Better late than never, but early is better still

Soon after I started blogging, I suggested that the importance of monetary policy would be clearly exposed by the way the recovery from the Great Recession played out.  That was true in the Great Depression, where the role of money was not noticed during the first couple years of the 1930s, but became clearer as each country started to recover after they left gold.  I don’t think anyone can deny that this prediction has been confirmed in this recovery.  Just look at the varying paths of the US, Japan, Britain and the eurozone.  One side effect is that we are now seeing much more interest on Fed policy from the left:

JACKSON HOLE Wyo. (Reuters) – Reginald Rounds was among those present at the Federal Reserve’s high-flying monetary conference here, enjoying the chance to button hole two top officials of the U.S. central bank.

The St. Louis resident is neither an economist nor a central banker. He’s a 57-year-old unemployed worker, who said he is trained in the green technology field and can’t find a job.

He was among a group of activists who gathered on the sidelines of the Fed’s annual symposium wearing green t-shirts with “What Recovery?” on the front and a chart depicting sluggish U.S. wage growth on the back.

“From the world where I reside, there is no recovery. We need a boost. We need a jump start,” said Rounds. “The key is jobs creation.”

The ten activists, most of whom were unemployed and seeking jobs, were sent as emissaries for a coalition of advocacy groups that has launched an unusual campaign from the left to press the U.S. central bank to keep monetary policy easy.

Of course these advocacy groups ignored the Fed back in 2009, when monetary stimulus really could have done a lot of good.  (Now it can do just a little good.)  A few years ago Matt Yglesias said overlooking the importance of monetary policy was “a major intellectual weakness of the progressive movement.”  Brad DeLong expressed similar a frustration with the Obama administration.

Why did MMs get there first?  Because we have the best model—NGDP growth expectations falling below the implied target is excessively tight money.  Even if it looks like money is “extraordinarily accommodative.”  And we understand that fiat money central banks rarely run out of paper and green ink.

Here’s Peter Diamond back in 2011, pouring cold water on the recommendations of people like Blanchard and Krugman

Nobel laureate Peter Diamond, whom the Obama administration nominated to fill a vacant seat on the Fed’s board, puts it this way: “If the Fed says we are determined to keep going till we have, say, 4 percent inflation, would that really turn around expectations in a way that would stimulate the economy and create higher inflation? I doubt it.”

And here’s Peter Diamond a few days ago:

“Historians are going to tar and feather Europe’s central bankers,” Peter Diamond, the world’s leading expert on unemployment told UK newspaper the Telegraph at the sidelines of the meeting. “Young people in Spain and Italy who hit the job market in this recession are going to be affected for decades. It is a terrible outcome, and it is surprising how little uproar there has been over policies that are so stunningly destructive,” he claimed.”

It seems awfully cruel to tar and feather people who can’t do anything at the zero interest rate bound. Even MMs merely recommend tar, no feathers.

Seriously, I’m glad the left is coming around to the view that monetary policy is of great importance. I hope they’ll take a look at the school of thought that reached this conclusion in late 2008.

PS.  I also have a post on money at Econlog.



45 Responses to “Better late than never, but early is better still”

  1. Gravatar of Garrett Garrett
    24. August 2014 at 09:26

    In 2040 someone will write a book about how 2008 was all about tight money. In 2080, at the man’s birthday party, the head of the Fed will joke that he was right and that the Fed will never let it happen again. In 2090 it’ll happen again.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. August 2014 at 09:30

    James Hamilton seems firmly ensconced in the ‘interest rates are the price of money’ camp;

    ‘A number of researchers have documented that on the days that changes in LSAP [large scale asset purchases] policy were announced there were noticeable changes in long-term interest rates; see for example Christensen and Rudebusch (2012). This evidence suggests that LSAP did indeed matter for yields.’

  3. Gravatar of Peter K. Peter K.
    24. August 2014 at 09:56

    Ever since graduating from college in the early 90s and studying economics on my own, I’ve been a leftist who has been interested in monetary policy, a lot like Yglesias who is younger. I read William Greider’s book as a primer. Leftist Dean Baker writes about the exact time which prompted me to focus on the debate:

    “We have been here before. Back in the mid-1990s the absolute consensus in the economics profession was that the unemployment rate could not get much below 6.0 percent without triggering inflationary pressures. This was a view held not only by conservative economists, but by liberals like Janet Yellen, Alan Blinder, and Paul Krugman. Fortunately, Federal Reserve Board Chair Alan Greenspan was not a mainstream economist. He argued there was no evidence of inflationary pressures, therefore he saw no reason to keep the unemployment rate from falling below the 6.0 percent threshold.

