Kevin Drum on market monetarism
Update: Let me strongly recommend these two excellent posts on Switzerland, by Lars Christensen and Simon Cox.
Here is Kevin Drum:
Via James Pethokoukis, Scott Sumner claims that Market Monetarists got things right during the aftermath of the Great Recession when others didn’t:
It must be a major embarrassment to the profession that us lowly MMs turned out to be more correct during the crisis than any other major group (New Keynesians, New Classical, RBC-types, etc.) and indeed more accurate than other groups on the fringes (old Keynesians, old monetarists, Austrians, MMTers, etc.):
1. It’s now obvious that Fed, ECB, and BOJ policy was far too tight in late 2008 and early 2009, but MMs were just about the only people saying so at the time.
2. We correctly pointed out that fiscal austerity in 2013 would not slow growth in the US because of monetary offset, whereas in a poll of 50 elite economists by the University of Chicago, all but one gave answers implying it would slow growth.
3. We pointed out that massive QE would not lead to high inflation, while many other economists on the right said it would.
4. We correctly predicted that the BOJ and Swiss National Bank could depreciate their currency at the zero bound, while many on the left said monetary policy was pushing on a string at the zero bound.
5. We pointed out that the ECB’s tightening of policy in 2011 was a huge mistake, which now almost everyone recognizes.
I’m a little puzzled by this. Unless I’m misremembering badly, prominent lefty economists like Paul Krugman and Brad DeLong have been saying most of these things all along. And while I’m not really quite sure if these guys think of themselves as New Keynesians or Neo-Paleo Keynesians or modified Old Keynesians or what, they’re basically Keynesians.
The only one of Sumner’s five points where there’s disagreement, I think, is #2, and I’d argue that this is a very difficult point to prove one way or the other. My own read of the evidence is that the modest austerity of 2013 might very well have had a modest effect on growth, but frankly, a single year of data is all but impossible to draw any firm conclusions from. However, it’s certainly true that there were no huge changes in the trend growth rate.
Let’s take these one at a time. There’s really only one reason why Kevin Drum and others even pay attention to market monetarists. People like David Beckworth and I became well known in the blogging community for a very contrarian point of view in late 2008 and early 2009. We argued that monetary policy was way too tight and that this was making the recession much worse. Almost no one outside the market monetarist community was making that claim (with a handful of exceptions like Robert Hetzel at the Richmond Fed (in a much more polite fashion).)
In one of my early blog posts I wrote an open letter to Krugman asking him to support QE, NGDP targeting, etc., and he shot me down with a sarcastic reply, mocking the notion that monetary stimulus could help at the zero bound. Yes, much later he supported QE, and even at that time he was not really opposed, but the Keynesian community was strongly pushing the “monetary policy is ineffective at the zero bound” viewpoint in late 2008 and early 2009. Even more shockingly, so was almost everyone else.
If you don’t believe me, consider how Ryan Avent describes the impact of market monetarism in 2011:
Once upon a time, the Fed was viewed as having near-absolute power over the path of the economy. Then crisis struck and many argued that the Fed had run out of ammunition and fiscal policy was required. Eventually people began arguing that the Fed could do more and should do more, thanks largely to the efforts of Mr Sumner himself.
Or this from September 2012:
Yet even as this [QE] was taking place, the conventional wisdom across the economics wires was that monetary policy had largely done all it could do, or perhaps all it should do. The most straightforward argument on this score was that with interest rates at zero, the Fed was powerless to create more demand. QE could prop up banks, many suggested, but it could not influence the real economy. What was necessary instead was fiscal expansion, which could bypass a limping banking system and plow money directly into the economy.
A more sophisticated critique emerged from people like Paul Krugman, who diagnosed the economy has having sunk into a liquidity trap. With interest rates near zero, he argued, balance-sheet policy””swapping one zero-yield asset for another””was unlikely to prove effective. The only way the central bank could further stimulate the economy would be to slash the expected real return on bonds below zero by promising high inflation in the future. But this was hopeless; to do this, the Fed would have to credibly promise to “be irresponsible”: to tolerate inflation in some future in which the economy was no longer at the zero bound. Since no one would believe that the Fed would do such a thing, no one would expect high future inflation. The only solution to the problem is fiscal stimulus.
. . .
As these debates were playing out, a dissenting voice emerged in a tiny corner of the economics blogosphere. On February 2nd, 2009, Scott Sumner launched his blog with a flurry of posts assailing the conventional wisdom on monetary policy. But almost no one knew who Mr Sumner was, and so no one read those posts. Then on February 25th, Tyler Cowen linked to his blog, and readers and comments began trickling in. Mr Cowen’s status within the economics blogosphere signaled to the rest of us that these were ideas worth engaging.
The result was a long and detailed conversation on Mr Sumner’s key ideas, the heart of which was a call to refocus monetary policy on nominal GDP rather than inflation. As Mr Sumner is quick to admit, this is not an idea original to him. Rather, he argues (compellingly, in my view) it is one that follows directly from Milton Friedman’s monetarist revolution but which lost out to inflation targeting during the early years of the Great Moderation. The insight is that the central bank’s provenance isn’t the money supply or interest rates or inflation but simply demand, best captured in nominal output or income: the total amount of money spent each year. If one accepts, as most macroeconomists do, that nominal shocks can have real consequences, and if one then accepts, as is common, that central banks ought to try to smooth out nominal shocks, then it makes the most sense to just stabilise the biggest nominal aggregate. Alternatively, the best way to insure against a damaging fall in demand is to make sure that demand doesn’t fall, or at least to promise to quickly rectify any demand drop that does occur, by maintaining a stable path for nominal output growth.
. . .
The notion that the central bank should focus on raising NGDP and that inflation is largely a sideshow has taken a while to catch on. But caught on it has. That is down partly to the effectiveness of the idea itself and the argument developed by Mr Sumner. And it is down partly to the fact that Mr Sumner’s framework has done a good job explaining the ups and downs of recovery. Blogs helped his idea find an audience. As the audience grew, Mr Sumner was able to find print outlets for his views. And through blogs, economists advancing the idea were able to communicate and deepen their arguments, eventually forming what has been called the first school of economics to emerge online: the market monetarists. This school now has a book out, edited by David Beckworth.
