Mark Sadowski's Real Problem With MMT

     Sadowski-Sumner's chief ideologist from the Ministry of Wonkishness- finds MMT 'irriating.'

     They are an irritating source of misinformation much like the vulgar Internet Austrians. The only difference is I’ve largely learned to ignore Internet Austrians because almost everybody thinks they are cookoo. Unfortunately MMT is more plausible right now because of the large aggregate demand shortfall. Thus MMT/MR/PK still manages to get under my skin.

    So the worry is that many people still take MMT seriously. Speaking of vulgar Internet Austrians, Major Freedom-who now calls himself Geoff when he's on the Money Illusion had to get into the act:

   " It is an empirical regularity that monetary changes bring about effects with a time lag. You are setting an arbitrary cut off time limit when you say “soon after.”

   "If we take into account this time lag, then the tremendous increase in the monetary base in 2008, and higher inflation and NGDP, are in fact positively correlated.

http://research.stlouisfed.org/fredgraph.png?g=o5Q

"That huge uptick in CPI and NGDP past 2009 is not only positively correlated with a lagged change in the monetary base, but theory suggests that an increase in the money supply should, ceteris paribus, bring about higher prices and spending."

 "A missing link is how much of the shadow banking market experienced credit deflation alongside the increase in the monetary base. In other words, what happened to the total money supply. The Fed no longer tracks it, but by private estimates, the total money supply shrank in 2008, but then significantly grew thereafter. This is consistent with the CPI and NGDP outcomes."  

    I'm honestly not sure what that chart in his link is meant to show-I don't see much correlation. Neither NGDP or inflation have been setting the world on fire since 2009. Maybe with the total failure of his IA, Major is trying to hitch himself to the MM train?   

     No question IA is in a bad way, just check out Bob Murphy's blog:

     "http://diaryofarepublicanhater.blogspot.com/2013/11/bob-murphy-again-shows-theres-nothing.html

     

Mark Sadowski: Increasing the Monetary Base 'Granger Causes' all Kinds of Things

     This is the usual script. Sumner is caught out there in some logical inconsistency and then here comes the Market Monetarist house wonk to come up with some dense stats and charts that show that-what do you know. Sumner is right about everything after all. Confirmation bias anyone?

     In Sumner's attempt to find the 'Achilles Hill' of MMT he supposed that this is it: they are unable to explain how doubling the MB will lead to a doubling of NGDP and a 'near doubling' of the price level. However, to make this claim plausible he says it only applies to a normal economy-ie, one not in the middle of a deep recession-where there are IRR being paid. 

     Sumner responded with a flourish that anyone that would accuse him of claiming that dropping the interest rate from 5% to 0% would double NGDP and almost double the price level is all kinds of bad things:

      "My rebuttal is that whoever wrote that nonsense is a liar, a moron, and a jerk, all wrapped up in one. Life’s too short to respond to someone who claims I asserted that lowering interest rates to zero would cause NGDP to double. (It’s got several names attached, so I don’t know who wrote it.)"

      http://diaryofarepublicanhater.blogspot.com/2013/11/randall-wray-speaks-of-sumner-on-mmts.html

      Here is Randy Wray's response to that:

      "I provided all the relevant quotes from Sumner. He agrees that doubling Base will drive overnight rate to zero. Then NGDP doubles and prices double. Very clear. He might want to argue that doubling Base would double NGDP EVEN IF RATES DO NOT FALL. Fine. That just puts him even farther from every modern school of thought, out farther into a never never land of magic, with lending and spending magically increasing WITHOUT INTEREST RATES FALLING."

       http://neweconomicperspectives.org/2013/11/scott-sumner-find-mmts-achilles-heel.html#comment-523659

      So here we go again. Sumner ends up looking a little shrill and maybe just a little silly. Not to worry, in comes Mark Sadowski, the Market Monetarist Super Wonk. Turns out he's done studies that shows just how much increasing the MB does. 
   