    The unemployment rate fell below 5.0 percent in 1997 and was at 4.0 percent as a year-round average in 2000. Not only were millions of people to get jobs who would not have otherwise been able to work, workers at the middle and bottom of the wage ladder saw sustained real wage growth for the first time since the early 1970s. And, there was a huge swing from budget deficits to budget surpluses, giving the country the budget surpluses that the Clintonites always celebrate.”

    Basically we are back at that point – when as Baker points out in another post grassroots groups were pressuring Greenspan not to hike rates – except now we have Dodd-Frank and Yellen’s macroprudential policy whereas Greenspan preferred a much more loose regulatory policy which gave us the Tech Stock bubble and the housing bubble.

    Granted bubbles wouldn’t so bad if counter-cyclical policy wasn’t so actively malfeasant.

    Basically I see the left as still stuck in the Keynesians vs. Milton Friedman battle over the proper levels of government when they should prioritize keeping the NGDP level up at potential levels.

  4. Gravatar of Don Don
    24. August 2014 at 10:04

    I hope the news media get on the band wagon next. I heard a news story out of Jackson Hole and story was “The FED causes inflation” and that “only fiscal efforts can improve employment”. MM has a lifetime of re-education to do.

  5. Gravatar of Kevin Erdmann Kevin Erdmann
    24. August 2014 at 10:50

    If MM was implemented successfully, it would probably lower risk premiums on productive assets because of the reduced cyclical fluctuations and because of more mean reversion in bond yields. This would increase market prices of corporate assets, relative to production, and the left will have a freak out, a la Picketty, because the left is, at its heart, a conservative movement. I wonder how much of the success of MM would be mitigated by the unintended consequences working through political reactions.
    I think Morgan has a good point about it taking pressure off of fiscal policy to solve problems. But, as Robin Hanson would say, politics isn’t about policy.

    Or, another way of putting it: in 2006-2008, there was widespread mistaken worry about home prices. One result of this was pressure on the Fed to hammer the money supply. If a new monetary regime removes the ability to use monetary policy to express our collective political urges, will fiscal policy be the outlet, and end up more dysfunctional?

    Not saying we shouldn’t do it. I’m just saying that if there is a movement actively concerned with destroying prosperity that doesn’t meet their specifications, it may not matter if they support your benign means of progress in the abstract.

  6. Gravatar of David R. Henderson David R. Henderson
    24. August 2014 at 11:12

    Scott, What do you make of Zajac calling Peter Diamond “the world’s leading expert on unemployment?” Is that even close to true? I don’t ask rhetorically. I just don’t know. But when I think of economists who study unemployment, his name doesn’t pop into my head as even one of the top 5.

  7. Gravatar of Greg Ransom Greg Ransom
    24. August 2014 at 12:03

    “the role of money was not noticed during the first couple years of the 1930s”

    Bullshit. The role of money was already recognized in the Depression which began in Britain in the 2nd half of the 1920s.

    The role of money in creating the busts in Austria, America and elsewhere was alrady noticed and explain by Hayek and Mises in the late 20s and early 30s.

    Ignorance and miopia are not arguments.

  8. Gravatar of Greg Ransom Greg Ransom
    24. August 2014 at 12:10

    MM did NOT get there first.

    The Austrians got there first — recognizing the artificial boom and coming bust as they happened, and advocating an MV / Bagehot’s Rules policy norm in the wake of the shadow money crash — a shadow money crash predicted and explained in Hayek’s.

    To reiterate:

    MM failed to see the coming bust, failed to predict the shadow money collapse and was late the paet recommending a MV / NDGP policy norm after the onset of the bust.

    Hayekians were ahead of MMers on all fronts.

  9. Gravatar of Greg Ransom Greg Ransom
    24. August 2014 at 12:21

    Far, far, far better to have recognized the significance of monetary policy in 2006, 2005, 2004, 2003 like the Hayekians and the folks at the BIS

    By “late 2008” the horses were already out of the barn — a barn door the Keynesians and MMs left wide open — in their scientific ignorance.

    “I’m glad the left is coming around to the view that monetary policy is of great importance. I hope they’ll take a look at the school of thought that reached this conclusion in late 2008.”

  10. Gravatar of Daniel Daniel
    24. August 2014 at 13:46

    I wish the Austro-nuts would make up their minds.

