Recommended reading

1.  For a guy who has been right about everything, Paul Krugman sure is wrong about an awful lot of things.  Bob Murphy has an excellent new post which digs up lots of Krugman claims that turned out to be somewhat less then correct.

Krugman, armed with his Keynesian model, came into the Great Recession thinking that (a) nominal interest rates can’t go below 0 percent, (b) total government spending reductions in the United States amid a weak recovery would lead to a double dip, and (c) persistently high unemployment would go hand in hand with accelerating price deflation. Because of these macroeconomic views, Krugman recommended aggressive federal deficit spending.

As things turned out, Krugman was wrong on each of the above points: we learned (and this surprised me, too) that nominal rates could go persistently negative, that the US budget “austerity” from 2011 onward coincided with a strengthening recovery, and that consumer prices rose modestly even as unemployment remained high. Krugman was wrong on all of these points, and yet his policy recommendations didn’t budge an iota over the years.

Far from changing his policy conclusions in light of his model’s botched predictions, Krugman kept running victory laps, claiming his model had been “right about everything.” He further speculated that the only explanation for his opponents’ unwillingness to concede defeat was that they were evil or stupid.

Read the whole thing.

2.  Caroline Baum has a very nice post on “never reason from a price change.”  She’s one of the relatively small number of journalists that seem to really get this idea.

The Fed is equally confused when it comes to long-term rates. If you were to ask policy makers if interest rates move pro-cyclically, they would all answer yes. But when rising market rates become a reality, the cries go out that higher rates will damage the economic growth. At the same time, a decline in long rates is automatically assumed to provide economic stimulus. Alas, the expectation that the 100-basis-point decline in 10-year Treasury yields last year would boost investment was mugged by reality.

Getting back to oil prices, economists are still waiting (hoping?) for the oil-price-tax-cut to materialize. Bad weather is getting old as an excuse.

Read the whole thing.  Moving from the sublime to the ridiculous:

3.  John Tamny has a post entitled:

Baltimore’s Plight Reveals the Comical Absurdity of ‘Market Monetarism’

In case you are wondering who John Tamny is, in an earlier post he explained that Bernanke’s inflation targeting idea was unwise, as it would imply that each and every price was stable, not just the overall price level.  Flat panel TV prices could no longer decline.

I’m too busy to do a post mocking all of Tamny’s more recent claims, but he was polite enough to write it in such a way that all I really need to do is quote him.  It’s self-mocking:

‘Market monetarists’ believe that economic growth can be managed by the Federal Reserve.  .  .  .

Market monetarists’ believe the Fed can achieve the alleged nirvana that is planned GDP growth and national income through money supply targets set for the central bank by members of the right who’ve caught the central planning bug.  .  .  .

In fairness to the neo-monetarists, they would all agree that Baltimore has problems that extend well beyond money supply. Still, if money supply planning is the alleged fix for the broad U.S. economy, presumably it would have a positive impact locally.  .  .  .

Specifically, ‘market monetarists’ seek consistent money supply growth, and then when the economy is weak, a bigger increase in the supply of money to boost GDP. . . .

It’s kind of simple. Money supply once again can’t be forced. . . .

It can’t be repeated enough that production is money demand, and is thus the driver of money supply. Money supply shrank in the 1930s not because the Fed decreased it (if it had, alternative sources of money would have quickly revealed themselves), but because the federal government erected massive tax, regulatory, and trade barriers to production. All that, plus FDR’s devaluation of the dollar from 1/20th of an ounce of gold to 1/35th of an ounce in 1933 further put a damper on the very investment that powers new production. It’s forgotten by economists today, but when investors invest they’re tautologically buying future dollar income streams.

If you are looking for a few laughs, the Tamny piece is highly recommended. Indeed I’d call it “tautologically funny.”

PS.  Over at Econlog I have a new post that indirectly addresses some of the confusion in the Tamny post.

