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Tuesday, February 25, 2014

Scott Sumner's Dream Walking: Ramesh Ponnuru on Monetary Offset

     Did you ever see a dream walking? This was the title of one of the late conservative writer William F. Buckley's last books.


     http://www.amazon.com/Walking-American-Conservative-Thought-Twentieth/dp/0672512408/ref=sr_1_1?s=books&ie=UTF8&qid=1393349454&sr=1-1&keywords=william+f.+buckley+dream+walking

    
  Sumner gets to say yes after this piece by the National Review's Ponnuru-the NR being Buckley's baby appropriately enough. 

      
   "On the fifth anniversary of President Barack Obama’s fiscal stimulus, defenders of the policy were out in force making the case that it worked. Most of their arguments failed to address the strongest reason for doubting that it did much good."
 



      "That reason has to do with the Federal Reserve. To the extent that the central bank has a target for inflation (or nominal spending), and has the power to hit that target, the Fed constrains the power of fiscal policy. If Congress tries to stimulate the economy during a slump, for example, the Fed will offset that stimulus by loosening money less. Some of this offsetting will actually be automatic, based on market expectations that the Fed will stay on target."
      "It's likely that if Congress hadn't enacted a large stimulus, the Fed would have done more quantitative easing early on, lowered interest on reserves or taken some other expansionary step.Here is some evidence that when you take account of this possibility, fiscal stimulus has no effect."
 
    http://www.bloomberg.com/news/2014-02-24/what-defenders-of-obama-s-stimulus-don-t-understand.html

    I've said how many times that this is the real Sumner endgame-to empower the Right against Keynesianism and ultimately shrinking the size of government. 

      Notice how he thinks that Sumner has given him the best reason to oppose fiscal stimulus-he thinks this is better than other arguments like Ricardian Equivalence and 'crowding out.'  So we should have not had a stimulus because then we could have had even more QE-we haven't had much, only three rounds, with a Fed balance sheet that has tripled, but clearly that fiscal stimulus had a chilling effect on the economy even if it was mostly tax cuts anyway-rather than spending on goods and services. 

     This is a very aggressive argument in that it's going as far as arguing for a 'negative multiplier'-if we had no stimulus in 2009 there would have been more QE that year-though we have actually now had 3 rounds of it-and the economy would have grown faster than it did. After all, unless you can show that the economy would have grown faster with more jobs with even more QE and even less fiscal stimulus-since 2011 U.S. fiscal policy has been contractionary-there's no good argument that we shouldn't have had it-Sumner always argues that fiscal stimulus would add to the debt but with record low interest rates this would have been the time to do it.

     This is what I've said repeatedly-the goal of Market Monetarism is to give aid and comfort to the Ponnurus-and Buckleys of the world. Tom Brown and others have argued that it's possible to have a liberal MMer. If so such souls must be extremely shortsighted.

    We recently had an argument over some stuff Robert Barro wrote that makes it sound like he doesn't understand the demand side of the economy. It seems to me that what he has written in recent years makes it sound like he doesn't.

   http://www.themoneyillusion.com/?p=26016

   However, he does sound like he understood it in 1975, it's true.

   http://www.amazon.com/Money-Employment-Inflation-Robert-Barro/dp/0521209064/ref=sr_1_8?s=books&ie=UTF8&qid=1393349325&sr=1-8&keywords=robert+barro

   Still, as I've said previously is that this is the brilliance of Monetarism in general. It's a Trojan Horse for Keynesianism as it acknowledges the demand side of the economy yet it still managers to come up with a theory rabidly anti Keynesian.

     

9 comments:

  1. Market monetarists could easily lay claim to being the most realistic and practical of the economic schools if they'd just admit that monetary policy is credit policy , and then incorporate that into their ngdp-targeting concept.

    By targeting ngdp at a certain growth rate , say 5% , and specifying a range of safe allowable leverage across the economy , say 150-180% , you then know you want to see a steady-state growth of new credit at ~7.5-9.0 % as a share of ngdp per year.

    You accomplish the dual goals of "great moderation"- type growth and financial stability by hitting your ngdp and leverage targets. Easy-peasy , and when people see the results , you're a hero. Not a mere 'maestro' - more like The Second Coming.

    There's a catch , of course. Times will arise , due to animal spirits and such , when the private sector refuses to take up new credit at the specified rate. The public sector could step up its deficit spending to fill the gap , "crowding-in" the necessary ngdp growth until the private sector gets out of its funk. This is pretty much how the economy functioned during the Golden Years after the war , and most everyone would kill to get that kind of performance back.

    It's only the MM's unhinged hatred of Keynes and gov't spending that keeps them from certain fame and fortune. Instead , they'll be a mere footnote in some dusty old economic history text of the future. What a shame.

