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Tuesday, February 11, 2014

Tom Brown Gives Us Some Scintillating Analysis on MM and MOA

     I think I've finally figured out how to make this young brother shine-I actually don't know how old he is, though he seems to me to be young at hear. The key is by writing about him and kind of calling him a little bit, he's come back hitting on all cylinders. I appreciate all this gray matter he's suddenly putting out here as what I have always wanted for this blog is to give us a place to learn-myself first and foremost. I don't think I'm anywhere near a guy with all the answers. What makes me different perhaps it that I ask questions others don't. This was true of Socrates. While I still think I disagree with Tom on Sumner and MM he writes some stuff in the latest comment streams which certainly are giving me food for thought. First a conversation he had with Greg over GDP, RGDP, and NGDP. 

    I learned something recently from Sadowski: apparently using just plain "GDP" should be read as NGDP (all this time I'd been thinking it meant RGDP). So can I replace all your GDPs with NGDPs (as Sadowski would do?). Remember a rise in NGDP can be due entirely to inflation with no change in RGDP.

    "My understanding of NGDPLT is that if done at the correct rate (5% is often cited), it mitigates the effects of nominal shocks on aggregate demand. Those shocks can cause recessions."

     "It doesn't necessary fix anything else in the economy. Sumner says you'll still have all your old supply side problems including booms and busts, etc. The idea is that NGDPLT is not a cure all, but it can help eliminate some of the unnecessary problems associated with the weirdness of money. I know the story much better from the MM perspective than any other: to an MMist, a recession is caused by an excess demand for the MOA. NGDPLT is supposed to eliminate excess demand for the MOA.|


     http://diaryofarepublicanhater.blogspot.com/2014/02/austrian-and-neoclassical-econ.html?showComment=1392138622884#c1556044252273487946

     This is something that Greg has talked about before that I've always found a little confusing. Greg himself responds to Tom here:

     "If Im reading Sadowski right I agree with him. The whole N or R should just be dropped. All measurements are N, the conversion to R is fraught with all types of problems and at times it muddles rather than helps the analysis. Just follow the numbers whether they are inflation adjusted or not..... but also look at real variables like sales and employment. If sales aren't increasing but GDP is that just means prices are going higher and no more output is being sold, which likely means no more people are being recruited to manage the output."

     I think I may be following the point here, though am not certain. I guess the idea is that when we get the prices of GDP they are by definition nominal prices. Later on we adjust them for inflation and get RGDP and inflation. If that's the argument I get it, though I still am not sure something isn't being left out somehow. Why do we have the term NGDP if GDP is NGDP?

     Tom then goes into a very fluent discussion on MOA. He's talking about a recent post by Nick Rowe. 

      "Hi Greg: I'm not sure that monetary base necessarily = demand, even in an MM universe. The reason I say that is because Nick Rowe recently did a thought experiment about a world in which the CB controls two interest rates: the IOR (which he called Rm) and the FFR (which he called Rb). He pointed out that to a monetarist such as himself, the only thing that's of macro-economic importance here is Rm, because that directly controls the "demand" for the MOA. The CB could set Rb according to some "law" (like a Taylor Rule), or choose not to set it and let it float, or even to outlaw lending altogether (Islamic style) and it wouldn't have any macroeconomic (i.e. long term) significance, because to an MMer, all you need to do is offset any nominal/monetary shocks to AD by adjusting the AD control, which could be Rm or it could be the quantity of base money. Either way. I'm not saying I agree, but that's the msg I got (and Nick basically confirmed that in a follow up answer)."

     http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/two-interest-rates-and-a-simple-question.html


      See I had read Nick's post as well but I didn't realize that Rm is actually IOR and RB is FFR.  Here's Greg's response to Tom. 

       "I think its true to them in the long term, is it not? Definition of long term is nebulous it seems and the extent to which it affects the short term seems to be dependent on all those other extraordinary measures and rules which the Fed enforces. 

     "When he talks about Rb (FFR) and the tools to control it, or not, what does he mean by outlawing lending? The FFR is an interbank lending rate so does he mean outlawing banks lending to each other or is he talking about outlawing lending to consumers? Nick seems to have very strange ideas about what banks do."

      "I must confess to not really getting what Nick or Sumner mean when they discuss MOA or MOE."

