I am currently at a blogging conference in Berkeley. Meeting people here has pushed me to think about how I would summarize my blogging. One approach would be to list a bunch of unconventional claims that I have made in various posts over the past 15 years:
1. The Great Recession is usually linked to the financial crisis, but it was actually caused by a tight money policy.
2. Monetary policy is usually linked to interest rates, whereas interest rates have little or nothing to do with monetary policy, which is better described in terms of nominal GDP.
3. Economists are often seen as people who predict the business cycle. In fact economists are unable to predict recessions and major moves in inflation, and shouldn’t even try.
4. Asset price bubbles are widely seen as occurring in various markets, whereas in fact bubbles do not exist.
BTW, none of these claims are precisely true, they are all useful approximations of reality—true in the sense that Newtonian mechanics is approximately true (albeit much less accurate than Newtonian mechanics.)
I could add many more contrarian views to this list (fiscal multiplier is near zero, price gouging is good for consumers, etc., etc.), but I’ll focus on these 4. Should we think of this “market monetarist” model as being analogous to something like MMT—a heterodox model that rejects textbook economics? I don’t think so.
In an essay discussing his battle with protectionists in the Clinton administration, Paul Krugman offered this piece of advice:
(ii) Adopt the stance of rebel: There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me!
That really resonated with me. All my wildly controversial ideas are 100% built up with standard textbook economic building blocks. In my blog posts (and in The Money Illusion book) I frequently cite popular textbooks as well as the claims made by mainstream macroeconomists that do not hold my unconventional views. I show that although they do not agree with me, my claims are the natural implication of many of the things that they have been writing and saying over the years. In that sense, market monetarism is nothing like MMT. It’s also quite heterodox; but only in its conclusions, not in terms of its underlying model.
Another way of thinking of my blogging is in terms of some even more basic “tools” that allowed me to reach these various controversial claims:
1. Never reason from a price change
2. Monetary offset
3. Efficient markets hypothesis
You could say that my blog is about applying these tools to a wide variety of problems. For instance, all three tools played a role in my reaching the conclusion that the Fed caused the 2008 recession. Never reason from a price change allowed me to look at the situation without being misled by low and declining interest rates. The EMH allowed me to see that almost all of the asset markets were signaling that money was too tight. And I understood that the central bank could have and should have used monetary policy to offset the drag to the economy (specifically NGDP) caused by other factors such as a decline in the property market.
I am sometimes associated with the advocacy of NGDP targeting. But lots of economists favor NGDP targeting (many more than when I started blogging). It’s the controversial claims that make my blog distinctive.
READER COMMENTS
steve
Jun 2 2024 at 3:10pm
Appreciate your efforts. You can probably tell I dont agree with everything you say but I have learned quite a bit from you and changed my mind about some things. Never reason from a price change ranks up there with “incentives matter”.
Steve
David Seltzer
Jun 2 2024 at 3:36pm
Scott: The EMH allowed me to see that almost all of the asset markets were signaling that money was too tight. Yup! I was still managing a small hedge fund in 2008. (seems like just yesterday). In 2007 we started Buying puts and built large positions in out of the money put spreads. Always knowing risk was defined. By 2009 we paid large bonuses to our traders and staff! I retired in 2010.
Philo
Jun 2 2024 at 4:44pm
I suspect that many—even most—of the economists who favor NGDP targeting do so because of your influence. It is definitely one of your blogging’s distinctive features.
Thomas L Hutcheson
Jun 3 2024 at 6:11pm
I agree. My example is Matt Yglesias who (sort of vaguely) favores NGDP targeting. I have chided him repeatedly for not crediting Scott.
That said, I still want to see a rigorous analysis of why NGDP targeting is better than inflation targeting
Matthias
Jun 12 2024 at 12:25am
Price level targeting is almost as good as ngdp level targeting.
I’m not sure how rigorous you need the analysis to be? And what kind of rigour you want? George Selgin and Scott Sumners have done a few of those analyses over the years. But perhaps you prefer more Greek letters in your analysis or so?
The main difference between price level targeting and ngdp level targeting is how they handle productivity shocks (positive or negative). So a comparative analysis would focus on those.
Nicholas Decker
Jun 2 2024 at 5:33pm
You mention being in Berkeley for LessOnline. Will you be there for Manifest? As a hero of mine — frankly I just want to shake your hand.
Scott Sumner
Jun 3 2024 at 3:02am
Unfortunately, not this year. If they have it again next year then I’ll try to attend both.
Thomas L Hutcheson
Jun 2 2024 at 6:06pm
If you do, I hope you would distinguish the September crisis from the decade of under target inflation as “caused by” tight money. Maybe you want to make both claims, but do so expliticly.
Why better by NGDP than inflation?
Pace Queen Elizabeth, this is pretty standard vies among economists.
A good one!
[Please do add the zero “fiscal multiplier.”
Scott Sumner
Jun 3 2024 at 3:10am
Inflation reflects both monetary policy and supply shocks.
Thomas L Hutcheson
Jun 3 2024 at 6:15pm
How is that a problem? shocks are shocks whether supply or demand, positive or negative and this certainly included past monetary policy mistakes.
Scott Sumner
Jun 4 2024 at 2:17pm
Yes, but I’m looking for an indicator of monetary policy, not an indicator of inflation.
