Is Scott Sumner Reality Based ?
Scott Sumner wrote
If pressed, Keynesians will usually point to real interest rates as the right measure of monetary ease or tightness. By that criterion the Fed adopted an ultra-tight monetary policy in late 2008. Monetarists will usually say that M2 is the best criteria for the stance of monetary policy. By that criterion the ECB adopted an ultra-tight monetary policy in late 2008. And yet it’s difficult to find a single prominent macroeconomist (Keynesian or monetarist) who has publicly called either Fed or ECB policy ultra-tight in recent years. Maybe tight relative to what is needed, but not simply “tight.”
To me this means that he claims that US real interest rates have been high “in recent years”. Of course he also says “in late 2008” but suggests that the real interest rates then were a policy choice and that the policy continues.
In fact real interest rates in the US are extraordinarily low. The 5 tear real interest rate is negative. I think Sumner made a definite claim about published numbers which is definitely false.
Sorry I don’t know how to embed Fred graphs. Please click this link.
I added the chart for you — spencer
update: thanks spencer. Also I have added the link to Prof. Sumner’s post.
I’d say he is crazy and delusional. Basically, I’m convinced that his methodolical a priori is that everything is determined by monetary policy. Since unemployment is high, he claims US monetary policy is tight. I think you quoted a declaration of religious faith and not a description of reality.
I don’t agree with Sumner’s claim about Keynesians. In fact Keynesians follow Taylor (a Republican hack and new Keynesian) and evaluate monetary policy by comparing the federal funds rate to the level given by a Taylor rule. The absolutely standard view among Keynesians is that the loosest possible monetary policy occurs when the federal funds rate is essentially zero. This explains why all Keynesians agree that US monetary policy has been very loose since the crisis began.
Note the careful qualifier “late 2008.” He has picked a cherry. In particular in late 2008 world financial markets were in a total panic with a desperate race for liquidity. This drove up the price of normal nominal treasuries and drove down the price of any asset with a thinner market (that is all other assets). This was not a shift in monetary policy (just as no Keynesians would call it a shift in monetary policy). It was also very brief.
The current 5 year real interest rate in the USA is negative. Real interest rates are extremely extremely low in the USA. But Sumner will not allow facts to weaken his absolute faith, so he decided to ignore all evidence from 2009, 2010 and 2011. He just talked about a brief spike about which neither the Fed nor any other entity could do anything.
He tried to write something which was technically true, but he slipped up. I quote with a totally fair elision
“By that criterion the Fed adopted an ultra-tight monetary policy in late 2008.
late 2008. … Fed … policy ultra-tight in recent years.” Late 2008 is not years recent or otherwise. It is part of one year. Sumner’s absurd claim is based on describing a few months over two years ago as “recent years”. Basically he claims that because real interest rates were briefly high years ago (during a panic) they are high now.
I can’t seem to find your link to Sumner.
The choice of Treasury bonds is not the best measure since the flight to safety has lowered them considerably. The Fed has traditionally only targeted Tbills which are near zero. The real tightness has been in commercial rates which the Fed also doesn’t target but has moved with credit easing. The blame would be one of omission, not countering market swings, rather than comission.
His target would not be interest rates at all but nominal gdp and demands that the Fed counter falls in that. The Fed would have a persuasion job to do in changing its target and convincing people it could and would make its target and they would have to much, much more than they have to accomplish it. I doubt it could accomplish this purely buying Treasuries, more likely riskier assets would have to be moved but it has accomplished some of this with QE2.
“To me this means that he claims that US real interest rates have been high “in recent years”. Of course he also says “in late 2008″ but suggests that the real interest rates then were a policy choice and that the policy continues.”
His explanation isn’t great, but he makes no such suggestion. More on this below.
“I’d say he is crazy and delusional. Basically, I’m convinced that his methodolical a priori is that everything is determined by monetary policy. Since unemployment is high, he claims US monetary policy is tight.”
This is a complete fabrication. It is no bearing on Sumner’s argument in the slightest. His definition of monetary “tightness” is NGDP, only NGDP, and nothing but NGDP.
