Scott Sumner On Nominal GDP & Austrian Theory
A reader has asked me to comment on the writings of a certain Scott Sumner. His writings are generally focused on making nominal GDP (NGDP), rather than some price index the target of monetary policy. Now, that is actually an improvement compared to inflation targeting, mainly for two reasons:
1) First, it recognizes that positive supply shocks do not reduce the ability of borrowers to repay debt, and vice versa for negative supply shocks, despite the fact that they create price deflation/inflation.
2) It suggests that positive supply shocks should not be met by more monetary inflation, and vice versa that negative supply shocks.
Related to these two facts is that in the long run, nominal GDP growth is likely to be more or less the same as money supply growth. So, while not being an Austrian, Sumner is actually closer to the Austrian analysis than the inflation targeting crowd.
But while being closer, he is not close enough to be an Austrian, or even a semi-Austrian, as should be apparent in this post where he poses 7 questions for Austrians:
"1. Why did NGDP collapse late last year?"
Well, that's a complex story, but mainly because money supply growth collapsed. Money supply grew rapidly after the Fed's initial series of rate cuts from September 2007 to March 2008. Then it fell first to and then below zero during the coming six months.
Another reason was that trouble began to surface elsewhere, for example in the U.K. and Spain, which prompted other central banks to lower interest rates, something which in turn caused the dollar to rally against most other currencies.
BTW: NGDP hasn't "collapsed", it has fallen only marginally ( 2.35% assuming we can the current estimates of Q3 2008 and Q1 2009 are correct). NGDP growth has however "collapsed" into negative territory, though it is likely to turn positive again soon.
"2. Could a suitably expansionary monetary policy have stopped NGDP from collapsing?"
Suitable is kind of a normative term, but if we reformulate that to sufficiently, and by that include also really radical moves (including for example if all else fails legalizing counterfeiting), then I suppose that it is true
"3. Wouldn’t Hayek have favored enough monetary expansion to keep NGDP from collapsing?"
I'm not a Hayek scholar, so I can't say for certain that he never anywhere in his writings endorsed that idea, but let's just say that until now, I've never heard anyone say that he did, and I can't remember that Hayek wrote that in any of the books and articles I've read.
"4. Hayek originally thought that the Depression was a needed corrective for the excesses and misallocations of the late 1920s. He later changed his mind and argued that the Fed should not have allowed NGDP to collapse. Was he right to change his mind?"
See below, but if he did change his mind, that is not important for me unless good arguments for it were presented from him (I don't believe in "arguments from authority").
"5. If monetary policy could not have prevented an NGDP collapse, what is your story? Is it the Keynesian liquidity trap? (I assume the answer is no.)"
This is basically a variant of question number two, and I there answered that with sufficiently radical moves, this probably could have been done. Though it couldn't have been done with any normal monetary policy action.
"6. If a suitably expansionary monetary policy could have prevented an NGDP collapse, should the Fed have tried to do this?"
No, since this would have prevented the necessary adjustments and would have required really radical moves.
"7. If the answer is no, why not? Wouldn’t that have prevented the collapse in manufacturing in Asia late last year? What is the structural imbalance corrected by having 10s of millions of Chinese lose jobs making stuff like shoes? (Presumably there was no shoe bubble.) Are Austrians worried about the U.S. trade deficit?"
Since the steep downturn in demand was unexpected by most manufacturers, and since adjustment takes time, this has of course created some short term pain. But ultimately, the status quo was not really sound for either Asia or America.
And for example China has already seen significant signs of a speedy adjustment of production for selling to the domestic market. Other Asian countries have not been so successful, but they probably will soon, and at any rate they will benefit from China's stronger economy.
He also asks:
"Do you agree with my view that the 1% (short term) interest rates of 2003 were a totally meaningless indicator of the stance of monetary policy?"
Actually no. This is kind of a complex subject, but in short, I agree that low nominal interest rates doesn't necessarily mean that monetary policy is inflationary, just as high nominal interest rates doesn't necessarily mean that monetary policy is not inflationary. Low nominal interest rates could instead indicate low inflationary expectations or a low time preference.
However, in this case it clearly did indicate that, as it was upheld by increases in money supply and foreign central bank purchases of U.S. securities., with the role of the former rising throughout the bubble. Some would perhaps argue that the former reflected the policy of foreign central banks as opposed to the Fed's. But while that is partially true, it overlooks that given the commitment by these foreign central banks to hold their exchange rate steady, the low interest rate imposed by the Fed provoked them into making these purchases (if interest rates had been higher, they wouldn't have had to purchase these U.S. securities to prevent their exchange rates from appreciating versus the USD).
1) First, it recognizes that positive supply shocks do not reduce the ability of borrowers to repay debt, and vice versa for negative supply shocks, despite the fact that they create price deflation/inflation.
2) It suggests that positive supply shocks should not be met by more monetary inflation, and vice versa that negative supply shocks.
