A decade later
I began this blog 10 years ago today, although my crusade to change monetary policy first began in the fall of 2008. In my first blog post I laid out my goals:
A blog is not the place for a lengthy dissertation, and so here I’ll merely list three views that underlie my unusual take on the current recession:
Premise 1: The only coherent way of characterizing monetary policy as being either too”easy” or “tight” is relative to the policy stance expected to achieve the central bank’s goals.
Premise 2: “Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.”
Premise 3: After mid-2008, and especially in early October, the expected growth in the price level and nominal GDP fell increasingly far below the Fed’s implicit target.
In plain English, the first premise means the Fed should adopt the policy stance most likely to achieve its goals. It is a point forcefully advocated by Lars Svensson, who Paul Krugman recently cited as an expert on the role of expectations in monetary policy. The second is a quotation from Mishkin’s best selling monetary economics text (p. 607), i.e. it’s what we have been teaching our students. And I have encountered few if any economists who disagree with my third assumption. Indeed, if this were not so, why would Bernanke be calling for fiscal expansion?
The logical implication of these three premises is that the Fed has the ability to boost nominal growth expectations, and if they let those expectations fall far below target (as they did last fall) the subsequent recession (depression?) is their fault. Why does almost no one else see things that way? That’s what I’d like to explore.
So where do we stand today? To me, it looks like one of those glass half full/half empty situations. I see lots of good things and lots of room for further progress. Let’s start with the good—changes that are in line with what I was discussing in early 2009:
1. After a steep recession in 2008 and early 2009, the growth rate of nominal GDP has been reasonably steady over the past 9.5 years. I expect this to continue.
2. There is greatly increased interest in NGDP targeting, as well as level targeting.
3. There is a greater awareness of the fact that the Fed is not out of “ammunition” once rates hit zero.
4. There is greater awareness of how asset prices provide useful information on the stance of monetary policy.
5. There is greater awareness of the importance of not reasoning from a price change.
6. There is greater awareness that monetary offset must be considered when thinking about economic shocks.
7. There is greater awareness that money was too tight in 2008.
8. There is greater awareness that the Fed should not have begun paying positive IOR in October 2008.
9. There is greater awareness that central banks can pay negative interest on bank reserves.
10. There is greater awareness of the importance of forward guidance.
Now let’s think about where we’ve fallen short:
1. NGDP growth was far too low during the years after 2009.
2. The Fed has not formally adopted NGDP targeting and/or level targeting.
3. We still don’t have a highly liquid NGDP futures markets (such as my “guardrails” proposal.
4. The profession still has not embraced the belief that tight money caused the big drop in NGDP during 2008-09.
5. There is still too much of a tendency to equate low rates and/or QE with easy money.
6. There is still too much faith in fiscal policy, too little awareness of monetary offset.
7. The forward guidance we do have is not as “data dependent” as it should be.
This is my 3882nd post and I’ve read almost all of the 160,270 comments. I don’t know how many total hits (WordPress is now so complicated I can’t really use it effectively.) But I’d guess close to 10 million hits, as I’ve averaged several thousand per day (trending lower over time.) The biggest day I recall was about 39,000 hits. Probably 10,000 unneeded commas.
All good times must end and the golden age of economics blogging is certainly over. But I’ll keep going. The next three years will be more interesting than the past three years because something unusual will definitely happen to the macro economy. Either our first successful soft landing (my guess), high inflation, or recession.
Thanks for your support.
Tags:
2. February 2019 at 10:25
Well done. This and SSC have been my favorite blogs for years now.
2. February 2019 at 10:51
Keep up the good work. Your perspective has been very influential to me, even if I don’t always agree with you.
2. February 2019 at 11:21
Scott — No idea where I’d be today if you hadn’t started blogging. Thank you.
Join the revolution on Twitter!
2. February 2019 at 11:53
Even though I took some undergrad macroecon courses, my understanding of the subject didn’t really begin until I started reading this blog in 2009.
Thanks for taking the unusual amount of time you spend to communicate to non economists.
As I’m sure you know, you’ve helped move discussions over monetary policy in the right direction.
2. February 2019 at 12:01
Like the previous commenters, I too enjoy your blog and find it very valuable.
Would you explain (briefly) Premise 2: “Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.”
