A Scott Sumner-Scott Fullwiler Grudge Match Revisited

       Sumner hasn't written in almost a week which is an eternity for him. I don't  know if he's ever gone this long without writing since he started his blog in 2009, though I doubt it. At this point the site has become captured by the usual tedious rants of Major Freedom.

       Lately Sumner's seemed more cagey about comments and tends to shoot and ask questons later a lot more than he used to-and I've only read him since about October of last year (2011).

       Looking through his archives I came across the times he tried to engage the MMTers in partiuclar the time that he ended up in an exchange with Fullwiler. It seems to me he doesn't try this sort of thing any more.

       I actually had read this before but it's very striking going through it again. First of all what comes through is that everybody sort of talks past each other-it was Steve Waldman over at Interfluidity that there a lot more consense between the MMTers  and the MMers then either side would admit. I think there's truth in this-the most important similarity is that both are concerned with demand stability and think that what really matters is the total aggregate spending in the economy and both seek to stabilize this.

      Of course Sumner's MMers do this through the Fed targeting NGDP level targeting-ideally-whereas the MMTers do this via the Job Guarantee (JG) where the government gets a job for everyone who wants one-not necessarily a government job, it can be nonprofit or for that matter with the private sector and the JG jobs wage pay a very modest wage-about $8 an hour.

    This JG wage is supposed to anchor the economy's prices much as the NGDP target is supposed to do. As an addition, Morgan Warster the major commentor over at Money Illusion as his Guaranteed Income which is also very similar from another direction to JG The main diffference I can see is that he sees all the GI jobs as being private sector and finds it through a job auction.

     In this post of Sumner's he rhetorically asked if there is any other theory than the Quantity Theory of Money which can explain the price level,

     "here’s my question: Are there any non-quantity theoretic models of the price level? Theories that could explain the difference between Australian and Canadian and Japanese and Korean price levels?"

      http://www.themoneyillusion.com/?p=10116

       Of course this question assumes that MMT is opposed to the QTM, and furthermore that as there is no other way of explaining the price level, MMT's alleged opposition to the QTM is fatal and by definition sinks its entire premise.

        This post generated lots of comments. The commentator Mark S left some comments in favor of MMT:

        "Lots wrong here as usual. The QTM assumes that an increase in bank reserves will lead to increased lending and an increase in the money supply. But I’ve already taught you that banks never ever lend their reserves. That is simply not how modern banking works. Now, I know you’ve admitted that you don’t understand banking very well, but you need to stop making this assumption that more reserves = more money in the economy. It’s simply not true."

       "How do I know this? I work at a friggin bank. I know exactly how and why we loan money. And it has nothing to do with how many reserves the Fed fires into the economy. It has only to do with our capital position."

       "The QTM is wrong wrong wrong."

        Mark S. then left a link for Scott Fullwiler who had written a post in response to Sumner's. Mark S. declared:

        "Scott Fullwiler thoroughly crushes you here."

         Mark S. is a good example of the problem MMT has, I think it's fair to say, in the political realm. He's exactly the kind of snarky-and as we'll see quite uninformed poster-that does MMT a lot more harm than good. Even if they are as many in it believe Copernicans in a world of Flat Earthers their approach isn't tailored to win over as many people as it perhaps could.

         In moving to Fullwiler's post, the main point he wants to make is that Sumner by his own definition had show that MMT is not advocating highly inflationary policies:

         "Scott Sumner sets out to debunk theories of the price level not based on a form of the quantity theory of money, and lumps MMT in with those approaches that “deny open market purchases are inflationary, because you are just exchanging one form of government debt for another.” While this is true, what’s interesting is that from within Sumner’s own paradigm, MMT-related proposals should not be inflationary."

          http://neweconomicperspectives.org/2011/07/scott-sumner-agrees-that-mmt-policy.html

          So while Sumner's post is focused on the question about how you need QTM to explain the price level, Fullwiler's focus is totally different. He wants to underscore that MMTs proposals are not in Sumner's own words inflationary.

         Yet what I don't get is where Sumner said they were? Is Fullwiler directing this point to those critics who have said that MMT is about hyperinflationary policies?

          "So, in the MMT proposals, whether for functional finance fiscal operations without bond sales or basic coin seigniorage, or in our critiques of QE, we’ve always recognized that these were not operationally possible with a positive interest rate target unless interest is paid on reserve balances at the Fed’s target rate. As such, we always propose that the rate paid on reserve balances and the target rate be equal"

             So his focus in in making a point that Sumner didn't actually mention. He does, however, finish with an answer to Sumner's question about QMT:

              "Finally, just as an aside, Sumner concludes with, “So here’s my question: Are there any non-quantity theoretic models of the price level?” Of course, the price level itself can be anything depending on which year uses as a base year and the value at which the base year is set, so what’s really of interest is understanding changes in the price level instead of the level itself. Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven."