Related to these two facts is that in the long run, nominal GDP growth is likely to be more or less the same as money supply growth. So, while not being an Austrian, Sumner is actually closer to the Austrian analysis than the inflation targeting crowd.
But while being closer, he is not close enough to be an Austrian, or even a semi-Austrian, as should be apparent in this post where he poses 7 questions for Austrians:
"1. Why did NGDP collapse late last year?"
Well, that's a complex story, but mainly because money supply growth collapsed. Money supply grew rapidly after the Fed's initial series of rate cuts from September 2007 to March 2008. Then it fell first to and then below zero during the coming six months.
Another reason was that trouble began to surface elsewhere, for example in the U.K. and Spain, which prompted other central banks to lower interest rates, something which in turn caused the dollar to rally against most other currencies.
BTW: NGDP hasn't "collapsed", it has fallen only marginally ( 2.35% assuming we can the current estimates of Q3 2008 and Q1 2009 are correct). NGDP growth has however "collapsed" into negative territory, though it is likely to turn positive again soon.
"2. Could a suitably expansionary monetary policy have stopped NGDP from collapsing?"
Suitable is kind of a normative term, but if we reformulate that to sufficiently, and by that include also really radical moves (including for example if all else fails legalizing counterfeiting), then I suppose that it is true
"3. Wouldn’t Hayek have favored enough monetary expansion to keep NGDP from collapsing?"
I'm not a Hayek scholar, so I can't say for certain that he never anywhere in his writings endorsed that idea, but let's just say that until now, I've never heard anyone say that he did, and I can't remember that Hayek wrote that in any of the books and articles I've read.
"4. Hayek originally thought that the Depression was a needed corrective for the excesses and misallocations of the late 1920s. He later changed his mind and argued that the Fed should not have allowed NGDP to collapse. Was he right to change his mind?"
See below, but if he did change his mind, that is not important for me unless good arguments for it were presented from him (I don't believe in "arguments from authority").
"5. If monetary policy could not have prevented an NGDP collapse, what is your story? Is it the Keynesian liquidity trap? (I assume the answer is no.)"
This is basically a variant of question number two, and I there answered that with sufficiently radical moves, this probably could have been done. Though it couldn't have been done with any normal monetary policy action.
"6. If a suitably expansionary monetary policy could have prevented an NGDP collapse, should the Fed have tried to do this?"
No, since this would have prevented the necessary adjustments and would have required really radical moves.
"7. If the answer is no, why not? Wouldn’t that have prevented the collapse in manufacturing in Asia late last year? What is the structural imbalance corrected by having 10s of millions of Chinese lose jobs making stuff like shoes? (Presumably there was no shoe bubble.) Are Austrians worried about the U.S. trade deficit?"
Since the steep downturn in demand was unexpected by most manufacturers, and since adjustment takes time, this has of course created some short term pain. But ultimately, the status quo was not really sound for either Asia or America.
And for example China has already seen significant signs of a speedy adjustment of production for selling to the domestic market. Other Asian countries have not been so successful, but they probably will soon, and at any rate they will benefit from China's stronger economy.
He also asks:
"Do you agree with my view that the 1% (short term) interest rates of 2003 were a totally meaningless indicator of the stance of monetary policy?"
Actually no. This is kind of a complex subject, but in short, I agree that low nominal interest rates doesn't necessarily mean that monetary policy is inflationary, just as high nominal interest rates doesn't necessarily mean that monetary policy is not inflationary. Low nominal interest rates could instead indicate low inflationary expectations or a low time preference.
However, in this case it clearly did indicate that, as it was upheld by increases in money supply and foreign central bank purchases of U.S. securities., with the role of the former rising throughout the bubble. Some would perhaps argue that the former reflected the policy of foreign central banks as opposed to the Fed's. But while that is partially true, it overlooks that given the commitment by these foreign central banks to hold their exchange rate steady, the low interest rate imposed by the Fed provoked them into making these purchases (if interest rates had been higher, they wouldn't have had to purchase these U.S. securities to prevent their exchange rates from appreciating versus the USD).
posted by stefankarlsson at 9:27 PM
2 Comments:
5. Bernanke-style helicopter drop of sufficient size must by all logic keep NGDP up. I fail to see how, if you dropped $2 trillion from the sky - people would not start purchasing with it, unless we honestly believe that people are rational to the extent that they proclaim : "We shouldn't spend this money, because we know it will be inflationary and instead we will keep it in the bank and slowly make use of it during the next 50 years".
And even if ALL the money was used to repay debt, I find it highly unlikely that this wouldn't spur further lending and keep NGDP at least stable (although hyperinflation seems more likely)
Deflation and/or NGDP drops seems to be a non-issue, as long as you are willing to destroy a currency to avoid them?
I wonder if it's true that, as the article claims, Hayek was in favour of adjusting the money supply to offset changes in velocity re: the great depression.
This also seems to be Bernanke's current approach - increase M for now, and decrease M when V picks up later on. Do you consider this a good idea, i.e. to keep MV constant?
Post a Comment
<< Home