Does conservative monetary economics have a future?

John Taylor has a new piece in the Wall Street Journal that tries to lay out a conservative critique of recent Fed policy:

A growing number of economists, former central bankers and senior government officials””including Martin Feldstein, Paul Volcker, Allan Meltzer, Raghu Rajan, David Malpass and Peter Fisher””have now concluded that the Fed’s policies are not working. Critics want the Fed to return to a more rules-based monetary policy.

I’m all for a rules-based approach to policy. But unfortunately Taylor fails to make his case. You’d think a fan of rules-based policy would provide a razor sharp critique of Fed policy, but Taylor’s critique is anything but clear, as Paul Krugman indicates:

I mean, if anyone can find a coherent argument in Taylor’s latest, please tell me. My quick summary: Current monetary policy is just like in the 1970s, except for the lack of inflation thing. It’s completely ineffective, which means that we must stop it immediately, or else this ineffectual policy will somehow have vastly negative effects on something or other (not clear what). But the trouble is that people think stopping it would be too costly, whereas in fact it would have no cost, as illustrated by the really bad things that just happened when the Fed indicated that it might indeed stop the policy.

Also, the sluggishness of the recovery somehow proves that money has been too loose.

I have to admit that at this point the arguments against quantitative easing have become unanswerable “” because they’ve become incomprehensible, and there’s nothing to answer.

If one accounts for the hyperbole in Krugman’s attacks on conservatives, I think he’s basically right. Then Taylor shifts to a discussion of the 1970s and suddenly he makes a lot of sense. The reader is reminded how the conservative critique of monetary theory and policy during the 1970s turned out so successful. But then he tries to link the two; his critique of the policy of the 1970s with his critique of current policy. And it just doesn’t work. NGDP growth averaged 11% from 1972 to 1981, whereas it’s averaged barely over 2% during the past five years, the slowest nominal growth over five years since Herbert Hoover was in office. The problems of today are nearly the opposite of the problems of the 1970s.

Taylor is deeply frustrated that the Fed has moved away from the rules-based approach of the Taylor Rule. I get that. Taylor’s conservative audience is convinced that QE will lead to hyperinflation. I get that. Conservatives not named Milton Friedman instinctively equate “bad monetary policy” and “dollar debasement.” I get that. But Taylor is too smart to try to sell a simplistic “hyperinflation is coming” story and so ends up with a grab bag of unrelated possible problems that might or might not be a consequence of continuing or not continuing current policy.

If I can’t understand Taylor’s argument, I’m quite sure that bright young conservative econ students won’t be convinced. So does conservative monetary economics have a future? In my view the young will look for a clear and analytically powerful story. I’d obviously like to think that will be market monetarism, but I suppose it could end up being Austrianism or the Fiscal Theory of the Price Level, or something else.

Over the years I’ve enjoyed reading papers by Taylor, Meltzer, Feldstein, etc. But as I’ve warned over the past four years their current analysis of monetary policy is simply not persuasive. With the death of Milton Friedman in 2006, conservative monetary economics is both leaderless and rudderless.



35 Responses to “Does conservative monetary economics have a future?”

  1. Gravatar of edeast edeast
    14. July 2013 at 16:46

    Free banking. It works. Fairly conservative. No ngdp aggregate for people to guess at, loanable funds at point of sale, as people place their bets, on the real economy. Just trying to figure it out, but so far it is better than mm in my opinion. Selgin has this graph comparing money supply between Canada and the u.s. Late 19th century, cad money supply would contract 20% every winter. Whereas the us has a very multiyear general slope.

    Bond backed currency implemented by states, during war times, but remained in effect.

  2. Gravatar of J J
    14. July 2013 at 17:05

    Professor Sumner,

    It’s funny that the leader of a movement thinks his movement is leaderless. I bet that your influence increases greatly over the next decade as NGDP target fans graduate from economics programs.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. July 2013 at 18:12

    It took Milton Friedman a lot longer than five years to establish the fact that ‘money did matter’. 25-30 years, really.

