Jumping to conclusions
Mark Thoma recently took me to task for misinterpreting his post. Here’s what Mark said:
It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast. It would be just as easy to point to the recent tax cuts that Congress (surprisingly) put into place and give those credit for recent employment gains.
Knowing that Mark is a monetary stimulus skeptic, and a strong supporter of fiscal stimulus, I assumed his point was that even if the economy does pick up, how do we know it was monetary stimulus, not fiscal stimulus? Several Keynesians have made that argument in my comment sections. Then I went on to make a light-hearted joke about how Krugman doesn’t believe tax cuts are fiscal stimulus and Thoma does.
Now we find that two of the top Keynesian commentators don’t even agree on whether tax cuts count as stimulus.
Now he criticizes me for claiming that he said tax cuts had an expansionary impact, or at least I think that’s what I think he’s saying:
Sumner twisted my words on tax cuts. I didn’t say they were effective, I said that if one made the QE2 argument (which I was denouncing), one could just as easily make the tax cut argument. But I wasn’t actually saying the tax cuts had this impact (I also said fiscal policy could be given credit, but I guess Sumner ignored that because it didn’t fit the gotcha he wanted for Krugman.) [emphasis added]
I never claimed he said tax cuts had this impact. All I said was that the inference of his statement was that in some sense they “count” as stimulus. He could have mentioned a million potential causes of employment rising in January, including the migratory pattern of birds or the orbit of Mercury. The fact that he chose tax cuts, a well known Keynesian stimulus, and the fact that Mark is a highly respected Keynesian, led me to infer not that he was claiming tax cuts were effective in this instance, but rather tax cuts (and not bird migrations) are the sort of thing that might be capable of producing stimulus. In contrast, the clear implication of Krugman’s post is that tax cuts are not a type of fiscal stimulus capable of boosting output, as he said fiscal stimulus had never been tried in this recession, and used spending data that ignored tax cuts to show that there had been no fiscal stimulus. Anyway, the whole thing was obviously meant as a joke, the “cheap shot” heading was the tip-off that I found it amusing to see the apparent inconsistency. I didn’t doubt that both have good reasons for their views, and wasn’t really trying to criticize either one. If I was it would have been Krugman, not Thoma. Most Keynesians believe tax cuts are stimulus.
Since we are on the subject of being misquoted, the following Mark Thoma statement isn’t exactly a misquotation, but comes close:
Or they are making the claim that those who said monetary policy is ineffective at the zero bound have been shown to be wrong?
Yes, he doesn’t even mention my name. But isn’t it usual practice that when you link to someone’s post in the middle of a “making the claim” sentence, the post you link to does actually, you know, make that claim? Check out my post and you’ll find I do not. But I’m not going to get upset, because I do in fact believe the monetary ineffectiveness proposition at zero rates has been shown to be wrong, and have said that elsewhere. And I’m pretty sure that Thoma has said elsewhere that tax cuts can be used as fiscal stimulus, which is all I was trying to say in the sentence that annoyed him.
So maybe we’re even now? Anyway, it doesn’t matter, as bloggers misunderstand each other 100 times a day. I’d say about 50% of all links to my posts involve misunderstandings, although that may be a reflection on my poor expository skills.
Mark Thoma also makes a substantive criticism of my views on lags. This is from the quote up top:
It’s particularly amusing to see people saying that QEII raised employment in January when we know good and well that there are substantial lags in the policy process and it would be very unusual for monetary policy to work that fast.
It would be amusing to know who claimed QEII raised employment in January. Mark then takes me to task:
“Cheap shots” are easy when you don’t understand the empirical evidence on the effects of policy,
Given that I’ve spent most of my life studying “the empirical evidence on the effects of policy” it is disappointing to find out that I don’t understand that evidence. Let’s start with Gauti Eggertsson’s important article in the September 2008 AER, which shows how the powerful monetary stimulus of the spring of 1933 caused an almost immediate increase in prices and output. (And Gauti cites not one but three of my papers—papers which discuss “empirical evidence” on money affecting prices and output.) To be specific, after FDR took us off gold in the spring of 1933 the US saw a 57% increase in industrial production in 4 months, and a 14% increase in the WPI. I’d guess that’s the fastest growth in AD in US history. I don’t see any long and variable lags there. Do you? Now you could argue that’s dollar depreciation not QE, but didn’t rumors of QE depreciate the dollar in September-October 2010?
