There is a sense of "every time I try to get out they pull me back in!" By his own account he had no intention to begin blogging but was actually set to publish some rather academic work on "Neoliberalism and Cultural Values."
This was his plan and then this happened and rained on his parade. This being the 2008 financial crisis. Everything he says makes it clear that what really bothered him is that this crisis was an occasion for certain preferred macroeconomic models and assumptions-namely his preferred macroeconomic models and assumptions to come under new question and skepticism:
"The sub-prime crisis that began in late 2007 was probably just a fluke, and has few important implications for either financial economics or macroeconomics. The much more severe crisis that swept the entire world in late 2008 was a qualitatively different problem, which has been misdiagnosed by those on both the left and the right. Most economists simply assumed that a severe intensification of the financial crisis depressed spending throughout much of the world. In fact, the causation reversed in the second half of 2008, as falling nominal income began worsening the debt crisis."
"Because central bankers misdiagnosed the problem, they were not able to come up with an effective policy response. It was as if a doctor prescribed medicine for a common cold to someone whose illness had progressed to pneumonia. And because economists were confused by the nature of the problem, it appeared as if modern macro offered no solutions. Thus policymakers turned in desperation to old-fashioned Keynesian fiscal stimulus, an idea that had been almost totally discredited by the 1980s."
Listen to Sumner's old mentor John Cochrane:
"These ideas changed because Keynesian economics was a failure in practice, and not just in theory. Keynes left Britain 30 years of miserable growth. Richard Nixon said, “We are all Keynesians now,” just as Keynesian policy led to the inflation and economic dislocation of the 1970s--unexpected by Keynesians but dramatically foretold by Milton Friedman’s 1968 AEA address. Keynes disdained investment, where we now all realize that saving and investment are vital to long-run growth. Keynes did not think at all about the incentives effects of taxes. He favored planning, and wrote before Hayek reminded us how modern economies cannot function without price signals. Fiscal stimulus advocates are hanging on to a last little timber from a sunken boat of ideas, ideas that everyone including they abandoned, and from hard experience. If we forget all that, we could repeat the economics of postwar Britain, of spend-and-inflate Latin America, and of bureaucratic, planned India."
This is an idea that all the freshwater guys-Sumner, Lars Christensen, Cochrane, Lucas, all keep coming back to. It was in Robert Lucas' class that we hear that when someone would try to put forward Keynesian arguments people would start giggling. Yet we are always hearing that the Keynesians are absurdly overconfident in their own models, in their own view of the world that they refuse to consider anyone else's views.
Well maybe then there's the answer to the perplexity of Cochrane-Sumner: empirical practice hasn't been too stellar for the age that supposedly repudiated Keynesianism either.
Because in the early 80s Keynesianism was held to be utterly debunked in their minds proves it should be debunked. What they can't get over is that the death of Keynes may have been exaggerated. Just because something was widely believed in the early 80s doesn't mean it should be believed today. As it happens in this case there is good reason it no longer is. