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.