as one between “left and right”, it strikes me that that is a proposition that is pretty difficult to deny.

  52. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 13:35

    Jason:

    Does a free market in money require the absence of a state?

    Consider the state as a gang of thieves writ large, and a free market in money as individuals being uncoerced and free to choose whatever money they want, and you’ll see why although it is possible for the two to coexist, it is very difficult for the gang to thrive if they can only take money from others as they become more and more prosperous and able to defend themselves more and more against the gang.

    If the gang can succeed in coercing others into handing over paper notes the gang issues, or the money their banking friends issue, even if others trade in commodities other than the gang’s paper notes or the bank’s paper notes, then you can see why banking and statism have historically been so interwined, and it is also why, hopefully, you can see how dangerous it is for states to have a monopoly in money, and as a corollary, why it is economically destructive.

  53. Gravatar of Eric G Eric G
    18. July 2012 at 20:14

    you said, “I greatly respect Meltzer’s work on monetary economics. But I’m afraid that David is correct in taking Meltzer to task for the editorial-it’s very disappointing. (However I wish he hadn’t used the term ‘corrupt,’ which is obviously not the issue here.)”

    You should definitely check in with your university’s poli sci department because your political analysis is almost always wrong. Remember when you told me Romney made huge cuts to mental health because the dems let him? Yeah, you seemed to not have any idea about the line item veto.
    Here you think somebody who has been respected hasn’t been lured by promises of cushy jobs by republicans, why? C’mon, he’s been corrupted, nobody posts such a stupid post if it weren’t for some other ulterior reason.
    Just like your boy Tyler Cowen writing about health care economic zombies, it’s just to repeat GOP talking points.
    Do you want another example? Greg Mankiw posting statutory corporate taxes on his blog with no explanation, now he’s Romney’s adviser. Grow up.

  54. Gravatar of ssumner ssumner
    19. July 2012 at 08:06

    Olivier, That makes no sense. If he thought QE did nothing, why would he claim QE will cause high inflation? If he believes it will cause higher inflation, that means it must have reduced real interest rates, right?

    Eric, You really are a complete idiot. You really think an 85 year old man who is very frail and weak would be angling for a plum job in DC?

    Second, You do realize that they guy who criticized Cowen had to write a follow-up admitting that Cowen hadn’t said the things he claimed Cowen said.

    Third, And regarding Mankiw, “now he’s Romney’s advisor?” He’s been his adviser for years.

    Fourth, The Dems could override Romney’s veto whenever they wanted. Do you know anything about Massacuhusetts politics?

    You seem like the classic case of someone who’s regressed in intelligence after reading too much Paul Krugman. The world’s just good guys and bad guys with white hats and black hats. It’s all very simple in your mind. Tyler Cowen? Just a corrupt ideologue who never strays off the reservation. This is your brain on politics. . . Very sad.

  55. Gravatar of Olivier Braun Olivier Braun
    19. July 2012 at 22:44

    Prof. Sumner,
    Why does it not make sense ? If the Fed buys for $600 billion assets, it adds that much to the money supply. That money could either be spent, via loans to the economy, or kept in excess reserves by the banks for example. In case one, it would affect the price level, wouldn’t it ? By avoiding the feared deflation for the Fed, by igniting inflation for A. Meltzer.
    Neither did happen, because the banks hoarded $500 billions and $100 billions went overseas (case 2, unexpected by both Allan Meltzer and the Fed).
    Considering the hoarding, A. Meltzer was wrong about the inflation he expected, an he admitted that much and explained the fact in the quote you provided. But considerind the hoarding, the decrease in V, the rise in M couldn’t have any effect on P, thus A. Meltzer could say that the fact that P didn’t fall was proof that the deflation fears were unjustified.
    Isn’t that what Allan Meltzer meant in the quote, and isn’t that logical ?

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