    They take credit for successful predictions (when you scream constantly about the coming apocalypse, it’s not hard to seem right when something bad eventually happens), while at the same claiming their theory makes no predictions.

    Well, which one is it, morons ?

  11. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 14:02

    “That was true in the Great Depression, where the role of money was not noticed during the first couple years of the 1930s, but became clearer as each country started to recover after they left gold.”

    Blowing up unsustainable bubbles are not “recoveries”.

    Tricking investors with legalized counterfeiting such that “investment”, rather than coordinated investment, increases, and such that “employment”, not coordinated employment, increases, which then leads to painful correction, as it did in the early 1950s, is not only not “recovery”, but the exact opposite.

    5% NGDPLT is no solution. If it were imposed after an inflationary bubble that just so happened to be associated with greater than 5% NGDP growth, then moving towards 5% NGDPLT would reveal a portion of malinvestment and a recession/correction would ensue. If on the other hand 5% NGDPLT were imposed during a time of correction that just so happened to be associated with lower than 5% NGDP growth, then an unsustainable bubble would be brought about and the increase in unemployment would be postponed to the future when it would be higher than having a correction in the present.

    The latter is what took place during and after the 2001 correction. Rather than let the market fix the errors, the Federal Reserve System increased inflation and credit expansion and postponed the unemployment to the future, when it became even more pronounced than it otherwise would have been in 2001 if the market was allowed to correct the errors.

    What has heretofore been largely neglected, and is far more important than any new inflationary rule flavor of the month, is market driven money, prices, spending, and interest rates. What Sumner glibly claims for NGDP targeting as the key overlooked action to take, which is being claimed as “important” ex post to historical events, is only apparently true because of its myopic approach to economic understanding. It is the same old advocacy for a “permanent quasi-boom” from Keynesianism.

  12. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 14:38

    “Why did MMs get there first? Because we have the best model””NGDP growth expectations falling below the implied target is excessively tight money. Even if it looks like money is “extraordinarily accommodative.””

    That is incorrect. MMs did not “get there first.” Austrians were already there since at least 1912. Their theory has been 100% consistent with what not only took place after the crash of 1929, before MM even existed, but also what took place after 2008.

    In both cases Austrians argued that government intervention in the form of far higher than market inflation and credit expansion, would hamper true recovery and prolong any correction needed because of prior inflation and credit expansion. What took place after 2008 is what Austrians expected to happen if government officials choose to do what they in fact chose to do (choices of which cannot be scientifically predicted ex ante).

    The economy continues to remain sluggish even now in large part because of “extraordinarily accommodative” monetary policy. According to what standard? Not governmental rules, that’s for sure. Not NGDP. According to the standard of the free market, money has been, and continues to be, far too loose. That is why the sluggishness in output continues.

    The standard of MM is an arbitrary governmentally imposed rule of hitting CTRL-P. There is nothing “market” about MM. To believe that NGDPLT is “market driven” on the basis that the quantity issued, still by choice of government, is based in part on the government observing how much money is held by market actors, is like saying wails of pain targeting torture is market driven if the torturer targets a frequency of wails of pain from his victim and lashes more times or lashes fewer times based on observing how many times the victim yelps. It is called market torture because the victim is seemingly deciding how many lashes he gets.

    If NGDPLT is “market monetarism”, then so is price inflation targeting, and every other single variable inflation targeting. With price inflation targeting, the market is “deciding” how many dollars should be printed, because all the Fed targets is prices, and they “let the market decide” how many dollars they want, in order for the Fed to bring about their chosen “rule” for price inflation. If prices fall, this is the market telling the Fed they want more dollars, because the Fed is undershooting its non-market target. If prices rise, this is the market telling the Fed they want fewer dollars.

    And no, before your ears start turning red and before you come back with the counter-argument that falling prices does not necessarily mean the market wants more dollars, because it could just mean higher productivity, and no decline in “spending”, you would only be assuming correct your conclusion for when the market wants more or less money. Declines in spending is just as arbitrary an event to believe the market wants more money, as declines in prices. There is nothing in free markets that has any law of constant growth in spending, or prices.

    Yes yes, let’s then move away from this point, forget about whether there are in fact any “market” forces introduced with shifting price inflation targeting to aggregate spending targeting, and instead move to the entirely different argument that employment having been more closely correlated with spending shows NGDP is the “better” target.

    What is being called market monetarism is just orthodox monetarism with a different rule.

