Then and now

Suppose we were back in the 1990s, and unemployment was 5.0%.  But now suppose the economy was growing slowly due to slow growth in the working age population and slow growth in productivity.  A “Pop Keynesian” says that we can solve this problem with fiscal stimulus.  What do the smart 1990s Keynesians say in reply?

What do they say today?



42 Responses to “Then and now”

  1. Gravatar of Ray Lopez Ray Lopez
    16. November 2015 at 06:45

    Nice tactic Sumner. Ask an open ended question that nobody will get right, so you can rip them apart in the comments section? How do you define “pop”? The entire question is silly. You should delete your post and avoid the embarrassment.

  2. Gravatar of Britonomist Britonomist
    16. November 2015 at 06:54

    A smart Keynesian might not say anything without good data on what the output gap is first, assuming it can be calculated well enough.

  3. Gravatar of Justin D Justin D
    16. November 2015 at 07:04

    Are there actually economists left who are advocating fiscal stimulus?

  4. Gravatar of Britonomist Britonomist
    16. November 2015 at 07:04

    Plenty here in the UK Justin.

  5. Gravatar of Student Student
    16. November 2015 at 07:43

    Try to do something bold… something unthinkable… something “impossible”.

    Build a lunar colony (composed of robots?) with the goal of developing the capacity to convert lunar ice into hydrogen propellant that could be sold for use by other spacecraft, including missions headed to Mars.

    Build a smartgrid, a space elevator, assemble an international coalition to build Romer-type charter city in ISIS controlled territory.

    I dont know… Don’t just sit there, do something.

  6. Gravatar of TravisV TravisV
    16. November 2015 at 08:23

    Dear Sumner Critics,

    I think I might know about a secret weapon for you. Look up what happened to stock prices when investors found out the 2009 Obama stimulus was probably going to get enough votes to pass in Congress……

  7. Gravatar of Elwailly Elwailly
    16. November 2015 at 08:43

    Another straw man to be torn down by the great utilitarian.

    Whatever “Pop Keynesians” are, most Keynesian are not.

  8. Gravatar of TravisV TravisV
    16. November 2015 at 09:26

    Video of Prof. Sumner at CATO now available:

  9. Gravatar of Questions that are rarely asked Questions that are rarely asked
    16. November 2015 at 09:59

    […] is from Scott Sumner.  And in these articles you can read about “Japan” and “labor shortage,” […]

  10. Gravatar of Jason Smith Jason Smith
    16. November 2015 at 10:45

    1990s US wasn’t in a liquidity trap (inflation was 4% and interest rates higher). Therefore a Keynesian wouldn’t have said anything about fiscal stimulus.

    In fact, Keynesians believed that monetary policy was best until the 1990s experience in Japan.

    I know you don’t believe in a liquidity trap but that doesn’t mean Keynesians don’t. It’s like you’re willfully ignoring the theory you’re trying to criticize.

    It’s like trying to criticize general relativity by saying Newton s law of gravity says there’s action at a distance that happens faster than the speed of light. It doesn’t make any sense.

  11. Gravatar of Jerry Brown Jerry Brown
    16. November 2015 at 11:35

    What Britonomist said. If they thought 5% unemployment was what was achievable without increasing pressures on prices then the government should be running basically a balanced budget. If 5% was still too high, then the government might be wanting to spend more than it collects in taxes. I’m not qualified to say what the Smart Keynesians would say though.

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. November 2015 at 13:20

    Regarding the Cato conference video, all I can say is Scott has a lot more self-control than I do. I would have been jumping up and down, screaming. How someone could ask a question about what alternatives there are to interest rate targeting after just sitting through Scott’s presentation which was all about alternatives to interest rate targeting….

    Then John Taylor’s answer…. Unbelievable!

  13. Gravatar of Peter K. Peter K.
    16. November 2015 at 13:36

    “A “Pop Keynesian” says that we can solve this problem with fiscal stimulus.”

    What’s “this problem”? Is inflation too low? Is the economy on the NGDP path trend?

    I would advocate both monetary and fiscal policy until inflation was running a little high but not too high. After inflation was running a little high for a while – and we saw some reverse hysteresis with the employment-to-population ratio back to trend – I would raise rates and taxes so that NGDP was at trend levels.

  14. Gravatar of Scott Sumner Scott Sumner
    16. November 2015 at 14:56

    Justin, Summers? Krugman?

    Travis, As I recall, stock prices rose.

    Jason, OK, assume interest rates were zero and unemployment was 5% and growth was slow due to population and productivity—what do Keynesians recommend in the 1990s?

    Peter, The problem is slow growth.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. November 2015 at 16:24

    News from Chicago; Bentley will have a tougher fight on their hands in DC.

  16. Gravatar of Major.Freedom Major.Freedom
    16. November 2015 at 17:33

    “But now suppose the economy was growing slowly due to […] slow growth in productivity.”

