Friday, August 31, 2012

My problem with the "Sumner Critique" Sumner's critique

This post of his gives me a good opportunity to share my problem with the "Sumner Critique" Sumner's critique.

First, I'm not arguing against the obvious point that money can be tight when rates are low. That's just a misunderstanding of economics to make a claim like that. Often, when someone takes issue with a market monetarist they just accuse you of thinking that. I'm not saying that.

My concern is that the "Sumner Critique" Sumner's critique meshes together policy goals with actual policies so that evaluations of whether a policy (say, "looser money") is simply being pursued is treated synonymously with whether a goal we all like (say, "NGDP back to target levels") has been achieved. Now, market monetarism could just be a central bank decision rule (if NGDP is below target, then loosen more). That's fine. But for market monetarists like Scott Sumner, who seem interested in going beyond decision rules and actually offering an analytic claim, there seems to be no way to logically make the statement "we have done the market monetarist policy rule and the goal was not achieved". Why? Because if NGDP level targets have not been reached then by definition you haven't been doing market moentarist policy.

Aside from the fact that it's just frustrating to deal with people who talk like this, it's also not helpful from a scientific perspective. The reason why people focus on the base and on short term rates is that that's what the Fed has fairly good control over. It's one thing to say that different economic conditions call for different rates and base money supplies, and to note the difference between a nominal and real rate. It's another thing entirely to say that rates and the base should be ignored and that we should focus our attention on NGDP as a measure of the policy stance, because the whole scientific question at hand is "how does monetary policy (OMOs that affect the base and short rates and maybe long rates for QE) impact NGDP in a depression?"

I don't normally take a particular Popperian attitude towards science*, but the whole problem here can be summed up as the problem of market monetarism (at least as presented by Scott Sumner) can't really be falsified.

This is not the case with Keynesianism or other theories out there to choose from. The policy goal is very distinct from the policy for Keynesians. You can do some back of the envelop calculations with the output gap, Okun's law, and the multiplier and get a policy proposal, and then you can see whether the goal is achieved or not. Of course there are all kinds of arguments left to have about the multiplier's real value, or about whether Romer and Bernstein did a good or bad job forecasting the output gap. There will still be arguments about all that. But nobody ever said anything like "NGDP level goals were not achieved and thus by definition Keynesian policies were not tried". In other words, we can get policy perscriptions wrong because of imperfect knowledge, but we don't define the policy by the achievement of the goal the way Scott Sumner and many other market monetarists seem to.

Sumner could make a case for a Sumner rule like the Taylor rule, and that can be grounded in NGDP levels just like the Taylor rule is grounded in inflation rates. That would be great. But that's very different from what he's doing.

This is the odd thing about reading Friedman too. I'll leave it to the historians of the Depression to validate Friedman's claim about the Fed stance. But there is something inherently odd about pointing to monetary aggregates as a sign that the Fed wasn't doing something right. It could be that, but it could be that your understanding of what Fed policy should be is wrong because it's not moving the broader aggregates.

*To summarize why I don't really approach things in a Popperian way: I think taxonomical and descriptive science is important and that has trouble with the whole "demarcation" attitude. I also think that adjusting theories to deal with empirical problems until we reach the point that another theory offers the better alternative is a good thing, and yet Popper explicitly calls this non-scientific. Finally, I think in an imperfect world we can make good inferences from a body of corroborations, regardless of whether they are corroborations.


  1. I thought the Sumner Critique was that fiscal policy was impotent because any move would be canceled out by the monetary authority.

    1. You are exactly right - I used that too casually.

      But it's actually a good example of it!

      It's one thing to say "there is a fiscal multiplier, it is not zero, but sometimes central bankers make really bad decisions".

      That is not the route that Sumner takes. The Sumner Critique again confuses goals with policies. It's not that there is a fiscal multiplier, it's that there isn't one because the goal isn't achieved due to bank policy!

      It seems like a very odd way of talking about things to me.

      It's particularly unhelpful right now when fiscal expansion would help banks gain traction for monetary policy and do exactly what Sumner wants them to do!!!

  2. I assume that you've seen this: Woodford endorses nominal GDP level targeting?

    While I sympathize with your argument here, I find myself increasingly drawn to something like the MM position. (Is that a bad thing?)

    At any rate, NGDP(L) targeting may very well be the first policy revolution that was launched from the blogosphere.

  3. Hello Daniel.

    That's a great criticism of Sumner's view.

  4. I just caught Sumner doing what you describe. You write:
    "Sumner's critique meshes together policy goals with actual policies so that evaluations of whether a policy (say, "looser money") is simply being pursued is treated synonymously with whether a goal we all like (say, "NGDP back to target levels") has been achieved."

    Caught in the act, Sumner says:
    "Woodford and Bernanke are right; the stance of monetary policy depends on outcomes like NGDP growth and inflation, not interest rates and the money supply."

    My earlier comment holds.


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