What would you have the Fed do when interest rates are near zero but the economy is weak? Are you making the case for QE?
2. February 2019 at 12:16
Everyone, Thanks.
Russ, There are actually two answers:
1. By far the best option is to change the policy target to NGDPLT.
2. If the Fed insists on sticking with inflation targeting, then do enough QE to raise market expectations of inflation up to 2%—no matter how much QE it takes.
2. February 2019 at 12:18
Happy blogiversary! (and apologies for using that atrocious word)
2. February 2019 at 12:20
This blog has been the first page I pull up on my 15 minute red line trip to work every day for the past 7 years or so. Thank you for continuing my education and interest in these topics.
2. February 2019 at 14:13
Thanks, can’t believe it’s been a decade.
You taught me so much.
2. February 2019 at 14:30
Scott, you’re the best—10 great years!
But this isn’t quitte true: “The only coherent way of characterizing monetary policy as being either too ‘easy’ or ‘tight’ is relative to the policy stance expected to achieve the central bank’s goals.” One could define these terms relative to the policy stance expected to achieve the goals that the central bank *ought ideally* to have adopted.
2. February 2019 at 14:33
Nice. Keep standing up to the CW, Scott.
2. February 2019 at 14:40
“our first successful soft landing”
Do we ever know when we’ve had a successful soft landing? For example, unemployment rate has been pretty steady around 4% since mid-2017, and inflation expectations have seemed well anchored. Does that mean that the Fed has successfully engineered a soft landing (so far)? They could have caused a recession (hard landing) or unleashed inflation over that last few years, but they didn’t.
2. February 2019 at 15:05
Congrats Scott!
2. February 2019 at 16:17
Well done that man! 🙂
2. February 2019 at 16:56
I’ve read 3,882 Scott Sumner blogs?
Egads.
Keep an open mind to money-financed fiscal programs, and if we can’t get NGDPLT then maybe a 2% to 3% inflation band target is good enough.
2. February 2019 at 17:18
And thank you for your support.
Progress has surely been made, but the “battle” is still uphill.
That shows up in quotes such as this one:
“The challenge is putting this advice into practice. After all, the Fed’s preferred price index has grown just 1.5% a year since the start of 2010 and remains below the target range. If Fed officials knew how to make prices rise faster, they would have done so already.”
https://www.barrons.com/articles/the-fed-believes-that-it-need-not-raise-rates-much-further-51549065931
2. February 2019 at 18:26
Thank you for teaching us about monetary policy in the last ten years. I personally have learned a lot. And your blog is definitely one of the reason why I want to be in economics journalism. You changed my life, and I can’t thank you enough.
2. February 2019 at 20:18
Congratulations Scott, and like many others, I want to thank you for teaching me so much through your posts – predominantly, but not only on macroeconomics.
I studied undergrad macro in the early 1990s, but I suspect as is the case for most people, that was a pretty odd experience: 2 semesters of IS-LM followed by 2 semesters covering a smattering of RE models (eg Dornbusch overshooting, Lucas ‘surprise’ AS, and various fixed-price and multi-period fixed-wage models). I thought I knew something but whenever it came to assessing real-world events, I didn’t have a clue – and that was despite being a good student. Certainly when the 2008 crisis came, I was no better-placed than anyone else to know how to think about it or what should happen.
You’ve explained things so simply and well with your stylised facts and musical chairs model. Early on, I found your posts a bit short on ‘concrete steppes’, but over time and in conjunction with reading Nick Rowe’s posts, I picked things up. Now, I feel a lot more confident (probably over-confident!) when processing some event on the Australian scene such that I can come to my own view and happily dismiss what most market economists and economic journalists say on the matter. Although it has nothing to do with my work, gaining this sense of understanding of macro has been extremely satisfying to me – highly ‘meaningful if you like – and I cannot overstate how much gratitude I feel for this. It might sound corny, but as a practising microeconomist, having some understanding of macro has made me feel like a ‘whole’ person – or at least a whole economist – rather than one of those microeconomists who dismissively and naively roll their eyes when some macro issue comes up, as it have done a lot more over the last decade.
Also, your posts on inter-country economic growth and measuring changes in the standard of living, capital taxation, education, films and more recently the Ted talks have all been extremely educational and/or thought-provoking. They have all changed the way I think about things.
