Sunday, April 28, 2013

You know that blogger at the New York Times that is a consistently huge proponent of expansionary monetary policy and who gets criticized by opponents for wanting to "run the printing presses"...

...Jonathan Catalan thinks that guy is "making a mistake" for not focusing on monetary policy.

It appears someone has drunk the Scott Sumner Kool-Aid on diagnosing the econ blogosphere. His diagnosis is of Krugman is wrong. Jonathan writes: "If I remember correctly, the reasoning for the change of emphasis to fiscal policy was mainly “political.” Krugman felt that it was more worthwhile to draw attention to fiscal stimulus, because inflation hawks were making it difficult for the Federal Reserve to change its position on the two percent inflation target."

As Jonathan points out and I think Krugman is well aware, there are less political obstacles at the Fed than in Congress. What I remember from the Japan paper and most of his blogging during the crisis is that in a liquidity trap monetary policy works on output through expectations - it cannot work through interest rates. It can't even work through inflation until we reach something approaching full employment again. Expectations are delicate, particularly for a central bank that has cultivated an image of price stabilization so fiscal policy and monetary policy together can work better than just monetary policy in a liquidity trap. The word Krugman always uses is "traction" - fiscal policy helps monetary policy get traction.

I imagine (and I'm only speculating here) that this has much less to do with Jonathan wanting to criticize Krugman and much more to do with Jonathan starting a transformation many Austrians and libertarians have made in the last couple years into realizing that a lot of Austrian macro is bunk and wanting to hitch on to the market monetarist train. John Papola did this virtually overnight and I feel like a lot of internet Austrians followed suit. Ryan Murphy did it a long time ago. I'm guessing something like that may be behind Jonathan's post. That's great - there's a lot to market monetarism. But that wrong way to embrace it is to alienate a huge group of people that agree with you on monetary policy and make public statements that seem to imply there's some kind of big division among economists on what the Fed should do. There's not. If you ask the average non-economist that's fairly up on things and reads the New York Times whether Krugman supports expansionary monetary policy at the Fed they'll say "well of course he does - duh!". If you ask the same person what Scott Sumner thinks, unfortunately he'll probably say "who's Scott Sumner?". I say "unfortunately" because Scott does deserve to be better known. Even among professional economists, a lot of people associate NGDP targeting with Christina Romer, not Sumner, for her 2011 op-ed. Older guys that aren't immersed in the blogosphere and as a result didn't know who Scott Sumner was first got the NGDP targeting message that way.

I don't think anyone has any trouble understanding the Keynesian position that we should be firing on all cylinders. Now the politics of Washington might only ever get us one, but there is no conceivable way that advocating fiscal policy has reduced the prospects of expansionary monetary policy.


  1. "a lot of Austrian macro is bunk and wanting to hitch on to the market monetarist train"

    Sorry to be harsh, but this is a baseless mischaracterization. Austrian macro is not limited to Rothbardianism/hard money deflation. What's happening is that more Mises Institute Austrians/libertarians are moving toward the GMU Austrian/Free banking/Monetary disequilibrium viewpoint, which has its own very long tradition (and which complements NGDP targeting in many ways).

    1. The idea of stabilizing nominal spending isn't something Sumner invented. Hayek called for it as far back as 1931:

    "Hayek’s monetary policy norm for a central bank, clearly stated in his writings, was to stabilize nominal income (MV or PQ in the equation of exchange MV=PQ). A collapse of the money stock M or its velocity V calls for the central bank counteraction to increase M and thereby restore MV."

    2. Free Banking Austrians have interacted with traditional Monetarists (such as Leland Yeager, whose work influenced both Free Bankers and MMs) for a very long time. Here's Larry White in 1983 giving a brief nod to monetary disequilibrium in the context of the macro merits of Free Banking (from 23:30 )

    Many of the MM's today, such as Bill Woolsey, have long links with GMU Austrians/Free Bankers. This isn't jumping on the bandwagon, it's a continuation of a decades-long dialog.

    1. 3. George Selgin came up with a type of NGDP growth rule called the "Productivity Norm Rule" in his 1997 essay "Less Than Zero."

