Sunday, March 25, 2012

Scott Sumner: An obstacle to sufficiently expansionary monetary policy?

The man is conjuring up enemies again. In this post, Sumner writes: "I believe that “liquidity-trap Keynesianism” is one of the major causes of the Great Recession—it contributed greatly to the monetary policy passivity. It’s been an abject failure." and "In my view the major battle going forward in mainstream macro will be between those who favor monetary policy rules as a demand-side stabilization tool, and those who favor fiscal stimulus. On the fringes you’ll have the MMTers, the Austrians, the RBC-types, etc. But they’ll never have much influence, because they don’t offer (stabilization) policy advice that is taken seriously in the halls of government."

It used to just be frustrating that Sumner seemed completely incapable of distinguishing enemies from (more or less) friends, and to watch his Krugman complex which rivaled that of many Austrians. But it's really getting worrisome to me.

If the fight was really between market monetarists and Keynesians, and if it wasn't the Austrians and RBC types that had some kind of control over the policy debate (if for no other reason than that they sound more "reasonable" to politicians afraid of money and debt), we would have substantially more monetary easing throughout this crisis. Sumner acts as if there is someone out there proposing fiscal stimulus as an alternative to monetary policy. If there is, I have yet to come across that person. Acting like monetary easing is a fringe position the way the market monetarists do might even be hurting the cause of getting it accepted as the right view. So why is this happening? The more I hear this out of Sumner the more I worry that it's about scientific priority and promoting NGDP targeting as the framework for thinking about it. If you say "ya, Brad and Paul are in agreement with me on the Fed, they just think there's a stronger case than I do for fiscal policy", you aren't doing much for the Scott Sumner brand. I hope that's not what it is, but I'm increasingly worried it might be.

Krugman's position - and as far as I know DeLong is there with him on this - is that:

1. In a liquidity trap, the traditional interest rate mechanism for increasing growth through monetary policy is gone, but

2a. Through a credible commitment to being irresponsible, monetary policy will still work, although,

2b. Credible commitment to being irresponsible is hard for the monetary authority to do for the simple reason that all their pre-Fed work has been dedicated to convincing people that their policy responses are not going to be sustained indefinitely.

3. Fiscal policy that trickles out is unlikely to do much and will hurt the long-term debt position, but large fiscal policy can shock the system to the point where traditional monetary policy (that does not rely so exclusively on expectations) gets traction again.

This means big monetary expansion coordinated with big fiscal expansion. You can find this spelled out in plain English in his Japan paper. He takes Koo to task in 2010 for suggesting that monetary policy is useless and he points out that to the extent that we have a strong monetary response we need less of a fiscal response. He cheers on people who reject Fed passivity. He reiterated in 2011 that he supports both monetary and fiscal expansion, and he supports fiscal expansion precisely because of how tough credible monetary commitments are (Sumner acts like these issues are trivial - who turned out to be right?).

But Scott Sumner doesn't seem to even get what Krugman is saying. In this post Sumner just can't seem to get his head around the fact that Krugman is not saying "monetary policy can't work", he's saying "monetary policy's effectiveness in a liquidity trap is almost entirely dependent on expectations of future monetary policy".

Then at the end of that post, Sumner suggests Krugman used to be a pure-monetary-policy guy in 1998, and now is opposed to it! I STRONGLY encourage you guys to read the 1998 paper on Japan. He's an advocated of a paired fiscal/monetary policy approach then just as he is now, and for exactly the same reasons. He doesn't talk about fiscal policy until later in the paper... maybe Sumner only read the beginning and skimmed the rest. But he is supporting the same position now as he was then:

The efficacy of monetary policy in a liquidity trap his highly contingent on expectations, and strong fiscal policy can jolt the economy into a position where monetary policy is less contingent on expectations to be effective.


  1. The expectations part of monetary policy, to me, seems to rest on:

    a) Excessively atomistic views of how prices are set in an economy characterised by large corporations and where prices are set by administrators.

    b) An incredibly skewed view of the reaction of average people to changes in monetary policy. The average person has very little idea what a Central Bank does or even what one is.

  2. RBC types actually publish in mainstream journals, but I'm not sure how influential they are when it comes to making policy. As Greg Mankiw and others have noted, the folks invited to Washington tend to be "brackish" engineers. And intellectual influence flows from policy-makers to academia, not vice-versa.

    The most inappropriately contractionary monetary policy has come from Europe. How much of a presence does either the Austrian school or RBC have there? I think relatively hawkish New Keynesians like Taylor and monetarists like Meltzer are more influential than folks associated with the Ludwig von Mises Institute or even GMU's Austrians.

  3. Scott's objections are more that fiscal policy cannot work, without the monetary authority permitting it to work. But if the monetary authority just needs to permit greater inflation, why not just explicitly pursue the monetary policy straightaway. It's actually what does the heavy lifting.

    That's why he opposes advocating fiscal stimulus - it is at best pointless, at the worst it confuses the issue.

    And as for credible commitments, at least in the U.S., it seems there has been better success in getting the Fed to pursue stimulus as opposed to getting Congress to pursue stimulus. Last I checked, year-over-year federal spending was falling.

  4. Many moons late, but this was a good post.


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