While I now comment less on your posts, I still read every one of them (except perhaps the Trump ones, which might get a quick skim!!).
2. February 2019 at 20:38
If a hard Brexit happens, will the activity associated with it boost NGDP and increase inflation in the U.K. and/or Europe in 2019?
3. February 2019 at 03:14
Let me echo my thanks to to others above. I started reading the blog in 2008 after Tyler Cowan linked to it and pretty much every post has been great (apart from the ones on Utilitarianism!). I hope you can keep going for at least another 10 years. Your ideas and explanations are gradually getting through so persevere.
3. February 2019 at 04:51
The whole “monetary offset” idea is nonsense. It’s the idea that fiscal stimulus will be ineffective if the central bank decides inflation is looming and that fiscal stimulus needs to be negated. Well obviously.
On the other hand if the central bank thinks some form of stimulus is necessary, then it WONT “offset”, in which case fiscal stimulus WILL BE effective.
The monetary offset idea is like saying that squirting water on a fire is ineffective because if the firefighter in charge decides the fire is under control and turns off the tap that supplies those doing the squirting then attempts to squirt will then not be effective.
3. February 2019 at 07:35
Your blog and your ideas are making the world a better place by helping people, including influential policy makers, understand monetary economics.
In time, your NGDPLT guardrails proposal, or something similar, will be adopted, reducing the unnecessary suffering of recessions.
THANK YOU! You should be extremely proud of yourself. Please persevere, for the battle is not yet won.
3. February 2019 at 08:17
You have inspired so many of us in the last decade, with your constant efforts. Thanks!
3. February 2019 at 08:19
Scott, you have been incredibly helpful to my thinking over the past decade. Excerpt from 2009 was delicious- you have been on point ever since.
Thanks and keep up the good work.
3. February 2019 at 08:41
Scott,
Congrats on 10 yrs….you re a rock star…always a must read whether you re blogging on Econ, politics, anything….Keep up the good work
3. February 2019 at 09:58
Everyone, Thanks–nice to see new names commenting.
BC, Too soon to declare a soft landing, as we still have above trend growth.
Brian, Hard to say. When Brexit was voted I predicted it would slightly slow trend growth in the UK. I still believe that, although of course it’s too soon to say.
Ralph, The fireman metaphor is wrong; it’s the “steering the ship” metaphor you need to think about.
Rajat, Thanks. Your post gets at my critique of modern macro. It’s not that modern macro lacks good models, rather the profession seems unable or unwilling to see what they tell us about the real world.
3. February 2019 at 10:26
Scott, I’ll join the chorus in thanking you for the time you’ve invested in this blog. I am a layperson with zero formal training in economics, and though when I started reading the blog I often had trouble following some of your arguments, my understanding of monetary economics is so much greater now than it was several years ago.
Thank you.
3. February 2019 at 15:12
Hi Scott
Congratulations. Your influence is even bigger than you know. This blog is the main reason I am now a central banker, and I’m sure there are many more like me. Looking forward to your ‘late-cycle’ commentary – as you suggest we have very interesting times ahead!
3. February 2019 at 22:56
Brian, if the Bank of England stays competent, nominal GDP in the UK will stay on a smooth path.
Whether that means inflation goes up or real growth keeps happening, depends on how Brexit plays out in the end. (But I suspect all the expected effects have already been priced in by the market when the pound fell after the referendum.)
4. February 2019 at 06:24
Scott,
This has been one of my favorite blogs ever since you started. I think it is fair to say that you’ve been proven the most right on the great recession of all the economic bloggers I’ve read. It’s been disappointing to see how unwilling the profession has been to self assess their views. Max Plank was right when he said science advances one funeral at a time.
Got to ask- why did you cite the fact that Ben Bernanke called for fiscal expansion? That statement seems to be in contrast with your views on monetary offset.
4. February 2019 at 08:13
Back in early ’09 when I found this blog off an Arnold Kling post (I think) no one else was clearly articulating what had just happened. Essentially all of the financial press, all my professors, all the talking-head business economists, were totally lost. From the standpoint of effective propaganda, it was really the Internet Austrians who had the best message at this time which in retrospect is a big indictment of the public facing macro community. Luckily Scott put in the time to reteach us all macro economics, in a way that elevated the right concepts which already existed in mainstream macro: EMH, Target the Forecast, Never Reason from a Price Change, and MV=PY. I still think some synthesis of the Sumner model will win in the long run.
