I
find Sumner so baffling sometimes. A lot of his criticisms of non-market
monetarists are based on strange diagnoses of their claims. Until this
morning reading this post I would have thought it obvious that most
Keynesians see Japan in the 90s and the
Bernanke Fed as running into exactly the same problems. And yet Sumner's
critique here is largely that Keynesians view them differently (and
that's a problem). Sumner claims that in the 1930s they would have
laughed at Friedman and Schwartz, but monetary tightening was a major
part of the diagnosis of the Depression for Keynes. Where I think the real disagreement
lies is in the claim that the Fed could have saved us. Keynesians then
and now think that is a harder case to make - not that monetary policy
is useless or impossible (another thing Keynesians don't claim but
Sumner has a nasty habit of suggesting they do), but that it's a
difficult tool to use in deep depressions. Once a monetary collapse happens, long-term expectations can be hard to dislodge (market monetarists tend to think they're easy to change, and therefore if they are not changed the monetary authority must be engaging in tight policy).
Wednesday, January 15, 2014
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"Sumner claims that in the 1930s they would have laughed at Friedman and Schwartz, but monetary tightening was a major part of the diagnosis of the Depression for Keynes."
ReplyDeleteActually Keynes was very slow to acknowledge that monetary tightening may have been a problem, and steadfastly refused to advocate that the UK devalue or detach from the gold standard.
Anticipating the Great Depression? Gustav Cassel's Analysis of the Interwar Gold Standard
Douglas A. Irwin
November 2011
Pages 28-32 are most relevant. Here are some highlights:
http://www.dartmouth.edu/~dirwin/Cassel.pdf
"...In a January 1929 article on the League of Nations gold inquiry, Keynes found himself coming around to Cassel’s view of the international gold problem. Keynes (1981 [1929], 776) wrote that “Professor Cassel has been foremost in predicting a scarcity” of gold, adding that “I confess that for my own part I did not, until recently, rate this risk very high.”..."
"...Although this article demonstrates Keynes’s familiarity with Cassel’s arguments, in his subsequent writings Keynes hardly mentioned the international gold problem at all. Keynes rightly believed that the international monetary cooperation that Cassel had always demanded was simply not going to happen, so he looked for other solutions. However, these solutions did not including leaving the gold standard. Despite the fact that he had been an opponent of the gold standard in the early 1920s - calling it a “barbarous relic” in his Tract on Monetary Reform (1923) – and although he welcomed Britain’s departure from the gold standard when in finally occurred, Keynes steadfastly refused to advocate a British devaluation or departure from the gold standard.19 In his testimony before the Macmillan Committee in 1930, Keynes concluded that the costs of departing from the gold standard outweighed the benefits because the burden of servicing Britain’s short- term foreign currency debts would increase by the amount by which the pound fell in value. Furthermore, he argued, abandoning the gold standard would be a breach of faith with Britain’s creditors, a violation of trust that would damage London’s reputation as a financial center..."
"...However, Keynes began to change his view when monetary policy was no longer handicapped by golden fetters: after Britain left the gold standard in September 1931, interest rates came down but unemployment remained high. According to Patinkin (1982), this is when Keynes became a monetary policy skeptic and began to push for increased government spending on investment as a way to get the economy moving again. As Keynes stated in late 1931, after Britain left gold, “I am not confident . . . that on this occasion the cheap money phase will be sufficient by itself to bring about an adequate recovery of new investment. . . . . If this proves to be so, there will be no means of escape from prolonged and perhaps interminable depression except by direct State intervention to promote and subsidize new investment” (Keynes 1982, 60)..."
"...Because Keynes judged the stance of monetary policy largely if not exclusively by interest rates, with low rates indicating to him monetary ease, he became skeptical of the value of monetary policy as a stabilization tool when nominal rates were so low.
By contrast, Cassel never lost faith in the power of monetary policy to improve economic conditions..."
To me it seems like deja vu all over again. Today Krugman is similarly influential, and is supportive of unconventional monetary policy after the fact, but never really advocates it, because his belief that monetary policy mainly works through the traditional interest rate channel makes him skeptical of unconventional monetary policy's benefits in a liquidity trap.
re: "To me it seems like deja vu all over again. Today Krugman is similarly influential, and is supportive of unconventional monetary policy after the fact, but never really advocates it, because his belief that monetary policy mainly works through the traditional interest rate channel makes him skeptical of unconventional monetary policy's benefits in a liquidity trap. "
DeleteWhat are you talking about "after the fact"?!? This is precisely the baffling sort of thing you hear from Sumner that I'm referring to. It's like we are experience different discourses and different crises.