  4. Gravatar of Benjamin Cole Benjamin Cole
    14. July 2013 at 19:59

    The ranting against a more-stimulative monetary policy is…exasperating.

    Taylor evens goes so far as to say that because the USA does QE, then Japan does it too. Horrors!

    Yes, I fear a more-robust Japan economy. That would tank ours. They should stay in permanent minor deflation and glacial growth.

    I understand Taylor is trying to suggest “currency war.” Leading to…hyperinflation. Although when Japan did QE from 2001-6, the USA did not go to QE and start a currency war.

    In fact, Taylor gushed about the BoJ’s QE program, in a 2006 paper he wrote!

    I have concluded that social norms are trumping economic thinking at this point in right-wing monetary world. Feldstein is blubbering about the Fed being “saddled” with $3 trillion in bonds. Yeah, what a weight to carry around, pumping money into the Fed in gushers. The world’s most profitable institution. I would like to be so saddled.

    The social norm on the right is that money should be tight, and that is determined by higher interest rates. The left-wing social norm is that deficit spending is the proper course.

    Social norms can trump even economic interest, and clearly trump rational thinking.

    It may be a social norm to not have women work, even though output is lost. It may be a social norm to “help farmers” 80 years after the Dust Bowl. “Green” energy must be applauded no matter who uneconomic.

    And so, the right-wing social norm is that money should be tight, and always tighter than whatever the current stance is.

    Lastly, I wish someone would bash the idea that not doing QE is “passive.” To stop QE is a very aggressive action to stifle economic output. To do, or not do QE is equally active.

    If manager of the Reds Pete Rose leaves a pitcher in the game who is getting bombed, as Rose wants to save his relievers for the next game on which he has a bet on for the Reds to win, then Rose is “doing something” when he leaves the bad pitcher in.

    Not doing QE is doing something. Watching your neighbor’s house burn down without lifting a finger as “you don’t want to get involved” is doing something.

    It would be reckless of the Fed to cease QE anytime soon, maybe for years.

  5. Gravatar of Edward Edward
    14. July 2013 at 20:32

    I’m enraged with conservative STUPIDITY over monetary policy. I don’t think any layman conservative commentator or politician, (with a few exceptions) ever really paidattention to the Monetary History, and its argument about the Fed not doing ENOUGH to halt the great contraction.

    Scott, how do you keep from pulling your hair out when dealing with these numbskulls?

  6. Gravatar of J J
    15. July 2013 at 02:56

    The conservatives are certainly pushing themselves into an ideological corner. They must now believe a combination of the liquidity trap and a supply-side story for the current economic situation. If there were no liquidity trap, then, without a demand shortage, QE would be causing inflation. Moreover, if there were a demand shortage and a liquidity trap, then deficit spending might be a good idea. The former simply didn’t happen and the latter is anathema to conservatives.

    Finally, these two occurrences — the liquidity trap and supply problems — are apparently not a coincidence. It turns out, according to Taylor, that, at the ZLB, overly aggressive monetary policy hurts the supply-side of the economy instead of causing inflation.

    These ideas cannot withstand evidence and eventually something will happen that forces conservatives to come up with new explanations. It’s hard to imagine where they can go if they refuse to abandon their two assumptions so far.

  7. Gravatar of ssumner ssumner
    15. July 2013 at 04:00

    Edeast, Free banking is not an alternative to NGDP targeting, they address completely different issues. You can easily have both.

    J, Well there is no one in the class of Friedman.

    Ben, Yes, it’s frustrating.

    Patrick, Yes, it took him a long time.

    Edward, If I keep typing my hands are too busy to pull my hair out

  8. Gravatar of TravisV TravisV
    15. July 2013 at 05:35

    Prof. Sumner,

    Have you seen this new post by Noah Smith?

  9. Gravatar of Russ Anderson Russ Anderson
    15. July 2013 at 05:39

    Thanks for the great article.

    Scott writes: “If I can’t understand Taylor’s argument, I’m quite sure that bright young conservative econ students won’t be convinced.”

