Sumner is Still Krugman Bashing After all These Years and on the Fate of Monetarism

     I think it's great-Krugman could care less what he has to say. As usual he overstates things:

     "As we all know, Krugman likes to brag that he doesn’t read any conservatives, as they have nothing interesting to say.  But that doesn’t prevent him from being dismayed by their lack of intellectual honesty.Here Krugman discusses Allan Meltzer’s repeated warnings that inflation is coming:

Tests in economics don’t get more decisive; this is where you’re supposed to say, “OK, I was wrong, and here’s why”.

Not a chance. And the thing is, Meltzer isn’t alone. Can you think of any prominent figure on that side of the debate who has been willing to modify his beliefs in the face of overwhelming evidence?

     "Here’s Steve Williamson, who changed his mind about inflation:

Back in days of yore, my concern was that we could indeed get higher inflation. How? I had thought that the Fed had the ability to control inflation, but when push came to shove, they wouldn’t do it. Once people caught on to that idea, we could get on a high-inflation path that was self-sustaining. Of course, since I said that, I’ve continued to work on these problems, and stuff has been happening. In particular, we’re not seeing that high-inflation path.

     http://www.themoneyillusion.com/?p=26739&cpage=1#comment-345903

      I actually did something I haven't done in awhile-I answer Sumner on his on blog-usually I don't bother as he clearly is never really interested in a dialogue with me-so I just save the dismantling for my blog. However, here he really is taking some license so I replied this way:

     "I can’t speak for Krugman but I find this kind of snark tremendously interesting so for him to say that is clearly wrong. I think he might have said this once-and you’ve since referred to it no less than 87,000 times-a conservative estimate. I don’t know that saying it once means he ‘likes saying it.’ You on the other hand clearly like saying he says he doesn’t read conservatives."

    "Is it your hope he’s going to breakdown under your snark to say “I’ve seen the light. I read conservatives and I like it. Sumner’s constant snark has made me see this.”

    "SW claims he’s not a conservative though I admit that his claim sounds strange. I guess to the extent that being a conservative means Krugman bashing and little else he is the conservative he pretends not to be.

Politically though SW says he supports Obama and may even kind of support fiscal stimulus-or at least he thinks an increase in public debt could be helpful right now, though admittedly for very complicated reasons.

On the other hand no question he’s on the ‘Freshwater’ side of the divide-though he claims that such terms are meaningless-but then which Freshwater economist would say they actually are meaningful? Logically if your a Freshwater economist you’re not even going to credit ‘Saltwater’ economists as being economists you’re going to say there are just economists and charlatans who claim to be economists and call themselves Saltwaters."

      http://www.themoneyillusion.com/?p=26739&cpage=1#comment-345903

      He does then bring up Laffer's recent mea culpa:

       "And here’s an article discussing Arthur Laffer:

And in June of 2009, he penned an op-ed warning excessive quantitative easing would inevitably lead to higher inflation and interest rates.

…we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits …Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.

Obviously, nothing like that happened.

     "In an interview with Business Insider from his office in Tennessee, Laffer admitted that he was wrong. The old maxim that dictates increasing the availability of cash through lower interest rates will lead to higher prices, he said, may need to be reexamined."

       Give Laffer credit for admitting it but those where some pretty absurd worries on his part. Even now reading what he said then sounds impossibly shrill. 

      Sumner goes on to tell us where he thinks Meltzer went wrong-he confused high powered money and base money, thinks that the monetary base can tell us something about the stance of monetary policy and thinks that monetary policy has its effects with long and variable lags-Sumner and the MMers claim it's variable leads not lags. He declares Old Monetarism in Meltzer's image dead:

        "I believe old monetarism is effectively dead. The monetarists (including Allan Meltzer) made enormous contributions to our understanding of monetary policy. But their model has reached a dead end. I implore bright young grad students with an interest in monetary economics to take a look at market monetarism. Since 2008 we’ve been more accurate in our predictions than any other school of thought. We have a coherent model that incorporates rational expectations and efficient markets. Our views on policy lags do not conflict with market indicators. We understand the difference between the monetary base and high-powered money. We understand the difference between temporary and permanent monetary injections. We understand the importance of interest on reserves. We have a model that can explain market responses to QE and forward guidance surprises. We can explain the price level, not (like NKs) merely the rate of inflation."

        Any number of these items remain questionable. I mean he and his MMers may pronounce them, however, in the larger field of economics many are highly controversial-the policy lag/lead argument for one-I'm not arguing for 'lags' or 'leads', I'm just pointing out that not everyone buys that you can judge the success of a monetary policy simply by how the TIPS market does the next day. He claims that MM has gotten everything right since 2008 yet this is again highly debatable. Lets for arguments sake give him 2013-not that I actually think they 'won a bet with Krugman' or anything else but let's just give him this for the sake or argument. 

       How is 2014 looking? It's tough to say that it's been some kind of slam dunk victory for MMers. I'm sure a post is coming where he claims that is is, of course.  Abenomics also remains questionable-I see for now his tactic is to claim that he never said it would be a huge success anyway-so if it isn't there's no egg on his face but if it is a success he'll no doubt again claim victory. Let's not even get started on IOR for which there is no consensus whatsoever on what it does and what removing it would do. 

       "We see one article after another demonstrate that the stylized facts simply don’t support NK sticky price models. This AER paper by Bils, Klenow and Malin is a recent example.  On the other hand models that rely on NGDP shocks and sticky wages are very unlikely to be falsified.  Don’t you want to base your research agenda on a rock solid assumption?  NGDP shocks cause demand-side business cycles.  Period.  End of story."

        Give credit where credit is due. It's not the end of the story but Sumner certainly has opened up a story the ending of which we won't know for some time. One silver lining for this extended economic malaise we've had is at least it has given economics to consider many ideas that it otherwise likely wouldn't have. 

         MM is one such idea-though other things Sumner doesn't like so much, like MMT have also been given some consideration. Between these two schools and Internet Austrianism, we''ll see which school comes to shape the understanding of economists most in the future.