How can you blame the captain? The wind blew us off course.

Suppose the captain set the steering wheel at a position that would be expected to lead us to New York.  At least as long as there was no wind. But it was windy, and we ended up in Boston.  Would you:

1.  Blame the wind.

2.  Blame the captain for not adjusting the steering to compensate for the wind.

Some commenters ask why I have such a strange definition of monetary policy, attributing any change in NGDP to monetary policy.  Heh, I’m just using Captain Ben Bernanke’s definition.

PS.  Some people argue that the Fed’s made a big effort, it just hasn’t been enough.  Actually the Fed’s made a negative effort.  Printing money is profitable, and hence the Fed ‘s profits have more than doubled form the level of 2007.  They are now earning the largest profits earned by any bank in human history.  Since when does printing money require a lot of effort?

PPS.  In any case, the recent recession was not caused by Fed errors of omission.  The dramatically slowed the rate of growth in the base during late 2007 and early 2008, from about 5% per year to zero percent.  That error of commission triggered the recession in December 2007.  Then in late 2008 they dramatically raised real interest rates, making the recession far worse.  Neither of those are good indicators of monetary policy, but no matter what indicator you use, the Fed is at fault.

PS.  Not much time today, but a few responses to comments.  After all the quotes I provided there are still some commenters who seem to think I was unfair to DeLong in simply pointing out that he had claimed that because the Fed was out of ammo we needed to use fiscal stimulus.  All I can say is “this is your brain on politics.”  The pushback on my defense of Mankiw et al was more reasoned, but I’m still not convinced.  The issue seems to be that they reported findings from others that supported their hypothesis, but overlooked findings from the same paper that contradicted it.  I claim that’s fair.  I do that.  I’ve seen Krugman do that.  As far as a know it’s OK to say “So and so claims X” and then later to say “and we believe Y” as long as So and so does claim X, even if elsewhere he argues “not Y.” 

On the other hand I won’t defend their entire paper, there are some rosy scenarios on taxes and growth.  I support supply-side reforms, but don’t expect a big boost to GDP.


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59 Responses to “How can you blame the captain? The wind blew us off course.”

  1. Gravatar of Mike Sax Mike Sax
    12. August 2012 at 17:38

    “Not much time today, but a few responses to comments. After all the quotes I provided there are still some commenters who seem to think I was unfair to DeLong in simply pointing out that he had claimed that because the Fed was out of ammo we needed to use fiscal stimulus. All I can say is “this is your brain on politics.” The pushback on my defense of Mankiw et al was more reasoned, but I’m still not convinced. The issue seems to be that they reported findings from others that supported their hypothesis, but overlooked findings from the same paper that contradicted it. I claim that’s fair. I do that. I’ve seen Krugman do that. As far as a know it’s OK to say “So and so claims X” and then later to say “and we believe Y” as long as So and so does claim X, even if elsewhere he argues “not Y.”

    I think a lot of people just don’t see the point in gettign into a grudge match with Delong on what he said or didn’t say in 2009.

    Even if everybody agreed you’re right what’s the actual payoff?

    I think Mankiw and company actually claimed “Wer’re right becaue the author said X” and all these authors are coming back and saying “We never said X”

  2. Gravatar of Max Max
    12. August 2012 at 17:47

    Printing money isn’t profitable if the interest on reserves exceeds the interest rate on short term government bonds, which it does.

    The Fed has made a lot of money by betting on falling interest rates (i.e. betting that the economy won’t have a strong recovery) and being right. Nothing to do with printing money!

  3. Gravatar of JSeydl JSeydl
    12. August 2012 at 17:51

    Except that the appropriate analogy would be a 100-mile-wide iceberg, rather than wind, that the captain could not navigate through — where 100-mile-wide iceberg means $8 trillion housing collapse.

    That is a good speech by Bernanke, though. Here’s the money quote: “Friedman understood that, in a world in which monetary policymakers put domestic economic stability above balance of payments considerations, a fixed exchange rate system is likely to be unstable during periods of economic stress.”

    A world in which monetary policymakers put domestic economic stability above balance of payments considerations implies a powerless central bank that will become victim to asset-bubble collapses, such as trillion-dollar technology stock bubbles in which companies like pets.com, with zero profitability, IPO for tens of millions of dollars or housing bubbles in which income-verification statements written on napkins pass for prudent mortgage underwriting. In other words, if the Fed had paid attention to trade imbalances, the world would be very different today.

    It’s almost funny how all of the Friedman worshipers stress the importance of floating exchange rates, yet they never want to talk about the Great Asian Peg or the huge U.S. trade deficit…

  4. Gravatar of Greg Hill Greg Hill
    12. August 2012 at 17:53

    On the Mankiw, et al, paper, you write, “The issue seems to be that they reported findings from others that supported their hypothesis, but overlooked findings from the same paper that contradicted it.”

    Well, in addition to this issue, there’s the issue that Mankiw, et al, misrepresented the work of the economists they did cite in favor their hypothesis.

  5. Gravatar of Bill Ellis Bill Ellis
    12. August 2012 at 18:14

    Mike Sax…
    “I think a lot of people just don’t see the point in gettign into a grudge match with Delong on what he said or didn’t say in 2009.”

    Yep, yep, yep…

    Not only is it pointless…It is harmful.
    Destroying the credibility of your allies is self-defeating.

    This ongoing poop fling is because deep down, despite their indisputable utilitarian bents…Scott Sumner is a libertarian and Delong is a Liberal.

    They are both putting petty tribalism above the good of the profession and the people.

    But Scott is more the one who won’t let it go.

    To paraphrase…

    “If Sumner is victorious in one more battle with the Keynesians, we shall be utterly ruined”.

  6. Gravatar of Nick Rowe Nick Rowe
    12. August 2012 at 19:00

    If the wind comes up very suddenly and unexpectedly, and you can’t see it until it’s too late, I think the Captain has a defence. It’s those long and variable lags vs leads again.

    BTW, I’m not going to throw any stones at Brad DeLong. My own apostasy/loss of faith/waverings/forgetting expectations on monetary policy has been all over the place over the years. And the belt+braces/give it both barrels/monetary+fiscal argument is not to be sneezed at, in an uncertain world with an imminent danger. (Easier to argue in the Canadian context, where we had a big surplus going into the recession, of course.)

  7. Gravatar of polymath polymath
    12. August 2012 at 19:02

    Seems to me Krugman and Delong have both been advocating “try absolutely everything because we don’t know what will work” from at least 2009.

    Meanwhile Scott’s line has been “fiscal expansion is dangerous and shouldn’t be continued/expanded because it’s useless and if the Fed just did the right thing, we’d be fine.”

    From where I sit, Scott has done a great job of promoting NGDP as a principled variable to target across a wide range of conditions (supply shock, demand shock, etc.). He’s also kept the Fed’s feet to the fire that they should be trying more stuff. Very useful.

    But the arguments for “fiscal expansion shouldn’t be continued” rely on a very shaky idea: that the Fed’s actual (not ideal) response function is the same in both the conventional and unconventional policy areas. That’s almost certainly false today. Unconventional policy is an experiment with unknown consequences and hence has a higher bar for action.

    Scott makes his work a lot harder (maybe impossible) by requiring his “in group” to adhere to this last principle. Instead he ought to better characterize the consequences of unconventional policy experiments, which would both accelerate Fed action and bring Delong’s practical position closer to his own.

    In fact he’s doing the opposite of that.