     "Recently I’ve noticed New Economic Perspectives blog author Dan Kervick repeating some version of the following question in response to any claim about the monetary base:

     “What empirical evidence exists for that claim?”

     "I’ve done Granger causality tests on the monetary base over the period since December 2008 and find that the monetary base Granger causes the real broad dollar index, the S&P 500, the DJIA, commercial bank deposits, commercial bank loans and leases, the PCEPI, and 5-year inflation expectations as measured by TIPS."

    "The empirical fact that QE has an effect on the exchange rate of the dollar means that the Exchange Rate Channel is effective. (It’s always been curious to me how people can believe in the liquidity trap when Bulgaria, Denmark and Switzerland all successfully control their exchange rates despite being at the zero lower bound.) Does MMT address how exchange rates are set? (I honestly don’t know.)"

    "The empirical fact that QE has an effect on stock prices (something which is obvious to nearly everybody) means that the Tobin Q Channel, the Wealth Effects Channel, the Balance Sheet Channel and the Household Liquidity Effects Channel are all effective. The usual MMT response is that “the markets are irrational”.

     "The empirical fact that QE has an effect on inflation expectations and the PCEPI means that the Unexpected Price Level Channel is effective. The effect on the PCEPI is not easy to observe, but most people acknowledge that QE has an effect on inflation expectations. Again the usual MMT response is that “the markets are irrational”.

      "The empirical fact that QE has an effect on commercial bank deposits, and loans and leases, means that the Bank Lending Channel is effective. This is particularly significant in debunking MMT (as well as Accomodative Endogeneity) since they claim that this is completely impossible."

      "But here’s by far biggest problem with Dan Kervick’s question."

    "I’ve read some of the research published by MMT economists such as Randy Wray (e.g. “System Dynamics of Interest Rate Effects on Aggregate Demand”). Mostly it consists of constructing stock-flow models using parameters derived from “neoclassical” economics estimates. I’ve never seen a single empirical MMT research paper, or even any evidence that they have any knowledge of econometrics at all.

What empirical evidence exists for MMT? None."

     http://www.themoneyillusion.com/?p=24551#comments

     Dan Kervick seemed rather impressed by this awesome display of wonkishness:

     "Mark, could you send me a link to any empirical analyses of the kind you mention demonstrating causal relationships between either changes in the size of the monetary base or expectations of changes in the size of the monetary base, on the one hand, and other variables such as RGDP, NGDP, inflation, or inflation expectations. I really am interested in examining evidence of this kind. Most of what I read on all sides in the blogosphere doesn’t examine this kind of evidence, but instead argues a priori from conjecture and hypothesized first principles."

     Sadowski obliged him. My concern though is that some may get overawed in reading Sadowski because of all the factoids and charts he comes up with that seem to show 'You see, Sumner was right all along.' 

      For example how many people out there actually know what it means to say that one thing 'Granger causes' another thing? Does Dan? I ask this because I don't know.He's a smart guy and may well do so, but surely many reading this don't. It doesn't necessarily mean real causation. As Granger himself said upon winning the Nobel Prize in 2003 GC has been used in manner of illegitimate ways as well. 

      As for Sadowski's list, he doesn't know too much about MMT as they are always going on and on about how QE raises stock prices, commodities, etc. and tend to disproportionately benefit the wealthy over the struggling or the poor. 

       

     

Mark Sadowski: MMTers Invented the Money Multiplier for 'Something to Beat Up in Socially Binding Fits of Rage'

     A good case can be made that Market Monetarism-Monetarism in general-is postmodernist. A perfect example is how Sadowski-the Great Wonk-somehow shows that the MMTers are all wet for attacking the money multiplier as false as no such thing exists anyway but is none the less very useful. 

    "Every Econ 102 textbook I’ve ever seen teaches the money multiplier is a function of three variables. The currency ratio is always portrayed as the depositors’ choice, the reserve ratio (above required, if any) is always the lenders’ choice, and the total amount of currency and reserves (the monetary base) is the central bank’s choice (even if supplied through the discount window), and all are dependent on the conduct of monetary policy by the central bank."