    You mean an inflationary economy where central banks refuse to allow healthy corrections to occur?

    OK, let’s assume reality.

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    16. November 2015 at 19:17

    Your book, it has arrived! 🙂 “The Midas Paradox” is in my hot little hands. Metaphorically speaking. (Actually, it is to the right of my laptop …)

  18. Gravatar of Justin D Justin D
    16. November 2015 at 19:58

    I suppose I should do a better job keeping up with Krugman, but I’m utterly shocked that anyone thinks the US needs fiscal stimulus. Unemployment is 5% and rapidly falling. There’s no need to do anything at all.

  19. Gravatar of Steve J Steve J
    16. November 2015 at 21:48

    Where do we draw the line on the difference between monetary policy and fiscal policy with regards to quantitative easing? Can the central bank buy bridges and we would still call it monetary policy? Is it the actor or the action that makes the difference?

  20. Gravatar of Min Min
    16. November 2015 at 23:29

    Why is slow growth a problem?

  21. Gravatar of TravisV TravisV
    17. November 2015 at 07:32

    Lorenzo from Oz,

    Huh??? Was Prof. Sumner’s book released earlier internationally?

  22. Gravatar of Student Student
    17. November 2015 at 08:28

    MF, what inflation and why is it healthy to have resources sit idle while workers sit around unemployed?

  23. Gravatar of Randomize Randomize
    17. November 2015 at 08:50

    If growth is slow due to a slow-growing/aging population, the smart ones would recommend… more immigrants?

  24. Gravatar of TravisV TravisV
    17. November 2015 at 09:03

    Prof. Sumner,

    You might find this interesting:

    “Jim Chanos isn’t buying the hot, new metric China bulls love”

  25. Gravatar of Dots Dots
    17. November 2015 at 11:13

    we should stimulate Indian and Chinese nuke plant construction via fiscal or monetary policy

  26. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    17. November 2015 at 11:58

    @Prof. Sumner, Keynesians in the 90’s, in your scenario, would say something about spending on education, controlled by the government, in order to jump start productivity growth.

  27. Gravatar of Jerry Brown Jerry Brown
    17. November 2015 at 16:12

    I’m not qualified to speak for smart Keynesians, but here is someone who is qualified in a column today. http://economistsview/2015/11/an-essential-part-of-job-creation-policy-is-missing.html

    “The Fed must make full employment its primary goal, and not let fears of inflation get in the way. Congress must make full employment rather than deficit reduction its overriding concern, and that includes implementing policies that attract new businesses that offer workers the chance to get ahead.”

    So monetary policy And fiscal policy with full employment as The goal. To be sure, in this column Professor Thoma is talking specifically about stagnating wages in 2015, but it is clear to anyone who reads him that full employment is the primary goal and that he believes that full employment ameliorates other problems as well. (Not that the goal separates him from Professor Sumner who also rates full employment very high as a policy goal. The point is he says monetary and fiscal policy.)

    Professor Thoma does not mention it today, but one of the reasons Keynesians support the government actively pushing for full employment through both monetary and fiscal policy is the belief that rising wages will result and that rising wages give firms additional incentives to invest to increase the productivity of their work force. And that full employment, and the resulting higher levels of income dispersed more broadly through the economy, gives firms more reason to believe that their investments will pay off through higher sales.

    Now I realize that all economists say full employment is a goal, but Keynesians say it is The goal. So the smart ones and the dumb ones both place more emphasis on it.

  28. Gravatar of Major.Freedom Major.Freedom
    17. November 2015 at 17:19


    “MF, what inflation…”

    The undue inflation of the money supply brought about by central banks.

    “…and why is it healthy to have resources sit idle while workers sit around unemployed?”

    Same reason why it is healthy for the government not to take over all production processes besides money for the purposes of ensuring everyone has a “job” and is “doing something.”

    Economic health is had when individuals are able to fully control the property they homestead and trade for.

    There is no room for central banks if the intention is economic health. Inflation misleads investors in a division of labor and causes resources to be malinvested, precipitating an inevitable correction process which takes time to fix. Of course what you have arbitrarily deemed to be “idle” resources are going to be a part of this correction process.

    In reality though, idle resources are a myth. See W.H. Hutt’s “The Theory of Idle Resources”, which can be downloaded for free if you Google it.

  29. Gravatar of ssumner ssumner
    17. November 2015 at 18:00

    Steve, Bridges would be fiscal policy.

    Min, I’m not sure.

    Jose, I doubt whether more spending on education would have a discernible impact on productivity.

    Jerry, Thanks for that link. BTW, I don’t believe that more AD would boost real hourly wages, but perhaps real annual wages would rise.

  30. Gravatar of Derivs Derivs
    18. November 2015 at 04:40

    “why is it healthy to have resources sit idle while workers sit around unemployed?”