  13. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 14:55


    What you ignorantly percieve to be Austrians not making up their minds, is really just your inability to understand Austrian theory, and your inability to parse statements as either Austrian theoretical arguments, or something else.

    Austrian economics cannot possibly take credit for successful predictions because it doesn’t make predictions you fool. If you see someone making a prediction, and they are either self-described or labelled “Austrians”, then they are still not making any Austrian argument or prediction.

    If an Austrian says they “correctly predicted the recession post-2008”, they are not doing so as Austrians. They are not “representing” the theory. They are just acting as a predictor. Mathematics does not predict the future, but that doesn’t mean that the people who study mathematics are somehow “not allowed” to make predictions. A mathematician correctly predicting the future did not do so as a mathematician. They are not “representing” mathematics by doing so. They are not “proving their mathematical models true”.

    You don’t have a clue about the content or the logical structure of Austrian theory. All you have is a hatred derived from being abused and you perceive Austrians as taking away the benevolent mommy and daddy figure you never had. You say “moron” in almost every post you make when mentioning it. That just shows that you were repeatedly called a moron and it is your way of owning what used to cause you pain.

    Hate hate hate, that is all you have. It is all you are. No knowledge of that you hate, because hate to you doesn’t need a reason. You were hated for being born. So hate is your way of life.

  14. Gravatar of Daniel Daniel
    24. August 2014 at 15:03

    You don’t have a clue about the content or the logical structure of Austrian theory.

    Now isn’t that cute, the neo-calvinists claim there’s “logic” to their religion.

    Good thing nobody takes your circlejerk seriously.

  15. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 15:15

    Austrian theory has the best model for explaining what has already happened.

    Before you knee jerk and say what use is it to explain the past if it cannot make predictions, it is paramount to understand that you cannot know where you’re going if you don’t know where you were.

    Austrian theory explains the past better than MM, and as a result it is a superior economic theory.

    Greg makes a good point:

    “Far, far, far better to have recognized the significance of monetary policy in 2006, 2005, 2004, 2003…”

    This is exactly right. MM has turned a blind eye to these years because their alarm system is only set to make a noise when NGDP falls by an arbitrary amount.

    If the Federal Reserve System brings about significantly large quantities of credit expansion, artificially low interest rates caused by credit expansion, but it just so happened to not find its way to increased spending on those specific goods which is tracked by NGDP, then even if the tricked markets are severely misallocating capital, and production becomes uncoordinated and unsustainable, MMs will recommend even more of what has been generating this malinvestment.

    MM requires, needs, and depends on the totally unwarranted article of faith that middle of the road “market socialism” can permanently coexist with a fixed “rule” of socialist money printing, and the market portion of the economy “adapting” to it.

    This cannot be done. It is an impossible dream.

    Price inflation targeting “worked” until it didn’t, which really means the errors accumulated until the price target no longer tricked investors into perpetuating the malinvestment. Not necessarily consciously, but in practise. Free market economists know that NGDPLT is no different in this respect. Malinvestment will build and build until investors are no longer tricked into perpetuating the malinvestment. (Daniel you ignoramus, no this is not a prediction, because it does not predict that NGDPLT will in fact be imposed. If it does, then Austrian theory applied becomes a historical analysis).

    This is Goodhart’s law. From another angle, the Lucas critique.

  16. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 15:24


    Haha, you don’t even know what Calvinism means.

    Austrian theory is praxeology. It is the logical analysis of action. You don’t have a strong enough will or ability to think logically, which is why you don’t get it.

    Nobody takes it seriously? Nobody takes you seriously. Austrian theory is more well known than some blogging yahoo.

    But in any event, being unpopular does not mean being false. Everything you believe about economics was once unpopular. You can’t refute Austrianism intellectually.

    I know that many people take Austrianism seruously. YOU for example take it seriously, because you’re constantly fumbling over yourself trying to refute it, bwahahahaha. 20 years ago Austrian theory was almost completely unknown. Now virtually every serious economist knows about it. It doesn’t matter if it is not immediately accepted. We’re dealing with mostly statist economists whose careers would be over if they “converted”.

  17. Gravatar of Daniel Daniel
    24. August 2014 at 15:26

    artificially low interest rates caused by credit expansion

    Except monetary expansion raises interest rates.

    Now you have two choices – if you are indeed dedicated to finding the truth, you adjust your theories.

    Or, like the cultist you are, you dig your heels even deeper in the face of contrary evidence and carry on with your circle jerk, while being completely ignored by anybody who matters.

