Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
On this week's Money & Politics Podcast, my guest today Scott Sumner, professor of economics at Bentley University and author of the must-read TheMoneyIllusion blog.
Professor Sumner is probably best known for his contrarian critique of the Federal Reserve, that a) mismanaged monetary policy -- not the housing bust or Wall Street greed -- caused the Great Recession, and b) its continued tight money policy is a big reason why the economic recovery is so weak and unemployment is so high.
Time magazine recently described Sumner as "most vocal supporter of NGDP targeting .. a strategy whereby the Federal Reserve, instead of trying to keep inflation stable and unemployment low, would announce its intention of taking any action necessary to maintain a long run nominal GDP growth rate target. This would mean that instead of buying up a certain amount of bonds like the Fed has done with QEs 1 and 2, it would set a target for the effect of those bond purchases and then, in theory, buy up as many securities as necessary to make it happen."
That's right, Sumner wants a more active Fed to boost the economy -- and thinks other free-market conservatives should, too.
Ricochet members, click here to subscribe or find the direct link. Everyone else, listen in above.
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Oct '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
Looking forward to the interview. Ngdp targeting is a rules based approach, so you could argue that he is really advocating for a more passive Fed, because he wants to take away their discretion.
Nov '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
I'm glad Ricochet finally has an answer to EconTalk!
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
Whoa, wait a minute. Sumner thinks the Fed has badly messed up its calculations for running the economy... and suggests they switch to a technique that is even more complicated and more difficult to pull off?
The first objection to NGDP targeting is the general point that top-down economic planning is doomed to failure. Mises, Hayek, Friedman, Rothbard, take your pick; the arguments have been around, unrefuted, for decades.
Sumner says Bernanke can't even follow his own theory of monetary easing correctly, and that boils down to maintaining a few straightforward ratios. Why does he think Bernanke (or any other Fed Chairman) could pull off a policy of calculating against an entire economy?
Mar '11
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
One hopes your synopsis of Professor Summer's position is flawed Mr. Pethokoukis for on the face of it calling such a policy madness is too generous by half. Still, I will hear him out and give him that opportunity to make the case.
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
Another big problem is the assumption that intervention to target NGDP will be successful at targeted levels. You can have a rules-based system where the Fed promises to throw its weight around until one variable reaches an explicit level, but that says nothing about its ability to do so effectively.
Sumner thinks rampant inflation is a good trade-off for higher national GDP and income. Maybe so, but who says Fed intervention is effective for controlling either aspect? The experience of the last 4 years provides plenty of counter-examples. The Fed can't even inflate the money supply at the rate they want; banks simply stacked up unprecedented levels of reserves and refused to lend. They can't control inflation expectations in any coordinated manner. They can't pop asset bubbles when they want to, or at best they can't do it in a way that avoids triggering a recession.
Where is this supernatural control necessary to balance inflation and NGDP supposed to come from? Shouldn't the Fed post a spotless track record of manipulation before they get to play with economic forces we have known are destructive for the last 1000 years?
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
And Sumner can not dismiss inflation's destructive effects by saying higher NGDP leads to higher interest rates and thus higher rates of returns on savings. This is the most crass example of ivory tower thinking I have heard on the subject.
It assumes perfect control over the timing of interest rate swings, perfect coordination between price inflation and savings ROI, perfect prediction powers of the time preferences of every single capital holder, perfect prediction of asset prices in the short- to medium-term, perfect segregation between monetary inflation vs price inflation, and so on. Sumner assumes the omniscient Fed can nimbly navigate interest rates and the economy's trajectory, keeping the "spread" between costs and returns stable, and thus avoid a rate mismatch which would devastate anyone dumb enough to save for the future.
Higher interest rates do not automatically equal higher return to savers, just like more money does not automatically equal more wealth.
I categorically reject Sumner's assumption, and say there is no way any economist can maneuver an economy to avoid inflation's savings tax. If he thinks inflation will raise NGDP/income, he must include its wealth destroying damage in his cost/benefit analysis.
Edited on August 9, 2012 at 6:18pmRe: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
As long as you are going to have a central bank, its actions need to be guided by something. I would prefer a rules based systems keyed off the markets rather that ad hoc discretion -- the current system. If you want to argue that the US should abandon its central bank, that is a different argument.
