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Tuesday, April 29, 2014

Noah Smith and Sumner on the 'Neo-Fisherite Revolution'

     Now that's what I'm talking about! I came across these two pieces and wanted to read Sumner and see if I could guess what argument he would employ against different scenarios. 

     Noah argued that he had no good reason not to believe the 'Neo-Fisherite; position.

      "But what I'm saying is, there seems as of yet no obvious reason for me to write off the Neo-Fisherite idea. And - as Cochrane and Williamson have both shown - it's possible to write down models where the idea works. The structural models so far all rely on rather odd and rigid fiscal policy rules, so the microfoundations are still kind of crazy. But I see no reason why those models are substantiallycrazier than any of the more mainstream, monetarist-type (or RBC-type) models. So for now, count me on the side of the Neo-Fisherite rebels, just because I think the idea is neat, and potentially very important, and I want to see where it leads."


      "Because the idea is very important. Everything the Fed does, pretty much, is based on the idea that the longer you hold interest rates at low levels, the "easier"- i.e. the more pro-growth and inflationary - your monetary policy is. The Neo-Fisherite idea doesn't just discount the effectiveness of monetary policy(like RBC models do, or like the MMT people do) - it stands that whole monetary policy universe on its head. If the Neo-Fisherites are right, then not only is the Fed massively confused about what it's doing, but much of the private sector may be reacting in the wrong way to monetary policy shifts." 


     http://noahpinionblog.blogspot.com/2014/04/the-neo-fisherite-rebellion.html


      The 'Neo-Fisherite idea is that lowering interest rates lowers inflation in the long run-and vice versa, raising them raises inflation. The NFerites get here because they believe that nominal interest rates are the sum of real interest rates and the rate of inflation. They also believe that the Fed can only influence the real interest rate in the short-term-in the long term it will rise again.  As the real rate is necessarily going up in the long term the only way to increase nominal interest rates is to decrease the rate of inflation. 


      Sumner, obviously, is not a fan of this idea. 


       "Noah Smith is making a very subtle error here, but before getting into the details let’s blow the neo-Fisherite model right out of the water.  We can do so with a couple points made in the comment section.  


       "First Nick Rowe:

Here is one very big bit of empirical evidence against the “Neo-Fisherite” theory:
For the last 20 years the Bank of Canada has been targeting 2% inflation. And the average inflation rate over that same 20 years has been almost exactly 2%.
The Bank of Canada has said it has been doing the exact opposite to what Neo-Fisherites would recommend: whenever the BoC fears that inflation will rise above 2% it raises the nominal interest rate, and whenever it fears that inflation will fall below 2% it cuts the nominal interest rate.
If the BoC had been turning the steering wheel the wrong way this last 20 years, there is no way it could have kept the car anywhere near the centre of the road. Unless it was incredibly lucky. Or was lying to us all along.

     http://www.themoneyillusion.com/?p=26671

     One thing Sumner did say that I did anticipate is that Noah and friends are misreading Monetarism by saying it believes that lower interest rates necessarily lead to higher inflation. As I suspected, Sumner accuses Noah here as being a product of Keynesianism


     And now we can see the subtle error that Noah Smith made in the passage quoted at the beginning of the post:


This is exactly the opposite of the “monetarist” conclusion that if the Fed holds R very low for long enough, inflation will trend upward.

     "Reasoning from a price change!!!  If I had a crystal ball, and peered into that ball, and saw that Yellen was going to hold short term rates at zero for the next 10 years, I’d absolutely predict ultra-low inflation, condition on that interest rate forecast.  So no, the monetarist prediction is not that inflation will trend upward.  As Milton Friedman said, the monetarist prediction is that inflation would trend downward."

     "Noah Smith is thinking like a Keynesian.  He’s trying to translate monetarist ideas about monetary policy into a Keynesian (interest rate) language.  He knows that we think easy money is associated with higher inflation, so he assumes we must also think that an extended period of low interest rates is associated with higher inflation.  Not so.  We don’t think low rates imply easy money."

    "Noah Smith and the neo-Fisherites are confusing the situation described by Friedman, with a subtly different case. Suppose a madman is put in change of the Fed who is committed to zero rates over the next 10 years, come hell or high water.  Then I might forecast an upward drift in inflation; indeed I think hyperinflation would be quite possible.  It depends on what else the madman did. But if you simply told me that rates would be low over the next 10 years under Janet Yellen, I’d assume that inflation would be low, and that low inflation is precisely the reason why Yellen held rates down."

    Sumner never gets tired of saying that high interest rates are usually a sign that money has been tight-not that high rates cause money to be tight, this is the difference between him and the NFers.  

    Morgan Warstler takes things in an interesting if rather eccentric direction in the comments section. 

     "“The economy has an equilibrium real, or inflation-adjusted, interest rate.”

      "Here’s the model I want your feedback on: what if the equilibrium real interest rate is negative forever?
And, yes I know this is just a hypothetical (but it is realistic one) idea that we are headed to a world without any credit / debt?"

     "Meaning in the future there are rents and purchases, but basically no one will loan you money to buy a thing to live your life or to start a business."

