He who LOLs last, LOLs best

My colleague told me that the job market site for economists has an entire thread devoted to this question:

Do you think Scott Sumner is batshit insane?(14 posts)

And here is the comment on top:

His blog is usually pretty good when he isn’t talking about how monetary policy was contractionary in 08-09. (Lol…)

my vote is not-quite-batshit-insane-but-still-insane

Commenter d4bb (notice how they don’t use their names) is actually about right; insane, but not batshit insane.  BTW, I’d actually be more inclined to hire someone who called me insane—let’s have some fun debates in the faculty dining room.

I agree that back in late 2008 I was just about the only one claiming that monetary policy was very contractionary.  That’s a pretty good definition of insanity–looking at the world in a way that others find preposterous.  But let’s see who gets the last “Lol.”

Bruce Bartlett recently sent me a very interesting paper by Lars Svensson.  At least I think it’s very interesting, as I don’t read math.  In any case, here’s what Svensson thinks about easy and tight money:

We see that there is a substantial difference between restrictions on the nominal and the real policy rate, since inflation is quite sensitive to the real policy rate in Ramses. In the top middle panel, we see that a restriction on the nominal policy-rate projection to equal 25 basis points for quarters 0–3 corresponds to a very high and falling real policy-rate projection. In the top right panel we see that the restriction on the real policy rate to equal 25 basis points for quarters 0–3 corresponds to a nominal policy-rate projection quite a bit below the real policy rate. . . .

If restrictions are imposed on the nominal policy rate for many periods, unusual equilibria can occur. We can illustrate this for Ramses in Figure 4.4, where in panel b the nominal policy rate is restricted to equal 25 basis points for 9 quarters, quarters 0–8. This is a very contractionary policy, which shows in inflation and inflation expectations falling very much and the real policy rate becoming very high.  (Italics added.)

A policy rate set at 0.25% for a long period of time.  A real interest rate that actually rose well above the nominal interest rate.  Sharply falling inflation expectations.  Does that sound a little bit like late 2008?  Looks like I’m not the only one calling that “contractionary.”

LOL

Those who can read math might want to tell me whether I misunderstood the paper.  After all, it’s well known that I’m delusional.

BTW, you have to wonder about people who have time to do these long threads at “Economics Job Market Rumors,” picking on an obscure professor at Bentley.  Don’t they have better things to do with their time?

I know what you are thinking—“What does that say about you Sumner.”

Here’s a more interesting comment by “8aea”:

When Sumner tries to get into the details of monetary policy, however, he gets a little lost. It is far, far more coherent to discuss these issues in Woodfordian “expected path of interest rates” language, but he instead insists on talking in terms of quantities. This causes problems during discussion of QE2, because from a “quantity” perspective it seems that QE is clearly beneficial, whereas from a modern (correct) perspective it doesn’t do anything at all unless it provides a signal about the future path of the Fed’s policy instrument. The funny part is that Sumner actually seems to acknowledge this (the fact that QE only matters as a signaling device, except for perhaps some slight portfolio balance effects) when pressed, but then declines into rambling about NGDP targeting and whatnot.

Woodford says the way to get out of the liquidity trap is to promise to hold rates at zero for a really long time.  If I wanted to be sarcastic like these guys, I’d say “How’s that working out for the BOJ?”  I do respect Woodford’s view, but I’m not sure that I’d characterize someone like Bennett McCallum as “a little lost,” and yet he also thinks the quantity of money approach is useful.  Woodford thinks of the transmission mechanism in terms of interest rates; I think of it in terms of asset prices.  Look at how interest rates and asset prices responded to QE2, and tell me which view seems more plausible.  Or how about the Fed announcement of December 2007, which caused a sharp stock market decline, and also caused nominal rates to fall across maturities from 3 months to 30 years.

BTW, the “signaling” that I am supposedly confused about is a signal for a higher future path of the supply of base money relative to demand—sending future prices (and NGDP) higher through the excess cash balance mechanism, once we are no longer at the zero bound.  Not sure why that’s viewed as “rambling.”

But commenter “d018” clearly nails me:

His obsession with nominal GDP borders on the sociopathic.

PS.  Responses will be very slow for the next few months.

PPS.  If DeLong, Yglesais, Svensson, etc, are saying the same thing as me, I might as well quit blogging.  It’s only fun if you can be a contrarian.

PPPS.  9.8%, 9.4%. 9.0%, 8.9%.  Why couldn’t my fellow economists have demanded QE2 in 2008?   Why did we have to throw nearly 2 years away on a futile and expensive fiscal stimulus, before getting serious?  Haven’t we been teaching our grad students for two decades that fiscal stabilization policy doesn’t work very well?  Did we not believe what we were teaching?


Tags:

 
 
 

81 Responses to “He who LOLs last, LOLs best”

  1. Gravatar of Contemplationist Contemplationist
    4. March 2011 at 07:05

    I would go with Morgan on this one. They were screaming for fiscal stimulus to increase the size and scope of government and claim victory after supposed decades of laissez-faire (what a joke) throwing their principles out the window.

  2. Gravatar of leftoutside leftoutside
    4. March 2011 at 07:11

    ‘If DeLong, Yglesais, Svensson, etc, are saying the same thing as me, I might as well quit blogging.  It’s only fun if you can be a contrarian.’

    Oh come now, you can still be contrary about the supply side! All is not lost.

    I think coming at this with only a smattering of macro knowledge has helped me ‘get’ your policy. It must be complicateed for people to learn a new way of looking at the world, it takes time to sink in – hell, we’re still using lighthouses as examples of public goodspar excellence

  3. Gravatar of Tyler Cowen Tyler Cowen
    4. March 2011 at 07:15

    This abuse is a sign of your growing status and influence; it is exactly how some people talk about Krugman.

  4. Gravatar of Alleged Wisdom Alleged Wisdom
    4. March 2011 at 07:16

    Have you seen this:

    http://www.shadowstats.com/charts/monetary-base-money-supply

    The guy is actually an inflation hawk, but his numbers show that the M3 growth rate started declining in 2008. M3 actually fell by 6% between mid-2009 and mid-2010, and it is still contracting.

  5. Gravatar of marcus nunes marcus nunes
    4. March 2011 at 07:18

    Tyler Cowan is 100% right. Some of us could post comments over there under “anonymous”…

  6. Gravatar of Dustin Dustin
    4. March 2011 at 07:51

    Yep, I agree. Tyler Cowen is right.

    And when somebody creates a blog called “Sumner in Wonderland”, then Scott Sumner will know his status and influence is at a Krugman level.

    http://krugman-in-wonderland.blogspot.com/

  7. Gravatar of Philo Philo
    4. March 2011 at 07:58

    “This abuse is a sign of your growing status and influence; it is exactly how some people talk about Krugman” (Tyler Cowen). But you don’t want Krugman as your model! Tyler Cowen is a better exemplar: status and influence, but (almost) no one abuses him.

  8. Gravatar of Contemplationist Contemplationist
    4. March 2011 at 08:22

    Krugman is hated because of his naked partisanship, ad-hominem, non-sequiters, red herrings and general obnoxiousness. Check out his tasteless hackery against Milton Friedman when he died in 2006. How one can ignore this kind of bullshit is beyond me.

  9. Gravatar of Indy Indy
    4. March 2011 at 08:56

    Perhaps you can see what I’m talking about when I lament the permanent adolescent out-snark-the-next-guy sarcastic-insult competition that defines 99% of contemporary conversation style. I would say “even among the highly educated and intelligent”, but the tragedy is that it’s not “even”, it’s “especially”.

  10. Gravatar of Doc Merlin Doc Merlin
    4. March 2011 at 08:58

    Darn that Tyler and his smug, chess-playing, foodie, faux-high class attitude!

  11. Gravatar of Doc Merlin Doc Merlin
    4. March 2011 at 09:00

    @Indy:
    Its not contemporary, its been around for atl-east a century, probably longer. From what I have read, snark and wit are the most effective way human males signal mental fitness to mates, and it sort of bleeds into everything else.

  12. Gravatar of Zippy Zippy
    4. March 2011 at 09:04

    Haha Scott, that was actually my post- I’m a pretty avid follower of your blog. I don’t think you’re batshit insane at all, and think you’re quite right about monetary policy issues and really issues in general.

    I phrased the original post that way because EJMR is a horrible, horrible place and I figured insulting you right off the bat would be the best way to provoke a sensible discussion and perhaps defense of your views. If I had just said “What do you think of Scott’s ideas blah blah blah…” it would have been about 10 posts of trolling and people saying “stop self-promoting Scott”.

    I’m not joking either. I really figured that would be the best way to go about things. That’s how awful that place is. I’ll be home later and I’ll see if I can post under my home IP (so it will register as d4bb)to prove what I am saying.