    Scott: I’m pretty sure Bernanke and the Guvs already agree unconventional monetary policy can help meet their existing inflation target which they are undershooting. The issue is that they don’t know what other effects it will have, so they aren’t confident it’s a net positive. You consistently pretend that isn’t an issue, when it’s the whole issue, with Bernanke, with Delong, with Major Freedom. 🙂

  8. Gravatar of Steve Steve
    12. August 2012 at 22:01

    The passengers bought a ticket to New York. Or at least that’s what they thought. The fine print on the reverse says that the ticket is non-refundable if the captain decides to drop off the passengers anywhere from Virginia Beach to Bangor. It’s probably their fault anyway, for being too fat and sitting on the same side of the ship.

  9. Gravatar of Steve Steve
    12. August 2012 at 22:09

    Polymath,

    I’ve questioned Scott on that point too. I’m not confident that monetary stimulus can efficiently counteract full-on austerity. It might be able to, but I’d rather not run that experiment. I’ve argued we should continue ALL of the spending we would have had in the absence of recession, and then use monetary policy beyond that to hit NGDP targets.

    As for the “other effects” of monetary stimulus, I feel that’s a contrived issue from people who simply don’t want monetary stimulus. I’m sure they would object to feeding a starving person, too, for fear of a blood sugar spike.

  10. Gravatar of Morgan Warstler Morgan Warstler
    12. August 2012 at 22:18

    polymath,

    DeKrugman’s position is 100% political.

    But then ALL positions are political.

    Scott’s continued mistake is not grasping this, admitting it, and accepting it.

    Once Scott does, he’ll follow in the footsteps of Uncle Milty.

    Scott’s argument that Fiscal gets / is neutered by the Fed is far meaner than he lets on, it is JUST AS crass as saying the EBC’s / Fed’s Fiscal demands should be acceded to.

    There is no way around it, the capt. is in charge, an the also gets to decide WHERE we are going.

    Remove the captain, replace him with a computer / futurers market, and the “it is structural” conservative argument will be hard coded into the target, and DeKrugman will be just as miserable, just as pissed off with where we end up.

    Money isn’t a social good, and the Greeks will bend.

    Selah.

  11. Gravatar of Jason Jason
    12. August 2012 at 22:44

    The problem is that no one is very clear about what they mean by “out of ammo”. It is a useless non-technical phrase that that can be used to ascribe false beliefs based on others’ interpretation of it.

    When you say the Fed is not out of ammo, I can jump in and say you are totally wrong because interest rates are zero therefore can’t be lowered and hence interest rate policy, the only policy that could be used apolitically, can’t happen. The Fed is out of apolitical ammo.

    But I know you mean that the Fed should do other things — things that are considered by many on the right to be tantamount to stealing money from the public — things that are inherently political.

    Currently they “can’t” even do more quantitative easing as it would be too political. I agree they can do it — in the sense of QE being possible. But in a political sense, they are out of ammo. They can’t do it without the right calling foul.

  12. Gravatar of A Failure of the Economists, not the Economics « uneconomical A Failure of the Economists, not the Economics « uneconomical
    13. August 2012 at 01:08

    […] can read Scott Sumner and he makes sense.  Scott is saying the same things that Lars Svensson was writing about back in […]

  13. Gravatar of RebelEconomist RebelEconomist
    13. August 2012 at 03:38

    “Printing money is profitable…..”. Wrong!

    You have not made money on a fixed income position until you have reversed it. Essentially, QE involves the Fed borrowing short to lend long. Assuming that the Fed wants want to avoid high inflation and taxing the banking system by increasing reserve requirements to force the banks to hold unprofitable reserves against their better judgement, if the demand for money as a safe asset falls, the Fed will have to either pay more interest on reserves to make the banks keep holding them until asset maturities return reserves to the Fed, or sell the longer term assets that they acquired in the course of supplying reserves, potentially at a loss.

  14. Gravatar of Benjamin Cole Benjamin Cole
    13. August 2012 at 04:27

    A serious question, if the Western world is going to do a Japan (and I think that is possible) is what to do with Fed profits?

    The Fed will have to go to perm-QE, if only by default. The other big weapon for stimulus, lower interest rates, will be about as useful as a firehouse against a flood.

    This leads to serious questions about the independence of the Fed.

  15. Gravatar of Benjamin Cole Benjamin Cole
    13. August 2012 at 04:29

    A serious question, if the Western world is going to do a Japan (and I think that is possible) is what to do with Fed profits?

    The Fed will have to go to perm-QE, if only by default. The other big weapon for stimulus, lower interest rates, will be about as useful as a firehouse against a flood.

    This leads to serious questions about the independence of the Fed. Why is the Fed independent—why can voters respond to final policy and regulatory policy (let alone questions of national defense), but monetary policy is elevated?

    Perhaps it is time top move the Fed into the Treasury Department.

    I cannot imagine a Treasury Secy pompously pettifogging about inflation in the last four years, if he might get voted out of office.

  16. Gravatar of RPLong RPLong
    13. August 2012 at 04:59

    Suppose economic outcomes are a ship that cannot be steered…

  17. Gravatar of Mike Sax Mike Sax
    13. August 2012 at 05:00

    “But then ALL positions are political.”

    This is probably why I like you-at least you admit it.

    You are totally right here as well:

    “Scott’s argument that Fiscal gets / is neutered by the Fed is far meaner than he lets on, it is JUST AS crass as saying the EBC’s / Fed’s Fiscal demands should be acceded to.”

    Whether or not your right in the poltical sense we’ll see in under 3 months.

    However, I think what you are also seeing is that the GOP is only about the base now. They used to get the independents, the Reagan democrats, etc.

    Romney’s pick admits that it’s all about the 35% of the ocuntry that is the GOP base.

    Since Clitno, the Dems have gotten the Reagan DEms back and the independents.

    Can Romney win just with that 35%? I’m very skeptical but this race will determine it.

  18. Gravatar of dwb dwb
    13. August 2012 at 05:34

    “Printing money is profitable…..”. Wrong!

    You have not made money on a fixed income position until you have reversed it. Essentially, QE involves the Fed borrowing short to lend long.

    huh??
    if the reserves are turned into money thats seniorage.

    If the Fed holds the long term assets, it returns the coupon income to the treasury (essentially an avoided cost), the Fed makes a couple hundred billion this way.

    The Fed intends to pare down the balance sheet well before any rate hikes, so there is not a scenario where it holds on to the assets while hiking rates (actually i wish there was such a scenario, QE has less effect when people think the Fed is shooting bean bag rounds).

  19. Gravatar of John Thacker John Thacker
    13. August 2012 at 05:51

    polymath:
    “Seems to me Krugman and Delong have both been advocating “try absolutely everything because we don’t know what will work” from at least 2009.”

    I don’t see how you square this claim with the quotes from Krugman and DeLong from 2009 that monetary policy was exhausted. They made monetary expansion a lot harder. And their pure hatred for anyone not in their in-group has made everyone’s lives harder.

    Mike Sax:

    “However, I think what you are also seeing is that the GOP is only about the base now. They used to get the independents, the Reagan democrats, etc.

    Romney’s pick admits that it’s all about the 35% of the ocuntry that is the GOP base.”

    This would be more persuasive if I didn’t hear this argument at least every four years. Why, I remember back in 1980 when the nomination of Reagan proved that the GOP only cared about the base. And that was for President. I’m afraid I don’t really see how the repeated GOP strategy of nominating the most moderate candidate running combined with throwing a bone to the base in the form of the useless Vice President slot is “only about the base.” Surely if the GOP were “only about the base” then McCain would not have been nominated in 2008 nor Romney in 2012.

    I would love to have the policies of Clinton. Instead, Obama is much closer to GWB than he is to Clinton. We’ll get GWB’s fourth term either way this year, I expect. My fervent hope is for more gridlock.

