There Sumner Goes Again Announcing that Keynesianism is Dead

      However, this news seems a little exaggerated. How big a coffin does Keynesianism have? Every few weeks he's claiming it has another nail in its coffin. It is  possible there's some confirmation bias here?

     "To say that today was a bad day for Keynesian economics would be an understatement.   Two more developments undercut the entire rationale for fiscal stimulus."

     1.  The ECB cut rates by another quarter point. For those not keeping score at home, here are the ECB rate cuts that have occurred since the summer of 2011:

Deposit rate down 75 basis points.

Main refinancing operations rate down 125 basis points.

Lending rate down 150 basis points.

     "Recall that in 2011 Keynesians like Paul Krugman were saying the fiscal austerity was slowing growth in the eurozone, but only because the ECB was stuck at the zero bound. I suppose some people might try to argue that 1% or 1.5% interest rates are fairly close to the zero bound. Sorry, but that argument won’t work. As long as the ECB is raising and lowering interest rates they are effectively steering aggregate demand, and fiscal policy is fully offset by monetary policy. You might not like the direction in which the ECB was steering inflation and nominal GDP.  I certainly agree with Krugman that it was far too contractionary. But the fact remains that as long as they are steering aggregate demand then fiscal policy is completely ineffective."

     http://www.themoneyillusion.com/?p=24616

      So now just the fact that the ECB has made monetary policy moves at all proves Sumner right? The fact that the ECB is able to raise or lower the interest rate is all the proof needed to disprove Keynesianism?  Then he claims that because the U.S. economy grew by 2.8% this proves Keynesianism is wrong, presumably because it could possibly have grown 2.8% if the sequester hurt the economy in anyway at all. 

      "The Keynesian model tells us nothing about fiscal austerity in the eurozone, because they have not been at the zero bound for most of the past five years. And it tells us nothing about fiscal austerity in the United States because (despite the zero bound) the Fed has used QE and forward guidance to offset the fiscal austerity of 2013."

     How has he shown that it was fully offset? As for the ECB it's not clear why this vindicates him. Yes, the interest rate was above zero but remember this idea that you only use fiscal policy when we're at the zero bound is more like the view of the bastard Keynesians of the Neoclassical school. 

    Keynes himself wouldn't have agreed with this:

    "The preceding analysis may make it appear to be in conformity with the view of those who hold that over-investment is the characteristic of the boom, that the avoidance of this over-investment is the only possible remedy for the ensuing slump, and that, whilst for the reasons given above the slump cannot be prevented by a low rate of interest, nevertheless the boom can be avoided by a high rate of interest. There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest is against a slump."

      "To infer these conclusions from the above would, however, misinterpret my analysis; and would, according to my way of thinking, involve serious error. For the term over-investment is ambiguous. It may refer to investments which are destined to disappoint the expectations which prompted them or for which there is no use in  conditions of severe unemployment, or it may indicate a state of affairs where very kind of capital goods is so abundant there is no new investment which is expected, even in conditions of full employment. It is only the latter state of affairs which is one of over-investment, strictly speaking, in the sense that any further investment would be a sheer waste of resources. Moreover, even if over-investment in this sense was a normal characteristic of the boom, the remedy would not like in clapping on a high rate of interest which would probably deter some useful investments and might further diminish the propensity to consume, but in taking, drastic steps by redistribution, incomes or otherwise, to stimulate the propensity to consume."

       "Thus the remedy for the boom is not a higher rate of interest, but a lower rate of interest!" 

         I submit that the EU technically being above the ZLB in now way harms the fellow who wrote these words in any way. 

         It's gotten so bad over at Sumner that Geoff-aka Major Freedom-as become the voice of reason:

         This blogpost is misleading of Sumner’s beliefs.

The title suggests that Keynesianism suffered a blow empirically, that is, due to specific past observations and relations between variables.

But Sumner’s actual view about monetary policy is a priori. For when he says:

“I certainly agree with Krugman that it was far too contractionary. But the fact remains that as long as they are steering aggregate demand then fiscal policy is completely ineffective”

He is not actually claiming fiscal policy effectiveness is conditional on monetary policy “steering” or “not steering” aggregate demand. Despite the argument, in his view monetary policy is always steering aggregate demand. Even if the captain is asleep and the wheel is left idle, aggregate demand is still being determined by the arbitrary movements of the wheel as the ship coasts along at sea.

So let’s not pretend that Sumner’s view on fiscal policy is conditioned by observable data. It is instead a method of interpreting any data whatever.

Fiscal policy to Sumner is always “ineffective” because the “real” controller is the Fed, not the Treasury. The Fed decides NGDP, not the Treasury.

     You could knock me over with a feather: Major Freedom is totally right.