This is always an issue near and dear to his heart. Sumner's main thrust is the usual claim that the fiscal multiplier is zero-or close enough to it-even at the Zero Bound. Still while he writes about the alleged zero multiplier often the title of this piece gives it a sweeping mission: to convince us that "Keynesian economics" is fundamentally flawed.
http://www.themoneyillusion.com/?p=20017
He admits that how you define "Keynesian" is quite varied. However, as usual, he prefers to speak to what he calls "intelligent Keynesians"; by intelligent Keynesians he means New Keynesians who basically accept that the fiscal multiplier is in fact zero the overwhelming majority of the time. The only time an NKer doesn't think the multiplier is zero is at the ZB, when nominal interest rates are close to zero.
So Sumner's argument is simply with the 'intelligent Keynesians" who think that fiscal policy is usually ineffective accept at the ZB. This sets up his task as simply proving that in fact the multiplier is zero at the ZB as well, which he argues it is provided the Central Bank does it's job. Note that those who would want to argue with him whether it's even zero above the ZB are out of the conversation. If you believe anything like that you are simply a caveman and not part of any intelligent conversation.
Regarding the ZB, his argument is that while the NKers think that here the Fed has mostly "shot its wad" as nominal interest rates are zero, he argues that there are other things the Fed can do. Of course one thing the Fed can do is QE and we are now in the fourth round of that.
However, Sumner in this post makes the counterfactual argument that had Obama not done his stimulus in 2009 the Fed would have done more. Essentially the Sumner Critique comes down to this. Monetary policy will always be tighter in case of fiscal stimulus than it otherwise would have been provided the CB isn't "incompetent."
What makes a CB "incompetent" however? This actual ly depends on the CB's policy does it not? If the CB is a inflation targeting regime-where inflation is it's first and biggest concern-then you can argue that if the Fed is doing it's job effectively, it will cancel out any positive effects of a fiscal stimulus with a tighter monetary policy.
However, did the Sumner Critique hold for the Marriner Eccles Fed? No, because Eccles wasn't pursuing inflation targeting. It seems to me that the SC only holds in the post Volcker era.
Remember, that the really clever part of Sumner's critique is that he isn't necessarily saying the Fed will make a decision to tighten in the face of new stimulus. He's simply making the counterfacutal argument that had the fiscal authorities not passed stimulus, the Fed would have had even looser monetary policy.
This makes it harder to refute the SC: after all, how do we know what the Fed might have done in 2009 had we not had ARRA? Sumner doesn't even see the fact that Bernanke asked for fiscal stimulus as upsetting his argument. He seems to conclude that Bernanke simply doesn't know his own strength.
Sumner's argument is that even if the Fed doesn't do anything active to offset the stimulus it might have done more if there wasn't any. Of course, he presumes that all things being equal, monetary easing is always preferable to fiscal stimulus as the latter gives us more "costly government debt.'
He imagines a counterfactual where the Fed faces incredible pressure to do something as the fiscal authorities failed to do anything in 2009. Note that Bernanke would not have welcomed this failure. However, Sumner thinks this would have forced him to do the right thing.
Ultimately he imagines the optimum policy would have amounted to a 2% level target of the price level. Supposedly this would have led to a bigger surge in AD than what we did get: the $800 billion dollar stimulus and QE.
He expects an awful lot from just the words, "We will pursue a 2% level target in the PCE." That is the claim however
Not that I write equations but his claim could be represented this way:
F+M<M
specifically the ARRA and QE do less for AD than simply having the Fed declare it will do a level target of 2% of the PCE.
The whole thing is unfalsifiable and circular. If NGDP is not at a level the fed didn't do enough; there is no proposed way to measure the fed's actions except by NGDP. Along with this, Sumner proposes unverifiable counterfactuals and effectively labels anyone who disagrees as stupid.
ReplyDeleteTo put it bluntly: Sumner, like Friedman, is a propagandist. Attaching labels to people he disagrees with; playing the downtrodden minority in economic debate, all while offering scant evidence or rigorous propositions that support his hypotheses. He even makes sweeping, arrogant statements like "in 100 years the EMH will still be taught," because he honestly believes his own crap.
I do not have the patience for these word games and rehtorical tricks, but try this: ask him for a single, falsifiable proposition about NGDP targeting (and, if possible, the EMH).