Yes, a brilliant economist really can be that bad at monetary economics

Last weekend I argued that Larry Summers was unqualified to be Fed chair.  Lots of people pushed back, pointing to his obvious brilliance.  But that’s not enough.  In my post I pointed to this column by Summers:

However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.

.  .  .

It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero. Consider a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate. Depending on where it was undertaken, this project would yield at least an extra 1 cent a year in government revenue for each dollar spent. At any real interest rate below 1 percent, the project pays for itself even before taking into account any Keynesian effects.

Now Matt O’Brien and Matt Yglesias are criticizing the same column.  Here’s Yglesias:

Unlike Summers’ monetary policy analysis, I think this [fiscal view] is correct. But the conjunction of the views is remarkable. He’s saying that in a low interest rate environment we dare not leave investment decisions up to the private sector, which is going to just blow the money on boondoggles and white elephants””the state needs to step in and plan the economy. Socialism, in other words. But does Summers really think that? It sure doesn’t sound like something he thinks.

If the choice were up to me and this was what I had to go on, I’d consider this viewpoint to be nearly disqualifying.

Matt O’Brien is also appalled:

In other words, he thinks the Fed pushing down real interest rates might only push companies to make bad investments they otherwise wouldn’t make. It’s a very Austrian view of things — the idea that pushing interest rates “artificially” low makes businesses make mistakes.

No wonder our neo-Austrian president loves Larry.  Two peas in a pod.

Bob Murphy must be rubbing his hands together with mischievous joy.  An Austrian cabal has taken secret control of the Democratic Party at the highest levels of the US government.

But seriously, I hope people are beginning to understand why I’m horrified by the thought of a Summers Fed.

Let’s hope this backlash is in time.



34 Responses to “Yes, a brilliant economist really can be that bad at monetary economics”

  1. Gravatar of Bob Murphy Bob Murphy
    25. July 2013 at 19:09

    Bob Murphy must be rubbing his hands together with mischievous joy.

    Actually, I saw the title of this post and just assumed you were writing about me, so I was pretty disappointed.

  2. Gravatar of SG SG
    25. July 2013 at 19:09

    Ok, here’s what the lefties need to understand: you simply CANNOT have someone like Larry Summers running the Federal Reserve.

    Krugman, and other “fiscalists” are fond of saying they favor an “all of the above” macro stabilization strategy. They believe that fiscal stimulus will work, and monetary policy might work, so why not do both? Whatever. But here’s the rub: putting someone in charge of the Federal Reserve who is skeptical about the effectiveness of monetary policy means that monetary policy WILL LIKELY NOT BE TRIED, let alone successful. The Romers explained in painful detail here how the Fed’s three great failures (Great Depression, Great Inflation, Lesser Depression) all include many public pronouncements about how the Fed had done all it could, but ultimately inflation (or deflation) was someone else’s fault. In retrospect, of course it was ludicrous for economists at the Fed to believe that.

    But the insidious idea–monetary policy doesn’t matter–will lead otherwise scrupulous, hardworking economists to wash their hands of the ONE JOB we expect them to do: stabilize the macroeconomy.

    Obama needs to know that if he nominates Summers, he’s nominating someone who has given every indication of buying into THE MOST DANGEROUS IDEA IN THE HISTORY OF THE FEDERAL RESERVE.

  3. Gravatar of TravisV TravisV
    25. July 2013 at 19:14

    Prof. Sumner,

    Are you going to praise the Democrats in the Senate who want Yellen rather than Summers?

  4. Gravatar of Bob Murphy Bob Murphy
    25. July 2013 at 19:25


    Regarding the criticism of Summers’ “Austrian” point: What function do you (or Matt O’Brien) think interest rates serve in a market economy?

  5. Gravatar of Rajat Rajat
    25. July 2013 at 20:02

    Bad at monetary economics he may be. But he’s a pretty naive economist more broadly if he thinks there are many public projects with positive rates of return not already being undertaken that would be undertaken if the government gave itself the permission to spend more.

  6. Gravatar of Aidan Aidan
    25. July 2013 at 21:02

    I don’t see any lefties pushing Summers for Fed chair, SG.

  7. Gravatar of Benjamin Cole Benjamin Cole
    25. July 2013 at 22:39

    Good blogging.

    BTW, people who say “the Fed causes bubbles or bad investment decisions” must be the same ones who blame the bartender for getting patrons drunk.