    "Every textbook that presents the simple model of multiple deposit creation follows this with a critique clearly stating its “serious deficiencies”. In Mishkin’s intermediate level textbook (I have the 7th edition), not only is there such a section, the chapter in which it is taught is followed by a whole other chapter that makes it abundantly clear that the currency and reserve ratios are variables."

    "All models are wrong, some are useful. The simple model of multiple deposit creation is useful. And there isn’t a single textbook I have seen that doesn’t point out its serious deficiencies. If students pass a course unaware of the simple model of multiple deposit creation’s serious deficiencies, that is the fault of the instructor, not the textbook."

    "So, in short, there is no such thing as “exogenous money” theory. The believers in endogenous money have carefully constructed an exogenous money strawman, complete with a series of erroneous beliefs and nonexistent defective textbooks, so that they could have something to verbally abuse and physically beat up in socially binding demonstrations of rage."

     http://www.themoneyillusion.com/?p=24551&cpage=1#comment-290613

     So it's got serious deficiencies but the MMTers are the ones that are all wet for pointing them out? Reading this almost poetical flourish of Mr. Sadowski, I couldn't help but remember when he accused me of having a style that was little too 'histrionic:

     " Often I think you’ve gone off the deep end, because many of the things that you say, such as this, are histrionic and completely irrational.""

     http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-may-be-great-wonk-but-he.html

     http://diaryofarepublicanhater.blogspot.com/2013/10/mark-sadowski-and-my-apparent-war-with.html

       Nothing histrionic about claiming that MMTers invented the concepts of endogenous money and the money multiplier for the purpose of having something they can "verbally abuse, physically beat up in socially binding demonstrations of rage."

     This argument is very like Sumner's argument for Rational Expectations (RE). You can't say RE isn't true because presumably it's adherents know much better than you do how untrue it is but find it useful and hear you are ignorantly arguing it's not true! It's funny that he thinks I'm irrational yet he seems to think that we live in a world where all models are false it's just about finding the one that we think is more useful. You can't show that RE, the MM or endogenous money are false because they are and their model builders find them useful. 

Ok I Love Randall Wray Again

    He has now attributed me for his recent post:

    "The title of this post was inspired from a post by Mike Sax."

     http://neweconomicperspectives.org/2013/11/scott-sumner-find-mmts-achilles-heel.html#comment-516800

     That's all I wanted, doesn't take much to make me happy. Still I disagree with Peter P:

     "Sumner doesn't even understand that doubling the base drops rates to zero and nothing else happens. As I said, debating him is a waste of time. But you got your attribution so it must have been worth it."

      http://diaryofarepublicanhater.blogspot.com/2013/11/wray-vs-sumner-on-interest-rates.html?showComment=1383700274926#c1009088908648164220

     There Peter does answer Sumner's missive that he never said cut rates to 0% to double NGDP but double the monetary base. However, the assumption that both Wray and Peter have is that doubling the base automatically drops rates to zero. Still I disagree that debating Sumner is a waste of time. Don't get me wrong asking his questions on his blog may seem futile for many, however, it's important that his zombie ideas are engaged properly as he has a very large forum and a large audience. 

    I think you ignore him at your peril. As Greg puts it, someone should right a post compiled of 'Stupid things Scott Sumner says' or STSSS. Think of Diary of a Republican Hater as that place. 

   It seems to me that both the MMTers and the MMers just wants to say the other side is clueless and just hang out in their little ideological ghettos. What I want, however, is to really get at truth and knowledge of the economic world. Seems to me that even the Great Wonk himself, Mark Sadowsk got a little frustrated in this one:

   "With respect to the Randy Wray post, it appears that Mike Sax blogged on a post that Scott did on MMT over two years ago. Sax’s post was blogged about at Mike Norman’s, and in turn Wray blogged on the post at Mike Norman’s (i.e. up the food chain of Ancient Fiscal Tautology it went)."