Sumnerian near-sightedness??
Thanks for the paper link. Moggridge and Howson have a different perspective of course. The Keynes/Cassel comparison to today is likely apt but for different reasons than you are suggesting. Cassel was laser focused much like Sumner. Keynes was more multifaceted and conditional in his claims. I'm not personally familiar with all the testimony that's cited here, but it strikes me as being very out of whack with what he was saying in 1923, 1926, 1929, 1931, 1936, etc. - which seems odd. Moggridge and Howson see consistency over this period so I see no reason to assume the flew the coup in these cases. I'm guessing it's more likely that Irwin is doing for Keynes what you're doing for Krugman - looking at the same evidence as me but putting a very odd spin on it when it's time to interpret it that has more to do with the fact that Krugman doesn't talk like Sumner and Keynes doesn't talk like Cassel.
Mark A. Sadowski, a slightly off-topic question...
DeleteWhy is it that Douglas Irwin and Patinkin are so focused on gold in this debate? Britain was on a fractional-reserve gold standard at the time. The link to gold didn't restrict the quantity of money directly, or the quantity of close substitutes for money like "sight bills". As I understand it the required reserve fraction at the time was quite large, >10%. Why didn't the Bank of England lower it if the wanted looser monetary policy?
@Daniel Kuehn,
Delete"What are you talking about "after the fact"?!?"
My favorite example is of this is the grudging thumbs up Krugman gave to NGDPLT on November 19, 2011, less than two weeks before Christina Romer endorsed it in an NYT oped. This of course occurred after he had been dismissing anything remotely related to the concept for two years.
@Current,
Under the international gold standard no central bank has absolute control of the price level in the long run. Yes, in the short run, there are things that the central bank can do to influence monetary policy stance such as adjusting reserve requirements, but they are limited in their effectiveness. If it helps think of the gold standard as a fixed exchange rate regime.
OK, but that's just NGDPLT. That was not your claim. Your claim was that he was supportive of unconventional monetary policy after the fact. You're moving the goal posts.
DeleteI don't ever recall him dismissing NGDPLT. Do you mean he dismissed selected claims of market monetarists?
I guess it all depends on what one means by "unconventional". The correct date was October 19, 2011 and the post is here:
Deletehttp://krugman.blogs.nytimes.com/2011/10/19/getting-nominal/
Where Krugman says:
"...My beef with market monetarism early on was that its proponents seemed to be saying that the Fed could always hit whatever nominal GDP level it wanted; this seemed to me to vastly underrate the problems caused by a liquidity trap. My view was always that the only way the Fed could be assured of getting traction was via expectations, especially expectations of higher inflation –a view that went all the way back to my early stuff on Japan. And I didn’t think the climate was ripe for that kind of inflation-creating exercise.
At this point, however, we seem to have a broad convergence. As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope..."
So by his own admission he was dismissive of NGDPLT. If memory serves the first post where he dismissed it was "Nominally Misguided" on November 9, 2009.
One thing that is ironic about the above quote is the idea that Market Monetarists had somehow moved to an expectations view. Scott Sumner's very first post in February 2009 ("About") specifically mentions the importance of expectations.
By his own admission he dismissed a selected claim of NGDPLT advocates - which is precisely what I said. I don't think he ever said "this idea that you'd want to target NGDP levels is crazy" even before he actually embraced it himself. If you find him saying that let me know, I could very well be wrong.
DeleteDo you take "I don't think NGDPLT to be absolutely foolproof and I think the market monetarists should be concerned about getting real traction on the expectations channel" as "dismissing" NGDPLT? I certainly don't. I'd raise the same possible problems with fiscal policy, and I'm not "dismissive" of fiscal policy just because I think it's foolproof.
re: "One thing that is ironic about the above quote is the idea that Market Monetarists had somehow moved to an expectations view. Scott Sumner's very first post in February 2009 ("About") specifically mentions the importance of expectations."
