My National Review article

I don’t have much time today, so a few quick comments.

In the National Review I try to show why conservatives should embrace NGDP targeting.

Here’s a recent article on higher interest rates:

With the U.S. housing sector still mired in a prolonged rut, higher rates are certain to do more damage, curtailing refinancing activity and worsening a logjam in foreclosures linked to faulty documentation.

Against that backdrop, it is somewhat baffling to see forecasters frantically raising projections for economic growth. Berner at Morgan Stanley says the tax agreement could push growth up by as much 1.2 percentage points in 2011, putting it above 4 percent.

I’ll let David Beckworth explain, although I imagine you already see the problem.

Here’s another quotation worth pondering:

The central bank’s $600 billion stimulus plan was supposed to lower interest rates. But President Barack Obama’s tax deal with Republicans, by rekindling fears of budget deficits in the bond market, has pushed them higher.

As the Fed meets this coming week, the surprise shot in the arm from the fiscal authorities might strengthen the case of hawks at the central bank, who think the economy is already growing of its own momentum. They could argue to scale down the $600 billion in bond purchases announced in November.

“The shift to fiscal stimulus implies that officials would be less inclined to extend the current program beyond the second quarter of 2011,” said Richard Berner, an economist at Morgan Stanley.

Suggestion to grad students who want to embarrass their Keynesian professors:  Ask them how the Fed reaction function is modelled in their estimates of the fiscal multiplier.  Ten to one they won’t be able to answer your question.

I replied to Arnold Kling in the comment section of this post.

David Henderson pointed out that I misused the term ‘conspiracy’ in my previous post.   I should add that my slightly mocking style probably led you to think I have a negative view of Mishkin.  I was actually just trying to be funny—I agree with his rebuttal of Inside Job (linked to in the final postscript.)   BTW, David is my favorite critic of the National Security State.



30 Responses to “My National Review article”

  1. Gravatar of Steve Steve
    13. December 2010 at 13:23

    The teach Keynesian economics in grad school? I almost hurt myself laughing over that one. Most of my classmates probably couldn’t tell you who Keynes was (or Friedman for that matter). But they know Sargent and Lucas and Barro. Unfortunately.

  2. Gravatar of Benjamin Cole Benjamin Cole
    13. December 2010 at 13:44

    What a splendid article in National Review.

    I wholeheartedly agree that “conservatives” need to re-think their obstinate refusal to consider that government can make the world better–yes, often by doing less and smarter. But government can be an thoughtful instrument for good.

    Anarchy, or coprolite-ism, is not the solution.

  3. Gravatar of scott sumner scott sumner
    13. December 2010 at 16:53

    Steve, Can I ask which school you are at? Or are they all the same now?

    Thanks Benjamin.

  4. Gravatar of Steve Steve
    13. December 2010 at 17:36


    I realize I was generalizing, perhaps unfairly. My school is fairly light on macro in general, so most students here only take the required two semester sequence on macro. But that sequence (here) is exclusively rbc-type-model based and maybe some growth theory depending on who’s teaching. If you want Keynesian theory you gotta get on your own time. Though I know it’s not the case everywhere, I’m sure there are a number of other schools that are similar to mine, and therefore many grad students who never see Keynesian theory after their undergrad classes.

    Personally, I’m more sympathetic to Keynesianism, maybe for reasons that are not quite rigorous. But I find your blog very interesting and thought provoking. I recommend it to all of my undergraduate students.

  5. Gravatar of Liberal Roman Liberal Roman
    13. December 2010 at 17:55

    I have mentioned this before, but the Yahoo Finance page really is high comedy.

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    13. December 2010 at 18:52

    Nice piece in NR, Scott. I even noticed the bit that was a nod to one of Morgan’s perennial themes 🙂

    I particularly enjoyed that the piece was so clear: in persuasiveness in these matters, clarity is next to Godliness 🙂

  7. Gravatar of JTapp JTapp
    13. December 2010 at 19:01

    Fantastic article, Scott. I think you should post a permanent link to in on your front page or in your bio as it sums up your views very well. Wish you had written it about a month ago, would have been great for use in class.