    You’re not quite hateable level famous yet I’m afraid. 🙂

  13. Gravatar of leftoutside leftoutside
    4. March 2011 at 09:22

    Doc Merlin, where I come from we dismissively refer to people like Tyler as ‘new money.’ No class, that only comes from land ownership and generations of inbreeding. 😉

  14. Gravatar of Ram Ram
    4. March 2011 at 09:35

    As I mentioned in my most recent comment, Woodford has shown that the optimal monetary policy rule, derived from a wide range of specifications for the benchmark New Keynesian DSGE model, is a flexible price level targeting rule. This implies that the stance of US monetary policy is indicated by the Fed’s forecast of the price level & the output gap, relative to financial market expectations. If the financial markets expect 2% per year growth in the price level together with a stable output gap (with the flexible price level of output growing by 3% per year), then they effectively expect nominal income to grow at 5% per year. If the Fed suddenly begins to forecast nominal income growth below 5% per year (because of disinflation/deflation or a growing output gap or both), then by Woodfordian reasoning the stance of monetary policy has become contractionary. This is roughly what happened in mid-to-late 2008, in a big way. Notice that expectations of the level of nominal income, responding to Fed forecasts/signals of intent, provide a nearly perfect indicator of the stance of monetary policy, exactly what our good host has been shouting from the rooftops since the early days of the Great Recession.

    How it is that these critics can complain that Prof. Sumner’s commentary is out of step with the Woodfordian mainstream because of his emphasis on NGDP is beyond me. Just because Woodford has not explicitly discussed this (obvious) implication of his framework, does not mean that it flies in the face of this way of thinking about the business cycle. LOL indeed.

    Also, I suspect Prof. Cowen is correct, which I consider a very positive development in the scheme of things.

  15. Gravatar of Andy Harless Andy Harless
    4. March 2011 at 09:50

    The question of whether monetary policy was tight in late 2008 is largely a matter of definition. How does one define “tight” monetary policy? If you define it by comparing the nominal policy interest rate to the latest reported 12-month inflation rate, then it wasn’t tight. If you define it by comparing forecast NGDP to the historical trend, then it was very tight.

    I have to admit, when I first heard (second or third hand and incomplete, some time in early 2009 IIRC) about what you were saying, I dismissed it as some crackpot idea. But when (a year or so later) I actually started to read your blog, I became convinced that your definition of monetary tightness is as reasonable as any other. In monetarist terms, NGDP is just a velocity-adjusted monetary aggregate, so it’s a variation on a traditional way of measuring the ease of monetary policy. In New Keynesian terms, it’s a special case of a forward-looking Taylor rule, and it’s the most obvious special case — a lot more obvious than Taylor’s original rule — so it deserves some presumption. In October 2008, if the Fed had been following a forward-looking, equal-coefficient Taylor rule, the governors would have been tearing out their hair trying to find ways to simulate negative interest rates rather than dragging their feet about cutting rates while obsessing about providing liquidity.

  16. Gravatar of StatsGuy StatsGuy
    4. March 2011 at 10:12

    “It is better to go down in infamy than to never go down at all.”

    Jack Bowman

    Thing is, I can’t figure why they’re all obsessing about your NGDP targeting ideas. Seriously, those are the gems. It’s all your _other_ batshit insane ideas that they should be scared of!

    🙂

  17. Gravatar of orionorbit orionorbit
    4. March 2011 at 10:14

    Hi.

    Question: If the interest rate on reserves is negative, why would the banks hold any excess reserves with the CB? wouldn’t they just lend to each other overnight and still manage to hoard on that cash rather than lend it to real people and real businesses?

  18. Gravatar of Student with too much time Student with too much time
    4. March 2011 at 10:26

    I am the person who wrote as “8eae” in the excerpt you posted. I am confused by this statement:

    “Woodford thinks of the transmission mechanism in terms of interest rates; I think of it in terms of asset prices.”

    At least in the core model, these are NOT separate transmission mechanisms. Assets are claims on a future stream of dividends, imputed rents, etc. When interest rates fall, it makes sense to consume a larger portion of these (future) streams today. True, asset prices are the intermediary here, but don’t let that fool you: this is exactly the same as the neoclassical intertemporal substitution channel.

    I agree that there are other effects, but they are effects that you have never emphasized. When firms’ equity becomes more valuable, agency problems become less severe and it is easier for them to raise capital for investment (usually through the debt market). This is, of course, Bernanke and Gertler’s “financial accelerator”. Somewhat more speculatively, when asset prices increase, the overall value of claims on “pledgeable streams” increases as well, and it is possible to manufacture more liquid assets (which are important stores of value for entrepreneurs, etc). This is the story suggested by Holmstrom and Tirole.

    These are conceptually distinct channels through which asset prices act as a transmission mechanism for monetary policy. But the standard story (which seems to be the one that you stress), where people feel richer and therefore want to spend more because asset prices increase, is a simple and direct manifestation of the intertemporal adjustment channel found in every New Keynesian model. This is why I don’t think you’re providing anything that Woodford can’t already tell us.

  19. Gravatar of Liberal Roman Liberal Roman
    4. March 2011 at 10:34

    I continue to believe that too much credit is given to the economics profession. Besides a handful of individuals, I don’t see economists really offering much value. I mean I can get a random guy off the street to tell me that you are “batshit insane” for stating that monetary policy has been tight and is still tight and expected to be tighter now. (Did you see that the ECB is going to raise rates? Do I hear another Euro crisis coming??)

    Anyway, my point is that a random right-wing talk radio host offers just as much insight into the economy as your average economist right now. “Printing money = evil. The End”

    It is only a handful of economists (Cowen, Krugman and you) that really offer anything worth thinking about.

    Keep doing what you are doing Scott. Eventually, you’ll get the recognition you deserve.

    P.S. I think the last 6 months have been our 1933 dollar devaluation moment. And sadly, from the rhetoric I am hearing from all the central banks, I think we are about to slip back down the recession hole. The oil shock could not have come at a worse time.

  20. Gravatar of anon/portly anon/portly
    4. March 2011 at 11:04

    “Sumner is a typical LRM — unreasonably convinced that his opinions are far more relevant than those of people with better records, and generally convinced that they’re out to get him.”

    I like the part about “better records.” Even in making an anonymous comment, this person can’t help emphasizing the over-riding importance of status in scientific discourse. It’s all about the Benja-, er, citations.

  21. Gravatar of anon/portly anon/portly
    4. March 2011 at 11:05

    “The notion that deflation is a problem is retarded. If you want inflation, print some money and hand it out on the street. Since we don’t do that, deflation is by definition not harmful.

    Scott Sumner is exactly the sort of retard who needs to be muzzled before he does any actual damage.”

    This one is so perfect my first suspicion is that Scott Sumner wrote it himself.

  22. Gravatar of Zippy Zippy
    4. March 2011 at 11:20

    For another example of why EJMR is a terrible, godforsaken place, here’s a fad troll thread someone made. They’re mocking John Forbes Nash’s mental illness:
    http://www.econjobrumors.com/topic/was-john-forbes-nash-batshit-insane

    Here’s a few more:
    http://www.econjobrumors.com/topic/famous-porn-star-visits-can-i-email-him-comments-on-his-pecker

    http://www.econjobrumors.com/topic/out-of-the-top-20-which-school-has-more-douchebags

    http://www.econjobrumors.com/topic/do-women-look-at-dirty-films-online

    Then there are about 90 million posts with personal attacks against the current job market star candidates, and frequent insults aimed at various famous economists and Nobel Laureates.

  23. Gravatar of Mark Mark
    4. March 2011 at 11:34

    Why are you getting some upset about some garbage posted in a garbage website?

  24. Gravatar of StatsGuy StatsGuy
    4. March 2011 at 12:17

    ssumner:

    “Woodford says the way to get out of the liquidity trap is to promise to hold rates at zero for a really long time. If I wanted to be sarcastic like these guys, I’d say “How’s that working out for the BOJ?”

    Less sarcastically (though, it’s healthy that you at least admit you’re batshit insane, since that’s the first step in healing)…

    There are two questions:

    1) Do you (the BoJ, the Fed) really mean it?

    2) Can you show it? [Sometimes you will be called out. If at that critical moment you flinch, then it will take an amazing amount of effort to recover the lost credibility. The Fed flinched in 2008-2009. We’ll be arguing over whether the Fed meant to tighten or made an mistake in summer/fall 08 for the next 200 years.]

    The commenter who argues about the promise of zero rates for a long time ignores the commitment problem. This problem can be eased in several ways, many of which involve institutional choices that create costs for reneging. One of the chief institutional tools is to actually PRINT money, because it’s HARDER TO UNDO than buying bonds. (Arguably, it’s still easy to crimp velocity, but if you print enough money, you can overwhelm this.) I think, in your critique of DeLong’s position of equivalency between bonds/money (swapping one zero rate instrument for another), it might help to hit this point harder. You talk about money being different from credit, but this is easy to ignore unless you explain why – it’s not zero interests, it’s not permanence (remember, woodford would say just promise to keep rates low a while), it’s about commitment induced by the institutional costs of undoing the action.

