Who should we listen to?

A quick comment on the current discussion over the seemingly low natural rate of interest.  Perhaps we should put more weight on the views of those who, in retrospect, have been right about the macroeconomy:

1.  Those who, at the time, thought that Fed policy was too tight in late 2008 (something that Bernanke has now admitted).

2.  Those who correctly predicted that the contractionary effects of the 2013 fiscal cliff would be offset by monetary policy.

3.  Those who correctly predicted that the BOJ could sharply depreciate the yen, if they wanted to.

4.  Those who claimed Bernanke was wrong in claiming monetary policy was highly accommodative in the years after 2008.  A critique that has now been confirmed by Vasco Curdia.)

5.  Those who said the Fed’s predictions for real GDP growth were too high.

6.  Those who said that if we ended the extended unemployment benefits, the unemployment rate would fall back to the natural rate faster than the Fed expected.  (Note this is the opposite of the previous prediction, which makes the success of both predictions especially interesting.)

7.  Those who first suggested that central banks could do negative IOR, and that markets would treat the policy as expansionary.

8.  Those who predicted that Trichet’s contractionary monetary policy of 2010-11, in response to transitory price rises from oil and VAT, was a big mistake.  Ditto for those who made the same prediction about Sweden.

9.  Those who first spotted the fact that the UK’s problem was productivity, not jobs, and hence that fiscal austerity was not the problem.

And yes, especially:

10.  Those who predicted low interest rates as far as the eye can see.

(Sorry, I guess that wasn’t a “quick comment”.)

Yes, correct predictions don’t prove anything (especially a single prediction).  But when they occur over and over again, they are at least slightly supportive of the claim that the person knows what he’s talking about.

And speaking of market monetarists, Lars Christensen recently gave a talk at Columbia, which is the best explanation of the euro-crisis I have ever heard. Please check it out.  At one point he points out that the two most influential macroeconomic schools of thought of the past 100 years are Keynesians and monetarists.  And both agree that the problem in the eurozone is a demand shortfall.  And the policymakers in Europe have rejected that view.

I would add these question to the Eurocrats:  Your rejection of the AD shortfall view is based on what academic theory? Does the eurozone have its own special model? If so, how’s that model working out for you?



16 Responses to “Who should we listen to?”

  1. Gravatar of TravisV TravisV
    3. November 2015 at 09:19

    A wise man once said: “Good economists don’t make predictions, they infer market predictions.” 🙂

  2. Gravatar of Dan W. Dan W.
    3. November 2015 at 11:14

    Investors see blue skies ahead. What do they know?

  3. Gravatar of ssumner ssumner
    3. November 2015 at 11:31

    Travis, Yup, that’s how I do it.

  4. Gravatar of Philo Philo
    3. November 2015 at 11:40

    @ TravisV:

    The man who said that is, indeed, wise, but the wisdom seems awfully easy to obtain. I wonder that more economists don’t share in it.

  5. Gravatar of Jason Smith Jason Smith
    3. November 2015 at 12:20

    It’s not the predictions themselves; the two main questions are:

    1. Are there any quantitative metrics to determine whether Scott’s model is working or not and whether conditionals have been satisfied? Or do we just have to go with qualitative terms like “low” (how low?), “depreciate” (how much?), “if they wanted to” (how do we determine what the BOJ ‘wants’?), etc … ?

    2. Can we use Scott’s model? How do we do that? How can I operationalize Scott Sumner’s views without having to get them from Scott Sumner directly?

    The current answers to these questions are no and no. That means Scott is more like a guru than a scientist and we’ll all end up fifty years from now debating what “Scott really meant” in his new book.

    Maybe we should listen to someone who has gotten numerically accurate predictions for the past ~ 2 years and has put out publicly available codes and equations for anyone to use … 🙂


  6. Gravatar of jknarr jknarr
    3. November 2015 at 12:56

    Scott, first they ignore you. Then they ridicule you. And then they attack you and want to burn you. (Ray and MF are ahead of the curve.) And then they build monuments to you. (I have mine on my desk.)
    Your NGDP targeting project is important.

    Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
    And the hearts of the meanest were humbled and began to believe it was true
    That All is not Gold that Glitters, and Two and Two make Four
    And Scott Sumner limped up to explain it once more.

    BTW, there is no natural rate of interest in with a fiat infinitely-elastic monetary base.