He repeats this mantra of NGDP tightness every two days on his blog. He tells his pets that they should target NGDP, should they ever have an opportunity to sit on the Fed board. His iPod is nothing but the term NGDP repeating for hours. (One of the tracks is PDGN, just for the sake of some variety.) He mumbles NGDP to himself when he falls asleep at night. He asked his wife to get NGDP tattooed on her chest, but she refused. (Sometimes she’s willing to use temporary tattoos when they’re feeling feisty.)
To claim that his definition of money tightness is related to unemployment, without the filter of NGDP, is simply wrong. Utterly wrong. He has a simple mantra. It is easily testable. He would be proven wrong, and quasi-monetarism would die a horrible death, if unemployment spiked while NGDP growth maintained steady. Sumnerism is NGDP and only NGDP.
If you’re going to criticize Sumner, NGDP is where you do it.
“This was not a shift in monetary policy (just as no Keynesians would call it a shift in monetary policy). It was also very brief.”
This is some weird phrasing from him, but he just wants people who claim to care about real interest rates to admit that money was tight for a time in 2008. Sumner uses NGDP for tightness, but if others want to use real interest rates for tightness then they have to admit (according to him) that policy makers allowed real rates to spike into extremely tight levels.
There’s no “shift” in policy necessary here. Negligence is sufficient explanation.
Allowing a spike in something that shouldn’t spike is a bad thing. If tightness is defined by real rates, then allowing a spike is allowing tight money. Allowing something to happen which can be prevented is a policy. It’s a choice to allow tight money instead of fighting it, and that idleness in the face of a spike is a policy.
Of course, for this argument to follow, you have to believe (as Sumner does) that the Fed had the power to fight this spike in real rates. He’s so convinced of the Fed’s power in this respect, that he considers allowing the real rate spike to happen as a choice, a “policy”. He doesn’t seem to consider the view that the Fed would not have had that power, that the Fed didn’t act to stop the spike not out of negligence, but because there was nothing that they could do about it.
But if the Fed did in fact have the power to stop real rates from spiking in 2008 (as Sumner fully believes), then allowing that spike to happen anyway can absolutely be called a policy. If you have the power to stop a bad thing and don’t do it, then that’s a choice.
“Late 2008 is not years recent or otherwise. It is part of one year. Sumner’s absurd claim is based on describing a few months over two years ago as “recent years”. Basically he claims that because real interest rates were briefly high years ago (during a panic) they are high now”
Same thing here. If they thought high real rates are bad, a sign of tight money, and then allowed high rates to happen anyway, then that’s a policy. Deliberately […]
In the case of the end of 2008, I am not sure that TIPS provide such a useful measure of real rates. As I understand it, there is a significant difference in the quantity of TIPS available from the treasury, as opposed to the availability of nominal treasuries. That difference in supply distorted the normal TIPS/Nominal relationship with the intense flight-to-safety demand in late 2008.
Last summer I spent days putting together a post to deconstruct a piece of cherry-picked, poorly thought-through, shoddy nonsense that Sumner put up.
In Setember, I gave up on him completely, since I concluded that he is insane.
So, yes, I would say he is delusional, and not at all reality based.
But it’s pretty close to typical in the pseudo-science of Economics.
I read his post entirely differently…. I read it as saying the evidence points to a need for looser policy, but that hardly anyone – Keynesian or monetarist – was arguing for looser policies. The point that interest rates were at 0% and the economy was still sinking sounds like an argument in the same direction as Sumner’s.
Sumner’s arguments for NGDP are a different topic. His argument here is that even by Taylor rule measurements, policy was way too tight – and that most prominent economists weren’t screaming for more. Regardless of who’s model is correct, I find it hard to disagree with this analysis.
Robert Waldman wrote:
“To me this means that he claims that US real interest rates have been high “in recent years”. Of course he also says “in late 2008″ but suggests that the real interest rates then were a policy choice and that the policy continues.”