HT:  David Beckworth

Update:  Well I may not have gotten the ECB to adopt NGDPLT, but consider this comment from yesterday’s post:

Must be nice to be the sort of rich hedge fund manager that gets this “critical” information before the rest of us.

And from today’s WSJ:

The ECB will post speeches of its board members on its website when they are scheduled to begin, without making them available to journalists ahead of time under embargo as the ECB had done for many years.

The decision, which takes effect immediately, came one day after the public release of comments by executive board member Benoit Coeuré caused a stir in financial markets. Mr. Coeuré  said the ECB would front load bond purchases under its €1.1 trillion ($1.2 trillion) quantitative easing program in May and June to account for a summer lull in bond markets.

HT:  lysseas



37 Responses to “Recommended reading”

  1. Gravatar of miguel miguel
    21. May 2015 at 05:40

    come on.. Murphy’s post is terrible (nauseatingly ad hominem). on his first point, of course rates can be negative – just how much depends on how much people are willing to pay to have their savings on the bank (instead of holding cash). But the bound is still there and does not change the argument in any relevant way.

  2. Gravatar of ssumner ssumner
    21. May 2015 at 05:43

    Miguel, You did not respond to Murphy’s explanation of why negative rates do change the argument in a relevant way. What is your response to his specific argument?

    Do you also find Krugman calling leading economists stupid and evil to be “nauseating?”

  3. Gravatar of miguel miguel
    21. May 2015 at 06:17

    Scott, not sure if I get it. If the “real” bound is approximately -0.5 (have no idea) instead of 0, there’s room for “standard monetary policy” when the rates are 0 (as opposed to what Krugman predicted.) Is that it? Seems to be a minor point- the bound is still there (be it at 0 or -0.5).

    Krugman’s style seems different to me – his aggressiveness is always toward (what he considers, rightly or not) bad ideas (and those that support them get called incompetent). Murphy’s style when it comes to Krugman is driven by personal animosity.

  4. Gravatar of ssumner ssumner
    21. May 2015 at 06:24

    Miguel, Didn’t Murphy mention something like 700,000 jobs? Is that not important? Krugman seems to think that that many jobs are important.

    Murphy has written posts that are highly critical of me, and I find those posts to be far less offensive than Krugman’s posts. Murphy always writes with a twinkle in his eye, he’s having fun. Krugman is simply mean.

  5. Gravatar of miguel miguel
    21. May 2015 at 06:44

    Scott, yes.. but Krugman was arguing on the existence and consequences of a lower bound. Ok, he overlooked the fact that it is not strictly at 0 and is slightly lower. But isn’t such a simplification general (even though it’s trivial to realize that rates can indeed go slightly lower)? It seems that Murphy is making this ‘mistake’ something bigger than what it is, like a conceptual error.

    That’s not comparable, there may be criticisms, but the tone with which he addresses you is generally one of sympathy and praise – I’d say butt-kissing, but let’s not be offensive..

  6. Gravatar of Martin-2 Martin-2
    21. May 2015 at 06:46

    miguel: keep in mind that since you have positive and negative mood affiliation with Krugman and Murphy you’ll perceive them differently even if their styles are similar. Like,if Krugman calls Murphy stupid then he’s talking about “ideas”, but if Murphy calls Krugman dishonest then he’s showing “personal animosity”. It happens to all of us.

  7. Gravatar of miguel miguel
    21. May 2015 at 06:52

    Martin-2 , sure, you’re probably right 🙂 but by the way, I do like Murphy a lot – except on the topic of Krugman.

  8. Gravatar of miguel miguel
    21. May 2015 at 06:54

    (and on religion – but that goes without saying)

  9. Gravatar of ssumner ssumner
    21. May 2015 at 07:06

    Miguel, You said:

    “It seems that Murphy is making this ‘mistake’ something bigger than what it is, like a conceptual error.”

