Scott Sumner's Straw Man Attack on Joe Stiglitz

     As a hero of Sumner said-I assume Ronald Reagan is a hero of his, after all he's impressed by Rick Perry-'there he goes again.' Sumner attacks Stiglitz again in a specious way. I'm thinking my prior theory about why Stiglitz is being attacked may be dead on-he's a heretic from the DSGC model.

   http://diaryofarepublicanhater.blogspot.com/2011/12/stiglitz-guilty-of-macroeconomic-heresy.html

    To be sure Stiglitz in criticizing DSGC-Dynamic Stochastic General Equilibrium-sees more value in the New Keynesian version of Krugman, et, al than the Neoclassical variant-Real Business Cycle (RBC). But he still thinks even New Keynesianism concedes way too much.

    As for Sumner's latest attack on not just Stiglitz but Delong for saying that Stiglitz's premise is not incoherent, let's read Sumner's snark:

   "On empirical grounds almost every single step in this argument is wildly implausible.  And that’s not hyperbole; I don’t mean one step, I mean every single step."

    Really Scott? You are mocking someone's What Caused the Great Depression theory as wildly implausible? Aren't you the guy who can say with a straight face that the Depression would never have happened if Benjamin Strong hadn't died?

    Say this for Stiglit'z theory. Whether or not it's true it's certainly no worse in terms of being overly simplistic

    To quote someone I like as Sumner likes Reagan-Krugman-'Sumner is shrill.'

     "Business cycles aren’t caused by 100 year trends, they are caused by “shocks.”  Where is the shock?  If each year 2% of farmers move to the city, how does that cause a sudden demand shock?  The economy was booming in the 1920s despite the gradual decline in farming.  Now you could argue that something else was propping up the economy, like a thriving manufacturing sector, and when the bottom fell out of manufacturing then the economy slumped.  But in that case why not blame the collapse of manufacturing?"

   First of all Stiglitz didn't say that this structural change was the only cause of the Depression in the way that Sumner claims that Strong's untimely demise was the cause of the Depression. Sumner tries to claim that he doesn't read my blog. If this is true he's in the minority at his own blog as I can tell from my traffic that lots of his readers also read me.

   What's more his mentor George Selgin does as well as at least on occasion, Nick Rowe, Brad Delong-made his twitter storm-and MMT's Scott Fullwiler. I don;t know if Sumner's denials are true-but maybe they are or he might learn something. For one thing if he wants to throw around words like "incoherent" around about a first rate economist like Stiglitz he ought to stop attacking straw men and putting words in Stliglitz's mouth.

   Sumner debunks arguments that weren't made. For starters, Scott, if you want to attack Stiglitz read the major paper he wrote about these matters rather than a small piece in Vanity Fair, Why don't you start there.

   "The standard macroeconomic models have failed, by all the most important tests of scientific theory.They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth."

   "After the crisis broke, policymakers relying on the models floundered. Notwithstanding the diversity of macroeconomics, the sum of these failures points to the need for a fundamental re-examination of the models—and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis. This paper first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous."

    "Further, the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. Finally, the paper contrasts the policy implications of our framework with those of the standard models."

   Let's reread that next to last sentence: "there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued."

   He said these systemic, structural changes extenuated the crisis, rendered the economy more vulnerable, he didn't claim it was the First Cause, no matter how much time Sumner spends debunking this claim, Stiglitz didn't make it.

   He also indicates that he is questioning the "standard model" by which he means DSGE. Part of why Sumner is so obtuse maybe his adherence to the very model that Stiglitz criticizes.

   And he is obtuse, I'm not engaging in hyperbole either. What an easy task he sets himself!

    " If each year 2% of farmers move to the city, how does that cause a sudden demand shock?"

     If things always happened as seamlessly as that, with a uniform movement of the farmers to the city every year for 100 years it couldn't cause a demand shock. However, anyone who is at all acquainted with the development of modern, capitalist, economies knows such movements don't happen so gradually and uniformally. It's like Keynes said: in the long run we are all dead.

    In the short run there certainly can be times where one industry that employs large numbers of workers very rapidly renders these workers redundant without there being a more or less equivalent rise of demand of these workers in another industry.

    In 2001 despite what Greenspan believes we had a very rough-rather than "short and shallow" recession, at least is was not shallow and this was when much of Stiglitz's structural change to the economy happened-recession where we lost 3 million jobs. While eventually most of these jobs were regained they were overall of a lower quality of job where many who had previously had white collar jobs were relegated to low paying service jobs.

   Sumner seems to think that it's impossible that there could be extended unemployment due to an industry that over a short time-not 2% a year for 100 years-cutting millions of jobs. I'd rather believe this lack of comprehension is willed rather than genuine.

   But after all, until Keynes, the entire Classical School insisted that there is no such thing as involuntary unemployment. To this day Sumner believes many other unbelievable things. Like that the current minimum wage of $7.25 could endanger the recovery, or that if Benjamin Strong hadn't died there would have been no Great Depression.