Mark Thoma cites Woodford’s assumptions about monetary policy lags:
1. First, I didn’t confuse peak effects with some effect. Sumner needs to look again at the empirical evidence. There is at least a one quarter lag before policy takes effects (and the delay is particularly long for inflation). You can find estimates saying anything, but there’s a good reason Woodford et. al. spent so much time trying to build a policy delay into their models. [Update: I should have given a reference. See Woodford’s book Interest and Prices, page 175 where he says “…there is a substantial real effect of the shock. … Furthermore, the effect occurs with a substantial delay; there is essentially no effect on output until the second quarter following the policy shock” Or, perhaps better, see the section in Chapter 5 called “Delayed Effects of Monetary Policy.”]
I have several questions about this. First, how does Woodford identify monetary policy shocks? If he uses changes in interest rates or the money supply, then I’d guess the shocks are misidentified. Second, does he use post-war data? If so, I’d guess the shocks are misidentified. Third, does he use interest rates and postwar data? If so, then I’m sure the shocks are misidentified. Eggertsson is his co-author on several important papers. What does Eggertsson think about Gauti’s work on the Great Depression? Does Woodford know that commodity prices set in auction-style markets respond immediately to monetary shocks? If they didn’t there’d be $100 bills all over the sidewalk. If he knows this, how does he explain there being no immediate effect on inflation? Don’t high commodity prices affect inflation?
Long-time readers know that I think it is far easier to identify monetary shocks in the interwar period than the post war period. Fortunately for us, but unfortunately for the people back then, the government did lots of wild and crazy (read exogenous) things with monetary policy. I’ve devoted half my life to studying these shocks. And I see both prices and output responding very quickly on almost every clearly identifiable shock. No long lags.
Now it’s fine if Mark Thoma disagrees, but I just want to make clear I am fully aware of the empirical evidence, including those post-war VARs that showed a price puzzle. And my reading of the best evidence available is that monetary shocks (when clearly identified) have an impact on prices and output within a few months.
In one respect Mark Thoma was clearly justified in being annoyed. I said:
He confuses peak effect, often estimated at 6 to 18 months, with some effect, which occurs almost immediately after major monetary shocks.
That was me jumping to conclusions. Reading his new post it’s clear he wasn’t confused at all—he just has a different point of view than me. So I’m sorry about that Mark.
HT: Mark Sadowski
Tags:
17. February 2011 at 19:02
HT:? (Sigh.)
17. February 2011 at 19:58
Scott
Even Thomas Sargent gets mixed up (I think) about MP (and the QTM). Maybe DSGE models give out “bad results”!
http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.1.109
Friedman´s thermostat analogy was much more interesting (and provides the right result)
http://faculty.hacc.edu/erandolph/Take_%20Home/Thermostat_2.pdf
17. February 2011 at 20:00
Mark, I’m getting more senile everyday. It’s there now.
17. February 2011 at 20:04
🙂
17. February 2011 at 20:20
Well this is sad.
Firstly, you would think labeling this “Cheap shot #2” would be a clue you were acknowledging your argument was not being made on completely solid ground. Thoma completely misses this*.
Of course that is nothing compared to how badly he missed the impact QE2 had from late August to early November**. Does he not believe in the wealth effect and Tobin’s q? And what about inflation expectations(which should directly reflect AD)? Was it coincidence these asset price changes occurred at the exact same time as changes in expected monetary policy? If the massive increase in stock prices, commodity prices, and nominal yields didn’t convince someone of the effectiveness of ZIRP, what will?
All I can think of when people deny the seemingly undeniable affect that monetary policy has on asset prices is: “Sure it works in practice… but does it work in theory?” It doesn’t work in their model, so it can’t be true.
And I still think Keynesian ambivalence to easier monetary policy deserves much more blame for tight policy than conservative/Austrian outrage does. Mark Thoma is to blame for everything that is wrong in the world and responding to him only encourages him and his group***.