    I didn’t read it that way. He suggested that the empirical implications of this were important. To be honest, he was pretty soft on Krugman. Krugman was insisting that the ECB was at the zero bound when their actual policy rate was 1.5% in 2011 and 2012. He acted as if fiscal austerity was a problem, even though KRUGMAN’S OWN MODEL says it’s not a problem when rates are positive. Murphy didn’t even mention that problem.

    Could you point to the specific sentence or paragraph in Murphy’s piece that you object to?

  10. Gravatar of Jason Smith Jason Smith
    21. May 2015 at 07:18


    Bob Murphy works for the climate science denying Institute for Energy Research. Probably not a reliable source.

  11. Gravatar of miguel miguel
    21. May 2015 at 07:23

    Scott, it definitely seems to me that way:

    “However, Krugman said that this conventional monetary policy lost traction early in the Great Recession once nominal short-term rates hit (basically) 0 percent. At that point, central banks couldn’t stimulate demand through open-market operations, and thus the government had to step in with a large fiscal stimulus in the form of huge budget deficits.”
    “Now this is quite astonishing, the macroeconomic analog of physicists accelerating particles beyond the speed of light. If it turns out that the central banks of the world had more “ammunition” in terms of conventional monetary policy, then even on its own terms, the case for Keynesian fiscal stimulus becomes weaker.”
    “Isn’t that cute? The foundation for the Keynesian case for fiscal stimulus rests on an assumption that interest rates can’t go negative. Then they do go negative, and Krugman is pinching himself that he gets to live in such exciting times. I wonder, is that the reaction Krugman wanted from conservative economists when interest rates failed to spike despite massive deficits “” namely, that they would just pinch themselves to see that their wrong statements about interest rates were actually relevant to policy?”

  12. Gravatar of Kolobok Kolobok
    21. May 2015 at 07:26

    Prof. Sumner,

    It appears that you and Murphy strive to use any and every opportunity to discredit PK. Unfortunately, you do not go into the substance of PK’s arguments. Instead, you merely throw around labels, turn and twist what he said. Completely unbiased observers could wonder why?

  13. Gravatar of Steve Steve
    21. May 2015 at 07:52

    Taking Stock: Sumner Sees A Rate Hike “Later This Year” (Audio)

    May 20, 2015

    Taking Stock with Kathleen Hays and Michael McKee.

    FED IN FOCUS: Scott Sumner, noted monetary economist at Bentley University, gauges the factors the Fed is weighing as it considers when to make its first interest rate increase since 2006 — from mixed signals on the economy and inflation that remains below the Fed’s target, to the risk that moving too slowly on rates could lead to another bubble and financial instability. Broadcasting live from the CFO Leadership Conference at Bentley University

  14. Gravatar of ssumner ssumner
    21. May 2015 at 09:00

    jason, I’m not using Murphy as a “source” and indeed I don’t agree with his views on macroeconomics.

    Miguel, I don’t see the inaccuracy in any of those three quotes. Krugman should have been recommending negative interest rates, instead he was telling central banks that negative interest rates were impossible. Even Krugman now admits he was wrong (as was I). How is that not a fair criticism?

    Kolobok, You said:

    It appears that you and Murphy strive to use any and every opportunity to discredit PK. Unfortunately, you do not go into the substance of PK’s arguments.”

    Obviously you are new to my blog.

    I have far more substantive criticism of Krugman over the last 6 years than any other blogger, it’s not even close. Your comment could not be more wrong.

    I also have many posts praising Krugman. I’ve recommended he be appointed to the FOMC. On monetary policy my views are closer to those of Krugman than to Murphy.

    Steve, That headline is accurate but misleading, I see a greater possibility of no rate hike than most other pundits.

  15. Gravatar of Ben Ben
    21. May 2015 at 09:05

    A bit of a click bait headline but a fun link.

  16. Gravatar of collin collin
    21. May 2015 at 09:10

    Overall, I don’t that Krugman got the big picture wrong here and most of thoughts were 75 -80% correct. For all the hyperinflation crowd noise, he was a lot closer to reality.