As the blogosphere cottoned on to the idea, it seemed to trickle up. This newspaper covered the idea in a column in August of last year. In October of 2011 Goldman Sachs’ Jan Hatzius endorsed the idea in a research note, and Christina Romer, a former head of Barack Obama’s Council of Economic Advisers, signed on in a column at the New York Times. In November of last year, Mr Bernanke was asked about NGDP targeting at a post-meeting press conference. And at this year’s Fed convocation in Jackson Hole, renowned monetary economist Michael Woodford presented a paper to an audience of central bankers which came down in support of the concept.
. . .
As the market monetarist community is now pointing out, the Fed’s new policy is a step in the right direction, but it is a long way from what they would actually recommend implementing. And they’re right. Fairly or not, however, the policy will be judged as a test of market monetarist ideas. Yesterday’s market moves suggest that nominal output growth should accelerate in coming quarters. How much acceleration is likely to occur will depend on how much room the Fed is willing to give the economy to run. If the rise in inflation expectations leads the Fed to begin walking back its new language a month from now, the gain will be small.
. . .
It is unfortunate for the school’s adherents that both the victory and the test are so incomplete. But they should be glad and proud all the same. And for the sake of the unemployed, let’s all hope they’re right.
In early 2013 Keynesians like Mike Konczal and Paul Krugman predicted that fiscal austerity would slow growth. Indeed they were so confident that this would occur that they suggested 2013 would be a “test” of the market monetarist proposition that monetary stimulus would offset the effect of fiscal austerity. If GDP in 2013 kept growing as fast as in 2012, the Keynesians would be proved wrong. It didn’t grow as fast, it grew considerably faster. Keynesians tend to cite real GDP growth, which accelerated from 1.60% in 2012 to 3.13% in 2013 (Q4 over Q4.) Nominal GDP growth (the variable Keynesians should use to analyze austerity) rose from 3.47% to 4.57%.
Ryan Avent was right that what people really care about is jobs, and in the period since December 2012 the unemployment rate has fallen considerably faster than during the previous three years. Of course after market monetarism passed Krugman’s “test” with flying colors, he denied that any test had taken place. But you can be sure that if there had a been a recession in 2013, Keynesians would not now be saying that the increase in income taxes, payroll taxes and budget sequester of 2013 weren’t really all that important. Here’s how Krugman characterized the austerity in April 2013:
as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.
And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.
As far as point 4, if you want to see Keynesian skepticism about the ability of central banks to depreciate their currency at the zero bound, then check out this Krugman post.
Kevin Drum also mentions Brad DeLong. Here’s DeLong in early 2009:
The fact that monetary policy has shot its bolt and has no more room for action is what has driven a lot of people like me who think that monetary policy is a much better stabilization policy tool to endorse the Obama fiscal boost plan.
The fact that Gary Becker does not know that monetary policy has shot its bolt makes me think that the state of economics at the University of Chicago is worse than I expected–but I already knew that, or rather I had thought I already knew that.
Just like Krugman, he mocks those who suggest that much more monetary stimulus is possible. In fairness, both Krugman and DeLong have become more supportive of monetary stimulus in recent years, but I specifically mentioned late 2008 and early 2009.
PS. I think Ryan Avent overstates my influence on others. But the important point here is that people like Beckworth and I were getting so much attention because we were saying things that other people were ignoring. If Kevin Drum wants to argue that we all believe those things today (“we” meaning both Keynesians and MMs), that’s great. That means we were even more influential than I imagined.
HT: Simon
Tags:
21. January 2015 at 11:48
Scott, I absolutely agree. When it started, your blog was a ray of light in the mad dark world.
21. January 2015 at 12:52
Nice post. Someone on John Cochrane’s blog linked to this statement signed by 350 economists last year, including the likes of Jared Bernstein, Robert Reich, and Dean Baker. Among other things it states:
“At the end of the year, we face a congressionally-created “fiscal cliff,” with automatic “sequestration” spending cuts everyone agrees should be stopped to prevent a double-dip recession.”
http://jobsnotausterity.org/
21. January 2015 at 12:56
Scott,
You said:
“It didn’t grow as fast, it grew considerably faster. Keynesians tend to cite real GDP growth, which accelerated from 1.60% in 2012 to 3.13% in 2013 (Q4 over Q4.)”
I’m not sure why you keep repeating this — it is essentially cherry picking and depends entirely on fluctuations in the endpoints of the data.
And it’s not just me; Konczal has the exact same problem with your analysis of the data. The data is completely inconclusive (either way; it doesn’t confirm the Keynesian view either).
http://informationtransfereconomics.blogspot.com/2014/07/i-do-not-think-that-calculation-means.html
21. January 2015 at 13:09
The problem is that we have not had “austerity” except for maybe Q1 in 2013. Nominal government expenditures (state, local, federal have been pretty flat since 2011, but moved up in the latter part of 2014.
In billions
Q4 2012 $5,810.3
Q1 2013 $5,728.0
Q4 2013 $5,766.5
Q3 2014 $5,969.0
Now Greece, they had real austerity.
21. January 2015 at 13:35
I am with you on this one. The amount of history rewriting that’s now coming from the left astounds me. I started reading your blog regularly in 2010, and even before that you were part of the discussion in the left blogosphere. The point being, I was there, and I remember what an uphill battle it was for you to gain traction among the left. Krugman and BDL and others seem to have come around, which I applaud, but to insist it was like that from the start is a complete lie.
21. January 2015 at 13:38
I doubt that Kevin Drum could pass an Econ 101 exam, even if Krugman and DeLong were sitting behind him whispering into his ears.
21. January 2015 at 13:42
What are the chances that
A) Drum realizes he is wrong
B) admits he was wrong publicly (contingent on A)
Fwiw, I don’t mind Drum who strikes me as an honest and earnest progressive.
21. January 2015 at 13:56
Thanks Vaidas and Zach and Dan.