  8. Gravatar of Mike Sandifer Mike Sandifer
    13. December 2010 at 19:09

    This is a great article Scott. However, Ron Paul, the retired rural obstetrician, is becoming the elder statesmen of US monetary policy.

    As you can see, he’s getting a promotion:

    “After years of blocking him from a leadership position, Mr.Paul’s fellow Republicans have named him chairman of the House subcommittee on domestic monetary policy, which oversees the Federal Reserve as well as the currency and the valuation of the dollar.”

    As you may know, he literally is a conspiracy theorist, blaming the Fed for just about every crime you can think of, directly or indirectly. Essentially, he argues that their inflationism is essential to the very existence of statist government. He’s written an entire book arguing that the Fed should be eliminated, etc.

    Your efforts in that article are laudable, but does there come a time when even serious academics start to simply mock those who put forward destructive economic policies, such as pro-deflationary ones? The humble quiet types who offer thoughtful and informed nuance don’t seem to have much hope selling their ideas in a sea of shouting foaming-at-the-mouth populists who offer much more intuitive explanations for the problems we have and their solutions. At what point do most economists start to become Paul Krugman?

  9. Gravatar of Joe Joe
    13. December 2010 at 20:12

    Professor Sumner,

    Would it be correct to say that while you are targeting nominal income, you are “hitting” the target by not letting nominal spending fall, through adjustment of M? After all, isn’t it correct that NGDP will only fall if nominal spending MV first falls? …… And if NGDP falls before nominal spending, then that would be a “real” recession.

    Did I get that right?


  10. Gravatar of Joe Joe
    13. December 2010 at 20:18

    Also, have you considered writing a letter to Scott Brown? I’m serious. Why not once a month, write a short letter/email to him, since his office is nearby you, giving him your advice on monetary policy, and eventually he might pay attention to the crazy right wing economist next door. Its worth a shot, as another avenue by which you may influence some policy.


  11. Gravatar of David Tomlin David Tomlin
    14. December 2010 at 01:40

    Excellent article. It’s the clearest explanation of your views I’ve seen so far.

  12. Gravatar of David R. Henderson David R. Henderson
    14. December 2010 at 08:47

    Scott, Thanks for the compliment. Three things:
    (1) Good article in NR.
    (2) While I didn’t like the tone of the commenter on NRO who accused you of being dishonest (there’s another word that’s even more misused than the word “conspiracy”), I do think you need to confront the issue of the limits on branch banking. The U.S. had one of the most backward banking systems of any developed country. That was surely a contributor to the Depression.
    (3) You weren’t impressed by Mishkin’s heavy reliance on “faith” when paid a handsome sum for due diligence, were you?

  13. Gravatar of Benjamin Cole Benjamin Cole
    14. December 2010 at 09:40

    Scott Sumner and Mike Sanifer:

    The elevation of Ron Paul is worth a long look.

    Paul has some admirable traits–he is dubious about our sprawling military-foreign policy complex—but he has ranted during House hearings at which Bernanke testified, including one rant that Bernanke (ever the picture of sobriety and circumspection) characterized as “bizarre.”

    Paul is a kook-crank when it comes to the Fed–and he is who the R-Party is putting in charge of oversight in this matter.

    This is a odd and potentially grim development.

    See below, from Feb 2010—

    In an odd exchange this morning at a House Financial Services Committee hearing, Fed Chief Ben Bernanke — who was in Congress to report on the country’s “nascent” economic recovery — fielded a long series of unusual allegations from Ron Paul.

    The Texas Republican and former presidential candidate named the Fed in a number of conspiratorial “cover-ups,” accusing the central bank of facilitating cash for Saddam Hussein’s weapons purchases in the 1980s. (Paul also implicated the Fed In Watergate.)

    The Fed may also be covertly planning a bailout of Greece, he said. Paul has championed the movement to audit the Federal Reserve.