      " because to an MMer, all you need to do is offset any nominal/monetary shocks to AD by adjusting the AD control, which could be Rm or it could be the quantity of base money"

      "Nick seems at odds to Moslers quote that a monopolist can control price or quantity of that which it has monopoly over but not both. His Rm is the price and monetary base is the quantity. He seems to think they can control both at the same time. "


     More from Tom:

     "So in the MM universe, if an exogenous demand shock occurs which causes demand for MOA to spike, in order to avoid a recession the smart CB will offset this shock to avoid all those harmful transients which will occur because of sticky wages & prices. So for example, in the gold standard world, if the demand for gold doubles, the CB should devalue the money by half: if currently $1 = 1 oz, then the CB should revalue the currency as $1 = 0.5 oz: This instantaneously offsets the shock and thus the recession is avoided. Mind you this recession (narrowly avoided) had nothing to do with any structural problems or fundamental aspects of the economy: it would have happened only because of the shock and the weirdness of money (the MOA being "money" here)."

      It's a great discussion. There's lots of moving parts here. What I do think is that the distinction of MOA vs. MOE could only be meaningful in the gold standard world. In our fiat money world the two are one in the same. 

     So I give my thanks to Tom for the scintillating discussion. He definitely understands some of this technical stuff better than I do-though I'm working on it. However I still can't quite buy into this:

      "so I think MMs see themselves as prescribing a means by which monetary policy can undo the effects of sticky wages and prices combined with nominal shocks: they see themselves as trying to neutralize the weirdness of money. This doesn't help too much with anything else driving the economy, and I think they realize that."

     "Now they might be totally wrong about how things work in the real world... but I think their intentions are good here: the real goal is to neutralize the weirdness of money and nothing more. That's how I see it anyway."


       My trouble is that Sumner's whole project is meant to pretty much tie our hands in how we run the 'real economy' by pigeonholing us into leaving all demand management with the Fed and therefore leaving nothing to the fiscal authorities but 'supply side reforms'-low taxes on the rich, deregulation, gutting the welfare state. 

      I can't say my misgivings are lessened by reading Tom's conversation with Nick either. \

      "...the goal of good monetary policy is to try to make Say's Law true."

       "Very clear and succinct. That implies that Say's Law isn't necessarily true... and that it requires good monetary policy in order to approach that ideal. I'd expressed the same sentiment (as a test... to see if I was getting MM ideas correctly) to David Glasner, but he'd admonished me for dragging Say's Law into it. To be certain, my question to David was clumsier and I may have confused him and myself in the process... but still on re-reading it, I detect a definite difference of opinion there between Rowe and Glasner. It'll be interesting to see if either of them has more to say on the subject."


         I don't think individual differences between David and Nick matter. Sumner is driving the train and he would wholly agree with Nick.  Nick basically said what I said the other day-the goal is a RBC world. 

         Another way to put it is how Sumner likes to: it's about 'driving a stake through the heart of Keynesianism.'

         More from Tom:

          "Mike, I can accept that their (or at least Nick's) idea is to make Say's Law true. I should really go refresh myself on Say's Law before I say something too stupid, but at one time I thought I understood it... which was why I was a little surprised that Glasner didn't think SL had anything to do with the goal of MM: I think I said to Glasner basically the same thing that Nick said to me (only it was buried in a lot of other words, and even then the kernal of it was clumsily stated)."

        It's not just Nick's idea it's the MM idea. Again, Glasner is something of a special case. I guarantee Sumner would follow Nick here. SL is basically that supply creates its own demand. That's what started this whole conversation. I had argued that Sumner basically agreed with RBC. Now SL is at the heart of all anti-Keynesian economics. Sumner may chide Prescott or Barro for not thinking the demand side matters but he wishes this were true and is trying to achieve it. 

        It's all about driving that stake through Keynes' heart. 

       P.S. I think in trying to determine whether an idea is part of MM doctrine, this exercise would work. If Sumner says it, write it down 10 times and put each piece of paper into the MM hat.If it's said by Nick Rowe, Marcus Nunes, or Lars Christensen write it down 5 times and do the same. With David I'd write it maybe one time. David Beckworth is probably more than 5 but fewer than 10-maybe 7. 

       This is not really precise but it gives you the general idea of who's driving the train. 

19 comments:

  1. "Scintillating analysis" ... wow, Mike you make me blush... but doubly so because you featured my "weirdness of money" speculation that Nick essentially threw in the dust bin (I was quite happy to let it die there). :(

    I left another comment at the old post (very bottom)... I wondered where you'd gone off to, when suddenly I thought... I bet he's making another post on our recent conversation! haha

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  2. "It's not just Nick's idea it's the MM idea."

    I stole it from Brad DeLong. Brad was saying it before MM even existed. You can find something a bit similar in Keynes' General Theory. Keynes wanted good monetary policy to ensure "full employment" and make "classical economics" true.

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  3. Yeah, that's true, Keynes did say that.