Rajat
Jun 2 2024 at 7:36pm
I have so much to say about this post…
First and most trivially, did you mean your second reference to Newtonian to be to Einsteinian mechanics or quantum mechanics?
Second, about the Krugman advice, Krugman referred to his debates with ‘intellectuals’, which both then and now mostly means non-economists. Whereas many of your ‘wildly controversial’ ideas are at odds not only with those of non-economists, but with the views of many modern macroeconomists, whether some variety of mainstream New Keynesians (NKs) or Neo-Fisherians. I’m no academic, but I listen to enough of David Beckworth’s show to gather that NKs have spent the last 15 years further complicating their models with more financial frictions and other imperfections, and more recently on developing seemingly ad hoc things like ‘non-linear’ Phillips Curves. These academics don’t really engage with your ideas or seek to debate or refute you, because that’s not where the profession is at. They would say that quoting things like Mishkin’s textbook is meaningless because it does not reflect the last 3 decades of progress in macroeconomics and the cutting edge of where the profession is at now.
Third, I have learned a tremendous deal from your blogging over the years, going well beyond those ideas you listed. You may not consider them very unique or special, but they have changed my outlook on many things. I’ll list just a few: (1) That the Fed reflects the thinking of the median professional macroeconomist, and so it is unrealistic (and unfair) to expect that a given chair like Bernanke could swing the Fed around to fully adopting something as radical as NGDPLT in the space of a few months. At most, a chair can move things by a few degrees this way or that. Similar can be said for political leaders and the prevailing social and political milieu that they inhabit. (2) Your response to Tyler Cowen on the Great Stagnation, which I referred to in another comment recently: People want things like nice homes, restaurants and holidays and that’s what economies should be allowed to produce without having people and resources deliberately channelled into STEM fields, etc. (3) Relatedly, and discussed in the same post, test scores aren’t an important measure of the quality of a school system. I used to be a believer in returning education to a focus on the 3 ‘R’s’. But your post reminded me how school used to be so boring and how now it is so much more fun, and that >90% of people don’t need to know the rules of grammar or how to do calculus. They need to learn how to work cooperatively and constructively with others, which is why kids spend so much doing on these maddening group assignments and class presentations. I realise Bryan Caplan has said a lot about this, but it was your commentary that encouraged me to listen and read his thoughts and book. (4) Your frequently-used ‘two brothers’ example on how taxing returns to savings is double taxation on savers. Barely anyone involved in tax policy acknowledges this! (5) Going beyond economics, your ‘Ted talk’ explaining how you think people ‘see’ meaning rather than ‘find’ meaning. This really made a huge impression on me. I could go on and on.
Scott Sumner
Jun 3 2024 at 3:09am
I meant Newtonian in both cases. It’s not perfect, but it’s close for most purposes.
Thanks for the comment. It’s gratifying when people say they find something of value. I had actually forgotten about some of the posts you mentioned.
Thomas L Hutcheson
Jun 3 2024 at 6:22pm
The two brothers analysis is enlightening, but I draw a different conclusion, not that we should not tax “capital” income, but that we should tax “consumption” rather than “income.”
marcus nunes
Jun 3 2024 at 9:24am
Focusing on interest rates as determining the stance of monetary policy:
(100) Justifying Powell´s “lack of confidence” – by Marcus Nunes (substack.com)
Thomas L Hutcheson
Jun 3 2024 at 6:26pm
Err … No. I don’t think “stance” is a thing that need “determining.”
After reading Alternative Approaches …” I think what Scott is really arguing is that interest rates manipulation is not a necessary and sufficient condition for managing desired outcomes (NGDP or inflation).
marcus nunes
Jun 4 2024 at 9:19am
In his words: “Monetary policy is usually linked to interest rates, whereas interest rates have little or nothing to do with monetary policy, which is better described in terms of nominal GDP.”
Thomas L Hutcheson
Jun 4 2024 at 8:54pm
I do not see why we need to “describe” monetary policy in order to discuss what instrument settings will achieve the desired outcome, inflation of NDGP. Going back to the original point, is the contention that the Fed been using some combination of instruments to have produced higher inflation or or higher NDCP growth in 2008 before the Leman bankruptcy? Then say so. Why say, “tight money?”
Philippe Bélanger
Jun 3 2024 at 10:12pm
Like other commenters, I just wanted to say that, even though I am not always 100% in agreement with what you write, I have an enormous appreciation for this blog.
David S
Jun 4 2024 at 3:21am
I guess I’ve been reading your blogs long enough that I don’t consider your ideas that unorthodox anymore. I still puzzle a bit over the principle of “never reason from a price change” but my befuddlement pales in comparison to the rank and file Trump voters who believe that massive tariffs will lead the U.S. into paradise. Or, the growing chorus of lunatics who want to prevent Wall Street investors from buying houses.
What helped my understanding of economics was a brief comment you made either on this site or your other one about how money hoarding causes recessions. That idea helped me appreciate some of the government actions during the pandemic—flawed as they were.
Looking back at the past few decades, inflationary Hell is a bit better than deflationary Hell—but Heaven is a stable and boring monetary policy that keeps expectations as stable and boring as possible.
Todd Ramsey
Jun 4 2024 at 9:36am
” lots of economists favor NGDP targeting (many more than when I started blogging)”
Your efforts are effective. You are changing the world for the better. Thank you!
Next stop: NGDP securities market!
Comments are closed.