To me this suggests that Robert Waldman is incapable of reading. Sumner makes it quite clear he believes interest rates are useless as an indicator of monetary policy stance in that very post. Sumner’s post starts with:
“Has there ever been a more complete intellectual breakdown in our profession? Economists of both the left and the right have been disdainful of the idea that the Fed and ECB adopted ultra-tight monetary policy in late 2008. When I ask economists why, they often point to the low nominal interest rates. When I point out that for many decades nominal interest rates have been regarded as an exceedingly unreliable indicator of monetary policy, they shrug their shoulders and say “OK, then real interest rates.” At that point I explain that real interest rates are also an unreliable indicator, but if you want to use them it’s worth noting that between July and late November 2008, real rates on 5 year TIPS rose at one of the fastest rates in US history, from just over 0.5% to over 4%. Then they point to all the “money” the Fed has injected into the system (actually interest-bearing reserves.) I respond that the people who pay attention to money (the monetarists) don’t regard the base as the right indicator, as it also rose sharply in 1930-33.”
In short, in a manner that even Waldman can comprehend, Sumner is saying
*real interest rates are bunk*.
And that underlines the whole problem with Keynesians. Their mind numbing preoccupation with interest rates has caused them to reach the conclusion that monetary policy has become impotent because *their* policy instrument of choice is pinned to the floor.
It would merely be sad, if it were not for the fact that this is deja vu all over again (1929-1933). Ask yourself this: how did we get out of the Great Depression? Short term T-bills had dropped to 0% in 1931 so by Keynesian standards monetary policy was as “loose” as it could possibly get.
Nothing changed by that standard in 1933 and yet from 1933-1937 real GDP increased by 43.6%. What caused the economy to surge so dramatically? *Magic pixie dust?* No, in 1933 FDR devaluated the US dollar by 41%. It’s a fairly conventional view now among most monetary economists that it was this single act that precipitated the recovery from the Great Depression (see Eichengreen, “Golden Fetters”). Monetary policy was (and is) hardly impotent just because of the zero lower bound in interest rates.
Sumner is operating from three basic principles:
1) The only coherent way of characterizing monetary policy as being either too“easy” or “tight” is relative to the policy stance expected to achieve the central bank’s goals. The Fed should adopt the policy stance most likely to achieve its goals (which implicitly are 2% core inflation and low unemployment). “Doing nothing” is the same thing as doing something.
2) “Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.” This is from Mishkin’s best selling undergraduate monetary economics text (p. 607).
3) After mid-2008, and especially in early October, the expected growth in the price level and nominal GDP fell increasingly far below the Fed’s implicit target. (And nearly three years later nominal GDP is still over 8% below trend.)
The logical implication of these three premises is that the Fed has the ability to boost […]
@ Mark –
Well, I for one, am both illiterate and rude, but I try not to be a fool. So help me out here. Since 3) is true, then If 2) is also true then, per 1) policy must be too tight, irrespective of interest rates. If 2) is still true, then there are things the Fed (is there any other entity that controls monetary policy?) should be doing, but isn’t.
What are those things?
I suppose the other possibility, that Mishkin is wrong, is too gruesome to contemplate.
Also, since Sumner says: “If pressed, Keynesians will usually point to real interest rates as the right measure of monetary ease or tightness. By that criterion the Fed adopted an ultra-tight monetary policy in late 2008,” and 3 is true, then Keynesians must believe that even now – with an example of a negative real rate – monetary policy is too tight.
OTOH, I thought that the Keynesian policy at the zero bound, per Krugman, frex, was to resort to fiscal policy, because monetary policy can’t become loose enough. What am I missing?
A walk through the Great Depression. It appears that MP was vital and that NIRA was an obstructive elephant in the room.
“What are those things?”
Well, more QE would be nice, a commitment to price level targeting would be much better, and nominal GDP level targeting would be better still.
“OTOH, I thought that the Keynesian policy at the zero bound, per Krugman, frex, was to resort to fiscal policy, because monetary policy can’t become loose enough. What am I missing?”
Since Keynesians only believe in the interest rate channel of the monetary transmission mechanism (ignoring all the other channels mentioned in almost any intermediate textbook on monetary economics) they believe monetary policy is impotent at the zero lower bound. But a reality based view knows that’s not true because monetary policy precipitated a recovery from the Great Depression although interest rates were already zero in 1933 (and had been for 2 years).
P.S. In his more transparent moments Krugman has acknowledged that a commitment to a price level target would work even in a liquidity trap. But then he always slips back behind the fog and mirrors.
I am just discussing the assertion made by Sumner. He does not discuss safety premia. He asserts an error of commission.