Jason, Last year Konczal tried to sell people on year over year data. Nobody bought his argument because no competent economist believes YoY data is appropriate for austerity than began on January 1st 2013. It is strongly impacted by growth in 2012. Whenever you are looking at events that began at the beginning of a year, you always using growth rate over the course of the year, not the average GDP compared to the average of the previous year. It’s not even a debatable point.
Matt, I don’t understand why people keep insisting on talking about government expenditures, that’s not how we measure austerity.
And you should never include state and local spending, unless you also plan to include private investment. They are equally endogenous.
And Greece has no bearing on this discussion, as it lacks an independent monetary policy.
Patrick and Anthony, I wish there were more people like Kevin Drum on the left—he seems very fair minded.
21. January 2015 at 14:10
Jason Smith
“The data is completely inconclusive”
I respectfully disagree.
I would describe the Fed’s target function as a mix of inflation, unemployment, job growth and real gdp growth. NGDP is probably a (good?) proxy for this target function.
Market Monetarism argues that the Fed has effectively been targeting 4% NGDP growth since 2010; all fiscal policy should be offset to reach this goal. Your data shows exactly this. Constant NGDP growth of 4%/year, within measurement error, independently of fiscal policy.
Your (convincing and interesting) analysis supports Prof. Sumner’s claim about monetary offset, in my opinion.
21. January 2015 at 14:18
Prof Sumner
“I don’t understand why people keep insisting on talking about government expenditures, that’s not how we measure austerity.”
I think it’s based on some New Keynesian models that include Ricardian equivalence. In many of these, it seems government spending is the important parameter, and not deficits/surpluses.
Of course, when it fits their needs, these same commentators often go back to Old Keynesianism and criticize tax hikes and cuts to transfer payments.
21. January 2015 at 15:02
Scott and LK, so long as government spending is a part of the GDP formula, then pepole will keep talking about it.
And I define governmnet customers in spending as austerity as do many others. Greece is an example of a dramatic cut in government spending.
21. January 2015 at 15:17
LK, But even in those models you’d use government output, not expenditures. Transfers are part of government expenditure, but they are also negative taxes.
In any case, it’s a moot point because 99% of Keynesians don’t believe in RE, and they’ve consistently said that payroll tax increases and benefit cuts are contractionary. So they can’t change the rules at this late date.
Matt, People can keep taking about it all they want, but that doesn’t make it true. Find me one famous Keynesian who doesn’t think transfers and taxes matter.
BTW, government spending is not included in the GDP formula. “G” does not stand for government spending in the GDP formula.
21. January 2015 at 16:20
“Keynesians tend to cite real GDP growth, which accelerated from 1.60% in 2012 to 3.13% in 2013 (Q4 over Q4.)”
If you move that forward or backwards a data point it falls apart:
http://www.nextnewdeal.net/rortybomb/what-happened-2013-two-clarifications-among-current-debates
It’s not a bad idea to watch your endpoint selection generally for this method, and specifically here since the sequestration started in March and there’s debate over whether the military cuts started in Q4 of 2012, i.e. it didn’t all happen on January 1st.
Also an important part of the WaPo post was whether the Federal Reserve would meet their inflation target, which they announced, cultivated and added ammo for throughout 2012 with things like the Evans Rule.
21. January 2015 at 16:21
Hi Scott,
What I am saying has little to do with the specific method of extracting growth rates from data but rather the number of data points on which these conclusions are based. A Q4-Q4 measure or YoY measure both depend on exactly two data points (out of ~ 20) and it is impossible that any two data points selected out of the time period since 2009 can construct a statistically significant measure that shows anything different than constant NGDP growth.
Another way to put this: the only thing the data show with any statistical significance is that NGDP growth has been a constant 3.8% +/- 1.6% since 2009, so choosing Q4 to Q4 or YoY should result in 3.8% + error. There has not been a statistically significant fluctuation in NGDP growth since 2009, so putting two insignificant fluctuations together shouldn’t result in some sort of positive conclusion.
The error is on the order of ~1.6% of NGDP which is far larger than the ‘austerity’ enacted, so you can’t see that either. The macro data is uninformative in this case.
I think in general you have a fairly strong case for the argument you are trying to make against Drum (it does seem like there’s a bit of ‘yeah, we thought that way all along’ as you put it at the end of your post) — it’s just this piece is so problematic that it detracts from the rest.
…
Hi LK Beland,
I guess it depends on your priors. I’m coming from a prior where neither theory is right, so failure to reject the null ends up with neither theory being proven correct.
This specific set of data shouldn’t give you reason to reject a monetarist position if you already have one, nor should it give you a reason to reject a Keynesian position should you already have one.
21. January 2015 at 17:08
“MMs were right and Austrians were wrong. How do I know? Because MMs have the only correct explanation.” – Kevin Drum
Uh huh
21. January 2015 at 17:17
“I don’t understand why people keep insisting on talking about government expenditures, that’s not how we measure austerity.”
Then how do you measure austerity.
Fiscal stimulus (austerity) is exactly changes in G (government spending). Okay, you could say changes in government spending – change in taxation. What was the change in taxation?
State and local are a huge portion of G. If Federal a change in Federal spending is exactly offset by local spending, then there is no change in G and no fiscal stimulus (austerity).
If the exercise is to measure the Keynesian multiplier, you can add in changes in I to changes in G. “I” depends directly upon the money supply. “I” is the monetary offset.
“government spending is not included in the GDP formula. “G” does not stand for government spending in the GDP formula.”
ummm…
“Components of GDP by expenditure
Components of U.S. GDP
GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).
Y = C + I + G + (X − M)”
Or as it appears on the report from the BEA…
22 Government consumption expenditures and gross investment
23 Federal
24 National defense
25 Nondefense
26 State and local
21. January 2015 at 17:22
Scott, so government purchases, transfer payments that probably show up as personal consumption expenditures don’t factor into GDP?
Yes taxes can matter as well as other factors. And sometimes tax changes don’t matter. But in the end we have not had significant austerity in the US.
Krugman often speaks of austerity as spending cuts. Here is his conclusion in the piece linked below:
“Prima facie, cutting spending depresses economies.”
http://krugman.blogs.nytimes.com/2014/11/06/spending-and-growth-2009-13/?_r=0
21. January 2015 at 17:37
Jason Smith,
to your point, GDP growth is effectively the 1st derivative of GDP…
Change in GDP growth is then a second derivative. Estimating the rate of change of a rate of change is tricky business.