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    1. So does this mean you think that Keynes wanted to "drown the government in the bathtub" and dance on his own grave?

      http://2.bp.blogspot.com/_5JJarCb6DPo/Sn9mKH2wI8I/AAAAAAAAAdc/vK2OHcZXJUk/s1600-h/keynsie+dansingjpg

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    2. Mark I wrote that just for you. You went for the low hanging fruit. Yes Keynes said that and it's debatable whether there he was mistaken.

      I don't know why it's supposed to be ok because Keynes said something as much as you and Sumner hate Keynesianism.

      Ok, maybe you'll tell me you don't hate Keynesianism. However, Sumner clearly does. Why else does he talk about driving stakes into the heart of Keynesianism.

      I doubt you'll find where Keynes said this. The point is that Sumner wants us to become some Republican Supply Side paradise which is why the goal is a RBC world.

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    3. "Why else does he talk about driving stakes into the heart of Keynesianism."

      Why would a person title his blog "Diary of a Republican Hater" or call himself "evilsax". Do you really hate all Republicans, and are you truly evil?

      A blog draws in readers by trolling. For example, Yves Smith inserts "QE" into the title of several of her blog posts every week whether they have anything to do with QE or not. Sumner frequently inserts "Keynesianism" into the title of his blog posts for the very same reason, to attract attention.

      Incidentally, if Scott hates everything about Keynesianism so much, why does he use the AD-AS Model (Chapter 3 of the GT) so religiously?

      "I doubt you'll find where Keynes said this."

      I believe it's in GT Chapter 24 Section III. But it's also related to the general theme of the GT as described in Chapter 1.

      Incidentally, although reviled by most modern conservatives, Keynes was himself rather conservative.

      "...Keynes' efforts were motivated by a strong desire to maintain the liberal capitalist order. Honest conservatives have always understood this. In 1945, economist David McCord Wright noted that a conservative political candidate could easily run a campaign "largely on quotations from The General Theory." The following year, economist Gottfried Haberler, of the conservative Austrian school, conceded that the specific policy recommendations of Keynesian economics were not at all revolutionary. "They are in fact very conservative," he admitted.

      Peter Drucker, a conservative admirer of Keynes, viewed him as not merely conservative, but ultraconservative. "He had two basic motivations," Drucker explained in a 1991 interview with Forbes. "One was to destroy the labor unions and the other was to maintain the free market. Keynes despised the American Keynesians. His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was the real father of neoconservatism, far more than [economist F.A.] Hayek!"

      John Kenneth Galbraith, whose politics were well to the left of Keynes, not to mention Drucker, agreed with this assessment. "The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to endure that the system would survive," he wrote. But, Galbraith added, "Such conservatism in the English-speaking countries does not appeal to the truly committed conservative."..."

      http://www.forbes.com/2009/08/13/john-maynard-keynes-conservative-opinions-columnists-bruce-bartlett.html

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    4. I call myself a Republcan Hater because I hate Republicans-not individuals but the ideology. I paricularly have a problem with people like Todd Akin who believe that women should be forced to bare their rape babies.

      I also hate the ideology of fiscal austerity that takes a self-righteous attitude to suffering people. The kind of society we are is perhaps suggested by teh homeless man who recenlty died of the freezing cold in a snow storm. No one thougth of helping this guy.

      I will admit to seeing this conservative ideology of blaiming the victim as being responsbile for such a tragedy. Of course, everyone just blames the victim-he should have gone to a shelter. He didn't so he must enjoy being homeless.

      Maybe if he chose the freezing bitter cold it's because those shelters are full of ex convicts booted out of prison thanks to lack of funding and the mentally ill also booted out of their insitutitions for the same reasons.

      "I doubt you'll find where Keynes said this."

      I know what he said about the classical world holding good-I meant when Sumner talking about 'Driving a stake through the heart of Keynesianism."

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    5. "Incidentally, although reviled by most modern conservatives, Keynes was himself rather conservative."

      "...Keynes' efforts were motivated by a strong desire to maintain the liberal capitalist order. Honest conservatives have always understood this. In 1945, economist David McCord Wright noted that a conservative political candidate could easily run a campaign "largely on quotations from The General Theory." The following year, economist Gottfried Haberler, of the conservative Austrian school, conceded that the specific policy recommendations of Keynesian economics were not at all revolutionary. "They are in fact very conservative," he admitted.

      I agree with all of this. I too believe in the presevation of the liberal capitalist order. Did you think I'm an Marxist?

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    6. I actually do see myself as something of a conservative-taking more of the long view. I mean being a liberal Democrat as I am is more or less the Whig position.

      However, what passes for conservatism in the America is very short-sighted. The idea of conservatism-going back to Plato-is to minimize and difuse social antagonism-as much as is possible. A realistic conservative I've written about this more than once.

      http://diaryofarepublicanhater.blogspot.com/2013/10/we-already-have-sensible-conservative.html

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    7. For instance, my problem with Sumner always telling us that fiscal austerity is no problem as long as the Fed does the MM panacea-I know his ideal policy is NGDPLT, how could I not as many times as I've heard it?-but he evidently thinks that even QE3 for full monetary offset, is that it's not true.