    I know in advance what your choice will be.

    Oh, and the reason I chose only that sentence to argue with is because it was the only falsifiable statement in all that drivel – and it just so happened to be false.

    The rest was just unfalsifiable bullshit. Austrian economics – it’s not wrong, it’s not even wrong. Intellectual fodder for sadistic morons.

  18. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 15:39


    “Except monetary expansion raises interest rates.”

    I didn’t say monetary expansion and higher spending on consumer goods, I said credit expansion.

    Credit expansion can and has reduced interest rates, and credit contraction can and has increased interest rates.

    Sumner agrees with this. He criticized the ECB a few posts ago for repeatedly “raising interest rates during recessions”. This is Sumner associating higher interest rates with “tight” money.

    Credit expansion eventually raises spending on consumer goods and eventually puts upward pressure on interest rates, but historically, by the time that has happened, the Fed would already be expanding credit once more and once more putting downward pressure on interest rates.

    All historical events are unique. Interest rates rose during the 1970s because the upward pressure of spending on consumer goods dwarfed the downward pressure from credit expansion.

    “Now you have two choices – if you are indeed dedicated to finding the truth, you adjust your theories.”

    First you have to show a logical flaw in Austrian theory before you can demand that I adjust my understanding of it. But you have not done this. You just asserted ex cathedra that monetary expansion raises interest rates, without any theoretical argument, let alone empirical analysis, to back that claim.

    You want me to change my beliefs based on faith. I won’t do it.

    I suspect in advance that you will not show ANY backing argument. I suspect in advance that your cultish approach to economic understanding will continue to lead you to make false claims that are contradicted by the evidence.

    Until you provide anything close to a substantive argument that exposes errors in what I say, there is no reason for me to degrade my beliefs by adopting your sadistic drivel.

  19. Gravatar of Daniel Daniel
    24. August 2014 at 15:43

    You just asserted ex cathedra that monetary expansion raises interest rates, without any theoretical argument, let alone empirical analysis, to back that claim.

    Theoretical argument –

    Empirical analysis – the 1930s and the 1970s.

    Anyway, you’re right – I do devote far too much arguing with morons. It’s a miracle the likes of you and Greg Ransom are able to breathe, let alone type.

    Carry on with your circle jerk, you imbeciles certainly enjoy it.

  20. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 15:50

    During the 1970s, interest rates were lower than they otherwise would have been had the inflation entered the market in the form of increases bank balances that went towards consumer goods only.

    But because money did enter the loan market at that time, interest rates were otherwise lower.

    Compared to a free market, interest rates were higher than they othwerwise would have been.

    Inflation of the money supply does not affect all goods equally at the same time. Many years can pass before a round of inflation causes an increase in consumer goods spending that through traditional bond pricing models increases “fair value” rates.

    Inflation can increase stock and bond prices more than it increases consumer goods prices at a given time.

  21. Gravatar of Daniel Daniel
    24. August 2014 at 15:57

    austrian economics

  22. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 15:57


    Hahahaha, the Fisher relation is not a theoretical argument that monetary expansion raises interest rates you ignorant putz. The Fisher equation is a theoretical relationship between nominal interest rates, real interest rates, and (price) inflation.

    What is even more hilarious is that I already said, in the very post you knee jerked in response to without even reading the rest, is that I agree with the argument that higher consumer goods prices tends to raise interest rates.

    As for the 1930s and 1970s, the evidence is entirely consistent with the theory that credit expansion lowers interest rates, and higher consumer goods spending raises interest rates.

    Keep hating you hater.

  23. Gravatar of Major.Freedom Major.Freedom
    24. August 2014 at 16:05


    To educate your ignorant mind: the Fisher equation would predict lower nominal interest rates when NGDP predicts higher nominal interest rates. This is the case when productivity expands to such a degree, given a constant aggregate spending and time preference, that price inflation falls.

    Also, if the theory that monetary expansion raises interest rates is true, then why haven’t interest rates been rising with the money supply since 1913? Monetary expansion has been taking place since the formation of the Fed. So why haven’t interest rates risen by the same factor?

    The answer hilariously enough can be approximated by what the Fisher relation tells us. So not only do you have no clue about the Fisher equation, but it actually serves to theoretically undercut your very muddled theoretical understanding of the 1930s and 1970s!!! Hahaha. What a dork!

  24. Gravatar of SG SG
    24. August 2014 at 16:33

    Some days I wish Scott would moderate comments.