Saying that Real GDP grew 1.6% in 2012 and 3.1% in 2013, while completely true, doesn’t mean that there was a change in the trend in GDP growth between 2012 and 2013. And if you look at the GDP level, it is pretty obvious that there was no change in the underlying trend of growth.
However, as there was no change in growth, this vindicates the MM position that the fiscal cliff wouldn’t impact growth. But to take an extra victory lap because the endpoints are in your favor will ultimately make you look bad.
21. January 2015 at 17:55
US compared to Greece:
http://research.stlouisfed.org/fred2/graph/?g=XVa
And yes, I understand Greece has no independent “Fed” and is tied to the ECB. But absent any policy change at the ECB, and Greece’s fiscal austerity their GDP collapsed.
And this does not mean monetarists are wrong. I just feel the cries of “austerity” from some economists in the US were more politically oriented than the numbers show.
21. January 2015 at 21:37
Listening to Sumner about how he is persecuted by his detractors is like listening to an old country song, “hey, why don’t you sing another, somebody done somebody wrong song…” It’s like soap opera…
Sumner forgot to mention that several times the Fed has suggested they are targeting NGDP or considering it. But (and this is a topic for another day) the variant of Targeting NGDP (it’s not clear but Sumner has several version of Targeting NGDP, even one that is apparently close to Selgin’s Productivity Norm) that says ‘have the Fed step on the accelerator and loosen money supply until such time NGDP reaches a target’ is dangerous, as it raises the specter that the Fed will be pushing on a string and there will be harmful lags in policy. What happens to the bloated Fed balance sheet then? It’s like a superheated liquid at atmospheric pressure: it does nothing until it finally explodes like a gas bomb at the smallest perturbation.
PS–I found this gem from June 2012. I leave it to the reader to ascertain how it’s withstood the test of time, see in particular the last line below 😉
http://www.themoneyillusion.com/?p=14983 I forgot to mention that Yichaun Wang has an excellent post that discusses the risks associated with Switzerland’s tight money policy. Because Switzerland prefers a low inflation/NGDP growth rate, it’s hard for the Swiss National Bank to cut interest rates enough to deter speculators. Other options like currency pegs also carry risk.
21. January 2015 at 21:48
@myself – From the link by Sumner to Wang’s June 2012 blog post on the Swiss franc and the EU peg. Note the numerous qualifications that Yichaun Wang makes about the Swiss peg. It’s as if Wang was apologetic about going against the consensus. This is about as bold a statement as you will find from a traditional Asian BTW, who generally hate being outside the consensus (not sure if Wang is first generation but their first name suggests they are). And I like this quote: “expectations can only be used as an argument if the policy would work even without expectation”. So, by the recent Swiss central bank decoupling from the peg, by this logic it shows the policy did NOT work (2.5 years after Wang wrote the below).
http://synthenomics.blogspot.com/2012/06/swiss-fragility.html
Expectations can only be used as an argument if the policy would work even without expectations
22. January 2015 at 02:04
“”Prima facie, cutting spending depresses economies.”
…yes, clearly anyone can see it is the carrot that expends energy to pull the horse.
…Absolutely unthinkable to assume that depressed economies cut gov’t revenue. While growing economies increase gov’t revenue.
22. January 2015 at 03:13
Great post Scott. Excellent links to Christensen and Cox too.
22. January 2015 at 05:17
“2013 would be a “test” of the market monetarist proposition that monetary stimulus would offset the effect of fiscal austerity”
WRONG. The FDIC’s unlimited transaction deposit insurance expired, transferring savings back through the non-banks (as I predicted, e.g., a market “zinger”).
22. January 2015 at 05:24
I remember when Krugman shifted from blasting Mankiw for proposing we wouldnt have catch up growth “who can claim there isnt slack in the economy” to claiming he said the stimulus is too small all along. He did always want more stimulus but he clearly predicted recovery along the lines of the CBO. It amazes me how people who read him religiously dont remember any of this. Now if I remember the standard Keynesian prediction for sequester was -2% of GDP which is genuinely massive. I wouldn’t believe it possible to hand wave away a clear prediction like that if I weren’t seeing it.
22. January 2015 at 05:32
When the rate-of-change in monetary flows, MVt, collapses, so does nominal-gDp. Both components of gDp have decelerated. The proxy for inflation (24 month roc), has fallen by 2/3 since January 2013. The proxy for real-output (10 month roc), has fallen by 1/2 since July 2014.
So where are the MMs now?
22. January 2015 at 05:37
QE is not monetarism. QE transforms safe assets (Treasuries, MBS), into impaired assets (interbank demand deposits). QE is deflationary when remunerating excess reserves. Raising the policy rate (now @.25%) would be catastrophic.
22. January 2015 at 05:45
Like I keep on saying, Tyler Cowen is proof you don’t need to be particularly smart to be a professor
http://marginalrevolution.com/marginalrevolution/2015/01/why-is-deflation-continuing.html
22. January 2015 at 05:51
Sumner’s been right about N-gDp (preceding the Great-Recession and recovery attempts).
For example, the roc in N-gDp peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). N-gDp fell to 6% in the 3rd qtr of 2008 (another 25%). N-gDp then plummeted to a -2% in the 2nd qtr of 2009 (another – 133%).
22. January 2015 at 06:11
Mike, No, there is no plausible start and endpoints where austerity slowed growth. MM passed the “rest.”
Jason, You missed the point. I’m not the one claiming it was a test, Krugman was. It’s the Keynesians who made sweeping claims about eurozone austerity based on a single data point. It was the Keynesians who made sweeping claims about UK austerity based on a single data point. So you don’t need to convince me, you need to convince them.
Doug, G is not the same as government spending, not even close.
You said:
“If the exercise is to measure the Keynesian multiplier, you can add in changes in I to changes in G. “I” depends directly upon the money supply. “I” is the monetary offset.”
So if there is 100% crowding out of investment (and no change in Y), you’d say the Keynesian model was confirmed, as G+I didn’t change? I’d say it failed.