  "Other than the absurdity of Wray responding to something Scott wrote over two years ago, the most absurd thing is the importance that Wray attaches to Scott’s remarks on interest rates. MM obviously doesn’t think interest rates are an important measure of monetary policy."

     http://www.themoneyillusion.com/?p=24551&cpage=1#comment-290613

     As I pointed out to Sadowski, this is a pretty feeble argument-Sumner wrote this post 2 years ago so it's 'all absurd.' Here was my response to Sadowski over at Money Illusion:

     "I don’t know what’s absurd about simply commenting on a 2 year old post-people are trotting out Krugman posts from years ago all the time-4 years, 6 years, 10 years, 15, if they think they’ve somehow caught him in an error. If you don’t believe me just check out Bob Murphy-most days he’ll have at least one old Krugman quote. We can’t discuss something Scott wrote 2 years ago?"

     "In what way does he now disagree with what he wrote then? IF he doesn’t then where’s the problem?

I just wanted to write a Sumner-MMT post-it’s not my fault if he hasn’t written anything about them since."

     The last part of Sadowski's comment was probably even more feeble:

     "So Wray’s argument that interest rates can have perverse effects on aggregate demand via the interest income channel (which is itself an incredibly implausible argument, unless you’re a bond coupon-clipping rentier like Warren Mosler who wonders how all the little poor people get by on their interest income when bond yields are so low) disproves Scott’s argument seems like an amazingly case of bidirectional obliqueness."

     If a liberal or a Keynesian were to employ such a'class warfare' argument we'd never hear the end of it from Sumner about how the commentator in question shouldn't be discussing it as they aren't economists. Notice that he switches gears to Mosler even though the post was by Wray so it's actually doubly irrelevant. 

     I think that Jose Guillermo sums up Sumner's point:

     "Sumner's law in plain English: "When banks double their deposits at the central bank in a moment when the economy is not at the zero lower bound, then nominal GDP will eventually double".

      I would say that Sumner wouldn't think it'd be eventual but instant and that because of IRR and an economy in a bad recession. It's not a very impressive law. Why would the Fed double the MB in the middle of a heathy economy? What is the actual value in this 'thought experiment.'

Wray vs. Sumner on Interest Rates, the Monetary Base, Prices, and NGDP a Case of People Talking Past Each Other

     Sumner argues that Wray has completely misconstrued what he said. 

     "My rebuttal is that whoever wrote that nonsense is a liar, a moron, and a jerk, all wrapped up in one. Life’s too short to respond to someone who claims I asserted that lowering interest rates to zero would cause NGDP to double. (It’s got several names attached, so I don’t know who wrote it.)

Rates just fell to zero in 2008 and I don’t see NGDP doubling.

   http://diaryofarepublicanhater.blogspot.com/2013/11/randall-wray-speaks-of-sumner-on-mmts.html   

    Then he said this to me:

    "Mike, That quote says doubling the money supply causes NGDP to double, which is not a very controversial claim. The claim that cutting rates to zero causes NGDP to double is absurd."

     http://www.themoneyillusion.com/?p=24551#comment-290539

     Of course, I'm kind of ticked at Wray too-he didn't give me attribution in his post though he clearly was inspired by my post yesterday that was also lined to at Mike Norman's Economics. Wray rather blasely announces he's got way too much going on in his life to be bothered with blogging-which is in his mind kind of on the level of a 10th grade Dungeons and Dragon's club. He claims to have not been aware of Sumner and Money Illusion until now. 

    If this is true then he has even less justification for not linking to me as this proves he got both the links to Sumner as well as the inspiration for the title from me. The title is no contest-I mean c'mon: Sumner, MMT Achilles Heel, Explains, hello?

   I think y probably explains this all best:

   "Wray claims that if the CB doubled the monetary base the only effect would be to reduce the overnight funds rate from 5% to zero. He proceeds to argue that this wouldn't have much of an effect."