    The amazing thing is that Taylor & political conservatives don’t have a coherent argument for tightening, yet still wield as huge amount of political clout. Their lack of a coherent argument is why I refer to their position as religious. They believe in tight money and come up with excuses to justify their belief. The result is the “grab bag” of incoherent excuses for tightening.

    Scott writes: “With the death of Milton Friedman in 2006, conservative monetary economics is both leaderless and rudderless.”

    Being old enough to remember Friedman in his prime, even then I wondered how much his monetary ideas sunk in with political conservatives. The impression I always got was that all they heard was “… blah blah blah … the Fed caused the Great Depression … blah blah blah …”. MMers and new Keysians got Friedman’s finer points about monetary issues, but political conservatives acted like it is still 1929 – the best money is tight money. Political conservatives liked Friedman when he said what they wanted to hear – tight money – but they did not hear what he was really saying. Friedman was opposed to the gold standard – even suggesting the government sell off its gold reserves – but political conservatives always hung on to the gold standard as The Gold Standard. So it is not surprising that all political conservatives remember of Milton Friedman’s monetary policy is tight money. That’s all they wanted to hear.

  10. Gravatar of Morgan Warstler Morgan Warstler
    15. July 2013 at 06:32

    Scott I’ve always said this, but I think there’s a real way to woo conservatives to your ideas.

    And I truly believe it is consistent with your ideas.

    If you start at 2000 and run 4.5% NGDPLT, or 5%, you can give conservatives an EXACT AMOUNT indeed and EXACT DATE when rates will rise.

    Which is all they care about.

    If I’m not mistaken, under 4.5% from 2000, we raise rates today.

    And at 5%, we’re close to raising them.

    So IF we owe 1.6% at 5% since 2000, then you can give them – with an added .4% for 4 months, we’re DONE.

    Now you could argue about dates, but the only time you’d sound silly is if you tried to run it off the peak of housing boom, admit we were in the over, and pick a date before it, where the past overage works to conservative advantage.

    But no one from MM is giving conservatives something hard to grasp hold of.

    You WANT THEM to adopt your arguments.

    THEY WANT to beat the left in future arguments and make left status and voice. (just be honest)

    So SHOW THEM how in clear hard terms, they will gain the upperhand using your arguments, tell them WHEN they will gain the advantage, so that the short term loss to their status is quantifiable.

    A LOT of them want to crush DeKrugman, and if you were meaner, and we’d already reached the point when rates get raised, you could use your arguments to whip DeKrugman.

    OTHER econs are meaner, and if they sense they will gain the magic Sumner sword and shield, and they know the specifics of when that is…

    They will likely put down a mixed bag of rocks and sticks and take a few lumps to come back stronger.

    And thats what you are / ought / should be selling.

  11. Gravatar of W. Peden W. Peden
    15. July 2013 at 06:48


    This paper is an interesting “period piece” from October 2008, arguing that the financial crisis as people were talking about it at the time just plain didn’t exist.


    (1) Bank lending had not dried up.

    (2) Interbank lending had not dried up.

    (3) Non-financial commercial paper markets had not collapsed.

    (4) Banks are not necessary for corporate finance to exist and actually own only 1/5th of corporate debt.

    They have an excellent range of charts supporting these assertions. All of this is evidence for your proposition that the shift in NGDP growth caused the financial crisis, rather than vice versa, because the financial crisis as it occured didn’t exist prior to October 2008. The paper also reminds one of the distinction between a financial crisis and a banking crisis: one can have one without the other.

  12. Gravatar of edeast edeast
    15. July 2013 at 08:02

    I realize that now, typed too quickly, just going through Glasner’s corpus, and read your and Selgin’s recent posts.

  13. Gravatar of Don Don
    15. July 2013 at 08:09

    I think time has passed John Taylor by. I’ve heard interviews with him and his ideas are old/wrong and arguments are poor. By contrast I’ve been listening to a podcast of Milton Friedman’s “Capitalism and Freedom” (9 hours from American Conservative University) and it really does hold up. Taylor should be become a footnote of history.