    “These specific allegations you’ve made,” Bernanke responded to laughs, “I think are absolutely bizarre.”

  14. Gravatar of David Pearson David Pearson
    14. December 2010 at 12:26


    The simplest explanation is that rising real term TIPS yields reflect improving growth expectations. This is certainly plausible.

    However, the real yield TIPS signal is less than clear.

    First, required TIPS real yields are offset by the implicit deflation put: the TIPS price will not fall below par in the event of a negative CPI. At low rates of expected inflation, this “put” is “nearer to the stike”, and its value rises. So as we move away from very low expected inflation, the effect is to raise required real yields.

    Second, the true real yield portion of a Treasury bond yield — the real term premium — provides compensation for unanticipated future inflation. The effect of QE and high fiscal deficits is arguably to raise the expected volatility of future inflation, and so the “inflation put” written by investors when they by a bond must rise in value, and therefore required real yields must rise to compensate.

    You might argue that there is no evidence of a rise in the expected volatility of inflation. I would disagree: other inflation hedges are spiking in value, and because they are “insurance”, or “call options” on unanticipated inflation, one would expect this to happen. BTW, high real term premia are a characteristic of economies with projected high, long term, central bank-financed deficits.

    So, yes, the market seems to be discounting more growth ahead, but I would be careful not to ignore the other two dynamics affecting real bond yields. In particular, I would worry — a lot — if the stock market has a meaningful decline while term yields and gold continue to rise. This would signal that, at some point down the line, monetary policy will exhibit a high degree of asymmetry…

  15. Gravatar of Jeff Jeff
    14. December 2010 at 12:27

    Ron Paul and other critics may end up doing some good, although not in the way they intend. Consider: the Fed has come in for a lot of criticism for QE2, so what will it do once the $600 billion of securities have been purchased and it still wants to do more? I doubt they will purchase even more, given the criticism they’re getting.

    The only lever left is to stop paying interest on reserves. Scott will finally get half of his fondest wish.

  16. Gravatar of CA CA
    14. December 2010 at 13:54

    Brad DeLong critiques your article.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. December 2010 at 15:28

    Scott wrote:
    “I should add that my slightly mocking style probably led you to think I have a negative view of Mishkin. I was actually just trying to be funny””I agree with his rebuttal of Inside Job (linked to in the final postscript.)”

    That’s the danger of trying to be humorous Scott. Not everyone shares your sense of humor (but more importantly many people have already tried to have their sense of humor surgically removed). 😉

  18. Gravatar of JimP JimP
    14. December 2010 at 17:19

    And DeLong is notably less nasty than usual. He seems to like quite a bit of the article – till that odd ending from Revelations. I didn’t know he was a Biblical economist.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. December 2010 at 17:27

    “Biblical economist?”

    Is there any other kind? Just kidding. Sort of. Kind of.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. December 2010 at 17:35

    I wrote this in response to a comment in Econbrowser tonight. I thought this site might find this interesting:

    “It’s questionable which policies generate more poor. What also matters is which policies recognize their poor. I could take you places within 10 miles of my extremely overpriviledged zipcode (19707) that would probably absolutely shock you (shantytowns). Do you want to visit the Stanton overpass or the woods near the White Clay Creek first. (By the way it’s particularily cold tonight (24 degrees right now)).”

    It’s true and I can find these places because I sympathize. I only wish you are also human enough that you would try and find similar places also.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. December 2010 at 18:40

    Życze ci dałby mi dodatki. Moja Polska nie jest bardzo dobry. Że jest w odróżnieniu od mojego ekonomii.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. December 2010 at 20:07

    Come to the Cabaret:
    What is good of sitting in your room?

  23. Gravatar of james in london james in london
    15. December 2010 at 13:27

    Off message, but …
    Re-reading your Hayek/ECB post, and Ron Paul’s lively interview in Fortune.