  20. Gravatar of CalmRevolt CalmRevolt
    13. August 2012 at 06:05

    RE: Hyperbolic reactions to the Mankiw-Taylor Paper

    I will never understand how any economist can be so derisive to another in the world of macroeconomics where there is so much ambiguity and unknown variables that allow for legitimately different interpretations of the data. For example, consider this great recession: Some see this as evidence for greater regulation to counter-act the risk-seeking tendencies of the financial sector. Other see this as a vindication of the efficient market hypothesis where regulators can’t possibly know better than the markets. Both are legitimate interpretations. That’s just one example but I see that is still the case with most other macroeconomic events and the corresponding data. An economist is not being a mendacious idiot or a fraud for not interpreting the data/evidence exactly the same as another to support their own worldview (I’m looking at you Krugman/Delong).

  21. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2012 at 07:28

    ‘Seems to me Krugman and Delong have both been advocating “try absolutely everything because we don’t know what will work” from at least 2009.’

    I’m with John Thacker, how anybody could say the above in the face of the mountain of evidence just provided to the contrary is astounding.

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2012 at 07:30

    ‘But Scott is more the one who won’t let it go.’

    Right, DeLong’s;

    ‘SCOTT SUMNER NEEDS A BETTER WORK ETHIC: USE THE GOOGLE! IT’S NOT THAT DIFFICULT! DEPARTMENT’

    was an attempt at reconciliation.

  23. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2012 at 08:06

    ‘Romney’s pick admits that it’s all about the 35% of the ocuntry that is the GOP base.’

    ‘All thinking people support you, Gov. Romney.’ Mike Sax responds; That’s not enough, he needs a majority.

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2012 at 08:16

    For those who hate Paul Ryan, this guy will really curl your hair;

    http://www.booktv.org/Watch/13749/After+Words+Edward+Conard+Unintended+Consequences+Why+Everything+Youve+Been+Told+About+the+Economy+is+Wrong+hosted+by+Michael+Ettlinger+Center+for+American+Progress.aspx

  25. Gravatar of Major_Freedom Major_Freedom
    13. August 2012 at 08:33

    In any case, the recent recession was not caused by Fed errors of omission. The dramatically slowed the rate of growth in the base during late 2007 and early 2008, from about 5% per year to zero percent. That error of commission triggered the recession in December 2007. Then in late 2008 they dramatically raised real interest rates, making the recession far worse. Neither of those are good indicators of monetary policy, but no matter what indicator you use, the Fed is at fault.

    Why shouldn’t the Fed slow the rate of monetary base growth!? As this chart indicates, the PCEPI was heating up and going above target starting 2004, so the Fed began to raise the fed funds rate and slowed the rate of growth of monetary base, exactly as their mandate of price stability would have them do!

    Back in 2000, the Fed had the fed funds rate at over 6%, and the monetary base was shrinking fast, from a 15% annual increase at the beginning of 2000, to -3% at the beginning of 2001! This burst the Nasdaq bubble. As a result, the Fed dramatically lowered the fed funds rate from over 6% to less than 2%, because of fears of a deflationary recession after the Nasdaq bubble burst. PCEPI did indeed start to decrease in 2001. So the Fed kept easing, which dramatically increased the monetary base, and by 2002, the decline in PCEPI was abated.

    Yet the Fed kept the fed funds rate too low for too long. From late 2002 to the beginning of 2005, the fed funds rate was kept below 2%. Looking at the PCEPI, the Fed finally started to raise the rate in 2004, and by 2006, the rate was back up to over 5%.

    Like you said, this tightening brought about another recession, as all the previous malinvestments that were relatively concentrated in the more capital intensive, round-about, and interest rate sensitive industries went into the deepest correction during the monetary tightening, bust phase.

    ———————-

    You may be focused on NGDP, but it’s the real side alterations brought about by non-market interest rates, which is itself brought about by non-market money production, that explains why monetary policy generates recessions.

    It may look like booms and busts are caused by NGDP fluctuations, because the correlations are so tight, and theoretically it may seem plausible that lower aggregate spending along with prices that don’t immediately adjust will result in unsold surpluses in resources and labor. This is why so many are convinced of the “Declines in AD lead to recessions” story.

    Yet Austrians have a different, although related theory, of recessions, and their theory is just as consistent with the data as is the “Declines in AD leads to recessions” theory. Austrians don’t just lump every capital resource together into a homogeneous “K”, and they don’t just lump every dollar spent into a homogeneous “AD.” Austrians focus on relative capital resource allocations, and relative spending (prices). They do this because that is the only way to connect the nominal side with the real side. The real side is diverse, heterogeneous, and multifaceted. Yet there is a particular structure to it, and each sector has to be in some balance with every other sector, or else certain problems will arise that no amount of additional green pieces of paper can solve.

    For example, look again at the sectoral chart I posted above, and use that as a guide for the following:

    Suppose that for some reason, a reason that we will assume is “inexplicable” for now, that a large number of durable goods manufacturing projects were started. What will this expansion require in real terms? Well, we imagine all sorts of things. There will have to be an expansion in raw materials construction for example. If we imagine an expansion in the car industry, then there will have to be an expansion in all the industries that additional car production requires and depends on. More iron, more rubber, more plastics, and so on. If a large number of car production facilities are started, but then sometime after the facilities are set up it is later found that there is not enough iron, not enough rubber, and not enough plastics, then I hope you will understand that the solution to this problem cannot possibly be more green pieces of paper. I hope you will understand that the problem is that the car production facilities should not have been started in the first place because there is simply a lack of sufficient complimentary capital to sustain such an expansion.

    Sure, we can also propose more iron production, more rubber production and more plastics production as a solution, but then that would require more of what those industries require and depend on, for example more machines that build iron, rubber and plastics manufacturing facilities.

    These constraints are due to the law of economic scarcity making its appearance. It’s a law that is taught in elementary school (“learn to share because we only have 3 building block sets”), and yet it often escapes PhD economists, who have come to “learn” that scarcity is but an illusion that can be overcome by “strong” central management, just like kids depended on their parents to always make available more food, more clothes, and more allowances while growing up. Kids who grow up not learning how wealth is made due to their parents acting as benevolent gift givers, as Santa Clause, these people tend to reach adulthood not knowing how wealth is made in the economy. So they transfer the image of mommy and daddy parental abolitionists of scarcity in the home, to mommy and daddy state abolitionists of scarcity in the economy.

    For market monetarists, Keynesians, and other dollar fetishists, they want a mommy and daddy figure to provide the children with a sufficient allowance. With a sufficient allowance, they take for granted economic coordination and treat it as spontaneous, they treat production as spontaneous, they treat Santa Clause as spontaneous. All that mommy and daddy have to do is provide the children with a sufficient allowance, and the children can go out to the neighborhood store and buy all the spontaneously produced goodies. The children come to believe that it’s their parent’s giving of money and spending that is responsible for the wealth!

    How little is it understood that the children in question eventually become adults who are responsible for producing wealth. How little is it understood that 150 million independent, mostly ignorant of each other adults can only produce wealth in a division of labor if their relative expansions of activity are constrained by the expansions other adults make, since wealth doesn’t appear underneath Christmas trees into adulthood.

    Austrians know that in a world where people are mostly ignorant of each other, in a world where there is no omniscient Santa Clause who knows when you’re sleeping and known when you’re awake, that the only way for so many to be coordinated in their behavior is through the market process determined price system. When non-market central banks unilaterally change interest rates, change money production, and change the issuance of credit, then it is inevitable that the expansions in each industry will NOT be in balance, because they depend on market determined interest rates, market determined supplies of money, and market determined supplies of credit, to each expand without too much discoordination.