*,**,***(Okay, if its not clear, I am trying to parody Thoma’s post and his over-the-top commentors. Normally Thoma is a great guy and he deserves credit for the bloggingheads he did with you a while back – I stand by the stuff about him missing QE2’s impact though)
17. February 2011 at 20:47
I love it.
The long knives are coming out. Couple different angry rebuttals in the ether. CRUSH THEM.
Now that you are throwing down the gauntlet, and they sense they could be left chasing your mob down the street screaming, “wait for me, for I am your leader!”
They have gone on record, their weak white underbelly is showing. Trust your instincts, the results will go your way – double down.
—-
Ok, now let’s get back to what would cause Ben to go nuclear (level price targeting)?
I think the answer is radical deflationary pressure from cutting government spending. Meaning the more you appeal to his raw GOP animal instincts, the more he is going to commit to “seeing it through.”
He’ll lay down cover fire as long as changes are structural. Give him an end to Davis-Bacon, and let Wisconsin & Ohio destroy public unions, and he’ll get much funkier.
His message will be clear: “We are ready to step in and stabilize things during large structural blasting – we’ll stand ready with a 2000 cc’s of Epinephrine to make sure that after each political excision, the patient gets up and cuts a rug before the next one.”
Its this same thinking that sent Greenspan out right after Clinton left to explain we need deficits – so please cut taxes.
Years ago, I spent some time with a billionaire involved in cable TV. He told me that routinely before a giant M&A, there are a Rolodex of institutional investors who will agree to take even larger positions in one or both companies and that the reason isn’t inside info – its to ensure that when the announcement is made, there is very little float that can go south, freak out the market and create bad news cycles. Good ideas still need cover.
I think of this like that.
Ben needs to see the political economy equivalent of Time Warner getting into Cable TV.
If all he’s there for is to goose things along no matter how stupid US policy is – we’re not ever going to see this:
http://www.youtube.com/watch?v=yV-tXWwohAU#t=1m36s
—-
That’s from American Prince notes from “American Boy: A Profile of Steven Prince”
http://www.nerve.com/archived/blogs/sxsw-review-american-prince
See whole thing here:
http://www.youtube.com/watch?v=YxaNe2SY-AI
17. February 2011 at 21:04
Although I appreciate, or at least like to think I appreciate, the quality of humor at this blog, even I was a little unsure at how much to take the “cheap shot” thing as a joke, and how much as serious. As evidenced by the elaboration above, it was sort of both – so it’s no surprise the humor fell flat a bit.
As much as I love the econ-blogosphere, between (say) Cowen, DeLong, Kling, Thoma and Krugman it’s not like you’re getting a constant stream of rollicking jollity. You should really try to fit in more and conform. Maybe then you’d be more popular with the others. Actually I think they have medications for this sort of thing now.
17. February 2011 at 21:08
If not Jan, how long do you think it would take before QE, at least in theory, could produce results in the employment market?
17. February 2011 at 21:17
I think people should also read what anon/portly wrote over at Mark Thoma’s latest response to Scott:
“Even if you think Sumner is mistaken in all of his views, he is very eloquent and passionate in bringing those views forward and defending them. What more can you ask for? On monetary policy issues, maybe it’s mere coincidence that the left-econblogosphere has moved in a Sumnerian direction (i.e. toward the idea that monetary policy may have been or still be sub-optimal), but I think it’s indisputable that it has. Plus he is almost unbelievably gracious with his commenters. I can’t believe that anyone interested enough in economics to read Economist’s View can not learn a whole lot from reading The Money Illusion. (And vice-versa of course).”
http://economistsview.typepad.com/economistsview/2011/02/cheap-shots-that-miss.html#comment-6a00d83451b33869e2014e5f4aa7b7970c
I for one appreciate it. I’m sure Scott does too.
17. February 2011 at 22:48
One more small note Mark. Note that we continue to see on Thoma’s blog a discussion about tax cuts are not stimulus…. from the left.
It doesn’t help the debate to group them. And yes, convincing Scott to stop using it will be just as hard.
Somehow we need to have common terms for “tax cuts” “fiscal (spending) stimulus” and “monetary stimulus”
Because then the fights / arguments will be more clear.
17. February 2011 at 22:56
“random grad student” replied to you at Marginal Revolution, citing Gautti Eggertson on tax cuts being contractionary.