     "This occurs, is occurring, because software eats the world."

      http://www.themoneyillusion.com/?p=26671

      Now we see that Morgan's technophilia truly knows no bounds-it's going to end debt, which in his mind is a great thing. An economy with no debt at all, public or private?

       In the terms of that NF equation-the nominal rate is the sum of the real interest rate and the inflation rate, though, this would mean that if we do NGDP we would have to have a higher rate of inflation. I know he doesn't want that. 

      
     

     



   


     

18 comments:

  1. Mike, also good links in Noah's to Ryan Avent and I think Simon Wren-Lewis (which gets comments from Williamson, Rowe, and Andolfatto)

    Plus David Beckworth on this:
    http://macromarketmusings.blogspot.com/2014/04/the-cure-for-neo-fisherism-history.html

    Also take a look at the link in Beckworth's to Josh Hendrickson's piece (at the bottom)

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  2. Mike, O/T: This is amusing: Bill Woolsey calling Scott's tax proposal "theft" and "totalitarian." (not to mention "awful"):

    http://www.themoneyillusion.com/?p=26694#comment-342759

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  3. My guess is Woosley is one of those who thinks all taxes are theft.

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    1. Woolsey favors what he calls a "digressive" consumption tax: exclude the first $X dollars, and then tax at a 10% flat rate beyond that.

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  4. For my part I Just think Sumner's proposals are regressive-no matter how much he says its what 'standard public finance shows'

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  5. Why-I'm asking you as the resident Sumner Whisperer-are consumption taxes the best way to tax?

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    1. Mike, I wish I knew. I haven't followed that debate very closely, and even if I had I'm not sure I'd know enough to have a decent opinion on it. I would suggest not sh*t canning it just because Sumner likes it though. :D

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  6. Tom believe it or not I don't dislike consumption taxes because of Sumner-though the fact that he likes it is not surprising. My problem with them is that a consumption tax is the most regressive kind of tax as wealthy people consume

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  7. a much lower percentage of their income

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  8. Depends on what the tax is on, or in how it's structured doesn't it? If you exclude the first $X in spending, and then tax the next $Y at one rate, and the next $Z at another.

    I don't know what's practical. Or structure it as a luxury tax: tax the bejeebers out of yatchs, but loaves of bread, maybe nothing.

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  9. Tom, That sounds like the progressive income tax, except that it is applied to consumption. I don't favor it for basically the same reason as Mike, and this too: The economy seems to rely on consumption for growth. Taxing consumption just might have an unintended consequence of slowing down the rate of growth. Just a thought.

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  10. Ok maybe it it were at a graduated rate. The way I've heard it before-and I've read at least on book on this which I have written about-is maybe a $30,000 exemption-which is pretty good though I ideally might prefer $50,000 but after that at one flat rate.

    If it were graduated that might be a little more feasible. Is a luxury ta going to be able to raise enough revenue-with all other taxes defunct?

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  11. On a more philosophical reason why is it preferrable to tax consumption than other kinds of income? I don't buy Sumner's whining about double or triple incidence.

    I mean as a society do was want to cutback on consumption when 70% of economic activity is consumption?

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  12. I mean 'a more philosophical level'

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  13. I've actually written about this numerous times.

    http://diaryofarepublicanhater.blogspot.com/2013/04/a-progressive-consumption-tax.html

    http://diaryofarepublicanhater.blogspot.com/2012/05/progressive-consumption-tax-and-other.html

    http://diaryofarepublicanhater.blogspot.com/2012/06/progressive-consumption-tax-idea-whose.html

    There are plenty of other links but I don't feel like looking for all of them.

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  14. I've actually written about this numerous times.

    http://diaryofarepublicanhater.blogspot.com/2013/04/a-progressive-consumption-tax.html

    http://diaryofarepublicanhater.blogspot.com/2012/05/progressive-consumption-tax-and-other.html

    http://diaryofarepublicanhater.blogspot.com/2012/06/progressive-consumption-tax-idea-whose.html

    There are plenty of other links but I don't feel like looking for all of them.

    Basically my skepticism over the idea of a 'progressive consumption tax' is twofold

    1. I'm quite skeptical it would really be made progressive-though willing to listen to good arguments, perferrably without the huffiness of Sumner when questioned on it. In fact I try and think usually am open on most questions.

    2. Philosophically I don't see why folks like Sumner prefer saving or even capital formation over consumption. If we cut back on consumption this would slow down the economy. In fact the book I read about this even admitted this but they said that the economy would rebound from this after about 5 years-just 5 years of subpar growth? Sounds like a small price to pay! LOL After that the writer said the economy would come back but that permanently there would be more capital production and less consumption.

    Why is this preferrable and how does all this new capital help with less people to buy the goods the capital produces?

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  15. I can't answer you questions Mike. I saved links to this tax debate, but I have a hard time concentrating on it ... I've just done a bit of superficial reading. Maybe I'll come back again sometime and revisit. Thanks for all the links!

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  16. Now maybe you see my problem Tom. Sumner won't answer my questions either though I'm guessing he wouldn't admit he can't as you do. Instead he acts like he could but somehow doing so would be a waste of his precious time.

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