Your interpretation of Sumner contradicts the quoted text. He brought up interest rates and made a specific and plainly false assertion on a simple matter of fact.
As to “targetting nominal GDP” why doesn’t he just cut out the middleman and say that the Fed’s orientation should be assessed by looking at real GDP and the unemployment rate ? The statement that the Fed should target nominal GDP is the statement that it can control nominal GDP, that is the claim thtat it doesn’t matter that we are in a liquidity trap. Sumner can’t expect me to accept the argument “unemployment is high, therefore monetary policy is tight.” I don’t think he has any more nearly valid argument. He simply assumes that monetary policy is effective when safe short term nominal interest rates are zero.
In support of that belief, he asserted that extremely low real interest rates are high. I didn’t bring up “real interest rates” he did.
I don’t think that the Fed has accomplished any of that with QE2. What evidence convinces you that QE2 was at least partially successful. I think that QE2 should work through real interest rates (either by gettting nominal rates lower or expected inflation higher). Real rates are now the same as they were when Bernanke first began discussing QE2. I’d say an open minded look at the evidence would lead the naive empricist to fail to reject the null that the effect of QE2 (so far) is zero.
What makes you confidently claim otherwise ? What evidence is there that anything was accomplished with QE2 ?
That’s a long comment but it does not address the quoted passage by Sumner. Your reference to Katrina shows the importance of verb tenses — it shares the phrase “in recent years” with the quoted passage, but it also includes the word “was” which makes it possible for it to refer to an isolated episode.
You can’t rewrite the text whose meaning is debated then claim I missunderstood it because I missed the word which wasn’t there.
I never claimed real interest rates are high today. Your entire post is based on a misconception. I watch the real interest rates every day, and I certainly know how low they are. I was very specific that real rates were high in late 2008, even giving the specific months. I also argued that monetary policy has been tight ever since 2008, but certainly don’t use real interest rates as the criterion. I called real rates the Keynesian indicator, and I’m certainly no Keynesian. If you want to refute me find a long list of Keynesian economists who thought money was tight in late 2008.
In a way that is what I said. However, I don’t agree with the way you put it. TIPS are real rates, they aren’t a measure of real rates. I think what you mean is that the TIPS rate is not the rate that managers used to discount future profits when deciding on, say, whether to invest in fixed capital.
Ah my. I don’t think you want to go there. Managers are willing to say what rate they use (when asked by Larry Summers most answered). They calculate accounting profits = gross revenue from an investment minus interest and depreciation (the interest there is nominal). Then they discount that flow with a rate that averaged over survey responses to 30%. This questinaire was sent out and returned in the early 80s (it’s an NBER working paper) so at a time when ignoring inflation was much crazier than it is now. Importantly 30% is (and was) huge compared to any market interest rate. CEO’s declared a short run bias relative to maximizing present discounted values which economists assume they maximize.
The quoted passage is brief and clear. He said “tight” not “should be looser”.
Your discussion (like Sumner’s) just assumes that the Fed can effectively stimulate more even if the federal funds rate is zero. This was an interesting hypothesis last summer. It is now a medicine which has failed both rolling over the proceeds from temporary liquidity facilities into purchases of T-bills and QE2 where huge immense gigantic open market operations much larger than any pre Bernanke. I don’t think the null that they had no effect on anything is rejected by the data.
I haven’t read the whole comment. Sumner can say both that real interest rates are bunk and that they are high. He may be right that they are bunk, but his claim that they are high is false. Disrespect for a variable is no excuse for making false claims about it.
YOu will note that I only discussed the quoted passage, which I think contains proof that Sumner is delusional. I didn’t discuss the rest of his writings. I didn’t even discuss the rest of that post. My topic is the quoted passage.
By the way, I am confident that you are not an illiterate fool, but, like me, you are rude.
“YOu will note that I only discussed the quoted passage, which I think contains proof that Sumner is delusional. I didn’t discuss the rest of his writings. I didn’t even discuss the rest of that post. My topic is the quoted passage. “
In other words this entire blog post is based on intentionally taking something Sumner said out of context and then missinterpreting it. The only thing you have succeeded in doing is discrediting yourself.
