Better homeless than in a lunatic asylum

A few weeks ago Paul Krugman suggested market monetarists were homeless.  By that he means we don’t have much support among GOP Congressman.  He doesn’t say why we’d want to have their support, after all, they don’t make monetary policy.

I pointed this out in a post a couple weeks ago, in reply to the Krugman post.  Now Krugman has posted again, repeating the claim that we are “homeless” because the House GOP doesn’t like us. Of course there is no sign he read my reply.  The only surprise is that lots of commenters think I need to reply again.  But why?  I already replied to his argument even before he wrote the latest post.

Still, I suppose one can always find something to comment on, so let’s consider this:

But there’s also a big difference in the intellectual roles of MM on the right and Keynes on the left.

Talk with Barack Obama, and you’ll find that he has a basically Keynesian view of the world. It may have wobbled a bit in the past, at times when he seemed to buy into the Confidence Fairy, but it’s still his basic outlook “” and his aides are very much IS-LM macro types. True, they haven’t gone all out to push for fiscal expansion in the face of opposition (but remember the payroll tax cut), but that’s mainly a political judgement on their part. It’s not a fundamental difference in worldview from friendly economists.

Contrast this with Republican leaders, who get their macroeconomics from Hayek and Ayn Rand, and are clearly liquidationist; it’s not that they don’t take advice from MM, they’re actively hostile to its very concepts.

That’s what I mean when I say that MM is homeless, in a way that my tribe isn’t.

Most politicians are morons when it comes to economics.  That’s nothing to be ashamed of; I’m a complete moron about most non-economics fields in science and the humanities.  Would you care about my views on particle physics or French poetry? What I don’t see is why someone would be proud that certain politicians seem to like their economic theories.  I never get a chance to “talk with Barack Obama,” but I very much doubt he is a “Keynesian.”

1.  Obama thought the high unemployment of 2008 was due to ATM machines taking jobs from bank tellers.  Maybe he’s a Luddite.

2.  Obama thought a low interest rate policy was dangerous, because it could lead to asset bubbles.  Maybe he’s an Austrian.  Or maybe he listens to Larry Summers.

3.  Obama would often leave Fed seats empty for long periods, believing the Fed could do nothing when rates had fallen to zero.  When he finally did appoint people to the Fed, they were not people who agreed with Krugman on monetary policy.  At one point 6 of the 7 members of the board were Obama appointees, and not a single one agreed with Krugman on monetary policy.  Obama didn’t even bother making any appointments in 2009, when they would have been really helpful, and when he had a filibuster-proof majority in the Senate.  Maybe Obama only reads Krugman on the days where Krugman says monetary policy is ineffective at the zero bound, not the days when he says monetary stimulus is highly desirable at the zero bound.

4.  Obama thinks so little of monetary policy he is supposedly looking for someone with “community banking experience” for the Board.  I’m sure all the community banking experts out there are up to date on Woodford’s latest models of how to do policy at the zero bound.  Maybe Obama is a follower of Elizabeth Warren, the senator who said super inflation hawk Paul Volcker would be a great choice to head the Fed. (After all the Fed is all about regulation, not monetary policy, isn’t it?)

Oh, and that payroll tax cut that Krugman mentions, it was a GOP idea, Obama had to be convinced:

The White House is counting the 2 percent payroll tax cut among its “wins” in the tax deal worked out with congressional Republicans. But it’s a win based on a Republican idea and one that many congressional Republicans support.

You may recall that a payroll tax break or “holiday” was a Republican proposal back in 2009. Conservatives liked the idea then in lieu of a tax credit.

.  .  .

In 2009, the White House rebuffed the idea, preferring its grab bag of stimulus spending programs.

Of course the employee-side payroll tax cut did not speed up the recovery in 2011, nor did the repeal in 2013 slow it down, as Keynesians like Krugman predicted.  They should have done the employer-side payroll tax cut that Christy Romer suggested, which would have cut labor costs and boosted employment.

