Scott Sumner Drives me Nuts Again

Just when I thought it was safe to read Kevin Drum again

he quotes Scott Sumner and disagrees in part. I go totally ape feces in comments.

Sumner (as quoted)

It’s incredibly frustrating. The political and policy world falls into two camps:

1) Those who believe no stimulus is necessary, everything is supply-side.
2) Those who believe stimulus is necessary but only fiscal stimulus can or should supply it.
....I feel like to both the centre left and the right, Milton Friedman is too heretical now — too right-wing for the left obviously and too left-wing for the right. Consequently, everything about monetarism has been stripped out of the public consciousness and we are left with vulgar Keynesianism and vulgar Austrianism.

We truly live in a Dark Age of economics.

Drum counters

where does statement #2 come from? The liberal economists I read do indeed believe that we need fiscal stimulus, but unless I'm misreading them badly, they'd all welcome looser monetary policy as well in one form or another. That might be NGDP targeting (Sumner's policy preference), it might be further rounds of QE, it might be a higher tolerance for inflation, or it might be something else. Whatever their particular policy preferences, though, I can't think of a single liberal economist who hasn't criticized Ben Bernanke for not combating the recession more actively

.

I comment.

I am not very prominent and I do think the Fed should try something (anything it can think of) to stimulate the economy. However, I think Sumner's characterization is basically fair to me. My guess is that only fiscal stimulus will, in fact work right now.

I typed "guess" but I think my view is basically proven by recent evidence (so I think the evidence proves that Sumner is totally wrong and that more or less everything he writes is grossly erroneous).

I don't reject Friedman's macroeconomics because he was coincidentally pro laissez faire in general. I reject his views because the data have rejected his views. His claim was that the Great Depression occured because the Fed did not counter an endogenous decline in the money supply due to the financial crisis. This time, the Fed made sure that the money supply increased during the financial crisis. There was still a great recession. The debate should be closed. Friedman bet everything on a prediction and that prediction has been falsified. To be a Friedman acolyte now is to trust faith over data. I stress I am not using "acolyte" metaphorically.

On fiscal stimulus -- There is a clear positive growth surprise starting in the first quarter of 2009. GDP growth was markedly higher than that forecast using DSGE models (currently top of the line New Keynesian models). It was markedly higher than the average forecast of professional forecasters in the Blue Chip data set. It was markedly higher than crude forecasts based on extrapolating trends or semi crude forecasts based on atheoretic time series models. There is a very broad consensus that the ARRA stimulated GDP among everyone who is paid based on making correct predictions (as opposed to paid based on making talking points for Republicans or being tenured like me so being paid no matter what).

In contrast estimates of the effects of QE II and operation twist are tiny and dubious. Bauer at the San Francisco Fed has an event study which, according to my back of the envelope calculations, does not reject the null that the 3 days during which QE II was announced were ordinary normal days for bond markets. The three days include the day of theJackson Hole speech and including two official announcements). The estimated effects on various interest rates were on the order of 0.14% . This was the second largest open market operation in Fed history.

The case that monetary policy *could* be effective under current conditions is a coulda woulda shoulda argument that gigantic failed efforts would have worked fine if the Fed had followed some specific advice to the letter.

I think that Sumner is totally wrong twice. First liberal economists argue for more monetary stimulus either because they are convinced it would be effective or because we think it certainly won't hurt and might help some. Second those liberal economists who believe it would be effective are placing hope above experience.