    1) Nomial interest rates can’t below zero. I don’t think a lot people thought that rates could go below zero for an extended time and judging by the latest increases in bond rates it is not a long term stable environment. I chalk up to we learn something every new recession and the cost of carrying cash is more significant than ever.

    2) Reductions in G could lead to double dip. It certainly could have and growth has been fairly low in 2010-2011. I thought he was a little doom and gloom here with reductions. And the big reduction of deficit in 2011 mostly came from the revenue side not the G spending reduction. (And a lot of the spending reductions was the slowdown in war spending?)

    3) In all reality, the job market came back quicker than people anticipated for the Great Recession. (As compared to the S&L 1990 and Dotcom bust 2001 where the job market was two years behind.) Again, jobs have had decent growth since 2010 but the big reduction in the unemployment rate is a significant drop in labor participation.

    Given you got more right (85%) than Krugman hardly disproves a whole lot here. And to state the US is doing a variation of the Japanese economy still sounds about right with the Great Recession.

  17. Gravatar of Ben Ben
    21. May 2015 at 09:42

    Also, ECB says a technical mistake caused the speech to be published after he gave it.

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. May 2015 at 10:14

    That Tamny piece has to be read in all its goofball entirety. I put up a comment there, pointing out that the ‘Market’ in Market Monetarism ought to be a clue that it’s not about Central Economic Planning.

    Though Brad DeLong makes the same mistake;

    ‘Does anyone think that if the government has a target for freight-car loadings or kilowatt-hours and takes steps to hit that target that it is pursuing a “neutral” and “non-interventionist” policy? No. So why is a government that has a target for the quantity of liquidity services provided pursuing a “neutral” and “non-interventionist” policy?’

    As well as a delightfully self-unaware diatribe against ‘the right’;

    ‘There is a very comforting feeling in believing that one understands the world. That leads to a dogmatic belief in dogma. And that means that there is always resistance to the ideas that the world is a surprising place and one always needs to be ready to mark one’s beliefs to market.

    ‘Indeed, with many people since 2005, I have found that the more clever they are, the better they are at thinking up reasons why they should not mark their beliefs to market. But using your cleverness in this way-as Paul Romer says George Stigler did-is, as Richard Thaler might say, not just dumb, but the limit of an infinite sequence of dumb.’

  19. Gravatar of TallDave TallDave
    21. May 2015 at 10:47

    So much wrong obviously wrong there. It is not “central economic control” or “central planning horrors” and certainly not “tragically bloody” (!). It is just an alternate monetary policy that in practical terms is only slightly different than the policy from Volcker through 2008, and would probably generally help elect Republicans (look at the UK today, and remember how we got FDR’s majorities).

    The entire section on Baltimore is sheerest nonsense, they’re not a monetary sovereign and NGPLT would obviously do nothing for their institutional deficiencies.

    I can hardly believe RCP even published this, it’s so embarassing. The idea that an inflation target dependent on RGDP is tantamount to Maoism defies parody.

    Can’t wait to see what Scott said.

  20. Gravatar of Thanos Thanos
    21. May 2015 at 10:57

    Why does Tamny again says that Market Monetarists target the money supply?? It is very strange. Market monetarism is all about NGDP not money supply growth!!

  21. Gravatar of Devin Devin
    21. May 2015 at 10:59

    What’s more disappointing than Krugman’s recent musings about the zero lower bound is that he has forgotten his own research. In his well cited 1998 Brookings paper, Krugman quickly moves past IS-LM and develops a simple intertemporal model under zero rate conditions, and recommending both sustained 4% inflation targeting and a monetary policy that goes beyond the interest rate channel into expectations and credit channels, among others.

    Woodford and Eggertson built off of Krugman to make a fully dynamic model that has been one of the theoretical underpinnings of forward guidance and the non-interest rate channels of recent monetary policy, which prof. Sumner has tirelessly shown to have been done better in the US than the Eurozone.