    And then those same drunk patrons make investment decisions, because, you see, once the Fed has waved a magic wand, EMT evaporates…..

  8. Gravatar of Saturos Saturos
    25. July 2013 at 22:53

    An Austrian *socialist* cabal. Should be interesting.

    In all honesty, though, I think Obama’s remarks were just rhetoric. He probably knows his own views on this matter aren’t particularly well developed or coherent, he’s listened to a lot of people talk and doesn’t think he really knows what’s going on, and doesn’t think anyone else does either. The pivot to the long run is purely political – there isn’t a lot of confident professional consensus behind what Romer told him, amongst the various things many economists have been telling him, he doesn’t feel he has to take any of them too seriously.

  9. Gravatar of Daniel J Daniel J
    25. July 2013 at 23:44

    I would die from laughter if he wants to hire him just so he’ll mint the trillion dollar coin on the upcoming debt ceiling fight.

  10. Gravatar of Martin Martin
    26. July 2013 at 00:42


    “Regarding the criticism of Summers’ “Austrian” point: What function do you (or Matt O’Brien) think interest rates serve in a market economy”

    Isn’t it better to talk about the function of the term structure, rather than the function of interest rates? If the term structure changes I can imagine that the time structure of production also changes. If just the interest rates are high or low, I can imagine the term structure to be such that the time structure of production does not change.

  11. Gravatar of George Selgin George Selgin
    26. July 2013 at 02:15

    Well, Summers’ claims may well be mistaken. But that shouldn’t cause any MM to dismiss the idea that monetary policy can cause problems by making interest rates “artificially” low. The suggestion is after all only the flip-side of the no-less “Austrian” (but really “Wicksellian”) idea that bad monetary policy can make interest rates artificially high, as it does by failing to provide for adequate M and NGDP growth. The question in light of this view becomes, “Are interest rates today artificially high or not?” If they are, then further expansion will help by bringing them closer to their natural levels. If not, then…well, then Summers has a point.

    Dismissing “Austrian” ideas is I know a sort of sport among the economics cognoscenti. But to scoff at (or to be “appalled,” as Matt O’Brien is, in Scott’s characterization) by the very idea that monetary expansion can cause trouble by making interest rates artificially low, is to be not merely anti-Austrian by anti-Wicksellian, which (if you ask me) is to reveal a defective grasp of “modern” monetary economics.

  12. Gravatar of MoMo MoMo
    26. July 2013 at 02:25

    Reading these monetary communists argue Hitler vs Stalin has been pretty amusing.

  13. Gravatar of Bill Woolsey Bill Woolsey
    26. July 2013 at 03:41

    I believe that firms will choose projects that have the higher expected returns even if the interest rate is lower. They will just make more profit.

    Summer’s argument assumes that those are all being exploited and so the projects only profitable at highly negative rates are left.

    If that were really true, then either the interest rate shouldn’t be decreased, because when all of the high return and low return projects are being pursued, there won’t be enough current resources, or else, the projects only profitable at very low interest rates are not white elephants but desirable projects that move consumer goods from the present to the future. (Warehouses full of durable consumer goods, for instance.)

    Durable public capital goods would be cheaper under that circumstance. Responsible government officials should do more of them.

    But that doesn’t mean that the central bank should generate a shortage of money so that liquidity effects keep interest rates high and insist that the government fund enough projects to keep real expenditures equal to potential output. The job of the central banks should be to keep nominal spending on output on a stable growth path. Let markets determine short and long term interest rates. And let government respond to price signals like everyone else.

  14. Gravatar of Bill Woolsey Bill Woolsey
    26. July 2013 at 03:54

    Isn’t the argument in favor of Summers is that when there is a crisis, he will do better? And doesn’t that mean that if there is a crisis for the big banks, he will bail them out better?

    We can’t have a Fed chairman whose focus is stabilizing the macro economy. How many campaign contributions come from the “macroeconomy?”

  15. Gravatar of ssumner ssumner
    26. July 2013 at 04:14

    Bob, The interest rate should equilibrate the credit markets.

    Travis, I hereby praise them.

    Saturos, Are Obama’s private remarks to Summers and Romer also just rhetoric?

    George, You said;

    “Well, Summers’ claims may well be mistaken. But that shouldn’t cause any MM to dismiss the idea that monetary policy can cause problems by making interest rates “artificially” low.”