      "This monetary policy rule would have have nominal GDP grow at the same rate as that of factor inputs. Doing so would allow productivity gains to be reflected in the price level while maintaining factor price stability. Thus, the Productivity Norm... would tend to stabilize nominal wages, allow the price level to decline, and yet keep aggregate spending growth stable."

      Less than Zero has been favorably cited by Sumner and Lars Christensen many times as influential on their thinking. So again, Selgin (let's call him 1/2 GMU Austrian) and the MM's have had a positive interaction for a very long time now.

      Please, let's avoid inflammatory language like "bunk, "hitching onto MM," and "drinking the Kool-Aid." Jonathan is a sophisticated thinker who is only looking for the truth, not to jump on the latest fad. He deserves better treatment from you than this.

    2. I said exactly zero about Rothbard or LvMI John S. I really have no idea why you've confused this one line so badly. Needless to say, I'm well aware of all the distinctions you're raising here.

    3. re: "Jonathan is a sophisticated thinker who is only looking for the truth, not to jump on the latest fad."

      I couldn't agree more. Don't try to twist my words into something else, John S. We really have no need for people like you trying to flare up a fight. I don't suspect Jonathan is unsophisticated or jumping on a fad. I think he's expressing support for market monetarism by addressing Keynesianism in a way that I don't think is all that convincing.

    4. Then what do you mean by the phrase "a lot of Austrian macro is bunk"? Which part specifically?

  2. Well said, John S ! Steve Horwitz and Roger Garrison should also be included in a list of economists who have been influential in developing Austrian macro.

    1. Yes! I'm reading Horwitz, and Garrison is in my queue.

    2. You lecture me on Austrian economics, Rob cheers you on, and you haven't even read Garrison?

    3. I didn't "lecture you on Austrian economics," I took issue with your implication that Austrians are suddenly "hitching on to the MM train." I wanted to show that Austrians have engaged these ideas for a very long time now.

      You're right, I'm not as well read on Austrian theory as I should be. However, I am familiar with the basics of Garrison's ideas from his talks and the powerpoint presentation. Horwitz's version seems to build on his ideas with more emphasis on monetary disequilibrium, which is what is more interesting to me at the moment.

      I've read (or am reading) these books:
      Free Banking in Britain
      The Theory of Monetary Institutions
      Competition and Currency
      The Theory of Free Banking
      in addition to other books on monetary economics, such as Perry Mehrling, Eichengreen, Gorton, and Kindelberger. I don't like to limit my perspective only to "Austrian" authors.

      Have you read any of Selgin/White? It seems to me (no disrespect intended) that you also are missing a large part of the picture of Austrian macro if you haven't read the Free Banking literature.

      Btw, I don't mean to start a flaming war. I did take your original post as implying that internet Austrians such as myself are capitulating en masse to MM as a way of slyly admitting that "Austrian macro is bunk" w/o having to say so explicitly. Perhaps I overreacted--I apologize.

    4. Again, I'm curious--what exactly do you mean by "a lot of Austrian macro is bunk." That's a very broad statement. Could you clarify, very briefly and in general terms, your position?

  3. "When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."
    "The question is," said Alice, "whether you can make words mean so many different things."
    "The question is," said Humpty Dumpty, "which is to be master - - that's all."

    It appears Humpty Dumpty was an Austrian (or possibly a Libertarian).

  4. It was a weird post, because I personally don't advocate either fiscal stimulus and I have my doubts about NGDP targeting. But,

    1. I think there can be a shortage of money;
    2. In a perfect world, maybe price corrections would be the best, but for whatever reason price corrections are difficult in the real world. I still believe in a lot of Austrian capital macro, but it's better to have some misallocation there than have a lot of misallocation because of a slower-than-necessary recovery.

    My point regarding Krugman was actually inspired by a recent Krugman post and a Bob Murphy post. Like I said there, Krugman has been arguing for better monetary policy. My point is that most of his emphasis turned to fiscal policy. Now that things have changed at the Fed, and inflation hawks have been disproved, it seems like a good time to switch back to emphasizing monetary policy. The benefit there is that it will become much, much more clear to the public that there is a unified front in the profession. It may also be a good way of "bargaining" with austerians, who have been backed up against the wall. Monetary policy offers a good "market solution" that lets Republicans "win" on fiscal austerity, but still addresses the demand shortage.