    Am trying to square why the Great Moderation also saw the Great Bankster Leveraging-Up of the US economy via banking and shadow banking.
    (again I link to the great uncommented upon NY Fed study and its great chart, discussed and shown here:

    I can’t believe the Great Recession had nothing to do with this Shadow Banking collapse. But the puzzle is that the Shadow Banking boom only drove up asset prices and not(that much) CPI.

    The real economy explanation I favour is that the US economy would have been growing at very low or possibly negative RGDP rates except for this leverage bubble. Why negative? Because of the slow but sure rise in government interference and taxation, and general outcompeting by the rest of the world’s development (Russia, China, and their various client states all coming in from the cold post 1989). Of course the US benefitted from this economic development in the RoW, trade is not a zero-sum game after all, but relative decline is hard to take. Hence, the US preferred to try, or allowed itself, to keep up via massive, unsustainable leverage.

    My point is that Scott and Brad DeLong’s NGDP charts hide enormous undercurrents of economic change, and that mere pumping up the money supply won’t be anything like enough, and could be positively dangerous and counterproductive without more fundamental reforms. Reforms that will be put off for longer because of the salve that would apparently come from the pumping up of the money supply.

    Ron Paul may sound a bit extreme, and his supporters likewise, but they are onto something that monetary economists are far too happy to either gloss over or relegate to a load of hopeless incumbent politicians in Washington to do something about.

    Scott knows this when he occassionally rants (like the best Tea-Partier) about the Fannies and other examples of state action that have crippled the US economy. But sometimes you need a crisis to take effective action and not first apply the sticking plaster of pumping the money supply.

    Morgan W has probably said this more punchier than me, but you have to put the horse in front of the cart to go anywhere, even if you do need a cart too.

  24. Gravatar of Bill Woolsey Bill Woolsey
    16. December 2010 at 06:14

    James in London,

    You may not realize it, but you are a naive Keynesian, worried about the paradox of thrift.

    Too little spending, in your view, results in too little growth. But growing credit and bubbles artificially generated the additional spending that allowed for growth to occur.


    If we can produce the goods and services, then enough income is generated to buy it all. There is no need for credit or asset bubbles to create demand.

    Leaving asside an imbalance between the quantity of money and the demand to hold money, “supply” creates its own demand.

    Bubbles shift production from more useful to less useful avenues. They shift the composition of output.

    Credit shifts spending from lenders to borrowers. Credit doesn’t increase spending.

    Changes in the quantity of money or the demand to hold money result in changes in spending. Increases in the quantity of money can always create all the spending needed.

    Decreases in the quantiy of money or increases in the demand to hold money result in reduced spending. Unless it is reversed, the market solution is a lower price level (including wages.) Real expenditure (and real incomes, and real output) adjust to the productive capacity of the economy.

    To the degree govermenet regulation hindered the productive capacity of the economy (which it may have,) then the result would be shortages and higher inflation.

  25. Gravatar of James in London James in London
    16. December 2010 at 08:00

    “A naive Keynesian” indeed. Mmm.

    It seems to me that you macro guys never, ever mention leverage. Maybe you are all too much in the ivory towers of academe. Leverage creates huge dangers. The shadow banking system was built almost entirely on debt, a lot was 100x leveraged, or even infinitely leveraged as many SPVs had no equity at all. This is even more “almost entirely leveraged” than normal banks with their 15x-50x leverage. All this leverage was built on the fluffy idea that asset prices would rise for ever (as usual) and a naive belief in the Federal Reserve Put. The positive feedback loop from the success of this “strategy” resulted in the “paradox of greed”, and the bubble. If that is naive Keynesianism then that is what happened.

    The shadow banking system in particular created the credit that went to individuals who were “releasing” equity in their homes and were certainly spending it on goods. Creating apparent wealth and even growth, but the growth wasn’t based on productive capacity of those consumers but on their taking on debt and gearing themselves up. But the debt remains even when the home asset price bubble bursts.