  25. Gravatar of StatsGuy StatsGuy
    4. March 2011 at 12:24

    Oh, back to point #1 –

    1) Do you (the BoJ, the Fed) really mean it?

    Why does this matter? Because investors all believe that the CB has incentives to get people to THINK that the CB means it, but not to really mean it. And if you get suckered, it hurts badly.

    You should do a post on the twisted motivations of central bankers.

    The answer to “Why would central bankers want people to think that they are going to keep money loose when they hope to tighten?” is very nearly the same as the answer to “Why did central banks in the Great Depression hoard gold?”

    Few people are as qualified to talk about this as you, but don’t let that get to your head. You’re still batshit insane.

  26. Gravatar of OGT OGT
    4. March 2011 at 12:26

    Scott you wrote: “PPS. If DeLong, Ygleaias, Svensson, etc, are saying the same thing as me, I might as well quit blogging. It’s only fun if you can be a contrarian.”

    If you were a ‘real’ blogger you’d just refine their opinions to stay contrarian…

    Harless: I agree that the forward looking Taylor rule is a good way to reconcile Sumner’s definition of monetary policy to more traditional definitions. It also coincides with the Fed’s actual legal mandate. The velocity adjusted monetary aggregate seems to just like a fudge of the monetarist problem of the unstable connection between M and V. (I realize functionally it’s the same as NGDP, it just ‘seems’ less credible to me).

  27. Gravatar of Blackadder Blackadder
    4. March 2011 at 12:36

    I notice that there is also a recent discussion on econjobrumors on the question “Was John Forbes Nash batshit insane?”

    On the plus side Nash was a brilliant economist, founded game theory, won the Nobel, etc. So being implicitly compared to him might not sound so bad.

    On the other hand, Nash *was* a paranoid schizophrenic.

  28. Gravatar of bertusmaximus bertusmaximus
    4. March 2011 at 13:14

    “The oil shock could not have come at a worse time”

    maybe the oil and general commodity price shock is a direct result of the main thrust advocated in this blog … economies aren’t closed static systems that befit models.

    the shadow stats link posted above has the figures on M1 … i suggest you have a look at the correlation between that and the equity and the oil/commodity markets … what you give with one hand, you take away with another. zero sum redistribution of wealth.

  29. Gravatar of Morgan Warstler Morgan Warstler
    4. March 2011 at 13:26

    One guy there gets it:

    “Political economic pressures are what held up the fed. Bernanke et al rightly see Obama as long term negative for the overall economy. So they have tried to make him look bad to get him out of office or at least cause gridlock as happened last november election.”

    Oil shock:

    We have to just friggin deal. It is going to go up whenever the economy grows. Bet on natural gas. Let’s call all of it Clean Coal, and get ready for $200Barrels.

    Fact #1:

    What we need a massive 5% productivity gain out of the public sector every year for the next 5 years, and 2-3% after that. Privatization of government alone will be a net jobs boom.

    Fact #2:

    And rents, we need to price housing properly, with tax policy and mortgage rates, and mark-to-market. We might as well do it now, when people can’t afford to drive.

    We’re going to be forced into both steps, and we have to start playing against Ben… you can count on him to keep printing, so now is the time to massive structural overhaul.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 13:34

    I’ve noticed things are getting a little nastier in the econblog world lately when you start defending Sumner or discuss monetary policy in general. (Maybe they’re afraid he’s right.)

    For example, last night I commented at Mark Thoma’s site at a post that was critical of Sumner:

    http://economistsview.typepad.com/economistsview/2011/03/long-and-vairable-lags-in-monetary-policy.html

    I was told by someone called Goldilocksisableachblonde (see a trend here?) to:

    “Take your bottom-feeding friend Warstler back to where both of your talents are better served , circle-jerking Sumner.”

    Now mind you, I did accuse Thoma of being a “data-free ideologue”, and Morgan, was, well, being Morgan, but still this abusiveness was a little uncalled for. (It’s good job I have a thick skin.)

    But all in all I guess this is a good sign. Now everybody knows enough about us to pile on the vitriol.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 14:38

    I’ve been looking at this morning’s BLS report on employment.

    Adjusted for the population correction factor total employment according to the household survey has increased by well over 1.1 million in the last three months, the most since December of 2003. The unemployment rate has declined for three consecutive months, the most again since December of 2003. The unemployment rate has declined by 0.9 points, the most in any three month period since November of 1983. Real final sales of domestic product grew by 6.7% at an annual rate in the fourth quarter, the most since the first quarter of 1985.

    If one believes that monetary policy (aka QE2) is completely ineffective in a liquidity trap then this shouldn’t be happening. ARRA (the discretionary fiscal stimulus) is being withdrawn. According to analysis by Goldman Sachs the negative impact of the withdrawl on GDP growth rates is 0.8%, 1.2% and 1.5% in 2010Q3, 2010Q4 and 2011Q1. And yet here we are having the first signs of a meaningful recovery from the recession. And the so called “tax cut” passed in the fall merely continues previous tax policy for another year or so. Somebody’s world view just got demolished.

  32. Gravatar of Liberal Roman Liberal Roman
    4. March 2011 at 14:59

    Mark,

    Couldn’t agree with you more. Except for the last sentence.

    No one’s views got demolished, because very few people’s world view depends on facts.

    However, speaking of facts and coming to grips with facts that don’t go along with your narrative, check out Krugman’s latest post.

    http://krugman.blogs.nytimes.com/2011/03/04/oy-canada-2/

    This is not about fiscal stimulus, but about the cause of the crisis in general. In it, Krugman admits that according to his world view (that the crisis happened because of too much private debt and because of a housing bubble), Canada should have a crisis by now. Lots of private debt. Housing prices haven’t fallen.

    Here is the punchline:

    “My take on the US economic crisis has increasingly been that banks were less central than many people think, while the housing bubble and household debt are the key players “” which is why financial stabilization by itself wasn’t enough to produce a V-shaped recovery.

    But if I take all that seriously, I should be very worried about Canada”

    Now, here at least Krugman is making an attempt to deal with contradictions in the real world that go against his evidence. This is much more than I can say for most economists on the right.

  33. Gravatar of No Stocks 4me Kramer No Stocks 4me Kramer
    4. March 2011 at 15:05

    best thing that could happen…….

    remove the clown with the noise maker replace him with Rick, I need more info from Rick than the few sec they give him, just because he’s more on what is key to me, “interest rates”

    “are U listening Bernakapart?” U got inflation, now raise the GD rates!

    And you fools at the BLS could do more “listening” too. “there IS inflation out here”

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 15:20

    Liberal Roman,
    Keynes of course was reputed to have said “When the facts change, I change my mind – what do you do, sir?”

    I acknowledge that despite his similarly monumental ego Krugman has the same flexibility. (And I would argue so does Scott.) But actually I was thinking about Mark Thoma, who is really getting under my skin these days.

    By the way I noticed this Krugman post recently:

    “I just heard Henry Farrell give a talk on networks, diffusion, intellectual influence, and the rise and fall of Keynesianism in the crisis.”

    http://krugman.blogs.nytimes.com/2011/03/03/datapoint-me/

    An admission of defeat perhaps? Is Krugman finally ready to lend support to the Quasimonetarist charge?

  35. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 15:27

    Liberal Roman,
    I probably should say why I’m not worried about Canada. It’s not the debt that matters. It’s the asset to debt ratio. Asset prices are very much influenced by monetary policy, and I don’t think Canada is about to repeat our mistakes. In fact they seem very close to adopting price level targeting.

  36. Gravatar of Student with too much time Student with too much time
    4. March 2011 at 15:37

    “Woodford says the way to get out of the liquidity trap is to promise to hold rates at zero for a really long time. If I wanted to be sarcastic like these guys, I’d say “How’s that working out for the BOJ?””

    I believe there is a “right” way to interpret you here: to note that monetary policy is not captured by one determinstic path of interest rates, but rather by a full-fledged policy rule that describes interest rates in terms of the realizations of macroeconomic variables. If the central bank plans to holds rates low for “too” long, it’s effectively changing its policy rule (to one with a lower target for inflation) and the market’s response will be a decline in inflation expectations. But if it keeps policy “easy” (with respect to some kind of Taylor rule) for a more moderate amount of time, inflation will actually become higher. Low nominal rates in the short run combined with a staggered, forward-looking price setting process and a higher long-term rate of inflation lead to lower real rates, a less negative (or more positive) output gap, and more inflation than there would otherwise be. The BOJ’s problem is that when it kept interest rates at zero, it didn’t make clear that its long-run Taylor rule would have a strictly positive target rate of inflation. Presumably this will not be a problem for the Fed.

    This pops out of a basic New Keynesian model; look at the first several chapters in Gali’s book if you want an especially compact exposition. (I’ll be the first to acknowledge that the basic New Keynesian model doesn’t get everything right; it does, however, capture the logic of monetary rules and price adjustment better than anything else I’ve ever seen.)

