Evidently Stiglitz hit a nerve with that Vanity Fair piece. Cause Sumner is still at it. What is it that Stiglitz has really done? According to Sumner he has put forward an "incoherent" theory. Nick Rowe as well seems to think he is guilty of "bad macroeconomics." Rowe charges him with committing the "lump of labor fallacy."
On the other hand Sandwichman-if you haven't read him yet you should, and I will have more to say about him to in a later post, probably today-accuses those that accuse Stiglitz of this as using a fallacy themselves, that lump of labor fallacy is a fallacy in itself, largely because according to Sandwichman it's a straw man argument: it would be untrue to claim that there is a finite, exact amount of "work that needs doing" within an economy, but no one has made such a claim, including implicitly.
It seems that Stiglitz may have offended the conventional wisdom of mainstream economists-in this broad sense this would even include New Keynesians like Krugman or Delong, though Stiglitz has more sympathy with them. They still accept the current standard economic models.
For Sumner at least it's not hard to understand why he has issues with Stiglitz. Just listen to how his Vanity Fair piece begins:
"Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago."
Now obviously there is nothing you can say that would more fighting words for Scott Sumner, market monetarist and NGDP targeting advocate, extraordinaire than "forget monetary policy." As these are fighting words, Sumner's "bloody shirt" he has been on something of a crusade since the piece has hit. I've already written about his initial reaction.
However, Sumner keeps throwing grenades. In another missive yesterday called "Don't Think We Don't See What's Going on Here" he writes a piece that was mostly devoted to criticizing the Fed for ignoring the dual mandate. He criticizes its exclusive focus on inflation and points out that there is nothing magical about 2% inflation. He quotes approvingly James Cole who says this:
"The United States economy flourished from 1982 to 2007—industrial production, for example, doubled, while per capita rose by more than one-third—while inflation (as measured by the CPI) almost invariably ranged between 2 percent and 6 percent. That is not an ideology speaking, that is not a theoretical construct. It is irrefutably the historical record. If that is the historical record, why the current hysterical insistence that inflation of more than 2 percent is dangerous or even catastrophic?"
As he also points out we are currently averaging considerably lower than 2% inflation during this recession. As he points out if unemployment is far lower than their target of full employment, while inflation is considerably lower than their-and Sumner argues this target may be too low anyway-2% target standing pat and only fighting deflation while but not actively seeking inflation-or as Sumner would put it "higher NGDP"-then they are blatantly not trying to fulfill their dual mandate.
He then quotes notorious inflation hawk, Richard Fisher:
"My colleague Sarah Bloom Raskin—one of the newest Fed governors, and a woman possessed with a disarming ability to speak in non-quadratic-equation English—recently used the example of the common kitchen sink to illustrate a point. I am going to purloin her metaphor for my description of our present predicament. You give a dinner party. The guests leave and you are washing the dishes. When you are done, you notice the remnants of the party are clogging the sink: bits of food, coffee grinds, a hair or two and the like. You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess. You look over your shoulder to make sure your kids aren’t looking, and, voilà, you turn the faucet on full blast, washing your immediate troubles away."
"From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house."
Sumner does point to the silver lining that Fisher is leaving in January. Up till now I am in nothing but full agreement with Sumner, but the he takes an interesting detour. Fischer's homespun analogy is ludicrous of course because when you think about it, taking that short cut on your dishes now and then is unlikely to destroy the plumbing of the "entire house" anyway.
But Sumner goes on a detour here and again goes after Stiglitz.
"Fisher’s speech produces two reactions. First, how could he be so clueless about monetary policy. But when you stand back and start to think about what it all means, a second question begins to emerge. Why are such fools allowed on the FOMC? How is it that the world’s greatest economic policy institution, the central bank that tends to set the tune for world aggregate demand, is managed by people who are so obviously incompetent? Let’s see where we can connect the dots:
1. Stiglitz develops a theory that unemployment is caused by rapid technological change, which makes workers redundant. This in some mysterious way reduces aggregate demand.
2. Stiglitz meets with Obama, to offer a Nobel Prize winner’s expert advice on our predicament.
3. Christy Romer and Larry Summers are horrified to find Obama spouting theories that the unemployment problem isn’t lack of demand, rather it’s ATM machines stealing jobs. Christy Romer can’t convince Obama that the Fed still has ammunition.
4. Obama never pays any serious attention to the Fed. When the Dems had a filibuster-proof majority in the Senate, he fails to even nominate people for several positions for a period of 18 months. Even today he is ignoring the problem, several seats remain empty.
The following quotation is from Fisher, but it might just as well have been Stiglitz:
My reluctance to support greater monetary accommodation has been based on efficacy: With businesses’ cash flow—driven by record high profits and bonus depreciation—at an all-time high, both absolutely and as a percentage of GDP; with every survey, including those of small businesses, indicating that access to capital is widely available and attractively priced;[6] with balance sheets having been amply reconfigured; and with bankers and nondepository financial institutions sitting on copious amounts of excess liquidity, I have argued that further accommodation was unlikely to motivate the private sector to put people back to work. It might even prove counterproductive should it give rise to fears the Fed is so hidebound by academic theory as to be blind to the practical consequences of harboring an ever-expanding balance sheet. This inevitably raises concerns we are creating distortions in the fixed income markets that inhibit proper market functioning, or concerns that—despite our protestations to the contrary—we are given to monetizing the government’s debt, an impulse that ultimately destroys a central bank’s credibility
I have argued that other, nonmonetary factors are inhibiting the robust job creation we all seek.
Monetary policy is one of those areas where the fringe right and the fringe left meet and shake hands. And right now they are influential enough to prevent the Fed from doing what it knows needs to be done. Not powerful enough to prevent all action—the Fed will prevent deflation, I have no doubt about that. But powerful enough to prevent the Fed from fulfilling their dual mandate. History will see all this very clearly, and judge the Fed harshly. How ironic after Bernanke promised Milton Friedman that the Fed would never repeat the errors of the Great Depression. How ironic after Bernanke eloquently spoke out against the passivity of the Bank of Japan (an institution that also cut rates to zero and did massive QE.)"
Wow! I mean Sumner is really reaching here. Stiglitz bares no plausible resemblance to Fisher. Superficially it might seem that Fisher's quote, "I have argued that other, nonmonetary factors are inhibiting the robust job creation we all seek." but this is a real reach, an overreach.
Stiglitz is not an inflation phobe. There is no shred of evidence that Stiglitz somehow nefariously influenced Obama to ignore the Fed. Indeed there is little evidence that Stiglitz has had any influence at all on the Obama Administration which is a pity.
You can certainly argue that Obama should have considered appointing someone else to Bernanke's job rather than giving him another term. This surely has nothing to do with Stiglitz no matter how tangential a causation. To the contrary one major reason is that Bernnake is a close friend of Geithner's back during the time he was Ny Fed President and had opportunity to work with Bernanke closely.
I agree with most all of Sumner's narrative until he tries to falsely equate an equivalence between Fisher and Stiglitz. Stiglitz has a record of opposing tight money by the Fed.
I understand Stiglitz's seemingly dismissive comments about Fed policy are provocative. But trying to somehow use the straw man tactic of attacking Fisher then when you hit him, falsifying reports and calling the body Stiglitz is unworthy and makes me wonder about Sumner's good faith.
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