Well, it's a matter of emphasis. You have to remember that Krugman has been talking about expectations and monetary policy at the zero lower bound since the 90s and New Keynesians generally have been talking about the importance of expectations for monetary policy generally for even longer than that. So maybe Sumner mentions it in 2009, but it's not a piece to consider that you usually hear market monetarists emphasize (Krugman seems to think that has changed over time - I can't confirm that one way or another).
TravisV here from TheMoneyIllusion comments section.
ReplyDeleteProf. Sumner responded to your post here:
http://www.themoneyillusion.com/?p=25891#comment-313328
Travis, a quick response to that quote.
1. During the 1930s very, very few people thought money was tight. Perhaps they thought it tight in 1929, but not 1930-33. Friedman changed minds on that issue. By the way, my view that F&S changed the minds of many Keynesians on 1930-33 is the conventional view. If he disagrees then he’s expressing a contrarian view.
2. Before the US got into trouble many NKs (including Bernanke) blamed the BOJ for being too cautious. After 2008 they started giving the Fed a pass for the exact same sort of errors.
It's always tricky when Sumner says that "money was tight". He often seems to mean that the nominal GDP was not at an adequate level - that the goal was not attained. It works both ways for him too - when things are going well it's because monetary policy got it right. For example, he recently wrote:
Delete"I favor setting monetary policy at a position where AD is expected to grow at a socially desirable rate. Suppose someone says; “No, that’s a bad idea, we should use fiscal policy.” And suppose he gets free rein over fiscal policy. And suppose it works, i.e. that AD grows at a socially desirable rate. What then? Then I’d say you’ve just adopted my preferred monetary policy—you set monetary policy at a position where AD was expected to grow at the socially desirable rate."
There seems to be no prospect in which you could have the right monetary policy by Sumner's standard and fail to achieve the desired outcome. And he doesn't seem like he'd deny it either - if I recall he's quoted Yoda before on this point: do or do not, there is no try.
Now, by that definition I'm sure lots of people would be happy to agree with Sumner that monetary policy was tight. By that definition I'd agree that monetary policy is tight too. The problem is it's an odd definition, so of course you don't have people coming out and saying that at the time. Many were noting that monetary policy was not gaining traction (or as Sumner likes to say, was not being tried).
Even given that caveat, there were still greater concerns than Scott lets on. In 1931 (which last I checked was between 1930 and 1933), Keynes identified the principle problem as being tight money (see The Consequences to the Banks of a Collapse in Money Values).
I think what really changed with F&S was views about the prospects for monetary policy to end the crisis. I don't think the change was so drastic on role of tight money in introducing the problem. As I noted to Mark above, Keynes had a multi-faceted perspective. Yes he thought money was tight, but then he was interested in the mechanisms that would hold demand at depression levels. And then of course he was interested in policy alternatives as well.
Sumner seems to take that orientation - then as well as today - as ignoring the monetary point. That's how you get crazy claims like DeLong and Krugman don't think monetary policy is effective, which is patently untrue.
"In 1931 (which last I checked was between 1930 and 1933), Keynes identified the principle problem as being tight money (see The Consequences to the Banks of a Collapse in Money Values)."
DeleteKeynes identified tight money as *a* problem in The Consequences to the Banks of a Collapse in Money Values, but nowhere does he recommend a course of action. Moreover, as was typical of Keynes during this period, the essay was first made public in October 1931 when he sent it to the publisher as part of Essays in Persuasion, one month *after* the UK suspended the gold standard.
TravisV here.
ReplyDeleteDaniel, thank you very much for your thoughful reply. Re: this paragraph:
"There seems to be no prospect in which you could have the right monetary policy by Sumner's standard and fail to achieve the desired outcome. And he doesn't seem like he'd deny it either - if I recall he's quoted Yoda before on this point: do or do not, there is no try."
Great point. I don't know if you've seen it yet, but Bill Woolsey wrote an excellent post trying to address your concern here: http://monetaryfreedom-billwoolsey.blogspot.ca/2014/01/testing-market-monetarism.html
The criticism that market monetarism is "non-falsifiable" is a very good one. Personally, I'm still trying to get my arms around these issues.........
When people realize they made some very poor decisions in the accumulation of debt, I don't think general economic expectations makes much of a difference at all. It's all about individual expectations and those are tied to current high debt loads. Confidence returns as personal balance sheets improve. Even then, people will likely be debt-averse for some time.
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