    "However Wray doesn't give a time frame. Is he talking short term or long term? In Sumner's example the monetary base is doubled permanently, so you could argue that even if it didn't have a huge effect in the short term, in the long term the effect could be that claimed by Sumner."

    "But the main problem is that Sumner claims the effect of doubling the monetary base permanently would not be due to the overnight funds rate being zero, but due to the size of the monetary base - i.e. the so-called "hot potato effect' of base money."

     "Wray completely ignored this aspect, because he has no knowledge of Sumner's theories."

      "So it's a case of people talking past each other."

     http://www.blogger.com/comment.g?blogID=2761684730989137546&postID=1160565064742378390&page=1&token=1383620886334

     That's about right. The big complaint I have of both MMers and MMTers is that they're both much too happy just to live in their own little ideological bubbles where they get lots of daily affirmation-rather than realy trying to challenge their core beliefs by ruthless comparison with the other side. 

    Mostly, MMers say they don't care what MMTers say anyway as they don't understand economics and MMTers say they don't care what MMers say because: they don't understand economics. This is not to say that I think it's all about opinions and so we should just 'tolerate each other's opinions'-no, I do care about actually getting ir right-not like the extollers of bipartisanship who thinks we should always just split it down the middle. However, I think just staying in your provincial ghetto won't get you very far. 

. 

    It seems that the rate dropping from 5% to 0% is not what Sumner said but more like what Wray inferred would happen if you were to double the monetary base. It's probably like y says in that both have their own 'discourse' and talks past the other. However, even if you were to agree that Wray is completely wrong in his characterization of Sumner here, this wouldn't make Sumner right-that doubling the MB would necessarily double NGDP and nearly double prices. 

    

     

Randall Wray Speaks of Sumner on MMT's Achille's Heel but Somehow Fails to Give Attribution to Diary of a Republican Hater

      UPDATE: I love Randall Wray again as he has added attribution. I figured it was just an oversight-but you know what they say it's all good publicity if they spell your name right. He has now spelled my name right.

      It's kind of bittersweet. I read Sumner's latest tantrum with considerable relish. 

     "My rebuttal is that whoever wrote that nonsense is a liar, a moron, and a jerk, all wrapped up in one. Life’s too short to respond to someone who claims I asserted that lowering interest rates to zero would cause NGDP to double. (It’s got several names attached, so I don’t know who wrote it.)"

    "Rates just fell to zero in 2008 and I don’t see NGDP doubling."

     http://www.themoneyillusion.com/?p=24551

      Here's what bothered me when I saw Wray's piece: he failed to quote my piece at all which clearly had some kind of inspiration-I mean the title was clearly derivative of mine. Compare mine:

      http://diaryofarepublicanhater.blogspot.com/2013/11/sumner-on-achilles-heel-of-mmt.html

      to his:

    http://neweconomicperspectives.org/2013/11/scott-sumner-find-mmts-achilles-heel.html#comment-514485

    I left a comment over at Wray but he doesn't allow comments before he checks them first so we'll see if he squashes mine. Please Mr. Wray I hope you're not going to go there! I want to believe we're on the same side here.

  

    We certainly do have Sumner predicitng NGDP would double as well as the price level almost doubling:

    "So let’s say they double the base and let rates go where ever they want. I claim this action doubles NGDP and nearly doubles the price level. MMTers seem to disagree, as I haven’t changed the amount of net financial assets (NFA) at all. But here’s the Achilles heel of MMT. Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost. So they claim this action would drive nominal rates to zero, at which level people and/or banks would be willing to hold the extra base money. Fair enough. But then what? You’ve got an economy far outside its Wicksellian equilibrium.”

     So we have it from the horse's mouth. Still why is Wray refuisng to attribute the inspiration for this-I agree that he adds his own insights to it but the title clearly was from my title. I was the one who put out this quote and link from Sumner yesterday. Mr. Wray somewhat disdainfully tells us he's not a blogger. I like him and respect him a lot. But maybe not being a blogger he doesn't understand blogger etiquette. 