18. February 2011 at 04:02
heh
18. February 2011 at 04:04
I suspect that in reality the “marginal propensity to consume” is a function of deficit, and is negative when there is a deficit.
18. February 2011 at 05:48
Marcus, I’ll look at that later. What’s Sargent mixed up about?
Cameron, You said;
“All I can think of when people deny the seemingly undeniable affect that monetary policy has on asset prices is: “Sure it works in practice… but does it work in theory?” It doesn’t work in their model, so it can’t be true.
And I still think Keynesian ambivalence to easier monetary policy deserves much more blame for tight policy than conservative/Austrian outrage does.”
I agree about the “doesn’t work in theory” problem tripping people up. Regarding your attribution of blame, I think you are right about late 2008 and early 2009, but the conservatives have been more to blame over the past year.
Morgan, My home state is making me proud. Those big spending Dems have fled into exile due to fear that they will lose a democratic vote on the issue.
anon/portly, You said;
“As much as I love the econ-blogosphere, between (say) Cowen, DeLong, Kling, Thoma and Krugman it’s not like you’re getting a constant stream of rollicking jollity”
Maybe I need smiley signs. Krugman went from “the stimulus is working!” to “there never was any stimulus!” I think that’s funny, but maybe that’s just me.
As for the names you mention, sorry but you are really missing something. Their posts are drenched with humor (Except Thoma.) I’m shocked you missed it. Do you think DeLong really thinks I can’t read, or am losing my mind? Do you think Kling really believes it is fighting dirty to present empirical evidence? Cowen has a wonderful sense of humor. I agree my humor’s pretty lame, but I’m floored you don’t notice all the humor in DeLong, Krugman, and Cowen.
In any case, would you agree that Thoma doesn’t have much of a case even if he didn’t notice it was humor. I granted that I shouldn’t have said he was confused on an issue. But that’s tame compared to the way he attacks people all the time. He’s constantly saying academics he disagrees with don’t care about the suffering of the poor, etc. People in glass houses . . .
dirk, If QE2 didn’t produce jobs by January, it probably never will. Unfortunately we’ll never know for sure whether it did. But if growth turns out strong in early 2011, there will be a strong likelihood that it did produce at least a few. In any case, what matters is expectations, not actual outcomes—which depend on many outside variables.
Mark, Thanks, that’s very nice of him. Even bloggers one strongly disagree with tend to be much nicer people than they seem when writing a critical blog. I once debated Thoma on the internet, and he is a very nice guy. But I can now see I’ve been too “unbelievably gracious” to my commenters. OK, guys, now I’m going to tell you what I really think of all your silly comments! 🙂
Morgan, Yes, I think there does need to be clarity among Keynesians as to whether tax cuts are stimulus. I’d always assumed the standard view was that they are stimulus, but the multiplier is lower than for spending. Most Keynesian reject Ricardian equivalence.
TGGP, Eggertsson was talking about the employer share of the payroll tax, unless I’m mistaken.
Doc Merlin, But there’s almost always a deficit.
18. February 2011 at 06:53
This was a really convincing reply to me. No arbitrage pricing should always dominate time series. Right so since it’s been Scott appreciation week I should add that I really enjoy your blog and you should write a book so I can buy it.
18. February 2011 at 07:53
Scott,
One might infer from your post that QE2 raised “employment” sometime after it was signaled. You have cited the Household Survey as a reliable indicator in the past. Here is the series for “Employed” in that survey since August:
Aug 276k
Sep 111k
Oct -294k
Nov -175k
Dec 297k
Jan 500k+ (ex-revisions)
Since Jackson Hole, we have seen a drop in Household employment followed by an increase. One might explain this as a lag effect, but you argue above that the effect (at least on output) is immediate. Further, the Employment Survey (private employment) is that hiring has not grown much since August, which saw 110k private jobs created vs. an average of 139k in 4q10.
I would say, at best, the data is inconclusive with regards to the impact of QE2 on employment. Of course, you may turn out to be completely right — its just too early to tell.
