These are the words of Unlearning Econ and I got so say I'm amped. This is the best moment for me since-a few weeks ago when Delong linked me...
http://diaryofarepublicanhater.blogspot.com/2013/07/larry-kudlow-krugman-delong-and-day-i.html
Ok. I think you knew I was going to use this moment as an excuse to link to that again!! I do also really appreciate UL's kind words regarding my post today.
http://diaryofarepublicanhater.blogspot.com/2013/08/then-how-do-you-explain-zimbabwe.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
I'm also grateful for his post because we really do need it. I think that it's vital that Market Monetarists be fully questioned and really explain themselves as they've made some pretty big claims. I like many of them personally-though Sumner himself, I've not always gotten along with so well-but it's important to really not fall for a bill of goods here as we have often done in the past.
I must admit that there is something very seductive about MM-it's the intuitiveness of it plus the simplicity. It's a very simple idea-just have the Fed stabilize NGDP-and we'll basically have defeated the business cycle. If you think I'm exaggerating in claiming that the MMers think that NGDPT will more or less end the problem of the business cycle see Sumner here:
http://www.themoneyillusion.com/?p=14433
Yet, what we should know even by reading Kant-perhaps he was the first to point to this problem-is that something can be highly intuitive and yet be wrong. In the 60s and 70s Friedman's claims were highly intuitive-his talk about steady money supply growth which turned out to be totally erroneous; as well as when he and Lucas claimed that only unexpected monetary changes had any effect, while we now know that it's even the opposite: expected changes have more impact than unexpected ones.
I think that UL's piece may even be pretty comprehensive. I mean the MM playbook is pretty standard. They start with the NGDPT proposal-which implicitly assumes that NGDP is the main driver of the economy; UL even questioned this which is good, as they normally don't even provide any explanation for this.
At first they make it sond like it's mostly going to happen through expectations If pushed they say through the 'Hot Potato Effect.' As UL argued in the comments section at his blog, that's not really a transmission mechanism.
http://unlearningeconomics.wordpress.com/2013/08/09/pieria-article-against-ngdp-targeting/#comments
More importantly as money is actually endogenous the HPE doesn't work as the banks don't lend out money but rather create money when giving credit to credit worthy borrowers. Once you get here, then their arugment shifts to 'Well what CB has ever desired to create inflation and failed?! After all, just look at Zimbabwe.'
This is another red herring as hyperinflation is not caused by wild-eyed Keynesian money printing but due to political instability that ultimately takes away any trust in the nation's currency. Then of course they will if all else fails argue that surely if the Fed just 'buys up everything' it can create inflation. Yet such an argument smacks of desperation besides the fact that it's not clear why these opponents of fiscal policy would develop an aneurysm if the Treasury were to do the very same thing. It makes you wonder why the CB buying up bonds is virtue itself, while the Treasury selling bonds is vice itself.
I think this list is pretty comprehensive-this is most every Market Monetarist argument. I'm trying to think iif there are others I'm forgetting but this is the main body. I have to laugh as UL-who was pretty businesslike and tactful in his piece in Pieria-confided at his own blog that it was tough to be:
"I temper my criticisms of market monetarism in the piece, but to be honest I find the whole thing pretty worthless. Market monetarists continually evade pertinent criticisms from MMTers and endogenous money theorists, who point out that things simply do not work the way they think they do. Any attempt at a serious discussion of transmission mechanisms is met with ‘expectations!‘ as if expectations are a magic wand and not simply a reflection of the actual behaviour of the economy. Scott Sumner in particular refuses to discusstransmission mechanisms or engage the Lucas Critique, and seems to be more concerned with making out he is an oppressed minority than actual arguments."
http://unlearningeconomics.wordpress.com/2013/08/09/pieria-article-against-ngdp-targeting/#comments
He's exactly right-Sumner has long since declared endogenous proponents as sort of 'intllectual untouchables' what Rorty-Sumner says he's an admirer of Richard Rorty- would call 'unaccetable conversational partners.'
http://www.themoneyillusion.com/?p=3973
However, this piece got Sumner out of the woodwork. So does he go beyond the small toolbox above? No. He denies he has no transmission mechanism though as UL points out he's argued against the importance of a TM in the past and insists he does have one-the Hot Potato Effect.