And followers of the IS-LM model?  Those would be the folks who thought money couldn’t have been tight in the early 1930s (or 2008), because interest rates were low.  Or the people who thought the US economy would slow down in 2013 due to savage austerity.  Or the people who thought monetary stimulus in Japan was pointless, they were at the zero bound.  Or the people who said the Swiss National Bank would not be able to stop the franc from appreciating.  Or the people who blamed the eurozone double dip recession on fiscal austerity, even though the US did slightly more austerity.  Or the people who said British fiscal policy really, really, really was quite contractionary, until growth picked up suddenly and they realized it could not have been contractionary.

PS.  And now Congress wants to pass a law requiring the Board of Governors to have at least one expert on community banking.  You can’t make this stuff up.



34 Responses to “Better homeless than in a lunatic asylum”

  1. Gravatar of Morgan Warstler Morgan Warstler
    22. July 2014 at 16:11

    Ya know it’s not like I didn’t spend almost 5 years pointing out we could make in-roads with cons.

    But note the intellectual dishonesty of DeKrugman even here…. Market Monetarism has lots of traction with the Reformocons, who get plenty of press.

  2. Gravatar of Major.Freedom Major.Freedom
    22. July 2014 at 17:25

    “I’m sure all the community banking experts out there are up to date on Woodford’s latest models of how to do policy at the zero bound.”

    You make it sound more sophisticated than it is. If they put Michael J. Fox’s finger on CTRL-P at the Fed, MM types would start believing his is the second coming.

  3. Gravatar of Major.Freedom Major.Freedom
    22. July 2014 at 17:29

    “What I don’t see is why someone would be proud that certain politicians seem to like their economic theories.”

    They need a mommy (Democrats) or daddy (Republicans) figure to give their approval, and to put their finger painting on the refrigerator.

    Ask Krugman if he has ever had “daddy issues”.

  4. Gravatar of ChrisA ChrisA
    22. July 2014 at 20:20

    Zinger of a post Scott!

    Actually, there is a win-win here, if the Fed moved to market based NGDPLT, then banking regulation could be their main (only?) job. And it would be appropriate to have a community banking specialist on the Fed board.

  5. Gravatar of Major.Freedom Major.Freedom
    22. July 2014 at 21:40

    Seems like “market” is the new “liberal.”

    Thrown around haphazardly to describe the rules a socialist, government monopoly in money is to abide by.

    And they don’t even feel any shame.

    Market monetarism is an oxy-moron.

  6. Gravatar of tesc tesc
    22. July 2014 at 21:45

    Sorry but when the National Review and the American Enterprise Institute are behind you, you already have a home without having to deal with politicians. What can be better than that?

    Christy Romer saying MM is the way to go in the NYT without having to leak Democratic boots DeKrugman style?

    “why someone would be proud that certain politicians seem to like their economic theories?”

    Krugman confused his politics with economics. The fact that no politician openly supports MM is evidence that it is the way to go. MM is nonsense-politics-proof.

  7. Gravatar of Major.Freedom Major.Freedom
    22. July 2014 at 23:25


    “The fact that no politician openly supports MM is evidence that it is the way to go.”

    You might wwnt to think a little bit more ahead. You’re kind of saying that MM will be proven a failure if accepted by those who elect Fed chairs.

  8. Gravatar of Britmouse Britmouse
    22. July 2014 at 23:51

    If Obama is a Luddite he has good company – all the Very Serious Keynesians who argue that falling UK productivity has raised employment.

  9. Gravatar of Nick Nick
    23. July 2014 at 03:48

    Anyone want to get a pool going for the date Krugman mentions professor sumner by name? I didn’t miss it did I???

  10. Gravatar of TravisV TravisV
    23. July 2014 at 03:52

    Dear Commenters,

    Could someone please explain the problems with this study?

    “States That Raised Minimum Wage See Faster Job Growth, Report Says”

  11. Gravatar of Joseph Joseph
    23. July 2014 at 04:05


    Your link in the post script isn’t working. It seems to point to a local file and not a web page.