18. February 2011 at 08:52
Scott
The abstract from Sargent´s article:
By extending his data, we document the instability of low-frequency regression coefficients that Lucas (1980) used to express the quantity theory of money. We impute the differences in these regression coefficients to differences in monetary policies across periods. A DSGE model estimated over a subsample like Lucas’s implies values of the regression coefficients that confirm Lucas’s results for his sample period. But perturbing monetary policy rule parameters away from the values estimated over Lucas’s subsample alters the regression coefficients in ways that reproduce their instability over our longer sample.
From what I gathered, he says that TQM is only valid when MP does not respond aggressively to inflation! This reminded me of Friedman´s thermostat analogy.
18. February 2011 at 10:21
BTW, I misread Mark’s comment, assuming Thoma had said that about me, not anon. My apology. And thanks to anon/portly
18. February 2011 at 10:45
Mostly off topic but…
Here’s a WSJ article that came out yesterday on Shiller’s proposal for “Trills” (a government issued security with a coupon tied to US NGDP):
http://blogs.wsj.com/economics/2011/02/17/worried-about-us-debt-shiller-pushes-gdp-linked-bonds/
I believe Scott first posted on Shiller’s concept in January 2010 when a NYT article on it came out. Shiller’s interest is from a financial markets angle. Scott’s interest in it is….well, you know.
18. February 2011 at 11:51
“Doc Merlin, But there’s almost always a deficit.”
Yes, which would make spending cuts a keynesian stimulus (if the MPC is negative).
18. February 2011 at 13:25
Prof. Sumner, I have some questions about the operationalization of NGDP targeting. Since nominal new money will have to be dispersed into the broader economy via an increase in bank reserves, all this additional NGDP is expected to lead to $ for $ additional lending. Am I right here? Do we have enough borrowers? Bank capital? This is the longer explanation of why I’m asking
http://rogueeconomistrants.blogspot.com/2011/02/some-questions-for-proponents-of-ngdp.html
I don’t know if I’m missing a key ingredient in understanding your policy prescription. I have been rattling against monetary easing as a stimulus in my little corner, but if you can do a bit of explanation incorporating debt, I and many others will gladly join your crusade.
18. February 2011 at 13:52
@TGGP and Doc Merlin,
With all due respect to Eggertson, in the Zero Lower Bound Supermarket (a subsidiary of Liquidity Trap Foods) fiscal multipliers are carefully segregated according to sign. Whereas you’ll find positive spending multipliers and negative tax cut multipliers all the way on the far left next to the unicorn steaks, negative spending multipliers and positive tax cut multipliers are all the way on the far right across from the dragon filets.
P.S. Doc, given your name, I thought you would have known that.
18. February 2011 at 17:45
Mark, tax cuts, let’s not call them stimulus? Or lets always qualify it? How?
18. February 2011 at 18:01
E, Thanks, I’ve written one and am still trying to get it published.
David, I recall that I didn’t take a strong stand on the data. I cited 6 indicators suggesting stronger growth, including the unemployment rate, and I cited two indicators suggesting weaker growth, including the payroll number (in my post QE2 after 3 months.)
My hunch is that sales move about a month before output and output a month or so ahead of jobs. But that’s just a guess. It’s believed that final sales were strong in Q4.
Marcus, Thanks for clarifying that, and yes, it is like the thermostat example.
Mark, Yes, Shiller and I come to the same place from separate perspectives.
Doc Merlin, Maybe, but I’m skeptical. Was that true in 1940-41?
Rogue, You said;
“Since nominal new money will have to be dispersed into the broader economy via an increase in bank reserves, all this additional NGDP is expected to lead to $ for $ additional lending. Am I right here?”
No, the banking system need not be involved at all. The Fed could simply buy bonds from the public with cash. This probably doesn’t satisfy, but I’m coming at macro from a very different perspective from the standard finance-oriented view. To me it’s all about the supply and demand for base money, and the expected future supply and demand.
Mark, Well put.
18. February 2011 at 18:38
Morgan,
The only legitimate AD stimulus is money.
Changes to tax policy qualify as supply side. That’s a totally different issue. And I’m very interested in a discussion on that.)
18. February 2011 at 19:44
“He’s a notorious thumper, he’s not a man I would care to share a bed with with.”
“If I smelled as bad as you I wouldn’t live near people”
“She reminds me of me”
http://www.youtube.com/watch?v=BwYgj9Lfb2Q&feature=player_embedded#at=12
“I call that bold talk for a one eyed fat man.”