  25. Gravatar of Don Geddis Don Geddis
    24. August 2014 at 20:14

    MF/Geoff: “Austrian … theory has been 100% consistent” Only because it is a Fake Explanation. “If you are equally good at explaining any outcome, you have zero knowledge.” We observe a real fire, and you constantly run in yelling “because of phlogiston!” It’s amusing (at best), and certainly childish.

    Austrian theory has the best model for explaining what has already happened.” False again. The best model for explaining history is clearly that the FSM wished it to be so, and caused the various events to happen by touching them with his noodly appendage.

  26. Gravatar of TravisV TravisV
    24. August 2014 at 20:22

    Prof. Sumner,

    Joe Weisenthal and Paul Krugman recently discussed Draghi’s latest speech where he begs for more fiscal stimulus:

    You might find those links interesting.

  27. Gravatar of TravisV TravisV
    24. August 2014 at 21:08

    Prof. Sumner,

    Why have U.S. stock prices continued to climb even as U.S. NGDP growth has been slowing lately?

  28. Gravatar of ssumner ssumner
    25. August 2014 at 05:16

    Garrett, Unfortunately you are probably right.

    Patrick, Thanks, I’ll take a look.

    Peter, Good points.

    Kevin, Yes, very good point.

    David, I’m not sure. My sense is that he’s a leading expert on unemployment, but not very strong in monetary policy—which is one of the causes of unemployment.

    Greg, Easy money didn’t cause the subprime bubble, tight money did cause the recession.

    SG, So do I.

    Travis, Thanks for the links. Maybe stocks are looking ahead.

  29. Gravatar of TravisV TravisV
    25. August 2014 at 05:59

    Prof. Sumner,

    Thanks, yes, I understand that stock prices reflect expectations of future NGDP not current NGDP.

    One possible explanation: as the FOMC becomes wiser, the market has been estimating a lower and lower probability of a giant crash in the future (a major reason why I think B of A has rallied a lot, by the way).

  30. Gravatar of TravisV TravisV
    25. August 2014 at 06:02

    Dear Commenters,

    How do you feel about this new column on California vs. Texas by Krugman?

    “The answer from the right is, of course, that it’s all about avoiding regulations that interfere with business and keeping taxes on rich people low, thereby encouraging job creators to do their thing. But it turns out that there are big problems with this story………

    So conservative complaints about excess regulation and intrusive government aren’t entirely wrong, but the secret of Sunbelt growth isn’t being nice to corporations and the 1 percent; it’s not getting in the way of middle- and working-class housing supply.

    And this, in turn, means that the growth of the Sunbelt isn’t the kind of success story conservatives would have us believe. Yes, Americans are moving to places like Texas, but, in a fundamental sense, they’re moving the wrong way, leaving local economies where their productivity is high for destinations where it’s lower. And the way to make the country richer is to encourage them to move back, by making housing in dense, high-wage metropolitan areas more affordable.”

  31. Gravatar of Saturos Saturos
    25. August 2014 at 06:06

    In the Econlog article Scott says, “There is no longer a shortage of money in the sense that there is a shortage of rent-controlled apartments in NYC. People can go to ATM machines and get cash in a way that people cannot find rent-controlled apartments in NYC.” I will once again try and explain why this seems wrong to Nick and I. (Here because I still can’t comment on Econlog, and I’m not making another account.)

    In a recession, there are a whole bunch of people out of work. If they were working, they’d be making and have a claim to a whole bunch of extra real output and income. But because their output cannot be exchanged, because their *nominal* prices or wage rates are wrong. The real ones might be just fine, so that if all the appropriate barter transactions were easily lined up the exchanges could be made just fine and people would stay in work. But the exchange rates relative to money, the nominal rates of prices and wages, are wrong. Now this makes them poorer. At the lower level of real income – sure, they can convert whatever wealth they have in financial assets to more liquid assets or money. If they have deposits at the bank, corresponding to a level of wealth associated with their level of real income, sure they can convert those to cash/medium of exchange (though not all at once of course, as that would be a run). But if they want to access more money than their accounts say they can claim? They can’t. “Well that’s silly”, you might say, “why should they ever be able to claim more money than they have in their accounts”. They should, precisely because they have unsold labor power, corresponding to unsold goods, corresponding to (untransactable) real income.