              So he does finally answer Sumner "Just as an aside" that in fact MMT is also a quantity-theoretic model of changes in the price level though with the two differences Fullwiler enumerated.

              This means a few things. First of all Mark S while an enthusiastic advocate for MMT actually doesn't understand it that well as, remember, as we saw above that he declared that QTM is "wrong, wrong, wrong." Of course he also declared he knew this because he "works at a friggin bank."

              What's more he provided the link where Fullwiler "crushed" Sumner and yet evidently didn't read Fullwiler himself at least the last paragraph or he would have seen this. Mark S. is probably not the best advocate/face of MMT. What we also see is that the premise of Sumner's question was flawed-it implied that the validity of MMT is repudiated if QTM is show to be the only explanation for the price level. As MMT actually doesn't deny QTM the whole premise of Sumner's post is wrong.

               In the comments section the two Scotts go at it some more. After a lot of going around and around, Sumner declares:

               "The whole point of my post was very clearly stated. I want to know if there are non-QTM theories of the price level. In your first reply you confused the price level with a price index. I asked you again. In this reply you didn't comment at all. Can I assume the MMTers have no theory of the price level? That's all I initially wanted to know about MMT, although I obviously appreciate your giving other info about the model."

               At this point you wonder why Fullwiler doesn't point out what he said in the post-that MMT is not non-QTM, though you also realize that this proves that Sumner didn't read the post properly any more than did Mark S, the fellow who knows everything because he "works in a friggin bank."

              The reason Fullwiler didn't point this out to Sumner til now is likely because this is not really the most important question for him-though it would have put Sumner's point to bed.

              So finally Fullwiler does point this out-again repeating himself from what he said in the last paragraph of the post:

              "as I explained in my post’s final paragraph, MMT’ers are quantity theorists—I said we have a quantity theory of AD, but I meant the price level in the language you’re more familiar with (the former is Post Keynesian language). At any rate, as I said there, we’re quantity theorists, but we just think monetarists are looking at the wrong aggregate—we prefer net financial assets of the non-government sector as our M, relative to desired net saving of the non-government sector as our V. Further, at a very basic, simplified, theoretical level, because the government sector is the monopoly supplier of net financial assets to the non-government sector, it is also the price setter (or, in more casual language, the monopoly issuer of the currency is the price setter). It’s sort of an MMT version of the fiscal theory of the price level.Finally, let me add that we don’t find a monetary base explanation of the price level useful. Aside from QE (which, again, necessitates or at least results in the overnight rate being equal the remuneration rate), the monetary base is 100% endogenous. Currency is added to circulation as the private sector desires to hold more of it via bank vault cash (which is replenished when banks purchase more from reserve accounts). Reserve balances are related to payment settlement needs and (where applicable) reserve requirements, and are provided endogenously based on demand for them. Thus, it is economic behavior that drives the monetary base, not vice versa. Certainly the desired monetary base can be affected by interest rates set by the central bank, but there again it is the effect of the interest rate on behavior that is of interest and the causative factor; the change to the monetary base in that case is largely a residual effect."

       Sumner doesn't comment again after this and yet in his next post about MMT he states this:

       "I recently did a post trying to figure out whether there are any non-quantity theoretic models of the price level. It led to one of the most intense debates I’ve ever seen in my comment section, and even other bloggers chimed in with posts. But no one came forth with a non-quantity theoretic model of the price level. It is very important that any monetary theory be able to explain why prices aren’t 100 times higher, or 100 times lower. Thus I’m more inclined than ever to think the QTM is the best starting point for monetary theory (although obviously it’s not literally true that M and NGDP grow at the same percentage rates.)"

      Again, why is he acting as if proving QTM disproves MMT as Fullwiler stated very clearly that MMT doesn't deny QTM though that it doesn't find a monetary base explanation of the price level useful?

     It seems to all point to the idea that Sumner reads what he wants to read. Nowadays he's become more rigid in listening to views he doesn't agree with-remember when he and Tyler Cowen used to knock Krugman for allegedly doing this?

    "I get crackpot theories sent to me almost every day. Many are emailed directly to me, not via the comment section. I ignore the vast majority of them. I simply don’t have time to read every book and article that is recommended. If someone wants me to read something they need to explain why it’s interesting–to perk my interest. Suggesting that monetary policy is not capable of preventing a fall in NGDP is not a good way to perk my interest—it’s so far-fetched I dismiss it out of hand. Remember Zimbabwe?"

     http://www.themoneyillusion.com/?p=15116#comment-167357

     So NGDP targeting is proved by Zimbabwe had hyerinflation? He certainly makes it easy for himself.