18. February 2011 at 20:13
Tomorrow I’m riding the range. I don’t expect you wussies to follow me at the break of dawn.
18. February 2011 at 22:50
“As for the names you mention, sorry but you are really missing something. Their posts are drenched with humor (Except Thoma.) I’m shocked you missed it. Do you think DeLong really thinks I can’t read, or am losing my mind? Do you think Kling really believes it is fighting dirty to present empirical evidence? Cowen has a wonderful sense of humor. I agree my humor’s pretty lame, but I’m floored you don’t notice all the humor in DeLong, Krugman, and Cowen.”
Krugman and Kling to me employ a very sober, sometimes even acerbic or bitter, tone. Sure, maybe they make a joke now and then, but “drenched with humor?” I don’t often come away from reading them thinking that they view the issues they discuss light-heartedly. But maybe this is just my limitations as a reader.
DeLong of course makes plenty of actual jokes and the fulminating style exemplified by “Scott Sumner Simply Loses His Mind” is certainly not entirely lacking in wit and playfulness.
But then, Delong thinks Fafblog is funny. Not just a little funny but the height of wit. Whereas in my model of jocosity, no matter how much I tweak things, I can’t make it come out that someone who likes Fafblog has any real sense of humor at all. Maybe I just need to employ a less parsimonious model.
Someone like DeLong who is so erudite and accomplished and hard-working and double-Harvardy – does he really need a sense of humor anyway? Not having one I think kind of humanizes him a little. I actually think DeLong works better as a fictional character than as a real person in the first place.
Cowen of course good point – he can be whimsical and witty and all that. Sometimes his style is so epigrammatic I forget or miss it, I think.
19. February 2011 at 09:05
anon/portly,
The main reason why I read all who you mentioned is for a good belly laugh, and I don’t mean that in a negative way at all. They obviously all add to the conversation in a very substantive way. But the amount of dry wit one usually finds in the field of economics is absolutely astounding. It’s probably what attracted me to the field in the first place (and, after all, laughter is the best medicine).
Now, as for my sense of humor, well, perhaps that’s an acquired taste. But, on the other hand, you’re excused if I manage to squeek out a chuckle from you from time to time.
19. February 2011 at 09:41
DeKrugman’s only redeeming characteristic is his supporting role in Get Him to the Greek. And I guess, on the right kind of jag, Morning Coffee is funny to laugh at. Ho, ho.
Otherwise, can we please get back to driving spikes through his hands and feet? Because when he’s not being funny, he is being evil.
19. February 2011 at 10:20
Morgan,
Thank You.
http://www.huffingtonpost.com/2010/06/08/paul-krugmans-get-him-to_n_605173.html
19. February 2011 at 14:48
anon/portly, Fair enough. But I don’t usually do posts like “Cheap shots.” I’m generally more straightforward.
If I don’t laugh about politics once and a while I think I’d go insane.
19. February 2011 at 21:16
“If I don’t laugh about politics once and a while I think I’d go insane.”
I actually think there’s kind of a connection between the subject of this post and the “wheel of politics.” Your chart makes clear that “pragmatic libertarians” are far away from the “corrupt Democrats.” But the “progressives” are near. Bloggers like DeLong, Thoma and Krugman all very strongly support certain elements of Democratic party special-interest politics – unions, minimum wage, higher government spending, government health care, etc. Bloggers like Kling, Cowen and Sumner do not have the same sort of “skin in the game” – they’re less likely to see a connection between electing the wrong politicians and the suffering of ordinary people – so maybe it’s easier for them to see the funny side of things.
(In this regard it’s a shame that someone as generally thoughtful as Thoma would toss out the “don’t care about the suffering of the poor” thing – he should see that Sumner could be as passionate about the effects on ordinary people of poor monetary policy as he, Thoma, is about the effects of poor fiscal and spending policy).
19. February 2011 at 21:41
Anon/portly,
I have absolutely no “skin in the game” as you call it. But I’m very much amused by your presence here. I truly hope you continue to comment in the Money Illusion.
20. February 2011 at 09:10
anon/portly, That’s a very astute observation.
Mark, I agree.