  14. Gravatar of NW NW
    15. July 2013 at 08:27

    I agree with J. It’s you. You’re the leader.

    It’s just that it seems like the only time monetary policy makers get questioned directly and appropriately with a relatively wide audience is when Ryan Avent gets to ask his one question at Bernanke’s press conferences four times a year.

  15. Gravatar of TravisV TravisV
    15. July 2013 at 09:37


    Jim Pethokoukis vs. John Taylor

  16. Gravatar of Zarathustra Zarathustra
    15. July 2013 at 09:59

    Im a young (possibly?) bright econ student!!!
    Although I’m far from conservative, of the various theories I have encountered in the blogosphere so far, market monetarism seems to make the most sense, to me at least. I think the fear for conservatives should be a drift towards the rand paul / peter schiff style of libertarian austrianism (just throwing those words together for kicks)… possibly destructive effects on the economy for the party supposedly most concerned with it.

  17. Gravatar of Lars Christensen Lars Christensen
    15. July 2013 at 10:17


    Friedman would tell you that there is not such a thing as conservative monetary economics – only good and bad monetary Economics. Presentday Taylor and Meltzer are clearly very bad monetary Economics.

    By the way Friedman was never a conservative. He was – like the two of us – a classical liberal.

  18. Gravatar of John John
    15. July 2013 at 11:19

    The Taylor rule wouldn’t work too well in a zero (or low) interest rate environment given that it is based entirely on adjusting interest rates by a set amount. It would be like trying to make a plane go faster using a whip.

  19. Gravatar of TallDave TallDave
    15. July 2013 at 11:35

    The right needs to figure out the real choice is between fiscal and monetary stimulus.

    The left will happily take the first, and grudgingly accept the latter. The right seems equally opposed to both.

  20. Gravatar of TallDave TallDave
    15. July 2013 at 11:38

    Zarathustra — yep, seeing a lot of that. The great tragedy of today’s debate is that the side that understands pro-growth policy fairly well is largely clueless on monetary policy, while the side that understands monetary policy fairly well is largely clueless on growth.

  21. Gravatar of J J
    15. July 2013 at 12:22

    Professor Sumner,

    Unrelated, but…

    To Krugman’s credit, his theory offers an explanation that can handle a lack of improvement in employment after many years. According to your theory — perhaps I am mistaken — after many years of slow NGDP growth, expectations and contracts should adjust and all should be OK on the demand front. You have proposed that this didn’t occur for Japan because of money illusion (too low NGDP growth will just never be enough). But, with positive NGDP growth in the US, there is no reason for expectations not to adjust and sticky wages not to cease to be a problem.


  22. Gravatar of Tom Brown Tom Brown
    15. July 2013 at 14:05

    Scott, what do you think of Krugman’s theory that the conservative monetarists are motivated in their opposition to QE because they’d like to see the economy do terrible on Obama’s watch, and had Romney won they’d be singing a different tune. It seems plausible to me.

  23. Gravatar of ssumner ssumner
    15. July 2013 at 14:05

    Everyone, Thanks for the support, lots of good comments.

    Travis, Yes, I’ll try to do a post on that.

    W. Peden, Thanks, that looks useful.

    J, I’ve done a number of posts on that. I’ve talked about AS and AD shocks getting “entangled”‘ similar to Noah Smith’s new post. Oddly, you and Smith both seem to have confused AD with quantity demanded. Actually, AS (and quantity demanded) adjusts to changes in AD.

    Also note that the economy has been hit by AD shocks for 5 years in a row. I believe the labor market has adjusted to the shocks of 2008-09; had there been no more shocks we’d be back at 6% unemployment by now.

  24. Gravatar of ssumner ssumner
    15. July 2013 at 14:10

    Tom, That may be part of it, but I’d guess that it often operates at the subconscious level.