Matt, I didn’t say cutting spending is not austerity, I said austerity is not cutting spending, it’s cutting the deficit. You don’t measure austerity with spending cuts, that’s nonsense. I’ll do a post at Econlog on that today.
Ray, You said:
“PS-I found this gem from June 2012. I leave it to the reader to ascertain how it’s withstood the test of time, see in particular the last line below 😉
http://www.themoneyillusion.com/?p=14983 I forgot to mention that Yichaun Wang has an excellent post that discusses the risks associated with Switzerland’s tight money policy. Because Switzerland prefers a low inflation/NGDP growth rate, it’s hard for the Swiss National Bank to cut interest rates enough to deter speculators. Other options like currency pegs also carry risk.”
Pretty well I’d say.
You said:
“This is about as bold a statement as you will find from a traditional Asian BTW, who generally hate being outside the consensus (not sure if Wang is first generation but their first name suggests they are).”
And a racist too. Thanks for maintaining the perfect idiot persona, wouldn’t want to see that spoiled. BTW, is “Lopez” a Hispanic name?
e, Yes, people have short memories.
22. January 2015 at 06:16
Wouldn’t be easier to say on #2 that the impact of the fiscal austerity ($50B) was decimal point stuff and other impacts would cover that amount. (Yes an error by Krugman but relatively small one in the course of The Great Recession.) Anyway by 2013, it would hard to say total government spending really decreased as the “50 Herbert Hoovers” in state government stopped in 2012ish and covered the federal austerity. Also a lot of the cuts were to military were they had enough room to put off spending on specific items and continued the drop on foreign wars.
My question what if it is impossible for a central bank to reach the right NGDP? What we have seen is the developed nations exporting inflation to the BRIC nations? (India 2013, Brazil 2014, Russia Today)
22. January 2015 at 06:39
Kudos Sumner and Market Monetarists. Now we
must storm the ECB and the FOMC!
22. January 2015 at 07:01
Scott what’s going on-two comments of mine have disappeared?
22. January 2015 at 07:14
Ok now that last one was printed.
I just want to say that Drum doesn’t make the best argument on fiscal austerity in any case-Simon-Wren Lewis makes a much better argument.
http://mainlymacro.blogspot.co.uk/2015/01/sachs-and-age-of-diminished-expectations.html
Basically his point is that the US had tightening during the 2010-2013 period with 2.2% GDP average growth. As this was far from optimum how can anyone be so confident in the counterfactual of what would have happened had we had less austerity?
Obviously 2.2% growth is pretty weak compared with what we have historically expected to see in a recovery. So while I don’t think KEynesians have a problem saying that without QE the recovery would have been even weaker with less fiscal austerity it would have been better.
WL tried the thought experiment of what would have happened with a fiscal multiplier of 2. Now obviously that’s a heroic assumption and his point wasn’t that he thought it necessarily would have been that high.
Of course there are many who would find that an unrealistic multiplier but what’s interesting is that assuming it’s 2 that would have gotten us 3.7% yearly growth rather than 2.2%, much more in line with historical expectations in a recovery.
I’m not sure what we would have to see to know that austerity had a negative impact. That there wasn’t a recession is setting the bar of proof too low.
22. January 2015 at 07:15
I just wrote another comment that disappeared
22. January 2015 at 07:27
Yes, I think that’s probably the answer to Drum.
#2 is clearly one issue where Sumner and Krugman differed. (I don’t know about DeLong, but it’s usually safe to presume that he and Krugman agree.) Of course, Krugman still believes that austerity *did* slow down growth from what it otherwise could been, but that the slow down effect was obscure by “other stuff.” Drum could try to resolve who has the stronger case, but it’s clear there is not agreement here.
On #1 and #4, at least back in 2009, DeLong was saying that he wasn’t sure if it was possible to engage in monetary policy past the zero bound, and Krugman was saying that it was not possible to do so effectively.
22. January 2015 at 07:32
Thanks Scott. Looking forward to the Econlog post. Because it is hard to understand where many economists are coming from with varying definitions out there.
22. January 2015 at 07:42
Scott,
It seems like no matter what else happens your first truly big ask is LEVEL TARGETING.
I say this in the nicest way possible, but after 6 years of following you, I think discussion of NGDP vs Inflation etc seems beside the point, and if you just banged the gong on Level Targeting, you’d get the 80% of the pie you really want, for 20% of the ask.
Level targeting:
1. Is easier to clamor for bc
2. The Fed doesn’t have to give up inflation
3. So you get their feet nailed down
4. Then later talk about NGDP and MM etc.
Even with just a 2% Level Target, there is too much discretion in when / how soon the the make must occur, it need to be something clear as day.
One more small idea: There ought to be a published monthly calendar kept at your Econlog blog that starts Jan 1, 2015 and shows the monthly GDP at LT, so that we can stop talking in inflation percentages as talk in real BILLIONS.
“The Fed owes us an extra $37B in added NGDP for it’s fail in January.
The Fed has reduced what it owes us by $20B in February, but is still down and owes an extra $17B for March.
The Fed now needs to slow things down bc just $10B in growth for April will put them on level target.”
22. January 2015 at 07:44
Saxie, if your comments have lots of links, Scott’s spam settings leave it pending his approval, and I don’t think he is aware of it.
22. January 2015 at 08:16
If “G” isn’t government spending, then what is it?
Any why does every economics text call it government spending?
If you want to play Humpty-Dumpty, you are going to at least have to tell us what words mean in your world.
22. January 2015 at 08:17
@Sumner – oh, I’m a racist am I? I am a Caucasian living in Asia and dating a Filipino girl who is part Chinese, and I’m a racist? LOL As for Ray Lopez, it’s a fake name. The “Ruy Lopez” is a chess opening, I am a chess fan, whereas “Yichaun Wang” is the bloggers clearly FOTB Chinese name that no American-Chinese would ever adopt (I could be wrong but most likely not).
For a more substantive point, you did indeed predict the Swiss crisis pretty well two years ago. So, how much money did you make off this brilliancy? Hahaha, exactly. Like the racist joke about the two Scottish professors who invented Cu wire by fighting over a penny–because so little money is at stake.