    That was not my claim at all. Summers himself believes AD is currently far too low. So he’s not making the argument that rates are below the Wicksellian equilibrium. He makes other mistakes:

    1. Thinks rates are a good indicator of monetary policy. They aren’t.
    2. Thinks business might do foolish projects at low rates, and hence we’d better leave investment decisions to the public sector. Those are certainly not Austrian beliefs.

    My Murphy comment was of course a joke, I don’t actually regard either Summers or Obama as Austrians.

  16. Gravatar of SG SG
    26. July 2013 at 04:42


    The liberals are objecting to Summers for the wrong reasons. They think he’ll be soft on financial regulation. What I’m worried about is that a Summers Fed which bangs the drum ever more loudly for fiscal stimulus would (1) be music to the ears of the liberal dems, and (2) signal to markets that the Fed has really given up trying to stabilize the economy at the ZLB.

  17. Gravatar of George Selgin George Selgin
    26. July 2013 at 04:54

    Scott, you are quite right o point out Summers’ inconsistency, which does make him a poor monetary economist, and I got the tongue-in-cheek aspect of your remark about his being an Austrian. My remarks were mainly in response to the quote from O’Brien, which seemed to dismiss the whole “Austrian” notion of “artificial” interest rates. I regret that I failed to make that clear in my original comment.

  18. Gravatar of John John
    26. July 2013 at 06:13

    Aren’t Austrian economists usually characterized by free-market views? I can’t think of any Austrian type thinkers in favor of fiscal stimulus, blaming technology for unemployment, or adding thousands of regulation to the most over regulated sector of the economy (health care).

    If Obama were a neo-Austrian, Scott would at least agree with most of his non-monetary views on the economy. Wouldn’t it be better just to call him an economic illiterate? Do you really think Obama could coherently explain Ludwig von Mises’s theory of the business cycle? I doubt he knows who Ludwig von Mises is or has ever read a word written by a true Austrian economist.

    Don’t use smear tactics against people who agree with you on pretty much everything about the economy besides money. These kind of petty internecine squabbles are exactly why the libertarian movement gets nowhere.

  19. Gravatar of John John
    26. July 2013 at 06:14

    I get that the neo-Austrian thing was a half joke but I stand by what I said above.

  20. Gravatar of Brian Donohue Brian Donohue
    26. July 2013 at 06:32

    Well Scott, anyone can see that y’all have had a great run the past couple years and likely into the next couple.

    I gotta tell ya tho, I sniff a bit of hubris here. We’re still talking about complex systems, but among you and your acolytes, anyone who doesn’t embrace the “NGDP magic” view is now cast into the Austrian hinterland. mmkay.

  21. Gravatar of StatsGuy StatsGuy
    26. July 2013 at 06:39

    “The liberals are objecting to Summers for the wrong reasons.”

    Do not mistake the public letter signed by Diane Feinstein as stating the real reasons they are objecting to Summers. They are stating reasons that are politically palatable.

    Also, if Obama has not figured out that QE has benefited his administration more than any other single policy, then he’s even less competent than many believe

    Scott – the mark of an austrian is the following:

    People behave rationally always and everywhere, except when the implications disfavor their preferred policy.

  22. Gravatar of Nick Nick
    26. July 2013 at 07:06

    Summers as chair would probably turn the Fed back into a one-man show which during his tenure would tighten prematurely sending the economy into a tailspin. The administration would be sure to not let the crisis go to waste and will roll over Republican resistance to get whatever legislation they want.

    Unless engineering that tailspin is a plot by the evil Republicans to run the table in 2016.

    So Summers at the head of the Fed is in everybody’s best interest except the American public. *Sigh*

  23. Gravatar of Gene Callahan Gene Callahan
    26. July 2013 at 07:44

    1) What George said.

    2) Anyone who doesn’t understand his point about low rates being just the flip side of high rates ought to read Goodspeed’s excellent new book, _Rethinking the Keynesian Revolution_.

  24. Gravatar of Bob Bob
    26. July 2013 at 08:00

    Next up, people will recommend Ron Paul as a possible option to lead the fed, Mike Huckabee as head of the IRS, and Tom Cruise as the head of the American Psychiatric Association.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. July 2013 at 08:55

    I found something which may be of interest.

    Larry Summers and John Taylor debated the implications of federal economic policy on April 4, 2012 as part of an event hosted by the Stanford Institute for Economic Policy Research (SIEPR). This was the second of two debates, after a February meeting by the pair at Harvard. They addressed the topic “Are Government Interventions an Important Cause of Our Recent Economic Problems?”

