Ken Duda Asks Why Can't Market Monetarists and Keynesians Just Get Along

      Call it his Rodney King moment. It's a good question.

      "Folks, thanks for the responses. I think I pretty much agree with all of them, and I feel like this Holy War is entirely unnecessary. I think we, and basically all economists, would agree that:"

       1. in a depressed economy, fiscal stimulus can increase output if the monetary policy at the time is to ignore any effect of the fiscal stimulus (and the markets expect that monetary authority will ignore fiscal stimulus);

       2. the monetary authority, if it wants, can always offset positive fiscal stimulus by tightening as much as the fiscal stimulus stimulates;

       3. monetary policy alone is sufficient to restore aggregate demand as long as monetary policy is not paralyzed;

       4. monetary policy can become paralyzed if the policy instrument is the nominal short-term risk-free interest rate, and that rate is at zero.

       "So why are we arguing? I just don't get it. Let's demand better monetary policy now. I think almost everyone here would agree that if the choices were (A) current policy, or (B) market-forecast-driven NGDP level targeting, B would be better. Fiscal stimulus is impossible thanks to braindead Republican deficit-obsessed obstructionism, so while I would love to see more fiscal stimulus, it's just not going to happen. Instead, let's focus on what we can do, which is better monetary policy, where no congressional cooperation is required.:

       "The Federal Reserve has the wrong target. Let's fix that, and, while we're at it, put an end to the tea-leaf reading and drive policy with market forecasts. You just know it's wrong when volumes of articles are written parsing ever last word of an FOMC statement. It shouldn't matter whether Janet Yellen says "patient" or not. And with NGDPLT, it wouldn't."

I'm sorry that Scott and Mark are annoying everyone, but let's please keep our eye on the prize.
       http://diaryofarepublicanhater.blogspot.com/2015/06/scott-sumner-mark-sadowski-jason-smith.html

       http://informationtransfereconomics.blogspot.com/2015/06/this-analysis-is-so-bad.html

       I think the best answer is that Scott Sumner doesn't want us to. He sees himself at the vanguard of a war against Keynesianism and he wants to 'drive a stake through it's heart'-his actual words. 

       So no matter what his benefactor, Ken Duda, may believe, Sumner doesn't agree. Again as I said in my previous post:

       I will finish with teasing out my own views on Market Monetarism. It's composed of 2 aspects. The first aspect actually is rather disarming for Keynesian'liberal types:

       "1. We should move from inflation targeting to NGDP targeting as NGDP can measure not just inflation but the kind of inflation-supply or demand side. In 2008 the Fed didn't cut rates out of worry over rising oil prices. In 2011 the ECB raised rates because of the same. NGDP would be able to differentiate."

    "I think by itself many liberals or centrists might find this attractive as many never really liked inflation targeting anyway-I am in the number."

     "Actually, at this point conservatives are a little bit skeptical-as they prefer inflation targeting- but reassurance is in the way in the shape of:

     "2. Full monetary offset. We can' ever have fiscal stimulus as the Fed will offset this effect roughly 1 to 1."

      http://diaryofarepublicanhater.blogspot.com/2015/06/scott-sumner-mark-sadowski-jason-smith.html

     If MM consisted only of 1 we would all be getting along and maybe we would all have decided-Keynesains arm in arm with Market Monetarists-that 1 is correct. But 2 does exist and the way Sumner continues to flag it suggests it's not a small, incidental part of MM theory that we can just pretend isn't there. 

     But Scott and his MM buddies-Mark Sadowski, Marcus Nunes-won't let us forget it. What Ken is basically asking from Keynesains is that we pretend 2 doesn't exist while Sumner continues to act as if 2 does exist. 

     Regarding austerity, Sumner continues not to answer the criticism of critics while trying to turn it around and claiming they won't answer his criticism. 

     "I have repeatedly pointed out that the US government did a massive amount of austerity in 2013, and yet GDP growth was higher than during 2012. One would think that Keynesians would have a response to my claim, a response that addresses the specific points that I made. Unfortunately, that has not been the case."

      "Russ Roberts recently did a post pointing to this problem:

When there was an increase in the payroll tax in January 2013 and the sequester reduced spending beginning in March 2013, Krugman wrote that monetary policy, which was expansionary, would not be able to offset the impact of fiscal policy:

...as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens...

Sorry, guys, but as a practical matter the Fed - while it should be doing more - can't make up for contractionary fiscal policy in the face of a depressed economy.

"When the economy grew more quickly in 2013 than in 2012, the test was no longer a test."

    http://econlog.econlib.org/archives/2015/06/russ_roberts_vs_1.html

     My question is what would be a fair test? What needed to happen in 2013 to show that fiscal austerity had no effect?

    Sumner and Roberts-who admits that he only consider arguments that imply smaller government-seem to think that all you have to show is larger growth in 2013 than 2012. 

    That's the wrong counterfactual. What you need to show is that growth in 2013 with fiscal austerity and QE3 was better than it would have been if you had QE3 and no fiscal contraction. 

    You have to show that growth would have been worse without fiscal austerity-or maybe just the same. 

    To be sure, Sumner might argue that had there been no fiscal austerity then there wouldn't have been QE3 though he hasn't explicitly claimed this. So that could be another counterfactual. What I think is clear is that the recovery through 6 years has been too slow yet we've had QE. So even with QE I can't see why we couldn't expect it to have had a faster recovery without the contraction. 

   Until an MMer can explain this they haven't explained anything. 

    Even the claim that GDP was much stronger in 2013 than 2012 is open to question. 

    "So I checked the post that supposedly refuted my views, and found that Wren-Lewis was wrong on both issues he raises. First, he addresses my claim that when examining the effects of the austerity that began on January 1st, you need to use Q4 over Q4 growth rates, not year-over-year growth rates. I doubt if there's a single serious macroeconomist who would disagree with me. And yet all he does is respond with snark, he doesn't even address my complaint. I think it's fair to say he doesn't have any argument against my claim, because there are no good arguments against my claim."

    That's just wrong on the face of it as Wren-Lewis is a serous macroeconomist who is probably held in higher esteem than other macroeconomists than Sumner himself who with all his carping about winning a bet with Krugman has become something of a joke among macroeconomists. 

    The fact is that Sumner deliberately cherrypicked his results here. I've also noticed that sometimes conservatives have cherrypicked comments about the effects of 2013 austerity from Keynesains before the fiscal cliff was resolved-at that point all the Bush tax cuts were set expire which would have been a much bigger drag on the economy. 

    Sumner in this post along with Roberts also continue to make the ludicrous claim that Iceland engaged in austerity even though the debt go GDP ratio wasn't lowered until after the recession was over and the finance minister declared victory. Even then, the ratio was cut fro 102% to 86% which is a real embarrassment to Reinhart and Rogoff who had claimed that any ratio close to 90%-and 86% is basically 90%-would lead to a catastrophic attack of bond vigilantes. 

   Then too, Sumner and Roberts continue to trip over the point that Keynesians always make regarding debt to GDP-there is a denominator as well as a numerator. 

   Overall, Sumner is making some very broad and sweeping claims over some pretty noisy data which shows his singleminded ideological commitment to driving a stake through Keynesianism's heart and why we can't just all get along as Duda might like.