22. January 2015 at 09:02
collin, Developed countries don’t export inflation. And the deficit fell $500 billion in 2013, not $50 billion. See my new Econlog post.
Mike, Others have made that complaint too, (even other MM bloggers.) I honestly don’t know what’s going on. They didn’t even appear in my span folder.
If it occurs again, save any long comments and email them directly to me. I’ll add it to your comment.
22. January 2015 at 09:06
Morgan, I emphasize PLT because the ECB has an inflation mandate.
Doug, Any text that says that is wrong, it means government output. That’s EC101.
Ray, Lighten up, I’m just joking–giving you a taste of your own medicine. Why so thin-skinned?
Pretty much all my responses to you are jokes these days. Aren’t your comments jokes?
22. January 2015 at 10:13
‘Patrick and Anthony, I wish there were more people like Kevin Drum on the left””he seems very fair minded.’
I didn’t say anything about his fair-mindedness. When I engaged with him several years ago, on his blog and at DeLong’s, he had almost zero knowledge of elementary economic theory.
Maybe he’s read up since then.
22. January 2015 at 10:30
Ray Lopez, “I have Asian friends” is not a strong defense against accusations of racism. A better defense would be keeping racist thoughts about “traditional asians” close to your chest, next to your other observations about that easily summarized people known as asians.
22. January 2015 at 11:09
Scott,
I taught Intermediate Macroeconomics last semester using Greg Mankiw’s textbook. Under the Expenditure Approach to GDP, G is defined as government spending. I can post the screenshots if you want.
22. January 2015 at 11:14
G is government spending… it is econ 101!
Y=C+I+G+X-M is the “expenditures approach.”
“”G” (government spending) is the sum of government expenditures on final goods and services.”
Source: Boundless. “Defining GDP.” Boundless Economics. Boundless, 03 Jul. 2014. Retrieved 22 Jan. 2015 from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/measuring-output-and-income-19/measuring-output-using-gdp-92/defining-gdp-346-12443/
“G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.”
http://en.wikipedia.org/wiki/Gross_domestic_product
“Government purchases of finished products of businesses and all direct purchases of resources are called government expenditures (G).”
https://courses.byui.edu/econ_151/presentations/Lesson_03.htm
You find me an econ 101 textbook that defines G as Government Output.
22. January 2015 at 11:16
Scott,
Sorry for the split post. I have a copy of Oliver Blanchard’s textbook as well. Here’s what he writes about the composition of GDP: “Third comes government spending (G). This represents the purchases of goods and services by the federal, state, and local governments. The goods range from airplanes to office equipment. The services include services provided by government employees: In effect, the national income accounts treat the government as buying the services provided by government employees–and then providing these services to the pulbic, free of charge.”
22. January 2015 at 11:31
So, acccording to Blanchard’s definition, all levels of government spending are in GDP.
22. January 2015 at 11:37
Doug, You said:
“You find me an econ 101 textbook that defines G as Government Output.”
The one you just quoted from.
Government spending equals government output plus transfers. Every textbook I’ve ever seen says transfers do not count as part of government output (G). Including the one you just cited.
Chris, Mankiw’s Elements of Economics, 4th edition, page 330, says transfer payments do not count as part of GDP. That means they are not a part of “G”.
Mankiw calls G “government purchases,” which means the same thing as government output.
Mankiw says welfare and social security are a part of government spending, but not are not a part of government purchases.
22. January 2015 at 11:39
Chris, No, Blanchard is saying all levels of government output are part of GDP. But not transfers at any level.
22. January 2015 at 11:43
Scott,
I didn’t know that this was a debate over whether or not transfer payments were part of GDP. Of course you’re correct, neither transfer payments or interest payments are part of GDP.
22. January 2015 at 11:46
People representing other schools of thought have been ‘right’ about recent events like inflation and growth, too, (pragcap, for one), so I’m not sure that means the school of thought is correct.
22. January 2015 at 11:46
I thought the issue was whether or not textbooks use the phrase “government spending.” But I still think that Blanchard is using government spending differently than you: He’s stating that it includes both the services provided by government employees as well as the purchase of office furniture for the offices of those employees. If I’m confused please tell me.
22. January 2015 at 11:55
“Of course you’re correct, neither transfer payments or interest payments are part of GDP.”
I have no idea, but that sounds odd, I would have expected it to fall under consumption, and just not part of G, to avoid double counting. It shows up nowhere??
22. January 2015 at 12:01
If what I just asked is true, then the gov’t is essentially taking a 3 way transaction, seeing their sides as offsetting, and removing themselves from the transaction as if it never touched their hands. That’s fantastic!
22. January 2015 at 12:03
Most government spending is transfer payments, so how the heck would you not count that in GDP?
Agree that austerity is reducing the deficit, which would reduce money creation.
Greece has austerity because it can’t sell government bonds.
On the surface the answer is for the central bank to buy their bonds; however, that doesn’t address the issue of why can’t Greece borrow as much as it did.
If the central bank is buying its bonds as a temporary measure then it’s defensible, but as a permanent measure it’s worrisome.
22. January 2015 at 12:13
Charlie,
I think including transfer payments would be double counting. Those transfer payments should either end up in C or I. GDP isn’t a measure of total activity but rather total net output.
22. January 2015 at 12:14
Derivs and Charlie Jamieson,
Transfer payments show up as part of consumption. Transfers and interest payments aren’t included in G. Sorry, I should have read my statement closer before posting.
22. January 2015 at 12:26
OK, I get it.
— You can also calculate GDP by adding national income, with transfer payments counting as income. I think this method would more clearly show the impact of government spending.
22. January 2015 at 12:45
Tranfers? Is that what we are arguing about?
Yes, G excludes transfers. The recipient of the transfer spends it and it is accounted for under C.
This is why it is important to have definitions! G defined as “Government Spending” in every text. None use the term “Government Output.” Don’t say “G isn’t Government Spending” when it clearly G has been defined that way.
22. January 2015 at 13:27
Excluding transfers is misleading in the sense that the Social Security (etc.) spenders are using government money.
If the federal government increases transfer payments, you don’t want to be fooled into thinking the private sector suddenly started contributing to economic growth.