    P.S. In all fairness Wray takes his analysis further than what I wrote yesterday-which is how it works. One blogger takes us to point A, the next following up on point A takes to point B and then the next takes it to point C. That's how it worked. However, I'll admit it, it's got me irked. Hopefully he'll acknowledge it was an oversight. If not, he's going to ruin it for me. Maybe I'll turn Market Monetarist out of spite. LOL.

   

    

Bob Murphy Again Shows There's Nothing More Pathetic Than Internet Austrianism

     Yesterday I wrote-belatedly-about the debate between Murphy and leading MMTer Warren Mosley. 

     http://diaryofarepublicanhater.blogspot.com/2013/11/the-bob-murphy-vs-warren-mosler-debate.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

    I was late to this:

    http://mikenormaneconomics.blogspot.com/2013/06/warren-moslervsrobert-murphy-today.html

    I thought that it was a very good debate. I disagree wit Mike Norman that Murphy was rude and condescending-not that I don't love Mike Norman, who just linked to my post a few days ago-but I do think that Murphy was wrong on substance and that Mosler certainly won the debate. 

   Having said that, a recent post by Murphy again shows how pathetic an enterprise Internet Austrianism is:

    "A lot of times Austrian economists will say that the Austrians used to be really popular and influential, but that they were eclipsed by the Keynesians in the 1930s. Then they might explain this outcome along the lines of, “The Keynesian economists told government officials exactly what they wanted to hear: spend more money to fix this depression, whereas the Austrians told them they were the problem, not the solution. So naturally, the Keynesians ended up teaching at the top rank schools (funded with tax dollars) and staffed all the important posts.”

     "Now usually, mainstream economists reject this type of explanation as a self-serving conspiracy theory. They will say the Austrians failed the “market test” in the academic arena. “If you Austrians had better ideas, they would have risen to the top in the peer-reviewed journals. Stop whining.”

     "In that context, I was very surprised to read Paul Krugman’s account of the Keynesian triumph:

If you go back to the state of American economics in the 1930s and even into the 1940s, it was not at all the model-oriented, mathematical field it later became. Institutional economics was still a powerful force, and many senior economists disliked mathematical modeling. When Paul Samuelson published Foundations of Economic Analysis in 1947, the chairman of Harvard’s economics department tried to limit the print run to 500, grudgingly accepted a run of 750, and ordered the mathematical type broken up immediately.

So why did model-oriented, math-heavy economics triumph? It wasn’t because general-equilibrium models of perfect competition had overwhelming empirical success. What happened, I’d argue, was Keynesian macroeconomics.

Think about it: In the 1930s you had a catastrophe, and if you were a public official or even just a layman looking for guidance and understanding, what did you get from institutionalists? Caricaturing, but only slightly, you got long, elliptical explanations that it all had deep historical roots and clearly there was no quick fix. Meanwhile, along came the Keynesians, who were model-oriented, and who basically said “Push this button”– increase G, and all will be well. And the experience of the wartime boom seemed to demonstrate that demand-side expansion did indeed work the way the Keynesians said it did.

     "Except for that last sentence–the part about Keynesianism “work”ing–Krugman’s narrative fits almost exactly the (allegedly) self-serving Austrian version.

   http://consultingbyrpm.com/blog/2013/10/explaining-the-success-of-the-keynesian-revolution.html#comment-77308

   I think the reason that mainstream economists always say that Austrianism failed the market test in the academic arena is: because they failed the market test in the market arena. To believe this Austrian conspiracy theory you would have to believe Keynes was 100% wrong in his claim that ideas over time are much more powerful than any vested interests. 

   In truth the fall of Austrianism in the 30s has more to do with the total mincemeat Sraffa made out of Hayek than any mustachioed government officials thwarting Austrianism. 

   As usual the only aid and comfort Murphy can find is taking Krugman out of context.