  5. "It may also be a good way of "bargaining" with austerians"

    You cannot bargain with sociopaths.

    Monetary policy is powerless. There is 1.7 TRILLION dollars of EXCESS reserves with the Fed. Pumping even more money into the system will not help.

    If the Republicans "WIN" on austerity, monetary policy cannot fill any resulting holes in current demand. Plus, the Republican policy on "austerity" is not about the current economy - it is about dismantling Medicare, Medicaid and Social Security in the future for ideological reasons and handing the savings to the wealthiest 1% of the population.

    1. Look at it from Krugman's perspective. He doesn't think monetary policy is "powerless." And, okay, maybe Republicans intend to tackle other social issues (the safety net), but this is a completely separate debate. Political problems over social security beats political problems over social security and a recession.

  6. "I think he's expressing support for market monetarism by addressing Keynesianism in a way that I don't think is all that convincing."

    I think Jonathan's post is far more measured than Sumner's latest. MM's can be plenty "alienating" on their own, don't you think?

    "Paul Krugman has a new post that fails on every level possible."

    1. What do you think of Sumner's claim here?

      "He’s done far more to hurt the cause than help the cause [of monetary easing]. The vast majority of people believe monetary policy is ineffective when rates are zero, and Krugman is one reason why people believe that. I understand that Krugman doesn’t believe that, and that he favors monetary stimulus. But by constantly saying monetary stimulus is ineffective at zero rates, he’s hurt the cause. And he’s said this literally dozens of times."

  7. Robert Waldmann doesn't comment here, so I will reprise his usual line: at this point, QE has been tried on quite a few occasions. It is not clear that it has had any noticeable effect on inflation expectations or other variable. Nor have the Fed's "messaging" attempts had the effects that monetarists predicted. This should lead us to re-examine the age old criticisms of the Quantity Theory of Money, which has been subject to serious criticism from even before Adam Smith.

  8. Will: Are you suggesting that people consider the so-called "Real Bills Doctrine", or the Post-Keynesian formulations of "Endogenous Money" by Nicholas Kaldor and Basil Moore?

    Speaking of those two concepts, they seem to have some sort of connection with one another, and some sort of relation to the age-old "credit cycle" view of the economy.

  9. Some of us Austrians were talking about monetary disequilibrium and other market monetarist ideas long before there was market monetarism or Scott Sumner had an internet connection. John S is right. The original claim that Austrians have suddenly "converted" to MM is just bad history. I've been synthesizing those two for almost 20 years. But then again, I'm used to this sort of thing.

    1. I'm well aware of the history of monetary disequilibrium in Austrian economics, and I think most of my readers are too.

      John S is going off the deep end in this thread. I'm observing here that a lot of people who previously advocated an Austrian story around capital structure lengthening and distortions by the Fed without much of a whiff of monetary disequilibrium have come around to the importance of that during this crisis. Some have gone the route of simply talking more about the long monetary disequilibrium history within Austrian economics. Some have more explicitly embraced the market monetarist camp.

    2. This may not even be Steve Horwitz - the blogger profile links to some random blog that doesn't seem to have anything to do with him. I'll leave it up though, just in case.

    3. "a lot of people who previously advocated an Austrian story around capital structure lengthening and distortions by the Fed without much of a whiff of monetary disequilibrium have come around to the importance of that during this crisis."

      The boom fueled by the distortions of the Fed and the contraction--in the absence of stabilizing monetary policy--in the bust are two sides of the same monetary disequilibrium coin. The fact that many internet Austrians were late in learning about or emphasizing the latter is overdue recognition that monetary disequilibrium plays a key role throughout the business cycle.

      Steve Horwitz here:
      Note the late date and the shockingly low number of views.

    4. You speculate that many internet Austrians now realize that "a lot of Austrian macro is bunk." Yet, among the Austrians in this thread--Rob, Steve, Jonathan, John Papola, and myself (by far the least knowledgeable member of this group)--who would agree with such a statement? My guess is none.

      Again, you'd have to clarify what you mean by that before I could tell you whether that's an accurate assessment of my own views.

  10. Oh it's me. Just a Google fart from the particular account I used.


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