Keynesianism and Sumner's Contempt

     In looking at this recent debate between Sumner and David Glasner on how much Friedman owes to Keynes, Hicks and IS-LM I had to laugh when in his latest piece Glasner observed that 'Sumner won't let it go.' 

     http://diaryofarepublicanhater.blogspot.com/2013/08/on-friedmans-keynesianism-sumner-just.html

     Of course not. He never can like the time he got in a fight with Krugman and other Keynesians back in December 2011 and January 2012-it went on for a number of weeks. As time went on Sumner got quite peevish. In one title he declared that he 'he hates all Keynesian talk.'

     http://www.themoneyillusion.com/?p=12472

    Ok, so what exactly is so mind numbingly stupid about Keynesian talk? According to him he ignores monetary offset. 

    "All Keynesian debates seem mind-numbingly stupid to me, because they leave out the essential factor; the monetary policy response to the shock.  Without knowing that we can say NOTHING about the impact of a spending shock on AD."

    So, according to him, we have to handicap any discussion of fiscal stimulus first with whether the Fed will accommodate it. That's obviously a factor but he sets it up so that monetary policy is always primary. We could just as soon ask whether fiscal policy will not sabotage monetary policy-as it largely has and Bernanke himself says. 

   http://diaryofarepublicanhater.blogspot.com/2013/05/the-fiscal-multiplier-sumner-vs-bernanke.html

   Sumner was running defense for Robert Lucas and John Cochrane who he felt had been treated wrongly by Krugman:

    "The ongoing debate about what Robert Lucas really meant couldn’t get more annoying.  The obvious solution is to do a Woody Allen/Marshall McLuhan, and just ask him.  He’s not dead yet.

The latest entry is John Cochrane, who really annoyed me by starting a new blog that I’ll need to pay attention too, even though I’m already short of time.  He criticizes this statement by Paul Krugman:

..think about what happens when a family buys a house with a 30-year mortgage.

Suppose that the family takes out a $100,000 home loan …. If the house is newly built, that’s $100,000 of spending that takes place in the economy. But the family has also taken on debt, and will presumably spend less because it knows that it has to pay off that debt.

But the debt won’t be paid off all at once — and there’s no reason to expect the family to cut its spending right now by $100,000. Its annual mortgage payment will be something like $6,000, so maybe you would expect a fall in spending by $6000; that offsets only a small fraction of the debt-financed purchase.

.   .   .

How could anyone who thought about this for even a minute — let alone someone with an economics training — get this wrong?

      "Cochrane then argues Krugman is confused about Ricardian equivalence:

So, according to Paul, “Ricardian Equivalence,” which is the theorem that stimulus does not work in a well-functioning economy, fails, because it predicts that a family who takes out a mortgage to buy a $100,000 house would reduce consumption by $100,000 in that very year.

      I have to say that revisiting this debate a year and 8 months later I still don't get it. I mean if someone takes out a home loan and buys a home are they really no better off? I mean if this is their first home they're certainly better off as they now are on their way to ownership of an asset-for most families nothing is more important than owning a home. On a macro basis, every time a home is bought this adds to our GDP. The family may have to cut back on their spending some but as long as the monthly mortgage payments aren't too high it won't cramp their style all that much. Of course, the government's finances are nothing like a household anyway. 

      If Ricardian Equivalence takes away any benefit of higher spending-or tax cuts-as it will have to be paid with future tax hikes, how do the Supply Siders have such a belief in the power of tax cuts on the rich? Then Sumner agreed with Lucas that government spending is pointless as what matters is the spending which can be done through the Fed:

      First I’ll provide Lucas’s actual statement, and then I’ll indicate what he should have said if he had known that dozens of economists would go over his off-the-cuff remarks with a fine tooth comb nearly three years later:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.

     "That’s technically incorrect, as deficits lead to slightly higher interest rates, and thus slightly higher velocity.  But in practice the change in velocity isn’t all that important, because central banks tend to target things like inflation, not M2, and hence offset velocity changes.  Here’s what Lucas should have said:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. The same is true if the Fed allows slightly higher velocity to boost inflation.  We don’t need the expensive bridge to do that. We can costlessly print up enough money to boost NGDP and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.

    "But he didn’t say that, and hence this long pointless debate over Keynesianism by economists using completely different languages, talking right past each other."

     So according to this, we have two possible scenarios, A and B. 

     A). The Fed prints up $500 billion dollars-it's printed more than this through out all the QE, etc. 

     B). The government puts up the same money and spends it out in tax cuts along with new bridges, schools and high speed rail. 

     Supposedly we're in exactly the same position after each action. All that matters is the $500 billion dollars not what they are used for. Yet, if we need more bridges, schools, and high speed rail then we are better off. Then in A the Fed buys bonds and prints money while in B the Treasury sells bonds and borrows money.  Another tricky point is does it matter where money enters the economy? The Monetarist answer is no. If the Fed spends $500 billion on mortgage backed securities that has the same exact impact as if the Fed printed $500 billion dollars of checks and sent them to each American household. 

      Of course, this sounds more like a fiscal action.