    It is silly to believe that as long as everyone, including the state and central banks, spend a collective 5% more each day, or week, or month, or year, that the real side of the economy will somehow spontaneously take care of itself, as if the neighborhood store will always have enough goodies in it, as long as the neighborhood children keep spending a collective 5% more each day, so that if one child’s parents become stingy one day, then the other parents can increase their allowance giving. Just as long as the parents as a group give all the children as a group enough money as a group, then the store will always have a growing supply of goodies to sell.

  26. Gravatar of Bill Ellis Bill Ellis
    13. August 2012 at 09:17

    Patrick R. Sullivan,

    (me) ‘But Scott is more the one who won’t let it go.’

    (Patrick) Right, DeLong’s;

    ‘SCOTT SUMNER NEEDS A BETTER WORK ETHIC: USE THE GOOGLE! IT’S NOT THAT DIFFICULT! DEPARTMENT’

    was an attempt at reconciliation.

    Please, And what prompted Delong’s post ? One more of the many Sumner posts taking a Keynesian to task for not supporting Fed action soon enough…blaming them for the lack of a recovery. (as if the Fed would have done anything different then )

    I read Delong everyday. Do you ?
    Delong does NOT keep on bringing up long standing beefs with Sumner. It is Sumner who won’t let the differences they had over the FED go…even though the are calling for the same thing now and have been for years.

    I did not say that delong is attempting reconciliation… He is not.
    But not attempting reconciliation is very different than keeping a fight going…Sumner is.

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. August 2012 at 09:47

    http://delong.typepad.com/sdj/2012/08/what-is-monetary-policy-and-how-effective-is-it-daniel-kuehn-is-remarkably-patient-with-scott-sumner.html#comments

    Who again is ‘keeping a fight going’?

    ‘I read Delong everyday. Do you ?’

    I was present at the creation…and the destruction, of Semi-Daily Journal;

    http://webcache.googleusercontent.com/search?q=cache:http://www.j-bradford-delong.net/movable_type/archives/000947.html

    —————-quote—————
    Semi-Daily Journal
    Brad DeLong’s Thoughts of the Moment on Economics, and on Other Topics as Well
    DeLong’s Home Page
    « 2002-10-03: Proposed Topics for Change Columns | Main Journal Page | The Industry-Level Shape of Productivity Growth in the 1990s »
    October 03, 2002
    Kudos to Patrick Sullivan

    In Army Secretary Tom White: Archive Entry From Brad DeLong’s Semi-Daily Journal, Patrick Sullivan wrote: “So Krugman is back on the Sec’y White trail. Up to this point virtually everything he’s said about the guy has turned out to be either wrong or grossly distorted. I’m betting that when the context of these e-mails comes out this will also be so. ”

    Looks like Patrick wins his bet…

    Posted by DeLong at October 03, 2002 09:48 PM | Trackback
    —————-endquote—————–

    Which is now missing from DeLong’s archives, btw.

  28. Gravatar of Major_Freedom Major_Freedom
    13. August 2012 at 09:53

    ssumner:

    Some commenters ask why I have such a strange definition of monetary policy, attributing any change in NGDP to monetary policy. Heh, I’m just using Captain Ben Bernanke’s definition.

    In order for you to justifiably claim Bernanke to be on your side, you are going to have to find out more about his subjective relative ranking scale of all the macro-economic indicators he is treating as superior in assessing nominal stability. You’ll have to found out if he likes NGDP growth targeting more than price inflation targeting.

    We can find out what he values most by observing his actions. Has Bernanke been generating price inflation stability, or NGDP growth stability?

    This is what Bernanke has done since he began as chairman in 2006.

    It certainly looks like Bernanke favors price inflation stability over NGDP growth stability. The fall in PCEPI from 2008 to 2009 was preceded by roughly equivalent growth in PCEPI from 2007 to 2008, so from 2007 to 2009 PCEPI can be viewed as stable.

    Contrast that with NGDP, and the dramatic fall in NGDP 2008 to 2010 was not followed by a roughly equivalent future growth in NGDP to make the entire 2008-2012 period a stable NGDP growth period.

    Bernanke’s actions are louder than his words. He does not hold NGDP growth stability to be superior to price inflation stability when it comes to providing information on the stance of monetary policy.

  29. Gravatar of Major_Freedom Major_Freedom
    13. August 2012 at 09:57

    Nick Rowe:

    If the wind comes up very suddenly and unexpectedly, and you can’t see it until it’s too late, I think the Captain has a defence. It’s those long and variable lags vs leads again.

    Is there no explanation for why the wind would suddenly come the way it did?

    Why do we have to treat such winds as inevitable and in need of a Captain to steer the ship?

    What if the Captain is the one responsible for the sudden wind change? Would it make sense to depend on him to deal with problems associated with winds?

  30. Gravatar of Edward Edward
    13. August 2012 at 09:58

    “If a large number of car production facilities are started, but then sometime after the facilities are set up it is later found that there is not enough iron, not enough rubber, and not enough plastics,”..

    But then, during the recession those commodities would go UP in price! (Assuming of course that demand has zero to do with it) And thats not what happened in 2008. Even oil declined. The law of supply is ubiquitous. Unless of course the “general demand” for those commodities declines much faster than their supply. And general demand is expressed in terms of you guessed it, money/AD.
    IT IS SILLY to believe that this is a real problem when all the evidence shows its a nominal problem. Austrians may tell a story about devalued capital across all industries, but their story doesn’t make sense unless it relies on a transmission mechanism, namely AD! Why do’t you just admit that such a thing as AD exists? Then we can have a discussion about whether more AD is worth the cost. (And sometimes it isn’t. The seventies, anyone?) But when you blather on about “unsustainable real configurations across the capital structure’ It almost seems like you’re making an RBC argument, rather than an Austrian one!

    Everyone else, notice how fanatical Rothbardians are. (And don’t say you’re not a Rothbardian Major!) They are mindlessness absolutist, and completely deny the Keynesian and or Monetarist demand story, while the Keynesians and Monetarists do not deny that there can be things such as structural problems. (Well the monetarists don’t deny it at least) We just don’t think the ridiculous transmission mechanism envisioned by the Rothbardians applies.

    P.S. By the way, Keynesians and monetarists have an explanation for how the boom turned into bust. First the Fed. Second the nonexistent cash savings of the American people. It is reasonable to assume that in the A.D. paradigm, if a bust consists of monetary disequilibrium, namely rising cash savings with a fixed supply of money, than a bubble consists of the opposite, declining or nonexistent cash savings during the boom OVER-investment not malinvestment.
    Or if you prefer underinvestment in cash during the boom, and over-investment in everything else. And thats exactly what we see in the evidence. Starting during the Clinton administration the savings of the American people declined to -10%, the trend alleviated somewhat, during the Bush Administration going up to -1%. Contrary to the Bull**** story of the Austrians and John Taylor (“too low for too long) The fiscal and monetary stimulus of the Bush Administration helped ALLEVIATE the cash savings scarcity! How’s that for irony!

    P.P.S. How is it possible that monetary and or fiscal easing can actually INCREASE saving? By increasing nominal income and production. The only way to increase both consumption and investment is to increase income. Which is better, having a $40,000 income with a savings rate of 10%, or a $100,000 income with a savings rate of 5%. the answer is obviously the second, Even though the RATE is smaller the LEVEL of saving is larger! Austrians never address this. They shed crocodile tears about the plight of savers, moaning that the Fed is counteracting the wishes of the American people to increase their purchasing power, not realizing that the Fed is HELPING the American people increase their purchasing power by increasing income. The FED CAN mimic a free market in money production, when MV declines thats a signal that demand for cash rises, when it increases, demand for cash falls.