You caught me on a good day. If you think this was rude….
“You can’t rewrite the text whose meaning is debated then claim I missunderstood it because I missed the word which wasn’t there.”
I don’t give a flying flip about the “text”.
There is a human being on the other side of that internet connection. That is a living, breathing person who can clarify (and in fact has done so) if the first interpretation was somehow unclear. It means not a thing to me whether Sumner’s grammar was wrong. If we spent the next ten days hashing out the morphology and syntax of a single blog post, you might be able to convince me that your interpretation of that single grammatical form is justfiably correct. I doubt it, but hey, it’s possible. You just might be able to convince me that you have a reasonable reading of that single blog post.
And yet your gramatically correct interpretation of Sumner’s views would still not reflect the actual views of a real person, who says he’s saying something else, exactly as I indicated earlier.
My suggestion? If you’re going to call somebody else crazy, you should first take some pains to understand their underlying argument, even if you think their eloquence in English writing is somewhere between Helen Keller and Bozo the Clown. My “rewriting” was based on being a long-term reader of Sumner. Your defense of your interpretation is based on a narrow semantic reading of a single blog post.
If our interest is semantic dick-waving about the “text”, then we should keep arguing grammar. But if we want to communicate, then we should allow for a bit of fuzziness, and try to find out what people actually mean instead of concentrating on what we thought they meant yesterday, not matter how well justified yesterday’s interpretation was.
This is your idea of ‘reality based’? Ignoring the huge fiscal stimulus that took place in the Great Depression? My my.
Got any figures to back up that claim? (Of course not.)
Yes there was an alphabet soup of new programs during the New Deal, but not all of those programs had a positive effect. I would recommend reading the post by Marcus Nunes below to get a feel for what NIRA’s effect was for example. While you’re there perhaps you can take a look at the timing of the rise in M2 and GDP. (Devaluation of the dollar anyone?)
Since you’ve provided no figures I will.
In 1930, the second year of Herbert Hoover’s administration, total government spending totaled $10 billion; at the height of the New Deal spending boom in 1936, total government spending reached $13.1 billion. Given that nominal GDP was over $100 billion in 1929 that’s not really all that “huge”, is it?
However, much of the benefit of fiscal stimulus is supposed to come from the fact that it’s deficit spending. In essence, government borrowing moves future consumption to the present and hopefully boosts the economy to a permanently higher level. But this borrowing was not dramatic by today’s standards. As a share of GDP, the New Deal deficit peaked at 5.4 percent of GDP ($3.6 billion) in 1934; in dollar terms, it peaked at $5.1 billion (4.3 percent of GDP) in 1936. Those numbers pale compared to our current deficits (roughly 10% of GDP) and yet real GDP was growing at a 9.5% annual average rate in 1934-1937. (And now, em, not so much.)
Does the New Deal experience thus suggest that, when it came to fiscal stimulus, just a little bit, for some magical reason, had a large effect in the 1930s? Interestingly, economic research suggests not. Long before she was named chair of Obama’s Council of Economic Advisers, Christina Romer wrote a short paper for the Journal of Economic History titled “What Ended the great Depression?” The paper provides empirical evidence that FDR’s fiscal policy provided little stimulus during the Great Depression. From the conclusion:
“Monetary developments were a crucial source of the recovery from the Great Depression. Fiscal policy, in contrast contributed almost nothing to the recovery before 1942.”
She also points out the economy had more or less recovered to trend growth before the US entered WW II. So the giant deficits run during WW II are quite beside the point.
To add more evidence, even Paul Krugman has stated that fiscal stimulus was very weak in the 1930s, although he fails to note the importance of monetary policy:
And just to complete the puzzle, here is a nice graph by Brad DeLong showing the relationship between currency devaluation and the timing of recovery for several large nations during the Great Depression. The original graph comes from Eichengreen and Temin’s classic paper “The Origins and Nature of the Great Slump Revisited” but DeLong was kind enough to add some color to make the point easier for all to see:
So from the standpoint of economic recovery the best part of the New Deal was the part you never hear much about: the monetary policy. And if this isn’t “reality based” then maybe Romer, Krugman and DeLong should join Sumner in a psyche ward (where perhaps they can play a rubber of Bridge). My, my.