The Anatomy of a Scott Sumner Post

      I watched Sumner at the Blogger's Conference in Kansas City with some interest. Of course I kept losing the connection but it was interesting. He was on the stage with right next to Tyler Cowen, next to Cowen was Delong, and to Delong's left was Karl Smith.

     It was interesting to finally see faces to the names many of us have come to know so well here on the blogosphere. Scott's speech was vintage Scott. If you are used to his style, if you read him frequently there was nothing new in what he said. It's what he always says. That people think monetary policy has been very easy. He mentions how Bernanke makes it sound like it's been incredibly accomodative but it isn't, that low interest rates are a sign that monetary policy has been too tight for an extended time.

    He also said that people miss the point in saying that the Fed would not deliberately neutralize fiscal stimulus in this environment. In fact, as he acknowledged in a previous post, Bernanke went as far as urging fiscal stimulus. Yet Sumner argues that teh question is not just whether the Fed tightens in response to fiscal stimulus but that there is an opportunity cost in fiscal stimulus as even if the Fed doesn't tighten in response it won't loosen as much as it otherwise would have. Ok, I mean it's admirably sophistical logic that can seem hard to argue with. But as Bernanke himself asked for fiscal stimulus maybe this premise is less clear? Surely if Sumner is right then Bernanke would have rather than ask for fiscal stimulus simply have further loosened monetary policy?

   In a recent post Sumner answered in response to Tea Party extraordinaire Morgan Warstler-a guy who has wet dreams at the thought of making "public employees eat it"-

   "liberals would be outraged if Bernanke said don’t do fiscal stimulus. I’m outraged if he doesn’t say don’t do fiscal stimulus."

    http://www.themoneyillusion.com/?p=13805#comment-148081

    However, in giving you what I promised in the title-the anatomy of a Scott Sumner post, not the above post I just linked but another one I will get to in a moment-let me quote what he said to me in response to my speaking of my post  about Dan Hervick's post on Sumner

   http://diaryofarepublicanhater.blogspot.com/2012/04/dan-kervick-on-scott-sumner.html

   Scoot in answer to my comment said this:

    "I call the D&S paper “excellent” and he calls my post a “blistering attack.” I wonder what he thinks of DeLong’s blog!!"

     The post Scott spoke of there, which Dan had written of is the post we will provide an anatomy of today. Let's consider his comment to me. It's vintage Scott. It's brilliant as usual. I'm serious. He is a master of his style. Morgan Warstler may well be right that he will pull of his coup. Let's be clear what his coup is. To turn back the clock to 2007. If you have any doubt about that, if you believe that he offers you something other than old wine in an interesting new bottle listen to how he understands it:

    "Traumatic events spawn wacky theories. After 9/11 some claimed the government had planted explosives in the Twin Towers. The Great Crash of 2008 spawned no less than three new theories on the Internet:

    1. The boom caused the bust. The Fed blew up the bubble, and the only solution is to abolish the Fed and go back to gold.

    2. The monetary base doesn’t matter. The Fed can swap dollars for bonds without creating inflation, even in the long run.

    3. A sharp drop in AD (or NGDP) will cause a big fall in real GDP. The Fed controls the path of NGDP. Low interest rates don’t mean easy money. Fed policy is highly effective even when rates are near zero. Fiscal stabilization policy is unnecessary.

   "No one should be surprised by any of this. What is surprising, indeed shocking, is that one of the three wacky theories was conventional wisdom just 5 years ago, taught to thousands of graduate students by hundreds of New Keynesian and monetarist macroeconomists in elite graduate schools. The theory was completely abandoned in 2008, then rediscovered in 2009—making it a new (and now heterodox) theory."

     http://www.themoneyillusion.com/?p=13819

   "How strange is all this? Imagine if the successful test of general relativity in 1919 (during the lunar eclipse) had caused Einstein to abandon his theoretical edifice."

     He tries to make it sound progressive here, drawing a parallel between his pre-2008 economics and general relativity but what's clear is that his "heterodox" theory is actually the orthodox theory that he is determined to defend to the death. But the parallel is a nice touch-a great job of his patented concern trolling.

    Let's get to the anatomy of the post in question, the one Dan wrote of. Sumner is a master.