22. January 2015 at 13:38
Charlie Jamieson,
the “Expenditures approach” is measuring final sales, plus a small fudge factor of stuff produced but not sold. So, if a retiree commingles his 401(k) income with his Social Security Income and uses that money to buy cheerios, it is all considered C.
The GDP report has a lot of stuff in it that is misleading. That stuff that is produced and not sold is called “investment.” So, if investment increases it could be a sigh that the private sector is optimistic and is trying to increase output. Or, it could mean that there is a lot of stuff sitting in a warehouse.
The quantities of transfers don’t swing around a whole lot quarter to quarter (or year to year) so if you are looking at GDP growth, they are very much a non-factor.
And as you have pointed out, there are other ways to add up the components to GDP.
22. January 2015 at 13:51
Scott/Mike,
Speaking of endpoints, we can look to the data to see when austerity occurred. Table 3.2 from the BEA details Federal Current Expenditures and Receipts. I take line 36 minus line 39 (total receipts less total expenditures) to determine the quarterly deficit. Here are the numbers (deficit, change in deficit, NGDP quarterly growth SAAR, unemployment):
2012Q1: -1,186.5 (+179.5) +4.4% 8.2%
2012Q2: -1,197.3 (-10.8) +3.5% 8.2%
2012Q3: -1,199.0 (-1.7) +4.4% 7.8%
2012Q4: -1,159.5 (+39.5) +1.6% 7.9%
2013Q1: -814.8 (+344.7) +4.2% 7.5%
2013Q2: -617.3 (+197.5) +2.9% 7.5%
2013Q3: -805.7 (-188.4) +6.2% 7.2%
2013Q4: -584.6 (+221.1) +5.0% 6.7%
Scott’s end point selection is appropriate, and a reduction in the deficit from -7.1% of GDP in 2012Q4 to -3.7% in 2013Q2 without any apparent negative growth effects is difficult to explain from a purely Keynesian perspective, unless of course multiplier effects are very low (<0.5).
http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=2006&903=87&906=q&905=2014&910=x&911=0
22. January 2015 at 14:02
“If the federal government increases transfer payments, you don’t want to be fooled into thinking the private sector suddenly started contributing to economic growth.”
Still waiting for confirmation, but if I am understanding it correctly, you would not. The debit and credit both take place in consumption. They offset one another, Pete is paying Paul and it counts in C when Paul spends it.
The problem becomes that transfers can increase considerably, taxes can increase considerably, and people can claim the gov’t is practicing austerity. What you and I thought was gov’t spending is really increased gov’t engineering/interference, but not spending/output. Pete is willfully transferring that money to Paul. Gov’t was not even involved!!!
22. January 2015 at 17:14
Chris, Government services like education and government purchases of office furniture are all part of G. Transfers are not.
Derivs, No, transfers are not a part of GDP, because GDP only includes output, and transfers are not output.
Everyone, Transfer payments are not anywhere in the C+I+G formula, as they aren’t expenditure on output. Wages are also missing from that formula. Whether people save or spend transfers has no bearing on the formula.
Doug, Mankiw specifically points out that government spending is not G, rather G is government purchases, which excludes transfers. That’s the only text I looked at, maybe some others get it wrong.
Thanks Justin, that supports my post over at Econlog, where I pointed out that the sharp drop in the deficit began around the first of January 2013, and that the deficit fell about 500 billion in calendar 2013. But the numbers in both 2012 and 2013 are a bit higher.
22. January 2015 at 18:12
“Derivs, No, transfers are not a part of GDP”
That is what I said in response to the question regarding the appearance of causing growth. You wont see any net change in either G or C or anywhere else.
22. January 2015 at 18:26
Mr. Sumner, do you use sectoral balances in your work?
…
Could it be that while federal deficits were shrinking, the private sector made up for that by running greater deficits (loans to the private sector have been expanding in recent years.)
22. January 2015 at 21:46
Sumner is right. Just to drop a name, here is what a leading econ textbook writer wrote to me: Mankiw, N. “Government purchases of goods and services require taxes but are not counted as transfer payments.” (private email)
23. January 2015 at 06:21
Derivs, Sorry I must have misunderstood you.
Charlie. No, I don’t find those useful.
23. January 2015 at 07:24
“If the federal government increases transfer payments, you don’t want to be fooled into thinking the private sector suddenly started contributing to economic growth.”
This is the funniest thing I’ve read so far today. Who’s fooling whom here?
Think about that term “*transfer* payment” for a moment. It suggests that government is taking money (through the power of taxation) from parts of the private sector and giving it to other parts. It is the redistribution of income in the market system. Since social security was mentioned, it is actually a hybrid—government taking money from one segment of the private sector, giving some of it back to the same folks it originally took it from and transferring some from one set of folks to another. Also, as far as “government money” is concerned, I always thought that trust fund was set up, in part, to discourage people from thinking that it was solely “government money”.
But, I’m sure there are folks that think that we *should* count transfer payments as GDP. Just think of the magic that would be produced by simply taking $100 from A and giving it to B. Presto! GDP increased by $100! And, if only we could take that $100 from B before he could spend it and give it to C. We’d then have $200 of additional GDP!
23. January 2015 at 07:59
“Derivs, Sorry I must have misunderstood you.”
My bad actually – semantic failure, and lack of precision on my part. I have to say, thinking of something called consumption, not as spending, but as output is a touch odd.
“It is the redistribution of income in the market system.”
Vivian, how that sentence makes me wish there was an exchange to call so that I could cancel my bid.
23. January 2015 at 10:00
Vivian: If the federal government expands the deficit to make its transfer payments — and this is definitely what is happening — then in fact the government is contributing to economic growth.
At a potential cost, of course, but the costs are not counted in GDP.
…
Sectoral balances explain why we didn’t have a recession when the deficit shrank. The private sector borrowing and business investment made up for the reduction in government borrowing.
To ignore this is to argue that government policy is primarily responsible for government growth — which is useful for those who want greater government control of all things.
23. January 2015 at 10:49
Charlie,
And who is the government borrowing from and who will, one way or the other, pay it back? Are not taxing and borrowing taking funds from the private economy? (Isn’t this why you continue to use the term “transfer payment”?)