    Calling that article a study is a stretch. It makes no attempts to control for different trend growth rates or any other state specific factors. The academic debate over the past 20 years on this topic has basically been a debate about how to properly control for other factors which this “study” makes no attempt to engage in.

  12. Gravatar of Benjamin Cole Benjamin Cole
    23. July 2014 at 04:09

    Excellent blogging.

    The whole Obama approach to monetary policy is lugubrious at best, and deeply lamentable.

    Krugman seems to be attacking MM out of maliciousness rather than reason. MM might work (I think it will). It is better than a Japan-style deflation perma-gloom.

    Why not embrace MM, even if you think a lot of deficit spending it a good idea too?

    And deficit spending, even it it does work, has to be monetarily accommodated, not choked off. MM does that. Aggressive QE strikes me as similar to deficit spending, except without the tax burden.

    Sad that Krugman (and some conservatives) do not become allies of MM.

    BTW, Dallas Fed put out study that QE is anti-inflationary….

  13. Gravatar of Zachary Woodman Zachary Woodman
    23. July 2014 at 04:36

    “BTW, Dallas Fed put out study that QE is anti-inflationary….”

    Could you link to that study?

  14. Gravatar of ssumner ssumner
    23. July 2014 at 04:52

    Thanks Joseph, I fixed it.

  15. Gravatar of John Thacker John Thacker
    23. July 2014 at 05:03

    Although in fairness, Scott, wasn’t the original Congressional-mandated idea that the Fed Governors have to be from different states (still the law, but widely flouted with loopholes) designed by Populists worried that having only New Yorkers would lead to too tight money?

    In any case, it’s hard to say that President Obama’s picks (other than Yellen) would have been much worse under such a rule.

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. July 2014 at 06:36

    Amusing coincidence; today a friend reminded me of my favorite Brad DeLong paper;

    Which, I guess, shows that whatever Obama is, he’s not a New Keynesian;

    ‘But even as monetarism subspecies four was failing its empirical test, large elements of monetarism subspecies three””Classic Monetarism””were achieving their intellectual hegemony. For under normal circumstances, monetary policy is in fact a more potent and useful tool for stabilization than is fiscal policy. The frictions that give slope to the expectational aggregate supply curve are in fact key causes of business cycle fluctuations. The natural rate of unemployment hypothesis has strong empirical support in U.S. data, and does mean that fluctuations are best analyzed as being about trend rather than being beneath potential. It is better, in fact, to analyze macroeconomic policy by considering the long-run implications of rules. Finally, any sound view of stabilization policy must recognize how limited are its possibilities for success.’

  17. Gravatar of Steve Steve
    23. July 2014 at 07:31

    “States That Raised Minimum Wage See Faster Job Growth, Report Says”


    The study could just as easily have concluded “Evidence suggests $0.14 minimum wage boost is optimal for job creation.”

    Ah, the perils of statistical insignificance.

  18. Gravatar of TravisV TravisV
    23. July 2014 at 08:06

    Tyler Cowen:

    “The manufacturing sector is now operating at 77.8 percent of its capacity, according to Federal Reserve data, well above the 76 percent average during the last expansion and not far from the 79.1 percent peak during the mid-2000s.

    That is from Neil Irwin. As I’ve been saying for over a year, we are no longer at the point where boosting nominal demand will help very much if at all.”

  19. Gravatar of Chuck E Chuck E
    23. July 2014 at 09:10

    I’ve got to believe capacity is being calculated at a new lower method. Strictly anecdotal, my factory is nowhere near the peak of the mid 2000’s. Most of my friends in small businesses are not complaining that they’re too busy. Everybody say things are, “steady.”

  20. Gravatar of dw dw
    23. July 2014 at 09:27

    not sure why we would expect business to spend more if they get a tax break on payroll taxes. while it would certainly improve their profits, it wouldnt have done much else as they wouldnt have had much reason to invest in the US since demand wasnt there, and for the most still isnt.

  21. Gravatar of Doug M Doug M
    23. July 2014 at 11:20

    Why do you read Krugman — why does anyone read Krugman?

    GW Bush was a Keynesian… Bush pushed for Keynesian stimulus in 2001, 2002 and 2008.

