Because these guys keep quibbling I figured for the heck of it I'd get involved. I became aware of the argument because of a post by Sumner. Bear in mind that I knew nothing of either Kimel or the website he writes at, The Angry Bear, previously. So while Sumner wrote this post to set Kimel straight he also gave him some good publicity and even spelled his name right. The post was entitled "A Suggestion for Mike Kimel."
Sumner's suggestion for Kimel boiled down to this: "Please take a close look at the data from the Great Depression, before doing more posts claiming I don’t know the facts."
"Mike Kimel continues to insist that I don’t know what was going on in 1933, a period I’ve spend 20 years studying. He insists that FDR’s dollar depreciation program began in October 1933, even though all economic historians agree in began in mid-April 1933, when the exchange rate for the dollar began declining (against gold and against other currencies.) He insists prices began rising before FDR took office off, which is not true. He presents a graph that he claims shows prices rising before FDR took office, but his graph shows inflation rates, not the price level. In fact, the graph actually supports my argument that inflation didn’t turn positive until after FDR took office. There’s a difference between the rate of inflation and the price level."
"When I complained that Keynesian theory wasn’t able to explain the rapid inflation of 1933-34, a period of massive economic “slack,” he responded:
"The problem for Sumner is that Keynesian theory is merely an extension of good old fashioned Adam Smith. Prices depend on supply and demand. You can have a good or service go up in price locally even as it goes down everywhere else"
"Keynesian theory is just supply and demand? Then why not call it ‘Smithian Theory.’ In any case, I was discussing the overall price level, not individual prices. I could go on, but perhaps that’s enough."
"PS. Ironically, his post is entitled “Scott Sumner digs deeper.”
Well I don't know that it's enough. I must say I find this debate between these two, enigmatic, to say the least.
I mean for me it's like what is the meat of the argument? Sumner's post hardly makes it clear what's at stake. My take on it is what the crux of it is whether or not FDR's fiscal expansion, and the NIRA, were in any way responsible for the recovery or was it solely monetary-Sumner's answer. The specific time that Sumner is focusing though is the strong recovery in prices and production achieved in FDR's first year. Sumner makes his taking us off the gold standard the more than efficient cause of this, he believes this was the most successful monetary policy move in monetary history.
As a Keynesian, I weigh in with a comment to Sumner: "Hey Scott! Interesting debate. I guess it comes down to how much credit you give the price recovery to fiscal and monetary stimulus respectively. I am a Keynesian but I would instinctively presume that they both had their part to play."
Sumner is having none of this. He corrects me: "Then you’d be wrong. The fiscal stimulus was small, far too small to boost prices during 25% unemployment."
"The NIRA was a disaster."
Meanwhile I checked out Mike at Angry Bear and introduced myself: "Hello Mike! Great blog I have now bookmarked it. I have been reading Sumner’s Money Illusion which I find interesting though I do differ with him on the efficacy of fiscal policy."
I go on in this vein for several paragraphs. I show him my past attempts to gloss Sumners and the NGDP debates http://diaryofarepu
I go on, "To boil it down, though, what exactly is your difference with Sumner here about? He credits the turn around in prices mostly to FDR getting us off the gold standard whereas he claims that the National Economic Recovery Act at best did little good at worst even retarded the strong recovery precipitated with the currency devaluation'
I finish with a question for Mike Kimel, "This is an age old disagreement-was it monetary policy that led to the strong recovery or fiscal. I consider myself a Keynesian my instinct probably says a bit of both. But Sumner like most monetarists place it mostly with monetary policy. What is your position to quantify it, are you saying what FDR did with gold wasn’t a big part of it or simply that his fiscal stimulus was also important?
"Out of 100 percent what percentages respectively would you ascribe to fiscal and monetary policy… LOL"
Kimel answers me, "I've had many posts indicating I believe monetary policy matters. Its also in the book Presimetrics. I would be shocked if it didn't matter in the 1930s."
Turns out he wrote a book-Presimetrics. There is also some kind of website. He also even has given us a curve which he modestly calls the Kimel Curve. Hey if Laffer can have one why can't he?
'As to the percentage... I've been playing with some numbers looking at the correlation between the growth rate of a function of nondefense spending and the growth in real GDP. That correlation is extremely high through 1938. I hesitate to write it up... I want to get back to the "kimel curve" stuff I was working on which I find more interesting, but I keep thinking if I write the right thing it will go away... "
A few observations. This Mike Kimel seems like a nice, interesting guy. And it turns out his Kimel Curve is very interesting-it's an attempt to calculate the optimum top marginal tax rate for the best growth rate. I like that idea a lot. According to him it's about 60-70 percent, ie, the rate before Reagan.
For those interested http://www.presimetrics.com/blog/
Kimel's style to be honest can be a bit well... In his own words he's "data driven." I like his idea but I actually found his data kind of hard to follow. He puts it in spreadsheet form but it's in a form that requires one to be very well versed in statistical jargon. Further down in his own comments he updates his thing with Sumner-again he says he wishes it would go away yet...-"Sumner and I have had a brief correspondence this afternoon. He kindly shared a piece of a manuscript he is writing that contains a table that has in it the “Annualist Index of Commodity Prices.” The index shows falls from 815 in mid-April (1933) to about 650 the following February, which indicates “falling prices in terms of gold.”
"He apparently collected those manually from old hard copies and is unaware of any electronic versions. In my last e-mail message to him I’ve asked him for permission to put the table on-line. Or he can put it up here – its possible he already has somewhere, but a quick google search hasn’t turned it up."
Seems like they both keep getting in deeper. However Sumner's rebuff on NIRA served a purpose. I looked up the piece Gautti Eggertsson did on the NIRA. I left a new comment for Sumner:
"Well you know what they say about opinions Scott. However to push back a little I will point out that Eggertsson has done some interesting research which disagrees with this."
“What ended the Great Depression in the United States? This paper suggests that the recovery
was driven by a shift in expectations. This shift was triggered by President Franklin Delano
Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold
standard and announced an explicit policy objective of inflating the price level to pre-Depression
levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make
his policy objective credible. The key to the recovery was the successful management of expectations
about future policy.”
As regards the short thrift you give the NIRA, for a different perspective again check out Eggertsson
“Can government policies that reduce the natural level of output increase actual output? In other
words, can policies that are contractionary according to the neoclassical model, be expansionary
once the model is extended to include nominal frictions? For example, can facilitating monopoly
pricing of firms and/or increasing the bargaining power of workers’ unions increase output? Most
economists would find the mere question absurd. This paper, however, shows that the answer is
yes under the special “emergency” conditions that apply when the short-term nominal interest
rate is zero and there is excessive deflation. Furthermore, it argues that these special “emergency”
conditions were satisfied during the Great Depression in the United States.”
“The New Deal policies, i.e. the wedges, are expansionary owing to an expectations channel.
Demand depends on the path for current and expected short-term real interest rates and expected
future income. The real interest rate, in turn, is the difference between the short-term nominal
interest rate and expected inflation. The New Deal increases inflation expectations because it
helps workers and firms to increase prices and wages. Higher inflation expectations decrease real
interest rates and thereby stimulate demand. Expectations of similar policy in the future increase
demand further by increasing expectations about future income.”
For the solution-I modestly believe-to this dispute see