Monday, May 21, 2012

Scott Sumner — The Trouble with History

When I object to comments by MMTers or Austrians, it’s most often based on the issues listed above. They seem a prisoner of the interwar period, failing to see how everything changes with a pure fiat money regime. 
For instance, both types of commenters put too much weight in interest rates as an indicator of easy or tight money. In the case of MMTers, there seems an inability to imagine “expansionary monetary policy” as being something like a shift from 10% trend inflation to 20% trend inflation, engineered via faster trend growth in the base. You certainly won’t find anything like that in Keynes, as far as I know he never once discussed the idea of using central bank policy to permanently raise the trend rate of inflation. Of course if this were to occur, you’d get higher interest rates. MMTers seem to assume the easy money would drive rates to zero, at which point the extra money would be hoarded.

MMTers also seem to make no distinction between real and nominal changes in bank balance sheets. Consider a monetary policy that has no impact on real bank assets or liabilities. If it created higher inflation, then nominal deposits, nominal loans, and nominal reserves would all rise proportionately. In that scenario it makes no sense to talk about loans causing deposits or deposits causing loans. In real terms nothing has caused anything. Thus the sort of considerations you’d use for analyzing a real change in the banking system is completely different from the sort of analysis you’d apply to a purely nominal change in the banking system. Microeconomic factors determine the real size of the system (in the long run), whereas monetary policy explains any additional long run nominal changes....

I strongly recommend that both MMTers and Austrians take a look at Milton Friedman’s work on money super-neutrality, which is where I first learned the basics of monetary theory. (Sorry, I don’t recall which articles.)
PS. I think both schools of thought have gained a bit of traction in recent years for roughly the same reason—the current 2% inflation target is a little bit like a gold standard. So you get some stylized facts that seem to fit each model. But never lose sight of the fact that central banks can change that target—and when that happens everything changes. 
PPS. I regard New Keynesian economics as the philosophy Keynes would have endorsed once he learned about the super-neutrality of money.
Read it at The Money Illusion
The Trouble with History
by Scott Sumner | Professor of Economics at Bentley University
(h/t The Armo Trader in the comments)

Where you do even start with this? Oh, Interest Rates and Fiscal Sustainability by Scott T. Fullwiler, Levy Economics Institute, July 1, 2006.

12 comments:

Anonymous said...

One can see the delightful hand of Cullen Roche in some of these comments.

Matt Franko said...

Somebody called Dan a communist! LOL!

beowulf said...

"PPS. I regard New Keynesian economics as the philosophy Keynes would have endorsed once he learned about the super-neutrality of money."

Ugh.
"Hayek requires the neutral money axiom, while Keynes rejected the assumption of neutral money in both the long run and the short run."
Paul Davidson
http://everydayecon.wordpress.com/2008/10/23/the-artificial-boom/#comment-35778

Greg said...

Yeah that guy HankB reads like he was lifting quotes from discussions between Cullen and Dan a few months back.

----------------------

I love his "Super" neutrality of money....
WTF does that mean?

Tom Hickey said...

@ beowulf

SS apparently thinks that if he lived long enough to read MF, JMK would have become FvonH. Really? If Keynes had been around long enough, Friedman would have been nipped in the bud.

MF was pretty much a Keynesian will Keynes (d. April, 1946) was live. As a matter of fact, later, after his "conversion" from Keynesianism, Friedman discussed economics with the Post Keynesians at Cambridge and failed to win them over.

Matt Franko said...

Greg,

I have NO F-ING IDEA what that means....

I dont think YOU (or I) have the problem here.

This is all semantics and I cannot understand it at all.

"neutral money"????? Nobody can even define "money".

Here is another one: "MMTers also seem to make no distinction between real and nominal changes in bank balance sheets."

What the hell is a "real change in a bank balance sheet"???? Who ever would even think to imagine that concept???

Trixie said...

Yeah that guy HankB reads like he was lifting quotes from discussions between Cullen and Dan a few months back.

Yep, yep. So much so that one may conclude it's merely the same two people talking to each other again. Dot-connection!

Ralph Musgrave said...

Frank Matto, I think I’ve worked out what Sumner means in his reference to “real and nominal changes in bank balance sheets." I left a comment on his blog answering his point. And it’s a pretty boring point.

In fact I just don’t bother reading Sumner’s blog on a regular basis. I find his points to be boring and trivial.

Anonymous said...

"Super"-Neutrality of money? LOL.

The trouble with history is that it kicks the ass of monetarists everyday.

Say didn't believe in his own law. Get a ffing clue Sumner.

Greg said...

I decided to look it up and there actually is a wikipedia entry on "super neutrality".

As I understand what they are saying it is that at some point increasing the amount of money will not increase the amount of goods. That nominal will outstrip real at some point.

All I can say is Wow! Ya think?!

Theres a term already for that no need to invent another. Its called HYPERINFLATION

Anonymous said...

Can someone please help me here: Do monetarists actually believe that competition exists in a capitalist economy, or not?

If an economy is running below full employment and full capacity, an increase in demand (increased "money supply") should in most cases lead to businesses increasing output, rather than just putting up prices. Sure, if there's no market competition then they'll just put up prices. But if they're competing with the guy next door to provide a product at a better price, why would they put up their prices?

Tom Hickey said...

The assumption is that equilibrium at full employ results from rational agents pursuing maximum utility in an economic environment of perfect competition and perfect knowledge in a market free of government intervention.

IN this model there are only two reason that the economy is not in equilibrium at "full employment" (they define that down using structural unemployment). The first reason is exogenous shock (No one could see this coming.) The second is government intervention. (The reason the recovery is slow is that government is getting in the way.)

Their answer is to reduce wages to increase investment, which increases supply due more attractive profit margins (provided prices don't fall, too), and the investment provides the income to purchase the goods.

The neoliberal answer is ALL about getting government out of the way and suppressing wages.