    The video of the debate can be found here:

    At the 16:30 minutes in you will find Summers saying the following during his introductory remarks:

    “I will leave the question of monetary policy to John [Taylor] where he is an expert. I don’t think the question of whether the Fed was wise or was unwise during the noughts bears on the question of whether government caused our problems. The Fed’s job is to set monetary policy and it may or may not have done the right job. But I will speak to the question of fiscal policy in the wake of the crisis.”

    Now ask yourself the following question, is someone who doesn’t consider himself knowledgable enough to debate monetary policy qualified to be placed in charge of the monetary policy of the most important currency area on earth?

  26. Gravatar of Mike T Mike T
    26. July 2013 at 08:58

    Benjamin Cole –

    “BTW, people who say “the Fed causes bubbles or bad investment decisions” must be the same ones who blame the bartender for getting patrons drunk.”

    >> Analogy is not entirely accurate. Would you think there could be some blame passed onto the bartender if they were spiking the patrons’ drinks with more alcohol than normal?

  27. Gravatar of Mike T Mike T
    26. July 2013 at 09:14

    Actually, even my analogy above isn’t all that good. An even more appropriate one would be the bartender letting all the patrons know that he/she will be putting in less alcohol in all their drinks. The patrons, given this information and their goal to achieve a buzz, alter their drinking habits accordingly, leading some to drink more than they otherwise would had their drinks not been slightly diluted.

    So even in this case, couldn’t you reasonably assign some blame to the bartender for getting some patrons more drunk than they otherwise would for those who overcompensated the dilution by drinking too much?

  28. Gravatar of TallDave TallDave
    26. July 2013 at 10:06

    I had a wonderful dream that we had all misheard and the president was actually appointing Sumner to Fed chair, not Summers.

  29. Gravatar of George Selgin George Selgin
    26. July 2013 at 10:33

    Mark Sadowski makes an important point: Summers isn’t a bad monetary economist, “Austrian” or otherwise. He’s not really a monetary economist at all. But of course, were he to be appointed this fact would hardly make him exceptional. We must bear in mind that Bernanke, in having done a lot of academic work concerning monetary policy, was himself an exception to the usual rule of having Fed chairs with little background in monetary economics.

  30. Gravatar of ssumner ssumner
    26. July 2013 at 12:13

    John and Brian, No, Obama is not an Austrian. Hayek favored NGDP targeting and free markets. Scott Sumner favors NGDP targeting and free markets.

    Obama . . . ?

    (Did I just refer to myself in the third person? I guess Brian is right about the hubris.)

    Statsguy, I don’t know Austrianism well enough to comment on their views on ratex.

  31. Gravatar of Insightful Conspiracy Theorist Insightful Conspiracy Theorist
    26. July 2013 at 12:22

    Summers thinks quantatitive easing is ineffective. This forum and the econblogs generally agree that quantative easing is of limited effectiveness – that’s why we want nominal gpd / price level targeting / etc. We just think quantative easing is better than nothing / convinces market participants that the Fed will keep nominal rates low for longer.

    People have taken Summers criticism of QE as saying monetary policy is ineffective entirely, and are worried. But maybe Summers simply agrees with the general estimation of QE and will do something more dramatic, which is actually something we would want.

    Something more dramatic might require a collusion between the executive branch; a debt instrument perhaps that the Government arguably guarantees so the FRB can buy but that there is some legal loophole for allowing Obama to unilaterally deny / delay payment of, so that we get the equivalent to a permanent monetary drop (generally presumed to be more effective than QE).

    If so, Obama couldn’t pre-arrange or have the same understanding with Yellen. Obama doesn’t know Yellen. It also is the sort of thing that you wouldn’t trust to someone outside the circle.

  32. Gravatar of TheMoneyIllusion » Does the Fed chair need to be an expert on monetary policy? TheMoneyIllusion » Does the Fed chair need to be an expert on monetary policy?
    26. July 2013 at 13:52

    […] Mark Sadowski left the following comment: […]

  33. Gravatar of TallDave TallDave
    26. July 2013 at 20:23

    Nice find Mark.

  34. Gravatar of ssumner ssumner
    27. July 2013 at 05:50

    Insightful, I think that’s wishful thinking. Where is his critique of monetary policy?

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