    If you sincerely believe Obamanomics is bad for the supply side you might not want the Fed to “bail him out” with monetary stimulus. Thus they don’t see their motives as sabotage, at least in some cases. In other cases it’s pure politics.

  25. Gravatar of ssumner ssumner
    15. July 2013 at 14:17

    Travis, Ouch, my misspelling of Meltzer showed up in the link.

  26. Gravatar of J J
    15. July 2013 at 14:54

    Professor Sumner,

    Can you elaborate on how we are confusing AD with quantity demanded?

  27. Gravatar of ssumner ssumner
    15. July 2013 at 16:20

    J, Actually you probably weren’t making the same mistake as Noah. It would make more sense in my view to talk about AS adjusting, rather than things being Ok on the demand front, but maybe that’s what you meant.

  28. Gravatar of Geoff Geoff
    15. July 2013 at 16:48

    Krugman wrote:

    “But the trouble is that people think stopping it would be too costly, whereas in fact it would have no cost…”

    This clown doesn’t even understand the law of opportunity costs.

    EVERY action has a cost.

    “… as illustrated by the really bad things that just happened when the Fed indicated that it might indeed stop the policy.”

    Right, so if someone gets a hangover from dropping their consumption of alcohol by any extent, then that proves drinking is what should be continued?

    This myopia is something to expect out of a child who hasn’t yet learned the trade-off between short term pain and long term gain. The brutish and rude put 100% weight on short term pleasure and pain decision criteria.

  29. Gravatar of TravisV TravisV
    15. July 2013 at 17:02

    Prof. Sumner,

    Here’s Paul Krugman on Noah Smith’s post:

  30. Gravatar of TallDave TallDave
    15. July 2013 at 17:26

    Scott — Well, I hate to defend people who are wrong, but seriously, hang out on some conservative websites for a bit. Many of these people are very sincerely afraid of inflation.

    You have to remember there’s a fear dynamic here for the right that almost doesn’t exist for the left — welfare-driven hyperinflation. Many of them look at QE and see the beginning of of fiscal monetization.

    Of course they’re wrong because the Plank curve is steep and if we collapse it will happen like it did in Greece: suddenly. The best way to avoid that is to do monetary stimulus instead of fiscal, but it’s hard for many people to understand why the distinction is so critical.

  31. Gravatar of rbl rbl
    15. July 2013 at 20:48

    If I had to bet between MMs and Austrians being the future of conservative monetary policy, I’d place all my money on the Austrians. From my amateur’s point of view it seems like the real divide is between those who believe in (for lack of a better term) persistent demand shortfalls and those who think that the explanations are all supply side. Maybe this is my bias as a liberal, but I see Democrats like Yellen and Romer basically calling for NGDP targeting, DeKrug attacking Taylor’s negative take on QE, and I compare it with the GOP seriously considering the gold standard, and I expect that NGDP targeting will remain on the fringe of GOP ideas. As Josh Barro said, “We have had zero success in convincing Republican elected officials that easy money is ever a good idea.” Shifting the balance between fiscal and monetary stimulus seems far easier than convincing someone who is opposed to any stimulus, ever.

  32. Gravatar of ssumner ssumner
    16. July 2013 at 07:00

    TallDave, Good point.

    RBI, Elected officials are completely beside the point, they defer to experts and the Dems and GOP pick the exact same people to head the Fed. And I mean that literally.

    Austrians are demand-siders, they simply use a different framework. If it’s supply side problems that will help the RBC model.

  33. Gravatar of ssumner ssumner
    16. July 2013 at 07:00

    Thanks Travis.

  34. Gravatar of flow5 flow5
    17. July 2013 at 07:50

    kenneth.saindon@atkinsgloba (blogger) on the IOeR rate of interest:

    “a quarter percent paid every 2-weeks, which equates to 6.7% annual when including the compounding”

    That means the IOeR policy is the “Highway to Hell”.

  35. Gravatar of Rules vs. Discretion | askblog Rules vs. Discretion | askblog
    21. July 2013 at 06:27

    […] Scott Sumner writes, […]

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