  31. Gravatar of Edward Edward
    13. August 2012 at 10:00

    “Mindlessly” Absolutist

  32. Gravatar of Matt Waters Matt Waters
    13. August 2012 at 10:49

    “I’ve questioned Scott on that point too. I’m not confident that monetary stimulus can efficiently counteract full-on austerity.”

    Yes, this is the only point where I have somewhat diverged with Scott on monetary policy. I see two different perspectives on how exactly a level of NGDP happens:

    1. The esoteric, macroeconomic view that NGDP is just another variable, and it is equal to MV. The Fed controls M and it can control V by making reserve-holding expensive. Therefore, there is no reason the Fed shouldn’t control like, say, how they control the Fed Funds Rate or the required reserve ratio.

    2. The in-the-trenches view for increasing M and V. For increasing M, the Fed has to buy assets. For increasing V and getting that M to actually be spent, real people have to really spend real money. They have to buy some physical product or service, through either spending down their savings or through risking the money in a real investment.

    Under the efficient market hypothesis and other liberal frameworks, people who hold money rationally increase their spending as the Fed sets expectations of future inflation. Higher inflation expectations decreases real interest rates, to where saving reduces real wealth too much.

    However, the real world does not work in such mechanically simple ways. One example is the SNB setting a ceiling on the Franc’s value. The SNB was clear in using its infinite power to overwhelm any trades above that ceiling. That power kept the Franc below the ceiling for awhile, but at some point the desire to leave the Euro became so strong the SNB had to counteract trades above the ceiling. Those investors basically guaranteed a loss for themselves, but their desire to leave the Euro was so strong they didn’t care how many roundhouse kicks they got from Chuck Norris.

    In a world where people no longer care about kicks to the face from Chuck Norris, how does monetary policy still work exactly? It CAN still work, but it wouldn’t be so easy as just announcing expectations. The Fed may need to engage in truly outlandish policy, such as negative IOR in multiple points and buying 5+ trillion of Tresuries before markets get the message.

    In short, the possible necessity of a down-and-dirty, unorthodox monetary policy has been what is sorely missing in most Market Monetarism discussions. Market, in fact, are not always rational and against an irrational market, the Fed may have to roll up its sleeves and do the work itself.

  33. Gravatar of Edward Edward
    13. August 2012 at 10:59

    Matt Waters I COMPLETELY agree. I support NGDP level targeting, but don’t think it would be as ridiculously easy as Scott and David Beckworth are pointing out it would be (In that sense I’m a “person of the concrete steppes!” 🙂 Scott given the fact that the conservatism of the Fed is getting so entrenched that the Fed is rapidly approaching ECB and BOJ levels of ineptitude and incompetence, wouldn’t a huge shock, a radical “insane” policy of say, monetizing the entire national debt, be required to shock the markets into believing the change in regimes?

  34. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2012 at 12:02

    Matt,

    “The Fed controls M and it can control V by making reserve-holding expensive.”

    This is the ONLY thing that matters – Sumner assumes that the Fed WILL do whatever it takes.

    And no IOR + a computer that prints money until the target is hit works by design fiat.

    You can say clearly why the design fiat won’t happen politically, but then you are right back in DeKrugman’s crouched snarling position.

    Screaming, “it will never happen” is not an argument.

    Thats a concrete a step as can be had Edward.

  35. Gravatar of Major_Freedom Major_Freedom
    13. August 2012 at 12:18

    Edward:

    “If a large number of car production facilities are started, but then sometime after the facilities are set up it is later found that there is not enough iron, not enough rubber, and not enough plastics,”..

    But then, during the recession those commodities would go UP in price!

    That doesn’t follow. In order for those prices to rise, there has to be a relatively higher demand for them. But they can’t rise in price if the earnings the car production facility was theretofore making, are not high enough! Remember, the earnings the car production facilities were making were based on past expectations that there was more capital available. You cannot just assume that the prices of iron, rubber and plastic can increase out of nowhere.

    (Assuming of course that demand has zero to do with it) And thats not what happened in 2008. Even oil declined.

    Why should the prices for the means of production rise, when so many projects were exposed as having insufficient capital in the real sense? It is expected that prices should fall. They were bid too high previously, when more capital was assumed available than there really was.

    The law of supply is ubiquitous.

    Then why are you ignoring supply?

    Unless of course the “general demand” for those commodities declines much faster than their supply. And general demand is expressed in terms of you guessed it, money/AD.

    It is silly to believe that there can exist a general overproduction of wealth that would even result in too many goods and not enough dollars to buy them.

    IT IS SILLY to believe that this is a real problem when all the evidence shows its a nominal problem.

    False. The nominal demand story does not have a monopoly on theories consistent with the evidence. The evidence is quite consistent with the Austrian theory.

    The evidence is not even consistent with the nominal demand story, since the chart I linked to above, the one with the vast differences between sectoral adjustments, cannot be explained by the singular concept of aggregate demand falling. It can only be explained by a dramatic shift in relative demands.

    Austrians may tell a story about devalued capital across all industries, but their story doesn’t make sense unless it relies on a transmission mechanism, namely AD!

    False! The transmission mechanism is RELATIVE demand! The fact that every change in relative demand has a corresponding AD associated with it, doesn’t mean that Austrians rely on AD!

    Why do’t you just admit that such a thing as AD exists?

    I do admit such a thing as AD exists. Nobody needs to deny that one can add up all expenditures for all industries over a period of time. That is not the issue raised by Austrians. Austrians are saying that changed relative demands within the aggregate demand are responsible for the fact that recessions occur, and why once the relative demands correct, there is a decrease in AD as each sector is dependent on other sectors and so cannot simply result in an offsetting shift in relative demands after which everything is hunky dory.

    Then we can have a discussion about whether more AD is worth the cost. (And sometimes it isn’t. The seventies, anyone?) But when you blather on about “unsustainable real configurations across the capital structure’ It almost seems like you’re making an RBC argument, rather than an Austrian one!

    Then you don’t understand ABCT! How surprising!

    Everyone else, notice how fanatical Rothbardians are. (And don’t say you’re not a Rothbardian Major!) They are mindlessness absolutist, and completely deny the Keynesian and or Monetarist demand story, while the Keynesians and Monetarists do not deny that there can be things such as structural problems.

    This is false. Keynesians and Monetarists deny that structural problems are the reason for recessions. They all attribute recessions to insufficient money printing or money spending in the aggregate.

    Everyone, notice how fanatical Edward is. He is a mindless absolutist, and completely denies the Austrian theory, while Austrians do not deny that should 90% of the money supply suddenly disappear from the face of the Earth, that a recession would occur!

    P.S. By the way, Keynesians and monetarists have an explanation for how the boom turned into bust. First the Fed. Second the nonexistent cash savings of the American people. It is reasonable to assume that in the A.D. paradigm, if a bust consists of monetary disequilibrium, namely rising cash savings with a fixed supply of money, than a bubble consists of the opposite, declining or nonexistent cash savings during the boom OVER-investment not malinvestment.

    Non-existent cash savings of the American people? That’s the stupidest thing I have ever heard. ALL CASH IN THE US IS HELD BY PEOPLE. At any moment in time, the totality of cash “savings” is precisely equal to the totality of cash!

    You are not even attempting to explain WHY there would be a sudden drop in spending and a sudden desire to increase cash. You’re just taking it as an inexplicable given!

    Austrians on the other hand are providing an explanation for why people would suddenly reduce their spending and suddenly desire to hold larger cash balances.

    Or if you prefer underinvestment in cash during the boom, and over-investment in everything else. And thats exactly what we see in the evidence. Starting during the Clinton administration the savings of the American people declined to -10%, the trend alleviated somewhat, during the Bush Administration going up to -1%. Contrary to the Bull**** story of the Austrians and John Taylor (“too low for too long) The fiscal and monetary stimulus of the Bush Administration helped ALLEVIATE the cash savings scarcity! How’s that for irony!