    They should be able to pull more money out of the ATM than they can, in the way that they would normally: Work more – their employers sell more output they contributed to – receive more revenue – they get paid more – they have more money in the bank – they draw more cash. In fact they may not even want to *draw* more cash, just access more cash for spending purposes, literally *have more money to spend*. (Or equivalently they may want a bank to access more base money for them, not necessarily the cash base but as deposits.) They may not want to increase the amount of money they hold on hand – but they still may demand to access more money to spend. Because they are capable of earning more real income than they are, and that income ought to be *spendable*, via the necessary medium of exchange.

    So there is the demand for *stocks of money*, a function of real income which can be equilibriated by falling real income. And then there is demand for *flows of money*, which can stay in disequilibrium relative to the (flow) supply of newly produced goods people are able and willing to produce and consume, and willing but unable to trade – even whilst the stocks are now in equilibrium again. You don’t pay enough attention to that distinction, and Nick’s writing remains distinctively more precise than yours in part because he does. (Talking about the disequilibrium being “transferred from the money market to the labor market” also confuses this distinction.)

    If Scott doesn’t find enough to agree with in that though then I will say here for my own benefit that I AM NOT GETTING INTO ANOTHER COMMENT WAR OVER THIS. Got it, self?

  32. Gravatar of Saturos Saturos
    25. August 2014 at 06:12

    Oh lord, Scott is going to absolutely crack it over that new Krugman post, isn’t he Travis?

  33. Gravatar of Brian Donohue Brian Donohue
    25. August 2014 at 06:34

    TravisV, my take:

    I’m Paul Krugman, and I just moved to NYC. It’s great. I’m walking more, etc. Everyone should move here.

  34. Gravatar of TravisV TravisV
    25. August 2014 at 07:01


    I would LOVE LOVE LOVE to hear Prof. Sumner’s take on Krugman’s latest column. I’d also love it if the EconLog guys, Pethokoukis, Ponnuru and Barro weigh in on the subject as well!

  35. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. August 2014 at 07:21

    Krugman sez;

    ‘…what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs….’

    Now, a few words from Krugman on the counterproductive policy of rent control?

  36. Gravatar of ssumner ssumner
    25. August 2014 at 08:27

    Saturos, I think we disagree more about semantics than content. Let’s start with an issue far away from macro–rent control. You could say that in NYC there is an excess demand for apartments and an excess supply of money. But I think it makes more sense to talk about there being just an excess demand for housing. The money market is in equilibrium (say we are at full employment) with most other goods and services.

    Now let’s assume that all markets are in disequilibrium. There is excess demand for all goods, services, and assets, and an excess supply of money. People hold more money than they wish to hold, and cannot get rid of it.
    Then I completely agree with you and Nick.

    But what about an intermediate case, many more excess demands than just apartments in NYC, but also lots of assets and commodities with flexible prices where cash can be freely exchanged for gold, silver, copper, bonds, forex, bank accounts, stocks, etc.

    I guess you could call that excess supply of money. But if you go that route then people like DeLong will predictably draw the wrong conclusion, as the bond market is not one of those markets in disequilibrium. That’s why I think it’s best to reserve the term “disequilibrium” for markets where there is a clear problem, where people can’t get what they want no matter how hard they try.

    I see the money market being in disequilibrium relative to the labor market, and in equilibrium relative to the asset market. I choose to call that situation with the terms appropriate for the rent control at full employment case, not the case where all goods, services, and assets are in disequilibrium vis a vis money.

    I hope this helps, but again, on content we probably agree, which explains my use of a Latin cliche at the end of the post.

    Everyone, I have other posts rebutting the claim that Texas is gaining population because of cheap housing. It’s growing far faster than all the neighboring states to the east, west, and north, which also have cheap housing. The real reason Texas is growing is because they have cheap housing and an efficient economic model, with no state income tax, for instance.

  37. Gravatar of mikef mikef
    25. August 2014 at 08:41


    My take is that Texas wages are lower is because they actually have entry level jobs from growing companies. When is the last time a New York company decided to expand in NY? From the upstate NY perspective, between down sizing and not hiring anyone out of college…you see a lot of people heading south.
    Average age in TX is 32, the average age in the Northeast is around 40…The average age in my company gets about 1 year older every calendar year.

    Again from an upstate NY perspective, our real estate prices are near the lowest in the nation…but our real estate taxes are near the highest. No mention of lower taxes in article. Everyone I know who has left for jobs in the south have increased their standard of living from sources other than the difference in real estate. That may be a difference in the NYC area..but not the Northeast in general.