    As you know, any policy rule for quantities can be mapped onto interest rates, and it is through those interest rates that policy has its effect. Maybe you think that policy rules for quantities are easier to talk about, but I simply can’t understand why this would be true: quantities are vulnerable to all kinds of unpredictable shocks, and describing rules in quantity terms fails to capture the Taylor principle logic that keeps prices well-moored in practice. I cannot think of any instance where quantities are a conceptually superior way to think about the current and future trajectory of policy. This seems to be where we disagree.

  37. Gravatar of Student with too much time Student with too much time
    4. March 2011 at 15:45

    StatsGuy, you say:

    “One of the chief institutional tools is to actually PRINT money, because it’s HARDER TO UNDO than buying bonds. (Arguably, it’s still easy to crimp velocity, but if you print enough money, you can overwhelm this.)”

    I don’t understand. The central bank doesn’t “print money”: it creates bank reserves, which banks may turn into physical currency on demand. Are you saying that reserves are harder to undo than buying bonds? This may be true, though I doubt it: the Fed now has the ability to issue debt, and I see no reason why the Fed couldn’t issue $1 trillion of debt tomorrow if it wanted to. (Seriously, what would stop it? Certainly not worries about creditworthiness!)

    Even if reserves can’t be unwound immediately, the Fed has a new tool that makes this mostly irrelevant: interest on reserves. If it wants to raise the Fed Funds rate to 1%, all it has to do is raise the IOR rate in tandem, and everything will be fine. I agree that if the Fed didn’t have IOR, *and* if its reserves were somehow difficult to unwind, QE would be commitment technology for keeping the Fed Funds rate near zero longer than a bank operating under full discretion would. But IOR exists.

  38. Gravatar of Student with too much time Student with too much time
    4. March 2011 at 15:50

    “I do respect Woodford’s view, but I’m not sure that I’d characterize someone like Bennett McCallum as “a little lost,” and yet he also thinks the quantity of money approach is useful.”

    I agree that it is a bit arrogant of me to dismiss McCallum in this way, but I think it’s justified. Bennett McCallum is a brilliant economist whose desire to think about monetary policy in imprecise terms has made him less relevant than his intelligence would warrant. (In fact, I’d say the same about you, though I hope you aren’t insulted if I say you’re not quite in the same class as McCallum!)

  39. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. March 2011 at 18:17

    At least I think it’s very interesting, as I don’t read math. That made me feel a whole lot better. When I read economic papers (which I do, for pure interest, it’s sad) I glide over the maths. Years ago, my first year micro-economics lecturer (who has since moved on from the academic world) said that there were three ways to express an economic idea: with words, with numbers and with pictures — as long as you could manage two out of three, you were fine. True then, still true.

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. March 2011 at 18:20

    When I originally did first year microeconomics, I was just in awe of this wonderful analytical method being laid out before me. Then we did macroeconomics in the second half on the year and my response was “what is this ad hoc crap?” Reading this blog is the first time macroeconomics has made sense to me. The story you tell just makes more sense than any alternative versions. (Particularly if one is an Australian: the local story of our magical fiscal stimulus that worked when no one else’s did is at least as silly as the stories conventionally being told about the US experience.)

    I wonder, if there had been the equivalents back in the 60s when Milton was telling folk the Phillips Curve was not reliable in the long run if eager young graduate economists would be knowingly agreeing that Milton was off the planet? Keep at it I say!

  41. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. March 2011 at 18:24

    I have recently discovered the Economic History network website, which I love. Thanks to this excellent blog of yours, and your generous interaction with comments, I found John Munro’s review of Hamilton’s classic work on the C16th Price Revolution by much clearer than I otherwise would have.

  42. Gravatar of Scott Sumner Scott Sumner
    4. March 2011 at 18:26

    Contemplationist. I think it was probably a mixture of reasons, including the one you mentioned, but also the counter-intuitive nature of monetary stimulus at the zero bound.

    leftoutside, Good points.

    Tyler, Thanks. But there is one blogger who is rarely abused, despite great fame in the blogosphere. He’s just too darn polite, thoughtful, fair and reasonable for anyone to hate.

    Alleged Wisdom, Those are interesting graphs. I’d point out, however, that no aggregate is a foolproof indicator. The Fed doesn’t even collect the sort of “divisia index” that some monetarists now favor.

    Marcus, Good point.

    Dustin, I look forward to that.

    Philo, You said;

    “”This abuse is a sign of your growing status and influence; it is exactly how some people talk about Krugman” (Tyler Cowen). But you don’t want Krugman as your model! Tyler Cowen is a better exemplar: status and influence, but (almost) no one abuses him.”

    Remember on the old TV show the scene with the devil in one ear and the angel in the other. I’m torn between giving in to my urge to attack, and following a more “above the fray” approach (which I know is right.) I suppose some would identify the angel and devil with the two bloggers you mention. But the angel tells me not to go there.

    Seriously, I’m under the impression that Krugman still goes after politicians very hard, but has recently let up slightly on academics and bloggers that he disagrees with. Is that just my imagination?

    Contemplationist, His 2006 NYROB piece on Friedman was the Krugman piece I most disliked. Most liberal economists had really nice pieces on Friedman at that time. Plus I don’t think the charge he leveled was accurate.

    Indy, I agree.

    Doc Merlin, Nobody hates Tyler Cowen.

    Zippy, I believe you, and I actually kind of enjoyed seeing that post. (Otherwise I wouldn’t have publicized it.) But I am angry at your charge that I’m not yet famous enough to be widely hated. It’s not fair that more people hate Krugman than me!

    Leftoutside, You said;

    “Doc Merlin, where I come from we dismissively refer to people like Tyler as ‘new money.'”

    How about “new ideas?”

    Ram, You said;

    “If the Fed suddenly begins to forecast nominal income growth below 5% per year (because of disinflation/deflation or a growing output gap or both), then by Woodfordian reasoning the stance of monetary policy has become contractionary. This is roughly what happened in mid-to-late 2008, in a big way.”

    You know much more about this than I do, so I’ll take your word for this. But that raises another question; why was my claim so controversial back in late 2008. Why was the claim of contractionary policy greeted with such disbelief? Is it because most macroeconomists really aren’t up to speed on Woodford’s model? I guess that’s plausible, as his book is not an easy read.

    I had thought that the output gap approach was regarded as superior to NGDP targeting, because NGDP targeting implicitly assumes that trend output grows at a constant rate. But that raises the question of whether and how it’s possible to estimate the output gap. Am I off base here?

    Andy, Thanks. You said;

    “In monetarist terms, NGDP is just a velocity-adjusted monetary aggregate, so it’s a variation on a traditional way of measuring the ease of monetary policy. In New Keynesian terms, it’s a special case of a forward-looking Taylor rule, and it’s the most obvious special case “” a lot more obvious than Taylor’s original rule “” so it deserves some presumption.”

    That’s a very astute observation. Each of those two ideas had bounced around in my head off and on, but seeing them juxtaposed makes me think about my own position in a different light. I might use that idea.

    Statsguy, You’re right. My dangerous idea is wanting to fire 90% of public employees, and privatize their jobs. NGDP targeting is supported by Yglesias and DeLong; how scary can that be to a liberal?

    orionorbit, If banks lend ERs to each other, there is still one bank or the other holding ERs at the time of day when the Fed measures reserves. So one or the other gets charged. Only by having the money go out as cash held by the public can the tax be avoided.

    Studentwithtoomuchtime, You said;

    “At least in the core model, these are NOT separate transmission mechanisms. Assets are claims on a future stream of dividends, imputed rents, etc. When interest rates fall, it makes sense to consume a larger portion of these (future) streams today. True, asset prices are the intermediary here, but don’t let that fool you: this is exactly the same as the neoclassical intertemporal substitution channel.”

    I’ll respond as best I can, and you tell me if it is different. In my view a monetary stimulus that raises expected future NGDP will immediately raise the prices of stocks, commodities, and to a lesser extent, real estate. The mechanism I envision for the broader economy being affected is not the wealth effect (although that matters) but rather the supply curve for those assets. If prices are higher, then commodity producers produce more commodities, corporations produce more corporate assets, and firms also produce more commercial and residential real estate. I’m assuming nominal wages are sticky in the industries that produce those assets.

    It’s quite likely that at some level I am simply describing the same process as Woodford in a different language. But I think this matters. Those who focus on interest rates get very pessimistic about monetary stimulus once rates hit zero. Obviously there is no upward limit to asset prices, so from my perspective the zero bound problem seems minor. I think Woodford also errs in assuming that monetary stimulus doesn’t change prices in the short run (say one quarter.) That’s true for many prices, but not asset prices, which respond quickly. If I am right, you don’t even need a monopolistic competition Keynesian model, the AS curve can be thought of as a supply curve.