  22. Gravatar of Don Don
    23. July 2014 at 11:56

    But MM is homeless. Keynesians provide a “scientific” excuse for Democrats to grow the size of government and increase regulation of markets. Democrats like those things more than Republicans. It is match made in heaven and it is better to ignore MM.

    Republicans, deep down, fear inflation and think that MM is endorsing inflation and just kind of voodoo. It is better to align with supply-siders and cut taxes. There is a clear set of folks that will contribute to that campaign!

    For MM to find a home in a political party it needs to help politicians raise contributions.

  23. Gravatar of tesc tesc
    23. July 2014 at 14:54

    “For MM to find a home in a political party it needs to help politicians raise contributions.”

    Exactly what we do not want. We do not want to loose IQ points like DeKrugman.

    We are doing awesome.

    By the way, Krugman issue is that he sees econ as a tool for political prominence. He sees MM lack of political prominence so he thinks MM failed.

    He thinks the Sumner is playing the same game he plays.

    Sumner wanted to influence the FED to do QE, not to get politicians to support economic policy they cannnot understand. Sumner succeeded, because he has different goals than Krugman.

    I hope Krugman learns the lesson what an economist goals are suppose to be and stops poluting economic discourse with political partisanship.

  24. Gravatar of benjamin cole benjamin cole
    23. July 2014 at 15:58

    Zachary W. on my smartphone…but go to Dallas Fed website, paper is recent easy to find…also I reviewed it on Marcus Nunes blog…

  25. Gravatar of Floccina Floccina
    24. July 2014 at 08:23

    Politicians are experts at just one thing and that is getting elected.

  26. Gravatar of Floccina Floccina
    24. July 2014 at 08:24

    Politicians are experts at just one thing and that is getting elected.

  27. Gravatar of ssumner ssumner
    24. July 2014 at 11:29

    John, The worst aspect of the law is what is says about their knowledge of monetary policy. They don’t even think expertise is needed. How hard can monetary policy be? It’s just easy and tight money, isn’t it?

    Patrick, The good old days.

    dw, You forgot about AS, that’s the whole point. If you boost AS then the demand doesn’t need to be there.

  28. Gravatar of tesc tesc
    24. July 2014 at 12:51


    I think that what dw is thinking about is that companies would not increase AS because they will wait for AD move first. Animal Spirits kind of stuff.

    I would say the FED can fix that with a specific target like the one you propose.

  29. Gravatar of mikef mikef
    24. July 2014 at 14:24

    The same day of that homeless blog posted, I read a NYT article about the great schism in the Democratic party. It seems that the under 40 Democratic crowd have a deep distrust of big government and stimulus and are only voting democratic because of non-economic policy reasons. Maybe Krugman will soon be the one without a home….these folks maybe fertile ground for MM home building…

  30. Gravatar of tesc tesc
    25. July 2014 at 02:49


    do you have the link?

  31. Gravatar of mikef mikef
    25. July 2014 at 08:08

  32. Gravatar of ssumner ssumner
    25. July 2014 at 18:01

    tesc, Companies maximize profits. If you reduce the cost of labor, they’ll boost output.

  33. Gravatar of tesc tesc
    25. July 2014 at 18:50

    ssumner, I agree. I was just describing their emotions ( :

    It is just that I came to figure it out that left wing economist think AD or any D is inelastic after a crisis, aka animal spirits. I actually do not understand why is it that they do not use the “inelastic AD” argument. They probably have not figure that one out.

    Your target rule moves all Ds in the aggregate or average to a known nominal level. So their craze would be gone. Although they will come up with something other craze like inequality. At least one less craze to battle for us.

    By the way, I do read the nyt. I really wanted to understand what in the world they were talking about and it helped.

  34. Gravatar of tesc tesc
    25. July 2014 at 18:53

    oh, the idea would be that because Ds are inelastic, lower cost would not increase output. Probably prices, but not output.

    But anyway you already supplied the solution to D problems through level targeting and S issues by proposing lowering costs.

Leave a Reply