Or, was Uncle Milt wrong?
But Charlie, in one, albeit superficial, sense I like you way of thinking. So, I’ve got a proposal that will help the US economy. Write me a check for as much as you’ve got. I promise I’ll spend it right away and wisely, too (why leave these things to bureaucrats?). Whaddya say? This will enhance GDP. We can even call that a “transfer payment”. Most importantly, and make no mistake about it, *I* shall be entitled to all the credit for that enhancement–not you. I’m looking forward to that check, and perhaps a statue in honor of good ole Viv’s “contribution to economic growth”.
23. January 2015 at 12:58
Hey, Viv:
I used to think the government debt ‘had to be paid back’ but have come around to the realization that in the aggregate, federal debt will never be paid back.
T-bonds are financial assets, pretty darn nearly the same as deposits or currency (better, maybe, because they pay interest) with the same guarantee. Don’t think everyone would go that far, but I think that it’s more realistic to look at it that way, although it mixes up the accounting.
Taxing and spending takes money from the private sector and puts it back into the private sector somewhere else. Ideally, this helps the economy. I don’t mind my private income being used to pay for roads or bridges, or to send checks to qualified people who otherwise can’t earn a living.
Should we send you a check? Well, if we sent you a check it certainly would help the economy, with some caveats. If we sent you a check for $1 trillion (via government borrowing) would that create inflation? And would you spend the money to the benefit of the greater good?
Many people don’t trust the government anymore to make good decision with our money.
In the private sector Viv can borrow money, of course, and ideally that will generate economic growth.
24. January 2015 at 22:01
I wouldn’t get too smug about this position, Scott. After all, the oil prices have come down and still there was resistance to Christmas retail growth.
24. January 2015 at 22:04
Scott, the reason Keynes doesn’t work now is that too much money goes to speculation and not into the real economy. That raises prices of commodities which is like a massive tax on the populace. Oh, do you make enough now with your grant to be able to laugh at the cost of living? 🙂
25. January 2015 at 06:18
Gary, Wow, this blog is really becoming a moron magnet. Keynes has never worked, it’s impossible for money to go “into” speculation or the real economy. Next time you visit Wall Street ask them where the box is that contains all the money put “into” the stock market. And higher prices are nothing like a tax. And I make less than I did teaching. Anything else?
25. January 2015 at 08:07
Vivian,
“Are not taxing and borrowing taking funds from the private economy?”
taxing and borrowing takes funds out of the economy, but government spending puts funds into the economy. So there is no net effect on funds in the economy if the government budget balance doesn’t change.
25. January 2015 at 08:18
Yes, Philippe, and, in case you didn’t follow the original discussion, the point is indeed about the *net* effect.
25. January 2015 at 08:40
I said there was no net effect on the amount of funds in the economy (all else being equal).
25. January 2015 at 08:42
maybe if you transfer 100 from someone who won’t spend it to someone who will, that will have an effect on aggregate demand, but that isn’t exactly the same issue as the amount of available funds in the economy.
25. January 2015 at 08:50
Philippe, if you are looking for an argument, I suggest you take it up with Charlie.
25. January 2015 at 09:13
ok
25. January 2015 at 10:37
Monetary policy is not costless. And I don’t just mean the costs of the cotton and linen that make up the FRNs, or the computer hardware and software that make up the electronic deposits.
Sumner has claimed that monetary policy is costless, whereas fiscal policy carries costs, which is supposed to be one reason to “advocate” for monetary policy to “manage” aggregate demand.
There are other costs which MMs do not consider, because they cannot be directly observed and measured, and MMs with their scientistic bias ignores them. These costs are opportunity costs of real activity. Monetary policy has effects on the real economy that necessarily sacrifice and make impossible all counterfactual worlds. These opportunity costs are real, and they along with observable costs determine what the real economy looks like.
Monetary policy has effects that run up and clash with resource and labor scarcity. By scarcity I do not mean a quantifiable lacking of resources in pounds of material or hours of labor. I mean the law of economic activity whereby the totality of potential and desired plans and projects in the subjective sense, always exceeds the implementable and realizable plans and projects in the objective sense.
What monetary policy does is make impossible the information, and the objective practical constraints, that investors require in order for their activity to be coordinated with each other. The absence of this information and constraints allows subjectively determined plans to temporarily exceed the objectively constrained plans in terms of resource availability over time.
Availability not in terms of monistic concepts such as number of factories or number of labor hours, but availability in terms of specific uses and designs of produced resources.
Investors do not agree on the future. Investors do not share the same expectations. Investors do not have the same thoughts as to aggregate resource and labor availability. Coordination would otherwise be impossible if it weren’t for the information and resource constraints hat only free markets can reveal.
The elimination of such information, which is to say a degradation in a less than 100% socialist economy, the real economy becomes distorted, which then has effects on both real AND nominal activity and statistics. Aggregates cannot reveal these distortions. Hence MMs will only grant the possibility of these distortions if aggregates change to some arbitrarily defined range. They are unable to understand the presence of distortions if there are “stable” aggregates. They do not understand economic calculation in a world of scarcity.
This is why they cannot understand why NGDP collapsed from within the economy both in the early 1930s and 2008-2009. That inability is communicated as an assertion of failure on the part of CBs to print enough money to bring about a continually rising NGDP. This of course does not answer why the CB found itself in a world where it had to print more money to reverse what otherwise would have been falling NGDP caused by forces within the economy. It is simply an evasion of answering the question. It is like answering the question what causes cancer to form, with “The doctor did not cure it”. It does not answer why human bodies acquire cancerous cells in the first place. An absence of treatment is not a cause for why that which is treated arose in the first place. This is the critical weakness of MM theory. It ignores it as if it is a proud thing to do.
26. January 2015 at 09:19
Scott,
I want to clarify that when I wrote that transfer payments “end up in either C or I” I did not mean that these were added to either in the GDP calculation. I only meant what I literally wrote. The social security check is either spent or saved. To include transfer payments in G would necessitate being able to remove social security check spending from C which is impossible (I think).
27. January 2015 at 06:20
Anthony, OK, that makes sense.