Scott Sumner and the Dark Ages of Macroeconomics

     Regarding my last post "There Scott Sumner Goes Again"

     http://diaryofarepublicanhater.blogspot.com/2012/01/there-scott-sumner-goes-again.html

     it is becoming clear what he is really doing again. His attempt to use the accounting identity S=I is meant to establish the Treasury View. This is a large part of what for Krugman makes the Dark Ages of Macroeconomics dark.

     http://krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/

     When he wrote this in 2009 he was writing in regard to Cochran and Fama but what he said here applies to what Sumner has been arguing a lot lately as well.

      "both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period."

       What is interesting about Sumner is he seems to have a limitless arsenal of reasons why fiscal stimulus does not work. One way he tries to argue is by first saying that he doesn't categorically claim it could never work just that it is very unlikely to work.

        But his misleading employment of the accounting identity is yet another Royal Road to proving that fiscal stimulus cannot work.

         "it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line."

          "’s like the fact that the capital account and the current account of the balance of payment have to sum to zero: that’s true, but it does not mean that an increase in capital inflows magically translates into a trade deficit, without anything else changing (what John Williamson used to call the doctrine of immaculate transfer). A capital inflow produces a trade deficit by causing the exchange rate to appreciate, the price level to rise, or some other change in the real economy that affects trade flows."

          "Similarly, after a change in desired savings or investment something happens to make the accounting identity hold. And if interest rates are fixed, what happens is that GDP changes to make S and I equal."

           Sumner made a lot of heavy weather in his latest post out of the idea that you can't accuse Robert Lucas of making arguments that show gross ignorance because after all he won a Nobel Prize, He tells us that he learned all about Keynesianism in Lucas' class-with all that giggling.

          Sorry to say then that you have to here charge his own argument of either being grossly ignorant or made out of deliberate bad faith.