4. February 2019 at 09:08
Thanks everyone.
Bob, I cited Bernanke as evidence that something was wrong with monetary policy, they weren’t setting their policy tools at a position expected to hit their target.
As far as monetary offset, you need to be careful. For instance, during late 2012 they continued to argue that monetary offset was not in place, even as they successfully instituted policies that did in fact lead to 100% monetary offset of the 2013 austerity. Focus on actions, not words.
That’s not to say there is 100% monetary offset in all cases; it’s quite possible that additional fiscal stimulus might have had some positive impact in 2009, despite the fact that the fiscal stimulus of 2008 was fully offset by the Fed.
4. February 2019 at 11:05
Great work. Appreciate the blog and have learned a lot.
4. February 2019 at 14:45
Thanks, too. Especially for educating those Austrians macroeconomists (and their sympathisers, even me maybe). Remember them? Where are they now? The Great QE “Wall of Money” that would very soon cause hyperinflation.
Shame the mainstream profession, the Fed, the vast majority of pundits and many finance-types still think near 0% rates and QE means “ultra-easy” monetary policy. If only.
Of course, you were only joking just then about “above trend growth”. What you meant was above an awful trend, that shouldn’t have been tolerated. Typical Scott Sumner in other words.
4. February 2019 at 17:51
Thanks for 10 years of great blogging. Learned so much and thought about so many things.
4. February 2019 at 19:07
Interesting retrospective. I learned a lot about fiscal vs monetary policy. I have also trolled well.
5. February 2019 at 01:11
Thanks Scott for your relentless pursuit. I’ve definitely enjoyed reading your blog and learnt much. Your chance of affecting the trajectory of the world is less, but the expected value of good policy is super high, so please keep it up!
5. February 2019 at 11:16
“This is my 3882nd post and I’ve read almost all of the 160,270 comments.”
Most people would write the second half of that sentence and then put a gun to their head. What’s wrong with you?
I guess on the other hand if your opportunity cost is something like reading more Knausgaard[*], I guess why not?
Okay, okay, I’m joking! I’m second to none in being in awe of the overall quality level of this blog. Both the quality of the ideas and the quality of the writing, although wrt the latter I realize no one is ever satisfied with their own efforts.
[*]I was inspired by the recommendation here, and after half of Book One I suddenly realized, hey, maybe going back to the slog through A Dance to the Music of Time, instead, isn’t such a bad idea after all. The advantage of Powell over Knausgaard would seem to be that though in both nothing interesting or arresting ever happens, in the latter there’s at least the suggestion or suspicion, occasionally, that something interesting or arresting *might* happen.
Whoops, there I go again. I’m joking!
5. February 2019 at 12:48
Congratulations. I hope you have the energy to continue another ten years at least. One thing in my opinion you forgot to mention on your „to-do-list“: to convince the public and the Fed in particular that inflation forecasts based on Philipps curve models are inferior and can result in bad policy decisions (see your most recent post). Not an easy task, I know, but the others aren’t either.
5. February 2019 at 18:46
i have followed your blog since 2008. i have rarely commented. i think you have a strongly analytic mind, but huge blinders about the gross inequities caused by central banking in it current form. i think you would have done a greater service to focus on ideas about practical problems of central banking favoring the leadership/managerial class than theories about futures markets that will never come to pass.
5. February 2019 at 20:03
Thanks everyone.
Fran, If I live another 10 years!
Yersinia, You said:
“theories about futures markets that will never come to pass.”
I wouldn’t be so sure that there’ll never be a NGDP futures market. Indeed I believe it will happen someday.
6. February 2019 at 05:03
thank you for your reply, but you did not address its central point: you don’t use your powerful mind to untangle the gross inequities caused directly by central banking it its current form. why, for instance, in the crash of 2008 weren’t the mortgages of the people purchased directly by the fed and held on any terms sufficient to protect the wealth of the holder (ignore legal restrictions as these are just excuses not to act), and regardless of fault, just as the stakeholder of the banks were bailed out regardless of fault.
6. February 2019 at 08:56
yersinia, Two wrongs don’t make a right. I’ve argued the banks should not have been bailed out. We should be trying to reduce moral hazard, not increase it.