    False. You are again not explaining WHY there is a sudden cash shortage, given prevailing relative prices and relative demands. You are just taking it as a given, which of course invariably leads to the seeming solution of inflation!

    P.P.S. How is it possible that monetary and or fiscal easing can actually INCREASE saving?

    Depends on what you mean by “saving”. If you ignorantly mean cash hoarding relative to spending, then monetary easing cannot increase this ratio. Only if people’s desire to hold more cash relative to spending takes place, can monetary easing lead to a higher ratio between cash and spending.

    You are making the same error that virtually every Keynesian makes, which is conflating a desire to save more, with a desire to hold more cash. They’re not the same thing.

    By increasing nominal income and production.

    No, the desire to save more is what increases the rate of production, irrespective of the demand for cash. People can hold more cash by reducing BOTH their consumption AND investment spending, leaving the ratio unchanged, and thus leaving the rate of productivity unchanged (after a period of adjustment).

    The only way to increase both consumption and investment is to increase income.

    False. Consumption and investment can occur on the basis of increased productivity and falling capital prices. This PHYSICAL cause for increases in output can occur without a single new dollar being created and spent.

    Nominal income does NOT need to rise in order for production and consumption to expand. This is not an advocacy for fixed money and spending. This is an argument to show you the actual source of prosperity. It is supply.

    Which is better, having a $40,000 income with a savings rate of 10%, or a $100,000 income with a savings rate of 5%. the answer is obviously the second

    This is just stupid. You’re holding prices constant, despite the fact that prices would not be the same in both scenarios. Plus your a priori claiming that more nominal spending is the solution, despite that very thing being the topic of debate.

    If you compare $40k income and 10% savings and $100k income and 5% savings, then GIVEN the person’s preferences, EITHER could be better. You cannot say one is better than the other in any objective sense.

    Even though the RATE is smaller the LEVEL of saving is larger! Austrians never address this.

    This is again stupid. The level of savings is not what determines the height of productivity. It’s the RELATIVE saving versus consumption that determines productivity.

    In an economy where average earnings are $40k and the savings rate is 10%, there would tend to have a HIGHER productivity than an economy where the average person is earning $100k and the savings rate is 5%, DESPITE the level of savings being higher in the latter!

    For you have to consider relative demands. If the average person is earning $40k and saving 10%, then this means 10% of every dollar spent can go to investment. In the other scenario, only 5% of every dollar spent can go to investment. With a lower investment to consumption ratio, productivity will DECLINE over time, and with the numbers you proposed, production will decline VERY rapidly.

    In the real world, most businesses save and invest THE MAJORITY out of their revenue earnings. Contrary to savings being in the 5% to 10% range, it is usually in the 80% to 90% range.

    They shed crocodile tears about the plight of savers, moaning that the Fed is counteracting the wishes of the American people to increase their purchasing power, not realizing that the Fed is HELPING the American people increase their purchasing power by increasing income.

    Now you are conflating purchasing power with nominal income.

    The Fed is not increasing people’s purchasing power by printing more money and increasing some people’s nominal incomes and then eventually everyone’s nominal incomes. That is doing the exact opposite. That is decreasing the purchasing power of money.

    The FED CAN mimic a free market in money production, when MV declines thats a signal that demand for cash rises, when it increases, demand for cash falls.

    False. The Fed CANNOT mimic the free market, because in a free market, not every dollar held as cash will spontaneously make another dollar of production profitable.

    When MV declines, that is not a “signal” from the people that they want a coercive central bank to print money for its banker friends. It is not a one to one relationship. You are only perceiving such a relationship because you have a flawed understanding of how a free market operates in the area of money production.

  36. Gravatar of Bill Ellis Bill Ellis
    13. August 2012 at 12:21

    Patrick R. Sullivan,

    Cool, you read Delong.
    So I don’t get how you don’t see that it is Scott, for years now, that keeps poking the Keynesians with a sharp stick over the Fed…even though they have been calling for aggressive Fed action for years.

    Look at it this way…You can’t say that the Keynesians have been picking fights with Scott over the need for a more aggressive Fed for years now can you ?

  37. Gravatar of Bill Ellis Bill Ellis
    13. August 2012 at 12:32

    Patrick R. Sullivan,

    look at the nature of this latest crap fling…It is Delong defending himself against Sumner’s accusations (right or wrong )…About what Delong did or did not mean…years ago.

  38. Gravatar of Bill Ellis Bill Ellis
    13. August 2012 at 13:27

    From “What did Ayn Rand teach Paul Ryan about monetary policy?”
    by Brad Plumer…

    …Ryan’s most unconventional opinion on monetary policy came in the summer of 2010, when he told Ezra Klein that the Federal Reserve should actually raise interest rates even as the U.S. economy was still struggling: “[T]here’s a lot of capital parked out there, and we need to coax it out into the markets,” he said. “I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.”

    http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/08/13/what-did-ayn-rand-teach-paul-ryan-about-monetary-policy/

  39. Gravatar of Steve Steve
    13. August 2012 at 14:17

    “I think literally that if we raised the federal funds rate by a point, it would help push money into the economy”

    Yeah, the Repubs are putting up Marc Rich and Richard Fisher for their ticket.

  40. Gravatar of Steve Steve
    13. August 2012 at 14:45

    “I don’t get how you don’t see that it is Scott, for years now, that keeps poking the Keynesians with a sharp stick over the Fed…even though they have been calling for aggressive Fed action for years.”

    Well, it depends on which Keynesians. DeLong and Krugman are smarter than average Keynesians. They were ambivalent about monetary policy before they were for it, but have been supporters for a while now. Then you have guys like Stiglitz, who simply doesn’t know macro at all and opposes monetary stimulus because it distracts from fiscal stimulus.

    Unfortunately, it looks like the sharpest sticks are going to be required for the Republicans, which is going to a little painful for me and a lot painful for a libertarian Scott.

    It’s tempting to assume that etch-a-sketch will change his tune as soon as he is elected. But people assumed that Obama would change his anti-capitalist tune, and were proven wrong. I think it could be an epic mistake to assume Romney/Ryan will change their tune…

  41. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2012 at 15:27

    Yeah, Bill here’s the issue:

    Under Scott’s NGDPLT target at 4.5% starting TODAY, with NO make-up…

    Which Scott will ADMIT that if it is all he can get, he’ll take it…

    Scott and MM believes that:

    1. Even under the above horrific implementation of NGDPLT, it STILL works the same way.

    2. Rates gets raised even with unemployment up around 8%.

    3. The real power isn’t in the pump, it is in the commitment.- the VERY THING DeKrugman (and his supporters here) wants forget about when they say “do everything”

    The REAL GIANT mofo punch to economy from NGDPLT, is not the first pump that reduces unemployment a bit and rases inflation – the powerful smack that comes from RAISING RATES the moment we hit 4.5%

    At that moment, the whole world collectively meets Chuck Norris.

    We hit 4.5% and the Fed RAISES RATES.

    BAM!

    KAPOW!

    That’s the moment when everyone gets it through their heads that Federal Debt is about to get rolled over at HIGHER RATES.

    And suddenly the US debt position – the amount of taxes that go to debt service starts to explode.

    And…

    BAM!

    BAM!

    The US Govt. has to do AUSTERITY.

    Sumner’s plan tells us the Bond vigilantes are coming for sure, when we hit 4.5% up go rates…

    And down goes public employee pay. For good.