    Just so you don’t think I’m batshit insane, I do think most industries are monopolistically competitive. So I see stimulus working on several levels. Higher expected NGDP raises velocity, and increases AD for monopolistically competitive industries. (Monetarists call this an excess cash balance effect.) And then flexible prices (stocks, commodities, foreign exchange rates, etc) provide other mechanisms, as firms can almost immediately produce more exports, investment goods, houses (but not this time), and commodities. So there are many different channels by which monetary stimulus works. Some are the Keynesian AD channel (but where higher future expected NGDP boosts AD more than lower nominal rates on T-securities) and then some flexible prices/sticky wage channels.

    I’d be interested in knowing the extent to which you see that description overlapping with Woodford. I don’t know anything about the Tirole study you mention. Do my views sound at all similar? But again, I think you overestimate how much I rely on the wealth effect, it’s not something I emphasize.

    One other way to envision my view of monetary policy is to picture a simple economy with just consumer goods and fiat money–no financial sector. Assume the money is simply used to avoid the inconvenience of barter in transactions. Now ask how boosting the money supply 20% raises NGDP. It’s hard to picture the process in a new Keynesian framework. For monetarists, there is no problem.

    By the way, I don’t claim any profound theoretical insights that Woodford, Krugman et al lack. They are certainly smarter than I am. Rather, if I have any comparative advantage, it would be a greater awareness of the power of monetary stimulus, as I think they overestimate the credibility problem at the zero bound. If central banks say they want higher inflation, THEY WILL BE BELIEVED. And then there is my focus on the Fed’s ability to raise the prices of domestic corporate assets, commodities, and export goods almost immediately. Of course that means my model works better in the commodity intensive economy of the 1930s than today. Which is also the economy I spent most of my life studying.

    More to come later tonight . . .

  43. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 18:35

    Lorenzo from Oz,
    You wrote:
    “Years ago, my first year micro-economics lecturer (who has since moved on from the academic world) said that there were three ways to express an economic idea: with words, with numbers and with pictures “” as long as you could manage two out of three, you were fine. True then, still true.”

    I was greatly taken aback by Scott’s statement. I started as a math person (my first BA was in Math and I have over 30 hours of graduate Math albeit without an advanced degree). It might surprise some for me to confess that I have the most trouble narrating economics. I tend to use too few words and assume that my audience (my students) know more than they do. I’m teaching Development Economics this semester and it’s helping me to overcome this personal inadequacy.

  44. Gravatar of Bob Murphy Bob Murphy
    4. March 2011 at 19:03

    Scott wrote: Commenter d4bb (notice how they don’t use their names) is actually about right; insane, but not batshit insane.

    I just want to point out that I called you insane (in the sense G.K. Chesterton would use) with my name proudly at the top of the article. When we are using ameros in 10 years you can remind us of what a genius you are.

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 19:18

    Bob,
    As long as we’re talking about insanity. I’m probably insane in the Nash sense but not necessarily the Chesterton sense (hard to say). But I love my sense of sanity whatever it is. I’m not sure I would trade it for your sense of sanity. But as long as we’re talking about Chesterton allow me to quote him:

    “The same lesson was taught by the very powerful and very desolate philosophy of Oscar Wilde. It is the carpe diem religion; but the carpe diem religion is not the religion of happy people, but of very unhappy people. Great joy does not gather the rosebuds while it may; its eyes are fixed on the immortal rose which Dante saw.”

  46. Gravatar of Scott Sumner Scott Sumner
    4. March 2011 at 19:34

    Liberal Roman, Thanks. Yes, I’m also worried about the oil issue. If we can somehow avoid a severe oil supply shock we may just be able to turn a corner in 2011. If oil exports plunge then a double dip is possible.

    The good news is that more rapid growth (if it occurs) will gradually make monetary policy more expansionary (at the zero bound.) That’s why I have my fingers crossed. I do think Bernanke is much better than the ‘leadership’ at the ECB.

    anon/portly, What’s even funnier is that two posts later someone calls Cochrane a moron. So low status economists can’t disagree with high status economists, but an anonymous person can insult Cochrane.

    You said;

    “This one is so perfect my first suspicion is that Scott Sumner wrote it himself.”

    Don’t give me ideas. I might secretly create an “anti-Sumner blog.” Produce fake arguments easy to swat down, and give myself more prestige.

    Zippy, That’s depressing.

    Mark, Not sure if that was addressed to me or Zippy. I’m not upset, actually kind of flattered. And some of the questions (like the one I just answered at length), were very thoughtful. But the stuff Zippy describes seem pretty stupid.

    Statsguy, I could go on forever on your questions. Briefly, the BOJ tightened in 2000 and 2006, so we know it wasn’t sincere. The public quite rationally recognized that even before they reneged, so there’s no problem explaining that. My general view is that big institutions are clumsy, and not very hard to read. If they sincerely want something, they won’t have trouble convincing the public that’s what they want. In animal terms they’re more like dogs than cats.

    I agree that in a sense the whole QE gambit isn’t that different from promising to hold rates low for a long while. But I do think there is something of a difference, as low rates are also exactly what you get with ultra-deflationary policies. But since cash isn’t really a perfect substitute for other assets, even at low rates, pushing more and more cash out there probably has more effect. Nevertheless, QE is a really bad way of doing stimulus (NGDP targeting is way better), but is still less bad than doing nothing, much less bad.

    Statsguy, You said;

    “The answer to “Why would central bankers want people to think that they are going to keep money loose when they hope to tighten?” is very nearly the same as the answer to “Why did central banks in the Great Depression hoard gold?””

    Maybe I’m naive, but I still think in the end central banks must do what they promise to do. The problem since 2008 is that they’ve been promising NOT TO INFLATE. But Bernanke doesn’t want to go down in history the same way as the Fed leaders of the 1930s. So he’s genuinely motivated right now. If not for Fisher, Plosser, Hoenig, et al, Bernanke would be doing even more.

    OGT, Good point.

    Blackadder. There’s something odd about “A Perfect Mind” that I’ve never heard anyone comment on. Several times Nash was committed against his will. He would then “act sane” to get out as quickly as possible. Here’s my question: What does it mean if a patient is able to “act sane” in a world where mental illness is defined primarily in behavioral terms? This isn’t a rhetorical question, and I have no ax to grind. I’m just curious.

    bertusmaximus, Part of the oil price boost is demand driven, and that’s fine–monetary stimulus is supposed to do that. But the Libyan situation is supply side, and is worrisome.

    Morgan, Again, the tight money started when McCain was running–it came at a horrible time for him.

    Mark, He’s commented over here, but I don’t allow those sorts of insults.

    You said;

    “Somebody’s world view just got demolished.”

    I’d be happy if I played a small role in discrediting “depression economics.”

    Liberal Roman, That Krugman post sounds interesting, I’ll check it out.

    Mark, I agree on Canada, they seem in good shape. Australia’s also in good shape, but their housing prices are so high there is a modest risk of a crash at some point. But their fundamentals are strong–very little public debt.

    Student with too much time;

    I agree that my comment on the BOJ was a cheap shot, indeed they cheated by twice raising rates (2000 and 2006) before inflation was at adequate levels.

    You said;

    “As you know, any policy rule for quantities can be mapped onto interest rates, and it is through those interest rates that policy has its effect.”

    Yes, in the models that’s true, but I’m not sure about the second part. I still think policy can work through excess cash balance channels, which are essentially unrelated to interest rates. Or by changing expected future NGDP, which encourages more or less spending. But let’s say I’m wrong, and that those somehow do involve rates transmitting the effect. My other worry is that in an imperfect world an attempt to make interest rate targeting work may produce worse results that using some other instrument. Nick Rowe talks about the communication aspect of policy, the central bank becomes “mute” at zero rates, unable to communicate through its preferred interest rate instrument, whereas a monetarist central bank can still “communicate.” I’m not a monetarist, as I favor targeting NGDP forecast, not M2, but the basic idea is that you want an instrument that doesn’t have a zero bound problem. In theory at the zero bound you can communicate by promising to hold rates down at zero for a given period, but in practice central banks weren’t able to quickly switch over to that language in late 2008.

    But the bigger problem (we might both agree) is the lack of a clear nominal anchor, or goal variable. If they’d done level targeting (P or NGDP) in late 2008, then even the interest rate approach might have kept working OK. The period of near-zero rates required to hit the target would actually have been much less than what we have had, which seems counterintuitive, but if you look at Japan is actually quite likely. Japan has had a roughly 0% inflation target, and even worse allows base drift; it doesn’t do level targeting. That’s the main reason they’ve had near zero rates for 15 years.

    I’ve said all along that the main impact of QE2 is Bernanke winking to the market that higher inflation is on the way. The actual purchases do have a small effect, but not much.

    I agree with your reply to Statsguy.