  38. Gravatar of Dan W. Dan W.
    25. August 2014 at 09:00

    Is one’s productivity, as Krugman asserts, dependent on where one lives? Generally yes. But there is a more important question: Are the individual benefits of living in a high productive community worth the costs?

    Can Krugman even comprehend this question? Can he even fathom that individuals may have values different than his? Some people really want to live in a single family home with 10,000 square foot yard. Who is Krugman to say that this choice is inferior? He can “encourage” all he wants but then what? When will he insist that people MUST live in high dense housing? If it “makes the country richer” it must be so, right?

    “The way to make the country richer is to encourage them to move back, by making housing in dense, high-wage metropolitan areas more affordable.” ~ Paul Krugman

  39. Gravatar of TravisV TravisV
    25. August 2014 at 09:08

    Prof. Sumner,

    Thanks, I forgot you already weighed in on this one (see below, for example):

  40. Gravatar of Tom Brown Tom Brown
    25. August 2014 at 09:28

    “Even MMs merely recommend tar, no feathers.” Lol, … the tar is about 99% of what’s unpleasant about being tarred and feathered.

  41. Gravatar of Saturos Saturos
    26. August 2014 at 03:29

    Scott said: “I see the money market being in disequilibrium relative to the labor market, and in equilibrium relative to the asset market.” [didn’t understand the next sentence.]

    Well Scott if you see labor as being in disequilibrium with money, because people can’t trade their labor services for each other’s labor services via money, because the nominal wage rate is too high (this follows from saying that excessive W/NGDP is pricing workers out of all of the labor markets), then it’s straightforward to go from there to saying that the prices of what they sell are also stuck too high, because wages are too high. So people are similarly unable to swap outputs for each other’s output. This just seems like getting more to the root of the matter to me – with money also as MoA, we can then see an accounting representation of the problem as the general wage/price level being too high, in nominal terms (relative to the nominal value of money, which in our economy is unity), as well.

    Financial assets are a different case, their prices don’t go into GDP as they are claims on GDP, they are stock claims on future GDP flows. They are relevant to the money stock/asset stock equilibria, not the money flow/GDP flow equilibrium. So the fact that those prices have adjusted is really besides the point.

    When my high school teacher taught me that in the Great Depression there were people who literally set cars and other excess product on fire because it couldn’t be sold, I could never understand it. “Surely you could always have managed to sell it if you lowered the price enough,” I thought. “And if everyone is having the same problem, then everyone could lower their prices at once, and then no one would even be poorer and everyone could still buy what they want. Which means the problem is clearly about money itself…”

    We agree enough I think. I think Brad de Long actually understands what Nick is saying even better actually, he just neglects additional factors, like the fact that downward pressure on bond prices is ultimately more than offset by a sharply reduced supply of bond issues, because people don’t want to borrow in a recession (the income effect)…

  42. Gravatar of ThomasH ThomasH
    26. August 2014 at 14:29

    While I agree that NGDP targeting is better than interest rate targeting, it’s not easy to distinguish public statements that implicitly assume that the monetary authorities will, in failing to maintain the inflation target, act as if they are constrained by the ZLB from a belief that they ARE constrained by the ZLB. It’s sort of a “no true Scotsman” argument, but neither the Fed nor, even less, the ECB actually carried out a real interest rate targeting policy during the recession, much less a “dual mandate.”

  43. Gravatar of Benny Lava Benny Lava
    26. August 2014 at 15:34

    I disagree with Krugman but for different reasons. He seems to ignore purchasing power for one. Another is that the oil and gas boom in Texas is real and a driver of growth not connected to any policy. Sometimes I wish economists would acknowledge these things. Seattle was a pretty down and out town until Bill Gates decided to move Microsoft there. Seattle’s resurgence was serendipitious. Much of the manufacturing in Houston is for the natural resource extraction industry. Also Texas has much lower regulations and that is harder for economists to measure than tax rates and the like but it is real and it matters, probably moreso than taxes.

  44. Gravatar of ssumner ssumner
    26. August 2014 at 16:03

    Saturos, Yes, I think we mostly agree, but choose different terminology to characterize the situation.

    Benny, I did a post showing that Texas population growth slowed after 2007, around the time of the fracking boom. It’s not oil and gas that is causing Texas’s population to grow so fast.

  45. Gravatar of ThomasH ThomasH
    26. August 2014 at 16:12

    @ Travis V
    Krugman takes a perfectly libertarian position in zoning restrictions driving up house prices and gets grief for not also talking about inefficient provision of public services.

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