    Capital investment is so beside the point as to be laughable: What now determines the “natural rate” is the the present value of trillions of outstanding debt and the quadrillions of interest rate swaps. That’s where the marginal “necessary” rate is set.

  7. Gravatar of James Alexander James Alexander
    3. November 2015 at 13:34

    Scott. O/T but a subject you like:

  8. Gravatar of Major.Freedom Major.Freedom
    3. November 2015 at 15:07

    No, you were wrong about money being too tight in 2008, if we don’t use your definition of “tight” money.

    Using the phrase “admit” to describe what Bernanke said is silly. He can’t admit to being right or wrong according to some arbitrary definition you cooked up on paper.

    It is amazing how many victory laps one can run on the basis of defining the track course in a most self-serving and convenient way, and on the basis of the reverse ad hominem of “Trust me about natural rates folks because I was right about predicting the past by pointing out my definitions of tight money in 10 different contexts.”

    1. Arguing from definitions.

    2. Or, the slowdown in inflation was offset by government deficits.

    3. Nothing new. Everyone who understands the printing press mechanism knows central banks can hyperinflation in any conditions, over than rejection of currency.

    4. Arguing from definitions. Vasco Curdia cannot “confirm” a definition as fact.

    5. Gaze into my crystal ball.

    6. Well that is trivial. Government stops financing unemployment, and there will be less of it.

    7. Arguing from definitions.

    8. What you call a “mistake” is subject to value judgments. More definitions.

    9. See 8.

    10. You do realize that you cannot look at any interest rates other than historically determined ones right? Saying “as far as the eye can see” suggests some forward looking predictive ability. Rates are not low as far as the eye can see. They have been held low on purpose by the Fed, who has said over and over they have no plans to raise them. What moron can’t predict what happens during a time that the Fed has stated over and over they will keep rates low?

    Yeah, no more reason to “trust” your low brow stuff on natural rates.

  9. Gravatar of Lars Christensen Lars Christensen
    3. November 2015 at 15:29

    Thanks for the kind words Scott. I learned from the best!

  10. Gravatar of benjamin cole benjamin cole
    3. November 2015 at 16:25

    Central bankers believe the weakness in aggregate demand can be solved by deflation. Central bankers can stand still in this understanding of macroeconomics.

    Unfortunately, large developed economies can slow down for decades at a time in response to central bank indolence.

  11. Gravatar of Ray Lopez Ray Lopez
    3. November 2015 at 20:31

    What?? Sumner links to a 2013 blog post as a ‘prediction’ for “Those who predicted low interest rates as far as the eye can see.”? Crazy.

    Sumner forgot #11: Those that believe money is largely neutral so the entire issue of using monetary policy is moot and irrelevant.

  12. Gravatar of Ray Lopez Ray Lopez
    3. November 2015 at 20:51

    Physicist and rising star economist Jason Smith destroys this post of Sumner’s, here:

    http://informationtransfereconomics.blogspot.com/ (“Scott Sumner asks the question, regarding macroeconomics: who should we listen to? “)

    Well said Jason Smith.

  13. Gravatar of ssumner ssumner
    4. November 2015 at 18:03

    Jason, As I’m sure you must know, no one can predict precise levels of macroeconomic variables.

    Thanks Jknarr.

    James, That’s great news.

    Lars, I really enjoyed that. I especially liked the various country comparisons.

    Ray, If you say Jason’s a genius, then it must be so.

  14. Gravatar of Ray Lopez Ray Lopez
    4. November 2015 at 19:21

    @Sumner – note I never actually said Jason Smith was a ‘genius’ (though he probably is, for one he seems to have a sense of humor which you lack with your bunker mentality, and IQ and humor correlate nicely, Mr. Sub-120 IQ)-those are your words. I said “rising star”. You seem to read and understand whatever suits you.

  15. Gravatar of Postkey Postkey
    10. November 2015 at 07:22

    “I would add these question to the Eurocrats: Your rejection of the AD shortfall view is based on what academic theory?”

    The new voodoo economics, the Barro/Ricardo equivalence proposition?

  16. Gravatar of Potpourri Potpourri
    7. December 2015 at 21:28

    […] Sumner asks the question, regarding macroeconomics: who should we listen to? He tries to suggest that we should assign a […]

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