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
Indeed. Getting rid of the central bank is a different issue altogether; I didn't think my comments were advocating that (though you can guess where my sympathies lie).
Instead, my objection is that NGDP targeting requires more discretion than Sumner admits. The Fed's blunt instruments are tuned to their current mandate of price stability, and even then not very well. They don't have a knob they can turn to directly juice GDP; even if they intentionally ran up inflation, the relationship between Fed actions and GDP would be so abstract as to turn it into a guessing game.
I would prefer a system where the Fed is legally constrained to follow the Taylor Rule. Or mechanically constrained to a Milton Friedman-inspired calculation against the money supply, essentially replacing Bernanke with a laptop and a spreadsheet.
Sumner mistakes an explicit target for a rule-based system. Rules must define the actions and calculations, not just the goal.
Sep '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
Price stability? In capitalism or a free market, prices are naturally pushed down by technological advances and start up businesses finding better ways to deliver services to consumers. This "market" that we have is not free.
The only prices I see falling are in businesses that don't have easy access to credit.
This is pure inflation with a central bank that has not demonstrated an ability to contract it's money supply in over a score of years.
Get rid of the mandate of price stability, let prices work, and the invisible hand will take care of the rest.
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
The pro-market aspects of NGDP targeting, via the Market Monetarist blog:
-- NGDP targeting is ”neutral” – hence unlike under for example inflation targeting NGDPLT do not distort relative prices – monetary policy “ignores” supply shocks.
-- Level targeting minimizes the amount of discretion and maximises the amount of accountability in the conduct of monetary policy. Central banks cannot get away with “forgetting” about past mistakes. Under NGDP level targeting there is no letting bygones-be-bygones.
-- A futures based NGDP targeting regime will effective remove all discretion in monetary policy.
-- NGDP targeting is likely to make the central bank “smaller” than under the present regime(s). As NGDP targeting is likely to mean that the markets will do a lot of the lifting in terms of implementing monetary policy the money base would likely need to be expanded much less in the event of a negative shock to money velocity than is the case under the present regimes in for example the US or the euro zone. Under NGDP targeting nobody would be calling for QE3 in the US at the moment – because it would not be necessary as the markets would have fixed the problem
Jun '12
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
I listened to the podcast a couple of days ago, and realized I do not know enough about macro-economics and monetary flows to be able to predict how such an NGDP targeting system might work, but I am a qualified system engineer who has architected control systems in detail and modeled such systems seeing in practice how they fail.
My concern here is that the inherent delays in collecting and analyzing economic flows with the required accuray inherently involves delays measured in months, I have great concerns that any rules based process, will under reasonably possible conditions become unstable, and lead to oscillatory or exponential behavior causing economic collapse. I am not sure it is possible for an organization such as the Fed to always make the right decisions, in highly politicaly charged atmosphere and somehow change the control settings at the right instant to maintain the target.
One needs a lot more information before entrusting the US economy to the central bank. I think the old invisible hand of the market is not perfect, but likely better than any method tried by falible humans.
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
BlueAnt: The first objection to NGDP targeting is the general point that top-down economic planning is doomed to failure. Mises, Hayek, Friedman, Rothbard, take your pick; the arguments have been around, unrefuted, for decades. · Aug 9 at 7:49am
I suggest that these authors are beyond the intellectual capabilities of Prof. Sumner. Let him begin with "Economics In One Lesson." After he's mastered that he can go on to the mysteries of NGDP if he's so inclined.
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
James Pethokoukis: The pro-market aspects of NGDP targeting ...:· Aug 10 at 8:53am
I suggest that there are no pro-market aspects of NGDP targeting. Any policy that calls for the manipulation of the market by a government entity is fundamentally anti-market and anti-freedom.
Aug '10
Re: Ricochet's Money & Politics Podcast with Jim Pethokoukis: Scott Sumner
John Hanson: I think the old invisible hand of the market is not perfect, but likely better than any method tried by falible humans. · 13 hours ago
Two thumbs up! The history of government intervention in the market is one of abject failure.