On the Merits of Koo, it's Mark Sadowski vs. Marko

     Ok, now this is what I'm talking about! This is what I envisage when I think about Diary-we have a nice wonk battle going now. Finally someone seems willing to engage the Mark Sadowski-I call him that for Tom Brown's benefit.

     Look, I knew perfectly well what would happen when I wrote that piece on Koo's theory of the balance sheet recession. I knew the MMers would be up in arms and of course Mark would be the one to lead on the push back. There wasn't any doubt that he would push back, just on what basis he would do so. I mean when you claim as Koo does, that fiscal policy deserves the credit during the Japan 'lost decade' for the growth in the money supply you know that's a bloody shirt.  What I was pleasantly surprised to see was that a new commentator who's been around the last few weeks put his hat in the ring to defend Koo.

   After all, usually when I do these things it's me against the MMers. Sadowski is challenge enough to deal with and sometimes others join the fray like Don Geddis. Before Mark could even respond, Marko left this comment.

   "Sumner and his slobbering sycophants love to pretend that their claims are based on empirical data. If so , they should be willing to concede that Koo's 'balance sheet recession' idea has merit , since there's plenty of data to support it , and more arriving all the time as this crisis claims new victims."

   
     http://diaryofarepublicanhater.blogspot.com/2014/03/monetary-offset-and-japans-lost-decade.html?showComment=1394032531245#c7322734967260988747

    When he says sycophant he makes me think of Greg who talks about 'sycophants and henchmen.' He's argued that Mark is a sycophant and Morgan Warstler is a henchman. I do think that Mark is kind of like the MM Minister of Information-not matter what the subject he has the data to show that MM is right about everything it turns out. 

    I have to give the MMers credit though-they're engaged. If you want to disagree with them at least engage yourself. Finally we have someone-besides me-willing to do that a little n Marko. No doubt, if there is anything that Mark always claims is that he's an empiricist first and foremost. Here Marko puts up some studies from notable IMF economists.

     "These empirical studies won't convince the MMs , naturally. They'll say : " What about Canada and Australia ? They have high debt , too. " Then when subsequent growth data shows that those countries suffered from the debt overhang as well , the MMS will scrounge around to find some other outlier to cling to."

   So how does Mark respond to these empirical studies? It's not really clear-to me anyway. At first he seems to find some fault which each of the IMF macroeconomists Marko sites. However, Marko came back with some incredulity:

     "I'm amazed how someone can totally destroy the work of IMF economists with just a few lines in a blog post. I wondered who these IMF clowns must be , so I looked them up on Google :

    "Cecchetti :"

    http://scholar.google.com/citations?hl=en&user=MRi06CcAAAAJ&view_op=list_works

    "Arcand's co-author , Panizza :

     http://scholar.google.com/citations?hl=en&user=TrHXjXkAAAAJ&view_op=list_works

    "Pretty prolific in their field , but I bet the blogger above blows them away. Let's see :

    :Mark A Sadowski :

    "Your search - Mark A Sadowski - didn't match any user profiles"

    "try again :

    "Your search - Sadowski Mark - didn't match any user profiles."

     "??"

    "Hmmmm........"

     This led Mark to elaborate that he wasn't criticizing any of these authors' work, just Marko's interpretation of them. However, in his discussion of the 'credit impulse' idea itself Mark says this:

     "The credit impulse is essentially the rate of change of the rate of change in credit market debt as a percent of GDP, or the acceleration of credit. So even though the credit impulse is positively correlated with growth in real consumption and investment, it does not imply that the stock of debt must increase in order for economic growth to take place. On the contrary it was developed specifically to explain the role of credit in credit-less recoveries."

      "Now, as a matter of record, despite the strong correlation, I am somewhat skeptical of the credit impulse concept. I think its theoretical justification is wanting, and I'm not entirely sure it is not committing some econometric sin, since the dependent and independent variables correlate strongly with lagged terms of themselves owing to the fact that they are year on year differences. In fact although Biggs, Mayer and Pick first wrote about their results in 2009, to my knowledge the credit impulse still has yet to appear in any peer reviewed research journal."

     Well the fact that it hasn't been in any peer reviewed research journal can be taken more than one way. Mark and I often argue how opposed to Keynesianism MM really is-I think it's clearly very opposed-but Mark admits to personally having an onus with RBC and 'staking my professional career in defeating RBC.' 

     Yet according to Krugman the peer review journals tend to be dominated by RBCers or at least Freshwaters. 

       http://diaryofarepublicanhater.blogspot.com/2013/12/tony-yates-inside-mind-of-your-average.html

        Noah Smith too suggests that RBC dominates much peer review. In any case, there's no question that an idea might have merit and yet not find any favor from peer review. 

       http://noahpinionblog.blogspot.com/2014/03/rbc-aint-dead.html

       As Mark further elaborates his skepticism with the credit impulse idea despite its admittedly strong correlation he it gets pretty interesting:

      "And as long as we're talking about Biggs, Mayer and Pick, there's another reason for my scepticism, and that actually has to do with Thomas Mayer's personal views."

       That's interesting as when I criticize MM, Mark and the other MM apologists dismiss any skepticism of mine based on Sumner's personal views. Yet he is saying he's dismissing empirical evidence just because one of the 4 researchers has personal views he differs with? Don't get me wrong I sometimes go 'gut' and by my intuition too but I'm not supposed to be a real economist...  Or so Sumner charitably likes to tell me. I find this very interesting. 