The fundamental transmission mechanism is not expectations, it’s the hot potato effect. But expectations are very important in any sensible model, including NK models. Still everyone agrees that in the end expectations must be about something. It’s absurd to say I don’t talk about transmission mechanisms. And no, RGDP did not move ahead of NGDP in the recent crisis. Both collapsed between June and December 2008, using monthly estimates from Macroeconomics Advisers. So your facts are wrong. Is that all you’ve got?
Actually, Scott, I'm asking you the same thing. Next you'll be telling us that, anyway, no CB ever failed in creating inflation-after all, how do Keynesians explain Zimbabwe?
P.S. I think I got to get Unlearning's words onto my front page...
P.S.S. Again, the MM reporotire is very simple/ NGDP level targeting will solve the business cycle via:
1. Expectations
2. The Hot Potato Effect
3. Zimbabwe
4. But surely if the Fed buys up everything we'll get some inflation?
http://diaryofarepublicanhater.blogspot.com/2013/07/larry-kudlow-krugman-delong-and-day-i.html
Ok. I think you knew I was going to use this moment as an excuse to link to that again!! I do also really appreciate UL's kind words regarding my post today.
http://diaryofarepublicanhater.blogspot.com/2013/08/then-how-do-you-explain-zimbabwe.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
I'm also grateful for his post because we really do need it. I think that it's vital that Market Monetarists be fully questioned and really explain themselves as they've made some pretty big claims. I like many of them personally-though Sumner himself, I've not always gotten along with so well-but it's important to really not fall for a bill of goods here as we have often done in the past.
I must admit that there is something very seductive about MM-it's the intuitiveness of it plus the simplicity. It's a very simple idea-just have the Fed stabilize NGDP-and we'll basically have defeated the business cycle. If you think I'm exaggerating in claiming that the MMers think that NGDPT will more or less end the problem of the business cycle see Sumner here:
http://www.themoneyillusion.com/?p=14433
Yet, what we should know even by reading Kant-perhaps he was the first to point to this problem-is that something can be highly intuitive and yet be wrong. In the 60s and 70s Friedman's claims were highly intuitive-his talk about steady money supply growth which turned out to be totally erroneous; as well as when he and Lucas claimed that only unexpected monetary changes had any effect, while we now know that it's even the opposite: expected changes have more impact than unexpected ones.
I think that UL's piece may even be pretty comprehensive. I mean the MM playbook is pretty standard. They start with the NGDPT proposal-which implicitly assumes that NGDP is the main driver of the economy; UL even questioned this which is good, as they normally don't even provide any explanation for this.
At first they make it sond like it's mostly going to happen through expectations If pushed they say through the 'Hot Potato Effect.' As UL argued in the comments section at his blog, that's not really a transmission mechanism.
http://unlearningeconomics.wordpress.com/2013/08/09/pieria-article-against-ngdp-targeting/#comments
More importantly as money is actually endogenous the HPE doesn't work as the banks don't lend out money but rather create money when giving credit to credit worthy borrowers. Once you get here, then their arugment shifts to 'Well what CB has ever desired to create inflation and failed?! After all, just look at Zimbabwe.'
This is another red herring as hyperinflation is not caused by wild-eyed Keynesian money printing but due to political instability that ultimately takes away any trust in the nation's currency. Then of course they will if all else fails argue that surely if the Fed just 'buys up everything' it can create inflation. Yet such an argument smacks of desperation besides the fact that it's not clear why these opponents of fiscal policy would develop an aneurysm if the Treasury were to do the very same thing. It makes you wonder why the CB buying up bonds is virtue itself, while the Treasury selling bonds is vice itself.
