I think this is interesting as it gets at what his appeal is I suspect for many. Like Tom Brown for example. Not to pick on my good friend and Diary reader but I'd say that his attitude is something Sumner no doubt would welcome. He believes Scott clearly and doesn't buy my skepticism.
"Also, I'm going to say that it's quite possible to be a liberal MMist: you could be all for more gov involvement in things and still think that monetary policy using NGDPLT trumps fiscal policy every time for the purpose of avoiding unnecessary recessions or depressions (caused by shocks)."
http://diaryofarepublicanhater.blogspot.com/2014/01/is-there-such-thing-as-liberal-market.html
I think the kind of comment he writes here explains a big part of it.
"Edward Prescott played a pivotal role in developing real business cycle theory in the late 1970s and early 1980s. Prescott claimed that monetary shocks did not have significant effects on real output. At about the same time both monetarist and Keynesian economists were arguing that if the Fed brought the rate of inflation down rapidly, unemployment would soar much higher in the short run. The monetarists claimed unemployment would later fall back to the natural rate, even if inflation stayed low. The Keynesians were less sure about that."
"Also, I'm going to say that it's quite possible to be a liberal MMist: you could be all for more gov involvement in things and still think that monetary policy using NGDPLT trumps fiscal policy every time for the purpose of avoiding unnecessary recessions or depressions (caused by shocks)."
http://diaryofarepublicanhater.blogspot.com/2014/01/is-there-such-thing-as-liberal-market.html
I think the kind of comment he writes here explains a big part of it.
"Edward Prescott played a pivotal role in developing real business cycle theory in the late 1970s and early 1980s. Prescott claimed that monetary shocks did not have significant effects on real output. At about the same time both monetarist and Keynesian economists were arguing that if the Fed brought the rate of inflation down rapidly, unemployment would soar much higher in the short run. The monetarists claimed unemployment would later fall back to the natural rate, even if inflation stayed low. The Keynesians were less sure about that."
"In 1981-82 the Volcker Fed did bring inflation down very sharply, and unemployment soared to 10.8%, the highest rate since 1940. How did this event affect Prescott’s views? This is from the same NYT column:
Edward C. Prescott, who won the Nobel in economic science in 2004 and is on the Minneapolis Fed’s research staff, said Mr. Kocherlakota was misjudging the Fed’s abilities. “It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed,” Professor Prescott, also on the faculty of Arizona State University, wrote in an email. Bond buying, he wrote, “is as effective in bringing prosperity as rain dancing is in bringing rain.”
"Well that settles it."
I see this kind of thing as a brilliant flourish by Sumner who gets credit among the Mushy Middle types for knocking both sides. Yes he gives Krugman and the Keynesians hell but he calls out a RBCer like Prescott as well so he's therefore a straight shooter and an honest broker. What I think it really does though is disguise his real position and his real objectives. It makes it seem that there's a lot more daylight between Sumner and Prescott than there really is.
Sumner would no doubt scoff that he's for NGDPLT futures and believes in the great power of the central bank to give the economy any level of AD it needs whereas Prescott denies monetary policy has any power at all.
Yet, I think that in truth Prescott and Sumner are very close. The seemingly wide differences over monetary policy is more about a difference in means than a difference in means. At the end of the day both men want one thing more than anything: to shrink the size of government. Everything else is window dressing.
Or consider what Stephen Williamson said about Prescott and what would have been his relationship to Milton Friedman if the latter were still alive today:
"Friedman was of course a big advocate of laissez-faire, but not in monetary arrangements - he thought the government should be the monopoly supplier of currency, and that the central bank had an important role to play. We may now consider some of his monetary policy prescriptions wrongheaded, but if Friedman were alive and were Prescott's colleague, he would be giving him a hard time over lunch."
However, the important point is that they'd be eating lunch together-would they eat lunch with Krugman or Delong? This is what intimate friends do not adversaries. In fact Friedman and Prescott differ not a wit with respect to ends-both wanted to shrink the size of government. So they had the same end but argued about the means. So to with Hayek and Friedman who were close friends and both frequent visitors of both the Reagan White House and Margaret Thatcher over at Downey Street.
So they agreed in politics no matter what their apparent fissures on economics. Freidman and Hayek were also good friends. Question: which is the authentic conservative position-Austrainism, RBC, or Monetarism? Answer is they all are. These rival Right wing schools only seem to be in conflict. In point of fact they're complimentary. Put it this way. Do you have a better chance winning a race of 10 horses with 1 horse in the race or 4? Whether Austrianism RBC, or Monetarism win it's the same result: a shrinking in the size of govt.
For folks like Tom Brown,-basically a nice Centrist guy, who's not political- Market Monetarism may seem very remote for Austrianism or RBC. In a sense I guess you could argue that Monetarism is the extreme Left of conservative economics. However, this is only true with regard to means not ends.
This point is brought home in reading Tom Sargent in his Rational Expectations and Inflation.' In chapter 2 he's apparently pretty critical of the Reagan regime as he argues that the monetary and fiscal policy of the Reagan White House was in conflict-it was a present issue at the time as he wrote in the mid 80s. We had monetary tightening and deep fiscal deficits thanks to the Reagan tax cuts-he doesn't mention the huge military buildup here.
In this, Sargent-the Right wing New Classical economist-seems to be critical of the Right wing Reagan Administration. Yet it''s not that straight forward.
Sargent talks about different fiscal regimes. There's a Ricardian regime that believes that fiscal deficits can't be inflationary because the assumption is that the monetary authority will monetize none of the deficit and the fiscal authority won''t borrow more public debt in the future but will at some point raise taxes to pay for 100% of the deficit.
Another fiscal regime is a Milton Friedman regime-Friedman proposed this back in 1949 where fiscal deficits are always fully monetized so that whatever the fiscal deficit, the Fed prints money to fully monetize the deficit-which Sargent calls an inflation tax.
There is a kind of intermediate regime that thinks with a deficit the Fed will probably partially monetize it, the govt will only partly raise taxes. In any case, Sargent seems to be critical of Reaganism's mix of tight monetary policy with deep deficit spending. However, he then suggests an alternative theory where there are three players. The spending authorities, the taxing authorities, and the monetary authorities.
In this case, the taxing and monetary authorities are in collusion against the spending authorities with the aim of cutting govt. spending.If you adjust this to say not 'spending' but 'nonmiliaary domestic discretionary spending' then I'd say this interpretation is dead on.
Prescott nominally claims to not be comfortable with this out of concern that this will lead to uncertainties for the market with such enigmatic monetary and fiscal arrangements. Still, at the end of the day, he shares the common Right wing aim of shrinking the size of govt. So I maintain that the difference is about means not ends. And having different theories about means out there gives the Right more horses in the race. You could say if you were a Right wing strategist who wants to see the size of govt shrink over time it'd be in your interest to have all these various Right wing theories in the 'marketplace of ideas.'
After all, this is what Mt. Pelerin basically was-and is where Neoliberalism was hatched.
P.S. In discussing Raicardian Equivalence we're of course reminded of Cochrane's talk of 'shlock economics' back in 2009 and how the fiscal stimulus wouldn't work thanks to full RE. However, to believe in the Ricardian fiscal regime means that fiscal policy can't be inflationary so why was he and Lucas also concerned about inflation?