    He starts this post speaking of the recent Delong-Summers paper on fiscal policy-they argue that during liquidity trap conditions-our current conditions. Again admire this. It's like an ace tennis serve:

   "The new DeLong and Summers paper looks impressive enough. I don’t buy their argument for fiscal stimulus, but I am willing to listen respectfully to the hysteresis argument (which seems central to their self-financing stimulus argument.) Obviously Brad DeLong Brad DeLong would not listen respectfully to a conservative arguing tax cuts are self-financing due to long run output effects. That would be “voodoo economics.” So the following points should be viewed in this context; I’m not about to trash their paper, which seems excellent. I’m about to trash the political culture that leads to this sort of paper."

   http://www.themoneyillusion.com/?p=13715

   Recall the quote above where he pointed out to me that while Dan Hervick had described this post as a "blistering attack" on Delong-Summers he had said their paper looks "impressive" (enough). Indeed he had pointed out that he called their paper "excellent." So gee, why would Dan call this post a blistering attack seeing as in the very first paragraph Sumner assures us that he's not about to trash their paper just the "political culture that leads to this sort of paper."

   Again, very impressive concern trolling. He seems to be praising their paper and discussing something-political culture-they have no control over. Note though he does get in that he will "listen respectfully" to their hysteresis argument though Delong would not extend the same courtesy back-he wouldn't listen to a 'tax cuts are self financing due to long run output effects.'

   So Scott finds their paper impressive. Although not the political culture that spawned it. And he's morally superior to them and perhaps is more intellectually open minded as he will listen respectfully to Delong who won't listen respectfully to him. On the other hand Scott says he'll listen respectfully which is not the same thing exactly as listening with an open mind.

    "The Fed is unwilling to provide enough monetary stimulus. OK, now what is the point of this paper? Is this to train our future econ PhD students? Are we trying to teach them the optimal policy regime? Obviously not. The optimal regime relies on monetary policy to steer the nominal economy, and fiscal policy to fix other problems. So we are going to defend the model how? A blueprint for failed states? For banana republics? Fair enough, but ask yourself the following question: In a failed state, which is more incompetent branch of government; the central bank or the legislature?"

     "Yes, the Fed is bad. But Congress is downright ugly. Deep down most economists are technocrats. They see the central bank as being the best and the brightest, the guys who are above politics, who will “do the right thing.” And how do economists view our Congress? The terms ’stupid’ and ‘incompetent’ don’t even come close to describing the disdain. So are we supposed to change our textbooks in such a way that the fiscal multiplier is no longer zero under an inflation targeting regime (as the new Keynesians had taught us for several decades?) And on what basis? Because the Fed might be so incompetent that we need Congress to rescue the economy? In what world does that policy regime actually work? If you have a culture that has its act together, such as Sweden or Australia, the central bank will do the right thing. If not, then all hope is lost."

    Ok. The central bank will do the right thing. If not all hope is lost. So if it doesn't do it's job we still don't do fiscal stimulus. We let ourselves go into another Great Depression rather than do fiscal stimulus.

     Back to Sumner:

     "And it’s even worse than that. DeLong and Summers seem to make the common mistake of assuming that as long as the monetary authority is not doing its job, we can assume the fiscal multiplier will be positive, as fiscal stimulus won’t be offset by monetary tightening. But that’s not right. It’s not enough for the monetary authority to be incompetent; they must be incompetent in a very special way."

     So while he praises them in the first paragraph and calls their paper impressive by now it doesn't sound so impressive. They make a common mistake. How can economists with their credentials write an impressive paper that makes a common mistakes? And he says that their policy prescriptions are for a banana republic. Oh, and, by the way, the name of this post is "Banana republic watch."

   "If we are going to teach our students how to “do the right thing,” we need to start by eliminating “depression economics” from the curriculum. Start with the fact that what Krugman calls “depression economics” should actually be called “expected depression economics.” That’s because fiscal stimulus acts with a lag that is just as long as monetary stimulus. (Here and here I argued monetary lags are surprisingly short.) So it doesn’t matter where the economy is right now, but rather where it will be in 12 months. Monetary policy should always be set in such a way as to produce on-target expected NGDP growth. That’s the Lars Svensson principle. If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed. With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world. Spending has opportunity costs. Unemployment compensation discourages work. Saving boosts investment. Protectionism is destructive. And so on. That’s the policy we should be teaching our grad students. The optimal monetary policy. Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress. As far as I can tell, those countries don’t exist."

    Hmmm. Delong and Summers aren't concerned enough with doing the right thing.  Still Scott leaves them on a high note:

    "Just to reiterate, this post is a not a comment on the core of D&S. I’m not qualified to judge their model, but it looks fine to me. I just don’t buy the assumption that motivates the entire exercise."

     Ok. I mean, nothing blistering about that. This is what I mean about his ace serves. He starts by saying it's an impressive paper but that he objects to the political culture that generated it. He promises not to trash the paper. Then he writes a post that actually turns out to be quite blistering. Then at the end he admits that he's not qualified to judge their model but it looks fine. He's basically trashing their paper-which in the first paragraph he vowed not to do-because he dislikes their assumption. You might think he needs to follow the model to tell you whether it's right or not. But he just knows they can't be right before he even starts reading it. Yet he says he "listened respectfully" to it.