      I don't believe that QE3 wholly offset the sequester last year. However, and this is important, so if you respond to this Mark try to speak to this too, even if there were total offset-again I don't agree that there was this is for arguments sake-all those effected by the sequester-losing benefits and services they crucially dependend on and the many workers who were furloughed still suffered. Sumner thinks he can just say 'QE3, I won my bet from Krugman' and this is somehow erased.

      However, the pain and hardship of these Americans increasess social conflict and anger. This is why I see sumner's conservatism as part of the perverse american kind that leads to more social discord not less.

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  4. Tom,

    This is a response to a comment you left on another post, which I really liked;

    "My concept of SL is that it would normally require a barter type economy: it's the "you don't produce, then you don't eat" kind of philosophy... and moreover, you'd better produce stuff that other people are interested in having if you hope to obtain some of their stuff in return: i.e. you'd better make yourself useful. That's my concept of Say's Law. To think that things are like that now is a bit crazy, so I'm with Nick on that part of it. But I also have to admit that the concept sounds fair enough... I don't see a huge problem with it. Of course it should be modified to make it more humane, but the general concept doesn't sound that objectionable to me. But maybe that's because I'm not understanding SL correctly!"

    I think that is an interesting take on Says Law, I like it! Sounds downright Calvinist, which probably describes Say (both frenchman 200 yrs apart) It also describes most of the admonishments we hear from far too many economists.
    Good thing for Nick and Mr Sumner we don't hold them to the "If you don't produce you don't eat" idea. They are no more "productive" than any govt employee. Both could be replaced tomorrow with no loss of output to our economy.Of course that holds for Krugman and DeLong as well.

    I agree we are far from the "if you want something make yourself useful" type economy, I probably just have a different idea of who's not very useful.

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    1. Hi Greg, well I finally did go re-read the wiki article on Say's Law (most of it anyway... it's not long), so now after skimming a wiki article let me pontificate on my expertise :D

      It seems Say's Law has many interpretations, not all of which really correspond to Say's original formulation of it. It seems one common denominator though amounts to the following:

      "There can be no global glut"

      Meaning that one good or service can be overproduced (which I think implies underproduction in other goods), but the total supply of goods and services cannot all be overproduced. Perhaps "overproduced" is the wrong word... but I'll stick with it for now. Well this is precisely the MM (and maybe Keynesian too) description for how a recession can happen: there's excess demand for money (the MOA), and since money is the other side of the trade for every other good in the economy, that means there's a lack of demand (a glut) for everything else. Say thought this could never happen because he considered that an excess demand for money wasn't rational. Say basically didn't see money as altering the basic idea of barter any. Nick says that Say later changed his mind on this.

      So maybe my first attempt at interpreting Say's Law above fits into somebody's concept of it (there are many), but I'm going to go with the "no global glut" synopsis from now on I think. :D

      But thanks!

      "Good thing for Nick and Mr Sumner we don't hold them to the "If you don't produce you don't eat" idea."

      ... good thing for a lot of us actually! :D

      Also, wasn't Calvin Swiss?

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    2. "... good thing for a lot of us actually! :D"

      Very true! Probably most of us......... which I think disproves the idea of no glut. If it weren't for the glut in production from the producers, those non producers would have nothing to consume.

      Calvin died in Switzerland but he was born in France and listed as "French theologian" by wikipedia. I learned that today

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  5. Ithink your original description was accurate Tom. No global glut means that there can't be demand problems.

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  6. Ergo don't ever do any wasteful government spending just tell people to work harder or maybe cut taxes for the rich. Say's Law is about Supply Side econ. Keynes is the anti SL in that he is for demand side.

    The Monetarists kind of try to co-opt Keynes by accepting that demand problems do happen but that these problems can be solved solely by an unelected monetary authority,

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    1. Ah, this is what you meant by a new post. Check out what Nick says:

      http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/tiff-macklem-retail-competition-flexible-it-vs-ngdplt.html?cid=6a00d83451688169e201a73d76f0ad970d#comment-6a00d83451688169e201a73d76f0ad970d

      "Remember as well, it [MMists being right] would also eliminate the justification for having a government with a contractionist fiscal policy: "Aggregate Demand is too high! We must cut government spending!""

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    2. Actually I meant this post I just wrote. Nick Rowe on Say's Law http://diaryofarepublicanhater.blogspot.com/2014/02/nick-rowe-and-tom-brown-on-says-law.html

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    3. I have to check out this link to Nick.

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