I think this list is pretty comprehensive-this is most every Market Monetarist argument. I'm trying to think iif there are others I'm forgetting but this is the main body. I have to laugh as UL-who was pretty businesslike and tactful in his piece in Pieria-confided at his own blog that it was tough to be:
"I temper my criticisms of market monetarism in the piece, but to be honest I find the whole thing pretty worthless. Market monetarists continually evade pertinent criticisms from MMTers and endogenous money theorists, who point out that things simply do not work the way they think they do. Any attempt at a serious discussion of transmission mechanisms is met with ‘expectations!‘ as if expectations are a magic wand and not simply a reflection of the actual behaviour of the economy. Scott Sumner in particular refuses to discusstransmission mechanisms or engage the Lucas Critique, and seems to be more concerned with making out he is an oppressed minority than actual arguments."
http://unlearningeconomics.wordpress.com/2013/08/09/pieria-article-against-ngdp-targeting/#comments
He's exactly right-Sumner has long since declared endogenous proponents as sort of 'intllectual untouchables' what Rorty-Sumner says he's an admirer of Richard Rorty- would call 'unaccetable conversational partners.'
http://www.themoneyillusion.com/?p=3973
However, this piece got Sumner out of the woodwork. So does he go beyond the small toolbox above? No. He denies he has no transmission mechanism though as UL points out he's argued against the importance of a TM in the past and insists he does have one-the Hot Potato Effect.
The fundamental transmission mechanism is not expectations, it’s the hot potato effect. But expectations are very important in any sensible model, including NK models. Still everyone agrees that in the end expectations must be about something. It’s absurd to say I don’t talk about transmission mechanisms. And no, RGDP did not move ahead of NGDP in the recent crisis. Both collapsed between June and December 2008, using monthly estimates from Macroeconomics Advisers. So your facts are wrong. Is that all you’ve got?
Actually, Scott, I'm asking you the same thing. Next you'll be telling us that, anyway, no CB ever failed in creating inflation-after all, how do Keynesians explain Zimbabwe?
P.S. I think I got to get Unlearning's words onto my front page...
P.S.S. Again, the MM reporotire is very simple/ NGDP level targeting will solve the business cycle via:
1. Expectations
2. The Hot Potato Effect
3. Zimbabwe
4. But surely if the Fed buys up everything we'll get some inflation?
If the Fed buys up everything the level of inflation would be determined by the price they pay.
ReplyDeleteIf every good that was sold last year were sold this year..... to the Fed... and they paid the same price then inflation would be zero.
What is interesting to think about is how such a scenario might actually play out. Lets say the Fed stated that as of next Monday they would purchase everything and just distribute it to us and they will do this for a year. We have to spend no money we just receive some income for whatever we sell; labor, apples,computers... . Dr Johnny gets a payment from the Fed for his service and Mike the mechanic just gets a deposit in his account when he fixes a car. All items at stores are simply bought up and distributed to the people who would have bought them. After a year the only way we can have inflation relative to previous year is if the same number of goods are sold but at a higher price, if we sell more goods at the same price we have an increase in RGDP (Growth/output)but no inflation. If we sell more goods at a higher price we have both.
Of course the first three have no predictable affect on inflation and this last one, while you can get all the inflation you want, it would be a pretty crappy economy to live in.
Thanks Greg for the very interesting thought experiment. So what happens is we again purchase everything but this time not through the Fed but through the Treasury. How much difference does this make?
ReplyDelete" So what happens IF we again purchase everything but this time not through the Fed but through the Treasury. How much difference does this make?"
DeleteI think it makes none. Except that under current accounting we would have an annual defict exactly equal to GDP.
Right. Sumner would think that this would make all the difference in the world. If the Fed does it it's great if the Treasury does it it's the end of the world as interest rates will go through the roof and we'll have to raise taxes by the same amount.
ReplyDelete