    You said;

    “I agree that it is a bit arrogant of me to dismiss McCallum in this way, but I think it’s justified. Bennett McCallum is a brilliant economist whose desire to think about monetary policy in imprecise terms has made him less relevant than his intelligence would warrant. (In fact, I’d say the same about you, though I hope you aren’t insulted if I say you’re not quite in the same class as McCallum!)”

    I think precision is overrated. The “true” model of the economy is a mixture of dozens of models. Almost every major model is true to some extent. McCallum mentions at least 10 forms of price stickiness—they’re probably all true to some extent. And there are some flexible prices, often brushed under the rug in New Keynesian models. The brilliant theorists pick up some aspect of reality, and assume the entire economy can me understood that way. It’d be like a political scientist explaining all voters with a single model of the “typical voter’s mind.”

    Ultimately I’m a radical skeptic about any macro model being “true,” there are only models that yield useful insights and predictions for policymakers, and models that fail to yield useful predictions and insights for policymaker. Woodford would feel physically ill if he had to read George Warren’s writings during the Great Depression. But Warren produced some insights and predictions that were way ahead of his more famous contemporaries. Then for 50 years he was viewed as a crackpot. Then people like Svensson and Eggertsson started getting interested in his policy ideas (he was the one who suggested that FDR manipulate the price of gold.) His views seemed very crude from one perspective, but later seemed to involve a very sophisticated application of rational expectations. There are an almost infinite number of ways to think about macro issues, and these go in and out of style like fashions. Remember; Woodford says he’s a neo-Wicksellian—that’s pre-Keynesian. I encourage you not to assume that any current models are the last word.

    I can’t believe how long this thread is, I’ll do the rest tomorrow morning.

  47. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. March 2011 at 21:02

    When I was a high school mathematics teacher students used to whisper (quite audibly to my magical ears) as I passed in the hallways “It’s Willy Wonka”.

    Yes. I confess, I am indeed Willy Wonka. So what are you going to do about it?

    http://www.youtube.com/watch?v=dyowZgDcZFU&feature=player_embedded

  48. Gravatar of Tom P Tom P
    4. March 2011 at 22:59

    Let’s face is Scott, you’re not “obscure” anymore.

    Now when’s your e-book on “The Great Recession of 2008” coming out??

  49. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. March 2011 at 00:17

    Bob Murphy: If you want to read a piece that accepts a weak version of EMH but still accepts asset bubbles read this: the author should have made it clearer that quantity controls are not necessary for asset bubbles, even in housing, they just make them more likely (and probably more volatile).

    Mark A. Sadowski: Development Economics, what did you do to get lumbered with the economic slums? I enjoy Deepak Lal’s writings: I do not agree with his emphasis on the Papal family and property revolutions, but he asks excellent questions and raises great objections. Do a search under ‘Deepak Lal’ on eh.net and there is a lot of great stuff. (But probably you already know this and I am teaching egg-sucking: oh well, perhaps some third party will find the information useful.) To me, development economics is either applied economic history or it’s pretentious crap. (Or, worse, misleading and destructive crap.)

    The reason I do not agree with Deepak Lal on his the “Catholic Church did it” thesis is that his thesis fails to explain why Japan industrialised and modernised more thoroughly and more quickly than Iberia and Latin America.

    Scott is a great narrator of economics with a fine sense of history, as we can see in his responses to “Student with too much time” above. He had me when he confessed to reading the New York Times in doing the research for his book on the 1930s Depression(s).

    I have other economic historians I like a lot: North, Fogel, Jones, Maddison, Temin, Hopkins (estimating the Dark Age collapse in trade — about 80% from the imperial Roman peak, with trade levels not recovering until about c.1200, they REALLY did economic downturns back then — via Mediterranean shipwrecks is great), Greif. I am sure I would like McCloskey, but I have only read her The Rhetoric of Economics and listened to her recent talk at the Mercatus Centre.

    (Morgan would have at least one reason to like Maddison, he dismisses Brad DeLong’s “hallucinogenic history”.)

  50. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. March 2011 at 00:28

    Bob Murphy: On EMH, I am comfortable with the notion that a weak version of EMH is true and that the consequent inability to reliably predict turning points means there will and can be asset bubbles in the same way as I am comfortable with accepting some notion of “money illusion”: money is how people make economic offers, and people simply cannot be expected to instantly know how the real price of money is travelling so its signalling/connecting role is not “neutral”. Why should we believe in costless/instantaneous information?

  51. Gravatar of Bogdan Bogdan
    5. March 2011 at 03:09

    Please keep writing, there aren’t many blogs I check several times per week.

  52. Gravatar of W. Peden W. Peden
    5. March 2011 at 03:13

    Lorenzo From Oz,

    Deepak Lal’s “The Poverty of Development Economics” was one of the key texts that got me interested in economics.

  53. Gravatar of Bogdan Bogdan
    5. March 2011 at 04:12

    I think you’ll be interested in this article : http://www.ijcb.org/journal/ijcb11q1a8.htm

  54. Gravatar of Scott Sumner Scott Sumner
    5. March 2011 at 06:29

    Lorenzo, I’m OK with graphs and words, so I guess that’s enough. I remember when Milton Friedman was widely viewed as a bit nutty for his “extreme” views. (Back in the early 1970s.)

    Bob, Ameros? I presume that’s a Nafta currency. But I don’t favor that sort of single currency—I’m nuts, but not that crazy!

    BTW, I’m a big Chesterton fan.

    Tom P. Someone with more time than me should construct an e-book out of my blog.

    Lorenzo, Thanks for that Maddison review. I know very little economic history, but I do find it plausible that Europe began moving ahead of the rest of the world by sometime in the Middle Ages. I think the skeptics focus too much on what China was CAPABLE of doing, which isn’t really the point.

    Bogdan, Thanks, That does look interesting. The abstract sounds very plausible to me.

  55. Gravatar of Dtoh Dtoh
    5. March 2011 at 06:35

    Scott,
    Time to get back on my capital reserve ratio as a more effective monetary tool rant. I don’t want to delve into a discussion of how asset purchases by the Fed impact NGDP except to say I think I better understand your views on this and while they may be predictively accurate, I’m still not convinced they accurately describe or quantify the various factors which are at involved. I also think much of the effect relies on expectations, which carries a risk of decreased future effectiveness if the the market discounts the proffered explanation of the mechanism and concludes that King Ben is dishabille.

    One benefit of controlling capital reserve ratios is that it would work through the mechanism of expanded credit which is well understood and more credible with the market.

    More importantly, it would allow the Fed to simultaneously control inflation by targeting food and oil prices with high capital reserve ratios on long commodity positions. The greatest risk to recovery is the ongoing opposition to expansive monetary policy by the inflation hawks. Effective use of capital reserve ratios would solve this problem.

  56. Gravatar of Morgan Warstler Morgan Warstler
    5. March 2011 at 06:35

    “Morgan, Again, the tight money started when McCain was running-it came at a horrible time for him.”

    Scott, the mechanical issue on the crisis was overnight lending – the music stopped and none of the banks trusted each other.

    There’s nothing the Fed could have done in Sept 2008 to save McCain. And you’ll never sell it to the GOP.

    That’s why I’m always very interested in getting into the 2006 money was too loose side of things, because you need to make like Fisher & Friedman and promise better control of booms; which to the political economic tacticians, is another dog whistle to trust you.

    Also, you should make the mustache of your blog title, “and why we should fire 90% of public employees”

  57. Gravatar of StatsGuy StatsGuy
    5. March 2011 at 09:53

    @ Student with too much time

    “Even if reserves can’t be unwound immediately, the Fed has a new tool that makes this mostly irrelevant: interest on reserves.”

    Please note my initial comment that you quoted – “Arguably, it’s still easy to crimp velocity, but if you print enough money, you can overwhelm this.”

    Your exposition of IOR is essentially that it’s a tool for crimping velocity (I’ve noted this elsewhere), hence quantity of money doesn’t matter (Q and R map to each other, just like quotas and tariffs). So all that matters is expectations over the rate.

    If we stay away from boundary cases (a LOT of money, or questions about fiscal debt repayment), this is true – as I noted. However, this leaves you with a catch 22:

    IF it’s true that IOR can fully negate hard currency printing or Fed deposits, then if people don’t believe announced targets from the CB, why would any of this have any impact whatsoever? Essentially, it can all be undone (and easily).

    So the question becomes: How do you convince private actors that you mean something if they have reasons to believe you don’t, when it’s impossible to commit?

    In response, you can argue this:

    * CB’s don’t have an incentive to get private actors to lever without them having to print a lot of money.*

    Except, most people think they do. Bernanke doesn’t want to have to print 2 trillion dollars – look at how it brought criticism to the Fed’s role – but he wanted private actors to re-lever. He would be much happier if NGDP were running at 6% and he could go on TV and talk about hiking rates a quarter a point. Alternatively, consider all the press attention given to the “Fed is out of ammo” argument – which is silly, because the Fed can print anything, right? No, the key to the argument is that the Fed is reaching the _political_ limits of printing, and jeopardizing its independence. This is an institutional/political argument. You can disagree with this if you want, but plenty of people believe it – enough to affect expectations.