    I don’t think I actually believe in either paradox as the market will adjust if it expects no divine (Federal Reserve) intervention to correct either apparently endless trend. So they are not paradoxes, I guess, just trends in the market that will ultimately self-correct if the market is left to its own devices.

  26. Gravatar of Joe Joe
    16. December 2010 at 22:21

    Bill Woolsey, have you ever considered just writing a book on your ideas so we can learn so much more. I’m currently reading through yeager and rabin many writings and am stuck at walras’s law, the stock-flow- problem, notional versus effective demands, none of it makes sense to me. And I cant figure Nick Rowe either on this. There are no outside sources on this in the interment or mainstream book to make it understandable. If you wrote up a book and know of other good references that would be great too.

  27. Gravatar of Doc Merlin Doc Merlin
    17. December 2010 at 06:13


    I also like Bill’s explanations in general.

    Notional demand is the demand we talk about in a standard microeconomics class. Effective demand is what results when we have a constraint in a different market causing a spillover effect.

    Example: Lets say that housing (the traditional form of savings in the postwar era; 40% of total US savings is in the form of housing) supply is heavily constrained (due to land use regulations, this actually happened). This will spill-over into other savings vehicles and cause a higher than normal demand for other types of savings (for example treasury bonds). Because of the increased effective demand for treasury bonds, the real yields on them will be lower than the notional demand would suggest.

    In contrast notional demand is the demand that happens for something, when there are no other constraints in any other market that affects it. In the real world, we can’t actually measure notional demand, just effective demand. However in problems in text books, we deal with notional demand, because effective demand is too difficult to deal with.

    Does this make sense?

  28. Gravatar of scott sumner scott sumner
    17. December 2010 at 19:09

    Steve, As you know I’m not a fan of either rbc models or Keynesianism.

    Liberal Roman. Yes, it’s full of good material.

    Lorenzo. I didn’t even notice that. Morgan is having a subliminal effect on me.

    Thanks JTapp,

    Mike, I agree about Ron Paul, but I think the quiet types win out over the shouters in the long run.

    Joe, No, NGDP and nominal spending are basically the same thing.

    I hope to influence policy by influencing more important pundits. I doubt I can directly influence policymakers.

    Thanks David Tomlin.

    David Henderson, Thanks, I left a comment over at NR in reply. Mishkin’s interview was less than impressive, but I think the reporter was a bit unfair to him.

    Benjamin, I agree with your comments on Ron Paul, both the good and the bad.

    David Pearson, Regarding the “put” issue, you can avoid that bias by looking at TIPS than have been in circulation for many years, and thus that have a lot of inflation already priced in. The value of those TIPS can fall with deflation.

    Regarding inflation asymmetry, it is possible, but I still think the Fed needs to focus on the expected value of inflation, not the tail risks. Perhaps the fiscal policymakers should focus on the tail risks. I’d add that easy money today makes high inflation much less likely 10 or 20 years out, as it reduces the burden of the national debt.

    Jeff, Maybe, but for some reason they are very reluctant to reduce the IOR.

    CA, Thanks, I have a new post that replies.

    Mark, Yes, I’ve noticed that many people don’t share my sense of humor. Or perhaps I should say sense of what I find funny, because I certainly don’t claim to be good at making jokes.

    JimP, I suppose DeLong recognized that I was being critical of the views of a large portion of the NR crowd.

    Mark, I didn’t read the Econbrowser piece, so that comment kind of went over my head.

    James of London, You said;

    “I can’t believe the Great Recession had nothing to do with this Shadow Banking collapse.”

    I agree, the Great Recession caused the banking collapse. But I thought you were claiming the opposite, that the banking collapse caused the Great Recession.

  29. Gravatar of Doc Merlin Doc Merlin
    17. December 2010 at 19:27

    @ David Pearson

    Re: TIPS:

    Where would we get that data, it sounds like a good test for the gold bugs and such.

  30. Gravatar of ssumner ssumner
    18. December 2010 at 06:06

    Doc Merlin, Goggle the “St Louis Fred”

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