    In my opinion this omission is even more important to show that Krugman is simply playing the role of partisan now. He had the theory to back up MP at zero bound and has often ignored it!

  22. Gravatar of J Mann J Mann
    21. May 2015 at 12:02

    Jason, that’s an astonishing argument. Murphy’s post consists of what Murphy represents to be some quotations from Krugman and other columns and some economic statistics.

    Are you arguing that you believe the quotations or statistics to be false? If so, they’re pretty easy to check, and that would be more impressive.

  23. Gravatar of Adam Adam
    21. May 2015 at 13:11

    On Murphy:

    – Does the observation of negative interest rates imply that the central bank can cause negative interest rates? I suppose perhaps, although I’m not sure it was the ECB’s intent to get the negative rates that surprised everyone.

    – I’m not sure the Krugman predicted a double dip, and did not see Murphy cite something in which he did so.

    – I’m not sure it’s accurate that Krugman’s “policy recommendations didn’t budge an iota over the years.” In fact, I’m pretty sure that 2015 Krugman is not advocating the kind of stimulus package that 2009 Krugman was advocating. While he hasn’t retracted those recommendations, I do wonder what he would advocate today in similar circumstances.

    It seems to me that everyone who was not a market monetarist (nearly everyone at the time, right?) was pretty wrong about the effects of unconventional monetary policy in an acute crisis.

  24. Gravatar of Gordon Gordon
    21. May 2015 at 14:10

    There was research a few years ago that found that the success of pundits was related to their confidence rather than their accuracy. I suspect Krugman is aware of this and it influences his writing for the NYT. As a result, I’ve come to see him as the Rush Limbaugh of economic policy punditry.

  25. Gravatar of benjamin cole benjamin cole
    21. May 2015 at 14:54

    I think Krugman would support tax cuts offset by QE and that we should reach out to him on that level.
    Bernanke also recommended tax cuts in combination with QE.

  26. Gravatar of Benny Lava Benny Lava
    21. May 2015 at 16:10

    Did someone just argue that FDR devaluing the dollar was bad for the economy? Man oh man I know someone not getting a Christmas card this year.

  27. Gravatar of Benny Lava Benny Lava
    21. May 2015 at 16:13

    Also isn’t it ironic that Bob Murphy would try to fisk Krugman? I mean isn’t he an ABC hard money goldbug? Hasn’t his ideology been thoroughly discredited? I mean Keynsians are partially wrong but ABC is totally wrong.

  28. Gravatar of George Selgin George Selgin
    21. May 2015 at 17:48

    Benny Lane, ABC is considerably less “totally wrong” as an theory of the recent boom-bust than most other extant theories that assign a role for monetary policy errors. Indeed, for a fan of “monetarism” of any sort to so broadly condemn it is ironic, for many outstanding monetarists I know themselves believed that, this time ’round, excessively low interest rates did indeed contribute to the boom and crash. (Among others, Anna Schwartz, Meltzer, and John Taylor.)

    Knee-jerk criticisms of broad bodies of serious monetary economics–here, the very important work of Mises and Hayek, and the Wicksellian foundations upon which it rests–are all, if you ask me, as offensive as they are counterproductive. If more people would be capable of a little eclecticism, or at least of having minds open to a ideas from more than one school, we would have better monetary understanding all around.

    Why purists of one school should be convinced that monetary authorities err only by making money too tight, and those of another should believe just the opposite, is a subject for social psychology. As for me, I’m no psychologist: I simply wish the pox on all such houses.

  29. Gravatar of George Selgin George Selgin
    21. May 2015 at 18:00

    Sorry: Benny Lava, not Benny Lane. I must have a Beatles obsession.