    So CB’s probably do want the crisis to “fix itself”, or for the public to re-lever without excessive CB activism. That means people should be skeptical about CB claims of the depth of intentions to take non-traditional actions.

    In other words, why believe cheap talk? Krugman – who is no enemy of new keynesian models – has made this argument explicitly and ad nauseum.

    The argument above doesn’t require that the Fed ACTUALLY be unwilling to take politically hard actions to hit targets, but rather that enough people suspect that it is unwilling because they suspect the Fed is subject to a selfish institutional reward mechanism.

    That puts the Fed in a signalling game.

    Thus, the Fed needs to actually PROVE its willingness. Declaring a target is not enough.

    So, the question is this:

    In Q4 2008, were we in a situation that the Fed really wanted the rate outcome we achieved because they were mistaken (aka, ssumner’s argument), OR were we in a situation that the Fed really wanted a different rate outcome but was unwilling to take the commitment actions that would signal its true intentions until things got so bad that markets demanded the Fed take action?

    As they say in the Tootsie Pop commercials, the world may never know….

  58. Gravatar of StatsGuy StatsGuy
    5. March 2011 at 09:57

    @ student

    Interestingly, skepticism about the Fed’s ability to undo QE2 quickly can actually serve to its advantage. Also, I note that much of the investing world is still unfamiliar with the impact of IOR, and as such, it’s ability to undermine the credibility of QE or currency printing is perceived as questionable, even among economists.

    Also, can you imagine the fire that will be aimed at the Fed if inflation is running 4%, economy is growing 1.5%, and the Fed increases IOR payments to banks by billions of dollars per annum? Let’s say Reserves stand at 1.2 trillion, which at 0.25% is about 3 billion a year. NGDP goes up too much, inflation starts to spike, and the CB decides to increase IOR to 0.75% to slow down the economy. This induces banks to withhold loans and increases reserves slowly to maybe 1.4 trillion, with net payments to banks of ~ 12 billion per annum.

    It would be a public opinion firestorm, particularly after the last round of bank bailouts.

  59. Gravatar of marcus nunes marcus nunes
    5. March 2011 at 12:13

    Scott
    What an insult. Not so much that you were not invited, but that Stiglitz (gimme a break) was aloted to talk in the MP panel!!!
    http://www.imf.org/external/np/seminars/eng/2011/res/index.htm

  60. Gravatar of marcus nunes marcus nunes
    5. March 2011 at 12:18

    This is Blanchard´s first point to “guide the conversation” (the conference linked to above):
    -Economic imbalances: Achieving stable inflation is good, but we can now see it does not guarantee stable output. Before the crisis, steady output growth and stable inflation hid growing imbalances in the composition of output and in the balance sheets of households, firms, and financial institutions, as well as growing misalignments of asset prices. These imbalances ended up being very costly. The question now is how best to address such imbalances. Should we think of macroeconomic policy as having three legs””monetary, fiscal, and financial””each with separate authorities? Or should we think of extending both the mandate and the set of tools of monetary policy to cover both output and financial stability? And, if so, what tools do we have and how do we use them?
    Right: They thought it was stable inflation that guaranteed stable output. Blanchard (and most) will never realize that it was stable NGDP level growth that guaranteed BOTH stable inflation and stable output!

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2011 at 12:26

    Lorenzo From Oz,
    You wrote:
    “Mark A. Sadowski: Development Economics, what did you do to get lumbered with the economic slums? I enjoy Deepak Lal’s writings: I do not agree with his emphasis on the Papal family and property revolutions, but he asks excellent questions and raises great objections. Do a search under ‘Deepak Lal’ on eh.net and there is a lot of great stuff. (But probably you already know this and I am teaching egg-sucking: oh well, perhaps some third party will find the information useful.) To me, development economics is either applied economic history or it’s pretentious crap. (Or, worse, misleading and destructive crap.)”

    Well, first of all it’s work and I’m grateful for it. Secondly, it’s a priviledge (and a lot time preparing for lectures) for an adjunct to be charged with the responsibility of teaching an intermediate level course. Thirdly I honestly am delighted with the opportunity to teach this course as it aligns quite well with my research interest in economic growth.

    Thankfully I was able to chose the text: Economics of Development by Radelet, Perkins and Lindauer. I like to think I’m teaching it from an applied economic history standpoint rather than a “pretentious crap” perspective. Thanks to the text I’ve been able to give my students an overview of how beliefs concerning development have shifted radically in the last few decades away from centralized state planning towards the Washington Consensus emphasis on economic liberalization.

    I was not familiar with the writings of Deepak Lal so you’re not at all teaching “egg-sucking”. The amount I don’t know may surprise you (it always surprises me). Glancing at his writings he seems very critical of the early thinking on the Economics of Development but I think his viewpoint is a fairly standard one now.

    I particularily like Temin, Maddison and Fogel. I’ve referred to Maddison several times in class already. I took every course in economic history offered by my department (which isn’t many). Those were all taught by Farley Grubb, who is also our department’s most prolific researcher. As it turns out, he studied under Fogel. Hence Fogel was assigned reading and was my major introduction to Cliometrics.

    There’s a lack of interest in most economics departments in economic history primarily because most students are concerned about the job market and economic history only prepares you for academia and there aren’t many openings in economic history because students aren’t interested in studying it (and around and around we go). Other graduate students openly sneered at me whenever I mentioned I was taking a course in economic history. It’s a vicious downward spiral and unfortunately I think a major reason why economists were blindsided by the Financial Crisis and the Great Recession is the lack of knowledge of economic history by some otherwise very bright people.

  62. Gravatar of Dtoh Dtoh
    5. March 2011 at 15:23

    StatsGuy
    You said, “print 2 trillion dollars – look at how it brought criticism to the Fed’s role – but he wanted private actors to re-lever. He would be much happier if NGDP were running at 6% and he could go on TV and talk about hiking rates a quarter a point. Alternatively, consider all the press attention given to the “Fed is out of ammo” argument – which is silly, because the Fed can print anything, right? No, the key to the argument is that the Fed is reaching the _political_ limits of printing, and jeopardizing its independence. This is an institutional/political argument. You can disagree with this if you want, but plenty of people believe it – enough to affect expectations.”

    Which is why, the Fed should be using capital reserve ratios as their primary policy tool. That way they don’t have to do anything, they can make it all happen through by controlling the banks.

  63. Gravatar of Mike Sandifer Mike Sandifer
    6. March 2011 at 05:42

    As I commented on that post Scott, “What I notice here is a total lack of evidence cited for viewpoints alternative to Sumner’s.” Why even address this garbage?

  64. Gravatar of Scott Sumner Scott Sumner
    6. March 2011 at 07:52

    Dtoh, If you control capital ratios and increase the base by 100% every 6 weeks then you will still have hyperinflation. Monetary policy (base control) is a necessary and sufficient condition for controlling NGDP growth. And once you do that, I don’t see how capital ratio control adds anything.

    Morgan, You said;

    “There’s nothing the Fed could have done in Sept 2008 to save McCain. And you’ll never sell it to the GOP.”

    A good start would have been to cut rates from 2.0% to 1/4% and promise level targeting.

    Statsguy, You said;

    “So the question becomes: How do you convince private actors that you mean something if they have reasons to believe you don’t, when it’s impossible to commit?”

    I don’t see why central banks wouldn’t be believed. The BOJ promised to prevent inflation, despite a big rise in the base, and the Japanese public believed them. Later they pulled a lot of money back out of circulation, confirming the Japanese public was right to believe them. I don’t see why Bernanke would lie, or why the public would assume he’d lie.

    The markets seemed to believe his QE2 promise, which only creates inflation if at least part of it is expected to be permanent.

    You said;

    “No, the key to the argument is that the Fed is reaching the _political_ limits of printing, and jeopardizing its independence. This is an institutional/political argument. You can disagree with this if you want, but plenty of people believe it – enough to affect expectations.”

    his is wrong because the Fed’s most effective tools (lower IOR and level targeting) don’t involve any printing of money.

    Marcus, Yes, but I don’t have a Nobel prize.

    At least Blanchard is critical of inflation targeting, that’s the first step in the profession re-thinking what went wrong.

    Mike, I think people misread this post, it was about the Svensson quotation. The rest was meant to be an amusing lead in, to add some humor to an otherwise dry post.

  65. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. March 2011 at 11:12

    Mark: It sounds like your students are getting a great deal. So that’s a good thing then 🙂

    I am completely with you on the importance of economic history, that the downhill spiral in its status is a very bad thing with exactly the sort of disastrous consequences you highlight.

    And I am always happy to point people at Deepak Lal and useful online resources.