  42. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2012 at 16:11

    Captured live video of DeKrugman having an idea:

    http://www.youtube.com/watch?v=7nqkMihW0eM

  43. Gravatar of Julian Janssen Julian Janssen
    13. August 2012 at 17:36

    Here’s a post where I try to bring a lot of things together on Paul Ryan’s false virtue:

    http://socialmacro.blogspot.com/2012/08/paul-ryans-false-virtue.html

  44. Gravatar of TylerG TylerG
    13. August 2012 at 17:45

    Even if Mankiw and John Taylor are wrong in this dispute, man they are classy dudes. Look at how mellow and level-headed John Taylor’s response is:

    http://johnbtaylorsblog.blogspot.com/2012/08/paul-krugman-is-wrong.html

    He just makes makes his substantive points and never engages in any name calling or vitriolic rhetoric. I’m not saying they’re right but there would be so much more added productivity and intellectual value to the econ blogosphere if Krugman/Delong echoed that sentiment.

  45. Gravatar of Morgan Warstler Morgan Warstler
    13. August 2012 at 19:37

    Left this over with Miles Kimball… on Ryan:

    http://www.theatlantic.com/business/archive/2012/08/forget-paul-ryans-budget-his-scariest-idea-is-about-the-federal-reserve/261066/

    O’Brien isn’t being honest, he is glossing over the key points of both Friedman and Ryan’s thinking…. and Sumner’s.

    The truth is that the 2% inflation target can allow for LOTS AND LOTS of QE…

    AS LONG AS, we are also gutting the public sector and forcing them into 3-5% YOY productivity gains everywhere…. with all that deflationary effects of govt…

    EVEN ROMNEY says we have to keep spending stable – and the trick there is that you can do that with Mankiw’s support WHILE you slice and dice the public sector unions.

    Hell the FED will throw a dollar bill ticker tape parade if it has to make sure the economy doesn’t slow down while SIEU is filleted.

    The WHOLE POINT of say a 4.5% NGDP Level Target is that we very quickly are butting heads up against it, and DAMN! We have to raise rates!

    Shit! Raise rates! that’s what Ryan wants to do!

    Why???

    Because:

    1. the forces the cost of US debt rollover to skyrocket, and suddenly the bond vigilantes are out in force demanding the US cut its spending.

    2. we get rewarded by a Fed for all those deflationary productivity gains by lower rates for longer and money printing if need be.

    Screaming about inflation is no different tan setting the NGDPLT at 4.5% – it is nearly exactly the same thing in real day-to-day terms.

    O’Brein should be smart enough to figure this out, I think he is, I think he just wants to dance around the edges trying to count coup. “

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. August 2012 at 21:42

    In the summer of 2010, Paul Ryan told Ezra Klein that the Federal Reserve should actually raise interest rates even as the U.S. economy was still struggling:

    “[T]here’s a lot of capital parked out there, and we need to coax it out into the markets,” he said. “I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.”

    And in a WSJ piece titled “A Republican Road to Economic Recovery” (March 2nd, 2009) he said:

    http://online.wsj.com/article/SB123595257066605147.html

    “I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy.”

    I keep reading that Milton Friedman is big influence on his views and that in college he dove deeply into his works, so I’m a little puzzled. He couldn’t have dived very deeply could he?!? I mean, Ryan thinks raising interest rates is expansionary, and he wants to tie the value of the dollar to a basket of commodities.

    After all, Friedman’s great insight was that low interest rates don’t necessarily mean that Fed policy is easy, and usually mean the opposite. And Friedman thought that the Great Depression wouldn’t have been quite so great if the Fed had printed money to prevent the banking collapse. In fact it was because the value of the dollar was tied to a commodity, gold, that that the Fed was prevented from quantitatively easing.

    Doesn’t this sort of make Paul Ryan’s views on monetary policy the complete opposite of Milton Friedman’s? And isn’t monetary policy the very area of economics for which Friedman is justly famous? Then why do I keep reading that Milton Friedman was such a great influence on Paul Ryan’s economic views?

    This is the equivalent of saying that John Maynard Keynes is a great influence on one’s views, that is, except for the part about the need for government spending in a liquidity trap.

  47. Gravatar of Max Max
    14. August 2012 at 03:23

    Well, if you claim to “focus on what he [Krugman] actually says about the paper” you should offer more than word plays without, in fact, addressing any of the criticism. Taylor and Mankiw show some skill in framing it as an attack by Krugman in that they probably rely on his image as a liberal hack (see that “natch!” in Mankiw’s response). But Krugman was not the only one taking exception with the white paper, not at all – and I don’t see how Taylor responded to any of them. If you have the sincere intention to refute criticism you go for the real arguments, not for the cheap shots. I have no idea how Taylor being calm changes this basic shortcoming of not doing what he pretends to do. Krugman, at least, is fun.

    Also, I can’t really understand the permanent kerfuffle on the “style matters” front. These are public disputes and there a whole arsenal of rhetoric means (see Cicero of you don’t believe me) to convey what one wants to say in the most efficient way. If you prefer arguments only, that’s fine. But what I see is a lot of people complaining about how Krugman is basically a thug and selling themselves as honest brokers – just to engage in superficially calm rhetoric containing no arguments that reveals itself as exactly that: a rhetoric means to efficiently counter a vitriolic attack. How is that any better?

  48. Gravatar of Julian Janssen Julian Janssen
    14. August 2012 at 04:45

    I admit, I’m biased… I generally prefer Krugman to Taylor, but I looked at that paper he linked to in his most recent post and I feel what I found is worth mentioning for those who probably won’t get around to reading it (no accusations here, sometimes I neglect reading linked papers, too). One of the potential sources mentioned in the abstract was the debt limit brinksmanship (not those words). The paper, itself hardly mentioned it, but if you looked at the graphs of the index which the researchers put together, you see a high of uncertainty around when Lehman went bust, then it subsided somewhat, had a rise when the EU had trouble, subsided somewhat again, then rose to an all-time high for the period in the graph right as the debt ceiling debacle came around. To me, that would probably indicate that the issue was a bigger source of uncertainty than taxes and regulation.

  49. Gravatar of orionorbit orionorbit
    14. August 2012 at 06:50

    Scott, I think that the position that the size of the government should be reduced is a legitimate one and the main criticism of Mankiw et al. consists in that instead of taking their case to the electorate (because they know the electorate favors a much bigger govt than what RR would try to sneak through the back door), they produced a paper in which they in essense encourage voters to trust RR’s secret plan to end the recession. Now, for starters, as a self proclaimed libertarian you should be by definition opposed to any secret plan to end X and join Krugman in criticizing RR’s refusal to spell out any details on what they plan to do, as well as Mankiw et al paper insofar as it lends any support to such secret plans.

    The debate on empirical evidence is secondary in my opinion. However, you are wrong in comparing yours and Krugman’s blogging to a policy paper written on the basis of the authors’ academic credentials. The standards are just not the same., in a policy paper OF COURSE you have to cite empirical evidence against your hypothesis, at least that’s how it works in Sweden.

    And I don’t even get into Krugman’s accusation that the authors of the cited papers in Mankiw et al claim their conclusions were distorted because i don’t have time to read the material in length, but suffice to say that if this were the case in Sweden, it would be grounds for dismissal from any government position (even tenured professorship) not to mention a certain end to the authors’ academic careers.

    Additionally, I find Mankiw’s et al. inconsistency on Keynesian ideas disturbing; as DeLong wrote, if 09 stimulus was a bad idea, how come any RR tax cuts don’t are a good one?

    In my view, you are wrong to lend your support to Taylor on this one, even if you were right on your point about citations, their paper is a disgrace to the profession, as is Mankiw’s chicken-out from his position on raising the inflation target once he realized that conservatives don’t like the idea.