  30. Gravatar of A A
    21. May 2015 at 21:58

    Patrick Sullivan,

    The linked Delong argument seems closer to Sumner’s take on neutral/active monetary policy. Delong challenges the notion of “neutral” monetary policy given a targeted outcome. And he does so as part of a discussion about Friedman’s constant money growth method, which Delong seems to regard as an advertising tool rather than a well-grounded economic theory. In fact, Delong acknowledges: “In the case of Japan’s lost decades, Friedman was very clear that if the k%-per-year money growth rate did not balance aggregate demand to potential supply, it needed to be abandoned.”

  31. Gravatar of miguel miguel
    22. May 2015 at 00:17

    Scott, Murphy drew an analogy between rates going a bit lower than 0 to particles going beyond the speed of light. (It’s more like physicists extending the allowed energy range of some particle, or whatever).

    He said “the foundation for the Keynesian case for fiscal stimulus rests on an assumption that interest rates can’t go negative.” If Keynesian fiscal stimulus is justified in the zero lower bound if the minimum possible rate is 0, it is justified in the -0.5 lower bound if the minimum possible rate is -0.5. We just need to know how low can they go. The zero simplification is understandable, as people may be willing to pay a small amount to have their savings on the bank, but obviously not that much.

    He then compared the negative rate observation to the observation that massive deficits fail to spike interest rates, and chastised Krugman for not realizing how serious his mistake was.

    This kind of argumentation is not serious.

  32. Gravatar of ssumner ssumner
    22. May 2015 at 05:08

    Collin, The big reduction in the deficit occurred in 2013, not 2011.

    Adam, You said:

    “Does the observation of negative interest rates imply that the central bank can cause negative interest rates? I suppose perhaps, although I’m not sure it was the ECB’s intent to get the negative rates that surprised everyone.”

    The ECB set their official policy rate at a negative level, so they shouldn’t have been surprised by negative market rates. However they might have been surprised by negative rates on longer term bonds.

    And if you think Murphy’s column is about Krugman being “wrong” then you are badly misreading it. It’s about the way Krugman reacts to being wrong.

    Benjamin, Krugman supported the 2013 rise in income tax rates.

    Miguel, I read Murphy differently. I think he conceded that rates only go modestly below zero, but then presented evidence that even a minus 0.5% rate could create lots of jobs, at least in the Keynesian model. In my very first blog post (after the into) of February 2009 I mentioned negative interest rates as an option. Krugman was not willing to support it. A few weeks later I asked Krugman (in an open letter) to support my push for monetary stimulus. He refused, saying it was ineffective. That attitude from the top Keynesian pundit was extremely harmful.

  33. Gravatar of benjamin cole benjamin cole
    22. May 2015 at 05:25

    Re Tamney: he seems to confuse his political-economic biases with good macroeconomics.

  34. Gravatar of dwr dwr
    22. May 2015 at 08:02

    RE: Murphy’s piece: I think Krugman would admit to being wrong about (a) and (c). Indeed Krugman writes a lot about (c).

    RE: Tamny’s piece: Dear lord!

  35. Gravatar of Morgan Warstler Morgan Warstler
    22. May 2015 at 09:07

    Scott Sumner – the icing in the Twinkie!


  36. Gravatar of Benny Lava Benny Lava
    23. May 2015 at 09:12

    George, I think being stubbornly wrong is counter productive. If the evidence suggests a new line of reasoning it stands to reason we should change our minds. The last 6 years changed my mind. Of all the things that near zero interest rates and huge deficits produced, record low inflation was not what I expected. So I changed my point of view.

  37. Gravatar of ssumner ssumner
    23. May 2015 at 13:14

    Benny, You said:

    “The last 6 years changed my mind. Of all the things that near zero interest rates and huge deficits produced, record low inflation was not what I expected. So I changed my point of view.”

    This is admirable. BTW, consider the following:

    “Of all the things that low inflation produced, near zero interest rates and huge deficits are exactly what I expected.”

    Would be an alternative approach to the last 6 years. (However I was also surprised by how low rates have been, and for how long. But this way of thinking about it has been helpful.)

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