    Explaining economic growth (or the lack thereof) is, as they say, a growth industry. It’s a bit like being a dermatologist: your patients neither die nor get better 🙂 For some bracing pessimism on studying economic growth, try this lecture by Bill Easterly.

    In a sense, economic growth is easy: it is an increasing amount of capital per person — not “plonked down” capital but immersed-in-and-used capital. But trying to identify and quantify what creates that, rather harder.

    On “plonked down capital”, I find analyses of development and aid which do not consider capital flight fairly silly. Years ago, I was the secretary (i.e. tag-a-long bureaucrat) to a Parliamentary delegation to Russia and the Ukraine. Being young and eager I read a lot. We were being briefed by the DFAT folk (Dept of Foreign Affairs and Trade). I asked if capital flight was a problem. They looked at me as if I had grown a second head. We got to Moscow, where the embassy folk told me that capital flight was a real problem. (A lot of New York real estate was bought on American aid money to Russia.)

    But the failures of foreign aid and the failures of indigenous policy have a lot in common, as I discuss here.

    W.Peden: Yes, lateral thinking economists who can write are always a joy.

    Scott: Glad you liked the review. It is increasingly clear that NW Europe pulled away from the rest at least as early as the C17th even in ordinary living standards. See Robert Allan’s “How Prosperous Were the Romans?” paper which includes data on labourers in various cities across several centuries. (I cannot get the link to do anything other than an automatic download.)

    As for words and graphs, that’s why I find your blog so approachable, even when I have to work to catch up.

  66. Gravatar of Morgan Warstler Morgan Warstler
    6. March 2011 at 18:45

    “There’s nothing the Fed could have done in Sept 2008 to save McCain. And you’ll never sell it to the GOP.”

    A good start would have been to cut rates from 2.0% to 1/4% and promise level targeting

    Hmm. Maybe you can sell that to the GOP.

  67. Gravatar of Dtoh Dtoh
    6. March 2011 at 20:25

    Scott,
    You say, “. Monetary policy (base control) is a necessary and sufficient condition for controlling NGDP growth.”

    It is not “necessary” if you can control the multiplier or velocity. As for “sufficient,” a bicylcle is sufficient for travel from Boston to Washington D.C., but that does not make it the recommended mode of travel.

    If you have a policy tool, that is not only sufficient but also: a) results in a more rapid decline in unemployment, b) reduces inflation in food and energy prices, and c) limits political opposition to the policy, that would seem a better mode of travel than a bicylcle.

  68. Gravatar of Dtoh Dtoh
    6. March 2011 at 21:55

    Lorenzo,
    Plonked down capital is important, but equally important (and very inter-related) is labor specialization. In developing countries, the same person is farmer, carpenter, plumber, retailer, etc. Specialization in itself makes labor much more productive, but it also improves the utilization and return and thus the investment in capital

  69. Gravatar of Scott Sumner Scott Sumner
    7. March 2011 at 06:37

    Dtoh, You ignored my argument. I said if the base was doubled every 6 weeks there was no way to change velocity enough to offset that. Do you disagree?

  70. Gravatar of Dtoh Dtoh
    7. March 2011 at 14:42

    Scott,
    I’m not sure I understand why that would be the case. To be clear I’m talking about bank equity reserve ratios not cash reserves. It would seem to me you could double the base and if the banks just hold it as additional excess deposits with the fed, it has no impact on inflation or for that matter any economic impact at all.

  71. Gravatar of Dtoh Dtoh
    7. March 2011 at 16:36

    Scott,
    Just to be clear, I’m not disagreeing that asset purchases by the Fed can be used to control NGDP, my point is that I think setting bank equity reserve ratios would work a lot better for a whole lot of reasons.

  72. Gravatar of ssumner ssumner
    8. March 2011 at 09:02

    Dtoh, Banks would not want to hold capital in the form of reserves, they’d rather hold Treasury securities.

  73. Gravatar of dtoh dtoh
    8. March 2011 at 09:45

    Scott,
    That would depend on relative rates (plus some consideration of the maturity of Treasuries which are available.)

    Just to clarify what I am talking about.

    Assume for Bank A
    -100 billion in assets
    -8 billion in paid in capital (common stock that has been issued by the bank).
    -Gives a capital ratio of 8%

    Now suppose the Fed wants to increase M1.
    -The Fed raises the capital ratio requirement to 10% of the amount of assets held prior to the announcement of the increase.
    -The bank is now short 2 billion in capital, with almost no way to raise the capital (very hard to issue stock in a recession), and it can’t meet the requirement by reducing assets, because the the 10% is set on the amount of assets held on the date the Fed announced the the increase capital requirement.
    -At the same time, the Fed sets an additional capital ratio requirement of negative 20% on any new lending (i.e. new lending reduces the amount of capital the bank is required to have issued).
    -The only way the bank can meet the combined requirement is by increasing its lending by 10 billion, which reduces it capital requirement by 2 billion).
    -This effects a near instant increase in M1.

    This is a much better approach than asset purchases. The problem with asset purchases is that because of decreases in the multiplier and velocity, you need to move the base end of the lever a long distance to move the M1 end of the lever just a small distance.

  74. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. March 2011 at 02:11

    Dtoh: I am not sure you quite understand my point. By “plonked down capital” I mean grants, aid projects, etc which are “dropped” into a society but fail to connect to it in any useful way. (Funding investment out of the country by the elite I do not count as useful.)

    I agree with your point about labour specialisation. One of the things that made the Dark Ages the Dark Ages is how much was done at the village level. It is the slow widening of the circles of trade, and so expanding specialisation, which moves Europe out of the Dark Ages: based on development of locally funded and embedded protective services who have a vested interest in social stability and expanding trade (aka ‘knights’).

  75. Gravatar of Doc Merlin Doc Merlin
    9. March 2011 at 16:12

    “He who LOLs last, LOLs best”

    Or possibly thinks slowest? 😉

  76. Gravatar of dtoh dtoh
    9. March 2011 at 16:26

    Lorenzo,

    Interesting comment on protective service, which I always think of as a real double edged sword…absolutely necessary to development but when corrupted (as is frequently the case), a major obstacle to development.

    A couple of other thoughts.

    With a few exceptions (roads, electricity, phones) large infrastructure projects aren’t too useful.

    Foreign aid is usually counter-productive. The best foreign aid would be to hand out cash door to door at regular and predictable intervals.

    A lot of capital can be created with labor only.

    Per capita income is a much less important number than per family income. (The implication being that population growth through bigger families is a good thing even though it causes per capita income to go down).

    Individuals at the local level are very good at making resource allocation decisions for themselves.

    Getting from point A to point B on the development curve is incredibly complex involving billions of inter-related decisions.

  77. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. March 2011 at 23:50

    Dtoh: Interesting comment on protective service, which I always think of as a real double edged sword…absolutely necessary to development but when corrupted (as is frequently the case), a major obstacle to development. Well yes, but then you get into the incentives the folks with weapons face. In Latin Christendom (and Japan) the warrior class had some reasonable incentives for productive investment. Far better than in Islam, as the quote from ibn Jubayr cited here indicates (although he does not understand why the phenomenon he notes arises).

    I agree with your other comments. Not quite sure what you mean here: Per capita income is a much less important number than per family income. (The implication being that population growth through bigger families is a good thing even though it causes per capita income to go down). The willingness to invest in the human capital of one’s children is affected by such matters as size of families and (particularly) age of women getting married.

  78. Gravatar of dtoh dtoh
    10. March 2011 at 02:16

    The comment on family size is really a reaction to the non-profit groups and aid organizations trying to spread family planning in the developing world on the neo-Malthusian theory that more mouths to feed will make everyone worse off.

    Interesting comment on the warrior classes. Don’t know much about other countries, but the samurai were a rapacious to the rural population while the merchant and urban classes managed to circumvent much of their influence.

  79. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. March 2011 at 01:47

    dtoh: Yes, the real issue is the status of women. Both for human betterment and raising investment in human capital.

    I am including the daimyo in the warrior class: they had incentives to increase the productivity of their provinces and the freedom to act to do so. (Hence the merchants and urban classes acting as you say.) The salaried samurai were drones towards the end, but the quasi-feudal ones in the central zone had somewhat different incentives.

  80. Gravatar of Lorenzo from Oz Lorenzo from Oz
    12. March 2011 at 15:25

    Scott: It’s official, Arnold Kling thinks you are less insane than John Taylor. But my favourite bit was the comment that simply linked to this graph of change in nominal GDP with change in employment. Do you think they might be connected?

  81. Gravatar of Scott Sumner Scott Sumner
    16. March 2011 at 15:31

    dtoh, How does your proposal target NGDP or prices? Can you assume that changes in M1 result in changes in the Fed’s target? That’s not clear to me.

    I also wonder how this proposal changes M1. M1 is a bank liability, not an asset.

    Doc Merlin, That too.

    Lorenzo, Yes, Kling showed me that post in person–I was at a conference with him.

Leave a Reply