    Therein lies the beauty of free markets. Price signals tell you when to produce and not produce. Otherwise you are assuming that any project proposed should then be built because all resources produce profits.

    For example, where Prof.Summers lives there is about 32,000 MW/h of electricity generating capacity in his region. Hydro, Nuke, Coal, Nat Gas, Oil.. pretty much with cost of production being higher, in that order along a stack. Now Saturday is a low demand day and only 18,000 MW/h may be needed at peak usage. Therefore all demand can be met with cheaply produced Hydro, nuke and coal… So prices are about $14 a MW/h. Your production cost to turn on your gas plant is probably in the mid $20’s, do you turn on your plant at cost of production greater than what you will receive simply because it is there??

  31. Gravatar of Postkey Postkey
    18. November 2015 at 07:20

    “This is certainly true as regards labor. In a changing economy, people move from sector to sector, something choosing periods of unemployment over employment at low wages. This makes sense for them. For this reason, it makes no sense to craft policies designed to achieve “full employment” since this means overriding human choice.”

    It makes sense for people to choose unemployment and to starve {as in the 1930’s}!
    Since it is sensible for people to choose to starve, ‘we’ will ‘leave them to it’.

  32. Gravatar of Student Student
    18. November 2015 at 08:38

    Dervis – So 2008 – 2013 or so was just a low demand half decade?

    MF – If only we could get rid of the central bank and return the glorious good ole days where there was no inflation, malinvestment, or recessions.

  33. Gravatar of jonathan jonathan
    18. November 2015 at 12:31


    Pop Keynesian (PK): We should raise G to increase growth.

    New Keynesian (NK): But the Fed sets r to target inflation! If we raise G, this will increase inflation, and the Fed will just raise r to offset it! We’ll be back where we started, but with some higher inflation, which is a Bad Thing.

    PK: Maybe the Fed won’t raise r, because there’s slack in the economy and so an increase in G will raise GDP without raising inflation.

    NK: But that would mean that r is too low today, which the Fed wouldn’t allow, and we would be seeing below-target inflation if this were the case. If your argument is that the inflation target is too low, than say that, but there’s no need to bring G into it!



    NK: Hmm, i = 0, and this is a constraint on monetary policy. If growth slows down, the Fed can’t lower i, and so we should raise G to support demand. And maybe we should do that now, because inflation is below target. And maybe we should consider raising the inflation target, or adopting another policy regime, like a price level, NGDP growth rate, or NGDP level target.

  34. Gravatar of Ray Lopez Ray Lopez
    18. November 2015 at 19:47

    +1 jonathan.

    Comment is copy and pasted into my file. While I don’t know the latest theory, this summary sounds authentic and plausible. Now assume money is largely neutral (Bernanke et al. 2003 FAVAR paper) and laugh out loud at how ludicrous this NK/Pop/monetarist debate is.

  35. Gravatar of Derivs Derivs
    19. November 2015 at 00:53

    “Dervis – So 2008 – 2013 or so was just a low demand half decade?”

    Student, well if I remember correctly, 08-09 definitely was a disaster, so then I guess even as the recovery developed it never pushed on the capacity that was in place before the recession. You asked a specific question as to why would available capacity NOT be used. I answered with a specific numerical example. One day when you go work for someone, and they have orders for 10 million widgets but capacity to make 15 million, please suggest producing 15 million to your bosses and let me know how that works out for you.

  36. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. November 2015 at 04:04

    Travis V: got no idea, I had it on pre-order from Amazon and, voila!, it arrived.

  37. Gravatar of Student Student
    19. November 2015 at 08:26

    Derivs, I extended your numerical example to the macro events of 2008 – 2013 to inquire about whether that meant that you believed that 5 year period of excess capacity was due to a five year reduction in demand. Was that healthy?

    Perhaps it would help if you answered the question rather than making assumptions or spent a little time reading Scott’s work on what nominal output level signals tell us about monetary policy and macro economics.

  38. Gravatar of ssumner ssumner
    19. November 2015 at 08:52

    Jonathan, Good, but I initially thought “PK” was someone’s initials.

  39. Gravatar of Derivs Derivs
    19. November 2015 at 11:46

    “or spent a little time reading Scott’s work on what nominal output level signals tell us about monetary policy and macro economics.”

    Student, I’m too busy playing Fallout 4. One must always have their priorities in order.

  40. Gravatar of Student Student
    19. November 2015 at 14:11

    Ahh assumpions. I am old enough to have never even heard of fallout 4 (or fallout 1 for that matter). The name is a play on the etymology student t distribution.

  41. Gravatar of Derivs Derivs
    20. November 2015 at 01:07

    “I am old enough to have never even heard of fallout 4 (or fallout 1 for that matter).”

    Estudante, only did 3/4 of a billion in revenue in its first 24 hours… was hard to miss if you read the business news.

  42. Gravatar of Ben Ben
    20. November 2015 at 13:53

    Great post.

Leave a Reply