    I’m really really surprised that you spend so much effort into something trivial (no, we really don’t care what DeLong said in 09, he’s probably wrong on this and definitely wrong in deleting your comments, but WHY CARE?) and trivialize something very serious.

  50. Gravatar of B.B. B.B.
    14. August 2012 at 07:22

    BTW, the Pilgrims were headed for Virginia and ended up in Masschusetts.

    An example of path dependence.

    How would America have been different with a different captain in 1620?

    How would America have been different with a different captain in 2008?

  51. Gravatar of Max Max
    14. August 2012 at 08:12

    What is also remarkable in this context is that we get the umpteenth post/remark about how Delong/Krugman etc didn’t call enough for monetary policy in 2009 or rather denied it could be effective based on what are quotes – without a single exception – about ‘conventional’ monetary policy. Even though they are on his side at (least at) present. On the other hand Sumer pussyfoots around calling the Taylor/Mankiw paper out for its utter distortion of the literature, because, technically speaking, they didn’t “misquote” anyone.

    At this point I have the impression that annoying liberals/people back then ‘when I wasn’t an important blogger’ is an important part of Sumners portfolio.

  52. Gravatar of Max Max
    14. August 2012 at 08:18

    Scratch that last sentence, such imputations are useless (the way it is written it doesn’t make much sense, anyway), my apologies.

  53. Gravatar of TallDave TallDave
    14. August 2012 at 08:45

    After all the quotes I provided there are still some commenters who seem to think I was unfair to DeLong in simply pointing out that he had claimed that because the Fed was out of ammo we needed to use fiscal stimulus. All I can say is “this is your brain on politics.”

    Amen to that. DeLong is still the guy who said “If you are still playing for Team Republican and want to have any honor whatsoever, you need to leave the Republican Party now, apologize to America, and work to remove it from our political system.” He manages to make Krugman (who, even if he doesn’t care, at least seems to understand when he’s not being intellectually honest) look nonpartisan and self-aware.

  54. Gravatar of TallDave TallDave
    14. August 2012 at 09:07

    Mark,

    Ryan must have misspoke (or been misquoted) there, speaking extemporaneously as he was — that sentence only makes sense if he meant to say reduce interest rates: he’s talking about getting more money out of gov’t bonds and into the private sector, and even if he were Joe Biden I would expect him to understand that higher interest rates attract more, not less, investment. Look at the rest of the quote:

    We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets.

    And in 2010 he also seems to argue the opposite:

    That would end uncertainty, help keep interest rates down, and increase the confidence entrepreneurs and investors need to take the risks required for future growth.

    Now, as a convert this year to MM/NGDPLT, I think Ryan was way off track on his criticism of “easy money” in precisely the way Scott Sumner has explained so often, and the “basket of commodities” sounds even worse than current attempts to measure inflation, but it’s a bit unfair to characterize his view as “raise interest rates” except perhaps in the context of doing so in the years before the recession.

    (I’ll even throw in that it’s ridiculous for Ryan to blame monetary policy for the housing bubble.)

  55. Gravatar of Steve Steve
    14. August 2012 at 09:52

    What is Greenspan saying in this interview in BusinessWeek?
    Q: Would you agree we’re in a liquidity trap now?
    Greenspan: I can’t discuss that. I could, but I’m not.
    Q: I mean there are limits to how far monetary policy can work in a case like this, right?
    Greenspan: I’ll put it this way – Ben Bernanke has a far more difficult job than I had. He’s a very competent, experienced economist.
    Q: Do you ever talk to him?
    Greenspan: Of course. We are both fluent in Fedspeak.

  56. Gravatar of Morgan Warstler Morgan Warstler
    14. August 2012 at 10:25

    “This is the equivalent of saying that John Maynard Keynes is a great influence on one’s views, that is, except for the part about the need for government spending in a liquidity trap.”

    Sadowski, this is wrong.

    1. That wasn’t Friedman’s greatest contribution, the greatest contribution is teaching people government was bad. By any measuring stick, this was his greatest impact.

    2. The REAL Keynesian equivalent is the one ALL Keynesians make which is that during good times we should not be growing govt. giving public employees raises past inflation EVER etc.

    You can’t get upset with Ryan for picking and choosing which parts of the grand theory he likes UNLESS you are also upset with say Sumner for not highlighting the part of his plan that liberals will hate more often…. all those fired public employees.

    I’m the ONLY guy who sits here in the middle taking equal parts of Sumner’s complete plan.

    I revel in the wholeness of it, even the parts I find distasteful.

    Scott barely mentions the things that will REALLY set DeKrugman off.

  57. Gravatar of Doug M Doug M
    14. August 2012 at 10:36

    As a sailor,

    The captain can plot an accurate course to New York. But if there is no wind, the boat is addrift.

    To take this metaphor to monitiary policy. The captain’s tools are a stick and a string. You can’t push a string.

  58. Gravatar of Euler Euler
    15. August 2012 at 08:31

    Sumner says: “The issue seems to be that they reported findings from others that supported their hypothesis, but overlooked findings from the same paper that contradicted it. I claim that’s fair. I do that.”

    I’m just going to outsource this one to an actual scientist, Richard Feynman (http://www.lhup.edu/~dsimanek/cargocul.htm), who discussed it in a classic talk on scientific integrity. See if you live up to his standards:

    “But there is one feature I notice that is generally missing in cargo cult science. That is the idea that we all hope you have learned in studying science in school–we never explicitly say what this is, but just hope that you catch on by all the examples of scientific investigation. It is interesting, therefore, to bring it out now and speak of it explicitly. It’s a kind of scientific integrity, a principle of scientific thought that corresponds to a kind of utter honesty–a kind of leaning over backwards. …

    Details that could throw doubt on your interpretation must be given, if you know them. You must do the best you can–if you know anything at all wrong, or possibly wrong–to explain it. If you make a theory, for example, and advertise it, or put it out, then you must also put down all the facts that disagree with it, as well as those that agree with it. …

    In summary, the idea is to try to give all of the information to help others to judge the value of your contribution; not just the information that leads to judgment in one particular direction or another.

    The easiest way to explain this idea is to contrast it, for example, with advertising. Last night I heard that Wesson oil doesn’t soak through food. Well, that’s true. It’s not dishonest; but the thing I’m talking about is not just a matter of not being dishonest, it’s a matter of scientific integrity, which is another level. …

    And, although you may gain some temporary fame and excitement, you will not gain a good reputation as a scientist if you haven’t tried to be very careful in this kind of work. And it’s this type of integrity, this kind of care not to fool yourself, that is missing to a large extent in much of the research in cargo cult science. …

    But this long history of learning how not to fool ourselves””of having utter scientific integrity–is, I’m sorry to say, something that we haven’t specifically included in any particular course that I know of. We just hope you’ve caught on by osmosis. …

    I would like to add something that’s not essential to the science, but something I kind of believe, which is that you should not fool the layman when you’re talking as a scientist. I’m talking about a specific, extra type of integrity that is not lying, but bending over backwards to show how you are maybe wrong, that you ought to have when acting as a scientist. And this is our responsibility as scientists, certainly to other scientists, and I think to laymen.

    I say that’s also important in giving certain types of government advice. Supposing a senator asked you for advice about whether drilling a hole should be done in his state; and you decide it would be better in some other state. If you don’t publish such a result, it seems to me you’re not giving scientific advice. You’re being used. If your answer happens to come out in the direction the government or the politicians like, they can use it as an argument in their favor; if it comes out the other way, they don’t publish it at all. That’s not giving scientific advice.”

  59. Gravatar of Scott Sumner Scott Sumner
    17. August 2012 at 17:18

    Euler. Yes, I agree with those views.

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