Thursday, May 31, 2012

Scott Sumner's image-maintenance when it comes to Krugman is not helping build a consensus on good policy

Arggh - I've said this many times before, but Scott Sumner is really frustrating me in the way he talks about Krugman and monetary policy. Scott seems to feel the need to be the voice in the wilderness for monetary policy in this depression, and this has lead him to act as if Keynesians don't support accomodating monetary policy, practically by definition.

When Brad DeLong and others came out strongly in support of NGDP-targeting as the policy goal recently he took this as proof that before that point they didn't think monetary policy could do anything. That's not true at all of course - they just didn't really get on the NGDP bandwagon until then. There's a difference between wanting looser monetary policy and thinking that the best way to frame that is through NGDP level targeting.

Now back to Sumner on Krugman:

"Here’s Krugman in November 2008:
Nearly every forecast now says that, in the absence of strong policy action, real GDP will fall far below potential output in the near future. In normal times, that would be a reason to cut interest rates. But interest rates can’t be cut in any meaningful sense. Fiscal policy is the only game in town.
Those were the posts that had me pulling my hair out in 2008.  Why wasn’t Krugman calling for monetary stimulus?"

Ummm... he was, Scott. He just recognizes that you can't idealize central bankers or make people react how you want them to react to central bankers. To bastardize a little James Madison, "If men were angels no monetary policy would be necessary. If angels were to govern monetary policy, no fiscal policy would be necessary.  In framing a monetary policy which is to be administered by men over men, in a liquidity trap, the great difficulty lies in this: you must get the monetary authority to make a credible commitment. And if that's not in the cards you need to start talking about fiscal policy too."

Scott should refrain from pulling his hair out.

There are at least two mechanisms for monetary policy: through interest rates and through expectations about future spending and inflation. The former is a dud right now. The latter may not be, and the latter can influence demand directly and it can influence real interest rates through inflation expectations.

For four years now Krugman has been noting that the first mechanism is not an option and that the second mechanism is a reason for loose monetary policy. He has been haranguing the Fed for not embracing this view. An example from back in 2009 is here. He supports monetary stimulus every bit as much as Sumner does and is probably more realistic than Sumner about how hard a credible committment is (which is why he also supports fiscal stimulus - which Sumner doesn't).

And yet Scott Sumner still insists on only paying attention to the first point about the liquidity trap. Why? He has to know that Krugman has supported monetary stimulus for years now. The only reasonable conclusion is that he really likes to feel like he's a voice crying in the wilderness. That's not what we need right now. What we need is a consensus, and a consensus is Scott standing up and saying "yes, Lars Christenson, David Glasner, Paul Krugman, Mark Thoma, Brad DeLong, and I have been saying from the beginning that we need more monetary stimulus".

If you don't think that the liquidity trap is the only consideration in thinking about monetary policy, congratulations - you agree with Krugman, who said that a decade and a half ago.


  1. There is, I think, a small inconsistency in Krugman's thoughts about these issues over the years. IIRC, he was an optimist about non-standard monetary policy--quantitative easing--for Japan when NSMP was to take the form of exchange-rate targeting, but is a pessimist about the power of non-standard monetary policy in the U.S. because of the weakness of the portfolio-balance channel and because of commitment problems.

    I don't think these two positions sit with each other that easily...


    Brad DeLong

  2. A 2009 Krugman comment is not a counter-example to Scott Sumner's complaints about what Krugman was not doing in 2008.

    1. Yes, I googled "Krugman credible commitment to be irresponsible" and picked out that relatively early example.

      Until Scott can point to a case where Krugman opposed monetary stimulus there's not much of a case to refute, now is there? I can say that Scott Sumner should have been opposed to killing puppies in 2008, and your failure to find a post to the contrary after some quick googling doesn't really say much for my initial assertion.

      Instead he chooses to keep harping on Krugman's pessimism about the interest rate mechanism, trying to pass that off as pessimism about monetary stimulus in general. It just doesn't work.

  3. It's rare that I take somebody off my regularly read blogs but Sumner has become so smug and self congratulatory recently that I have had to stop reading him.

    I mean, for gods sake, the 'Sumner Critique' was ALREADY MADE by Keynes. Sumner says he can't take TGT seriously, but the fact is he hasn't really tried to read it.

    (My most recent post is on this., I'm slightly frustrated by it).

  4. Here's more victim-playing from those oppressed market monetarists:


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