    Marko

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  2. You're not Markos of Daily KOS are you-look at me daring to dream. Sumner would certainly object to your description of how NGDPLT works-as basically shoring up the credit channel. He has a new post that again rejects this way of looking at it-the credit channel for him is 'real' but it's nominal shocks that matter with monetary policy.

    http://www.themoneyillusion.com/?p=26213

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    1. Nope. Sorry , can't help you at Daily KOS.

      Sumner would never admit that monetary policy is almost entirely about credit , of course. Central bankers are well aware of it , and occasionally even say so , in unguarded moments. Their actions are more revealing , however , like "Funding for Lending" in the UK , similar programs by the BOJ , and MBS purchases here. Finance and investment professionals follow credit flows , and thus associated central bank moves , carefully , because their paychecks depend on it. Sumner and his gang quote Hatzius approvingly when he praises ngdp targeting , but they must wince when he talks about the credit impulse.

      Who knows? Maybe Sumner's paycheck depends on his denying the role of credit. He wouldn't be the first economist to sell out.

      Sumner sees no problem with ever-rising debt/gdp ratios. Of course , with ever more negative real interest rates , the debt/gdp ratio could rise to infinity , in theory. However , your economy would be one big mess of evergreened zombie companies and Ponzi schemes. That would probably suit him just fine , too.

      Marko

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  3. Ok so you'r not Markos. I guess I like you anyway! Bernanke himself talks about the 'credit channel.'

    http://diaryofarepublicanhater.blogspot.com/2014/02/sumner-on-credit-channels-and-monetary.html

    Sumner's basic premise is that the business cycle is due to sticky prices-so a recession is due to nominal shocks. His theory is that demand shocks are nominal and supply side shocks are real.

    Basically he denies that any real phenomena matter for monetary policy-so something like the credit channel is just an epiphenomenon. As for the debt to gdp ratio-are you thinking about private debt or public debt-there's a big difference. He certainly doesn't care about private debt to GDP and would see that as more 'real phenomena' that doesn't matter in questions of increasing demand.

    He does say public debt is a problem which is why he supports fiscal contraction.

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    1. Private debt is more significant because the debt stock is ~ twice as big as public , but both matter. Most people accept the concept of a fiscal impulse , including , as mentioned above , people like Hatzius at Goldman. If you go from a 3% of gdp budget surplus in year 1 to a 2% surplus in year 2 , you get a 1% impulse. Similarly in going from a 2% deficit to a 3% deficit. That money spends into the economy just like private debt. Whether it converts efficiently into gdp depends on a lot of things , just like for private debt. Some of it , maybe most these days , ends up in asset prices.

      The real vs nominal is smoke and mirrors. If you take out a loan tomorrow for $10K , it's $10K real and $10K nominal. Everything that happened in the past is nominal and everything current is real.

      The MMs can't explain transmission for squat. They fall back on stuff like "wealth effects" , until someone points out that the numbers don't add up. Then they say "long and variable lags" . Ha!

      The credit channel is their worst nightmare , and it's not going away.

      Marko

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  4. What is fiscal impulse-I''ll show my ignorance

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    1. Let's say the gov't runs a $300 billion deficit in year one. If it had $10 trillion in debt at the end of the previous year , it now has $10.3 trillion , so the change in debt is $300 billion. In year two the deficit is $600 billion , so the change in debt this time is $600 billion. The fiscal impulse is the change in the change , or $600-300 = $300 billion , which represents the true "stimulus" , since the first $300 0f the $600 would only have equaled the previous year's deficit expenditure , so wouldn't be expected to contribute anything extra to gdp.

      The credit impulse is the same thing except using private debt. The figures are usually normalized to gdp so as to give a more meaningful measure of expected economic response.

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  5. On real vs. nominal isn't it true though that the real value of your debt is the interest rate minus the inflation rate?

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    1. Yes , but the point is that reducing the real value of ever-increasing debt burdens requires ever-declining real rates. That's how we've managed to keep financial obligation ratios in a bearable range since 1980. See how the fed funds rate has had lower and lower peaks and valleys over time , as the debt/gdp burden has gone up ( interest rate scale is inverted , on right ) :

      http://s1.ibtimes.com/sites/www.ibtimes.com/files/styles/v2_article_large/public/2014/01/21/debt-real-fed-funds-1981-2014-societe-generale-research-note-jan-21-2014.PNG

      The question to ask yourself is what happens from here on out. Do you not think that a regime of increasingly negative real rates , as an accepted long-term policy , will influence economic incentives and activity ? Failing firms and malinvestment will no longer be discouraged - bad debts will get rolled over indefinitely. Firms will borrow to buy back stock , driving up the price to the benefit of the few at the top ( sound familiar ? ).

      True "investment" will be for suckers - the only game in town will be capitalizing on falling real rates.

      Show me an economy in the history of the world that has done well under such a system long-term. If you can't do that , you have to hope that we'll be the first one ever , or you have to accept the anti-Sumner , and common-sense , proposition that debt ratios matter , and can't grow forever.

      Marko

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