        "Thomas Mayer subscribes to Austrian Business Cycle Theory (ABCT). Consequently he blames loose monetary policy for asset price bubbles when there is no evidence for this, and he is opposed to better financial regulation when there is considerable evidence that financial innovation and the loosening of credit standards is responsible for the buildup in household debt. "

        Yet Sumner would agree with Mayer on financial regulation. He'd agree with this:

    ""A revival of Austrian economics could be a good start for such a research programme. Unfortunately, however, the battle cry of the public and politicians is for more regulation: regulate banks, regulate markets, regulate financial products! But those who push for blanket regulation suffer from the same control-illusion that got us into this crisis."

         The most you'll get Sumner to say is that we should have 'financial reform' but all he means by this is we should do even more financial deregulation. The fact is that someone can be right on some things and wrong on other. Even Rogoff and Reinhardt are right on somethings. If Mayer thinks that monetary policy is responsible for asset price bubbles that doesn't mean he's wrong about everything. What about the other three economists who don't subscribe to ABCT? Again, why can't I dismiss Sumner as I disagree with many of his personal views-like for supply side reforms and a 'progressive consumption tax?' 

      Mark continues to preach to the choir:

      "And the IMF has also made it clear that it is financial innovation and the loosening of credit standards that is responsible for the buildup of household debt (pages 102-103):

      "In each of these episodes, a loosening of credit constraints allowed households to increase their debt. This increase in credit availability was associated with financial innovation and liberalization and declining lending standards. A wave of household optimism about future income and wealth prospects also played a role and, together with the greater credit availability, helped stoke the housing and stock market booms. '

      Of course, but who does he actually think he's arguing with here? Not with me, certainly not with Greg. Surely not with Koo or Marko. Ok, so Mayer doesn't think so, but how about all those like Koo who do and believe in the credit impulse? Basically he's agreed that the empirical evidence for it-the correlation-is strong but he doesn't believe it because one researcher was an Austrian?! There's a lot at stake as the credit impulse directly questions MM claims on the all-powerfulness of monetary policy. 

    Mark then goes on and on writing about how financial innovation and loosening credit standards are a big problem! Again, could he any more be walking into an open door. All because Mayer is an Austrian. He finishes off:

      "Haven't we had enough of Austrian economics for one century?"

       However, I don't know that championing financial innovation and loosening credit standards is strictly Austrian-Sumner would oppose regulating this too as would many non-Austrian but conservative economists. Indeed, while Mark writes voluminously about how these evils cause asset bubbles, Sumner doesn't even believe bubbles exist-or if they do exist they don't matter, just do NGDPLT. 

      I also have to hand it to Greg. Mark had evoked M3 as the measure of finance. 

       "The ratio of M3 to GDP is also known by another name, and that is the velocity of money. The velocity of money is well known to be strongly correlated to interest rates and inflation as well as the rate of change in NGDP. By finding that there is a threshold level for M3 above which RGDP growth is adversely affected also suggests that there is a threshold level for inflation and NGDP growth below which RGDP growth is affected. This is not a result that would be at all surprising to MM."

         Yet Greg makes a great point here:

       "The M3 classification is the broadest measure of an economy's money supply. It emphasizes money as a store-of-value more so than money as a medium of exchange – hence the inclusion of less-liquid assets in M3. It is used by economists to estimate the entire money supply within an economy, and by governments to direct policy and control inflation over medium and long-term time periods."

      "Each M3 component is given equal weight during calculation. This means, for example, that M2 and large time deposits are treated the same and aggregated without any adjustments. While this does create a simplified calculation, it assumes that each component of M3 impacts the economy the same way. This can be considered a shortcoming of this measurement of the money supply."

       "Since 2006, M3 is no longer tracked by the U.S. central bank."


        "So M3 to GDP = velocity?"

       "M3 measurements are basically worthless because they assume that each component of M3 impacts the economy the same way so in their own words; "

        "This can be considered a shortcoming of this measurement of the money supply"
and since 2006 the US CB doesn't even track M3!!! This was at the end of THE most stable financial period EVAH!! aka "The Great Moderation" So velocity numbers were all over the chart during the great moderation and they stopped using M3"

        "Another nail in the coffin of MV=PQ??"

      Beautiful formulation Greg! I've got to repeat that to Sumner! Mark responds:

       "M3 is one of the three measures of "financial development" used by Nirvikar Singh, whom Marko cited for evidence, so it wasn't me who first brought up M3. Moreover, the World Bank maintains annual estimates of M3 for the US through 2012, which is where Singh got his data. And not only that, but Arcand et al's source of data (Beck et al.) maintains annual M3 estimates for the US through 2011 as well."

      "And the specific shortcoming you cite, that that each component of M3 is assumed to impact the economy the same way, is addressed by the Divisia monetary aggregates index developed by William A. Barnett:"

      http://en.wikipedia.org/wiki/Divisia_monetary_aggregates_index

     "Current Divisia M3 estimates are available at a monthly frequency from the Center for Financial Stability (CFS):"

http://www.centerforfinancialstability.org/amfm_data.php

Divisia appears to be the future of monetary aggregates.

     All I know is that the instability of velocity is what has done in Monetarists in the past-it's what drove the stake through the heart of Old Monetarism. 

    In any case, great job guys-Mark, Marko, Greg. Let's finish with Tom Brown. He's as usual taken the Swiss position-surely if we look hard enough we can find agreement. 

     "Also check out the last paragraph here:"

     http://uneasymoney.com/2014/02/28/exposed-irrational-inflation-phobia-at-the-fed-caused-the-panic-of-2008/#comment-52932

     "A tie in between MM concepts and the BSR concept?"

    Not a bad place to stop. David Glasner is certainly the MMer I have the most respect for. I do like you too of course, Nick!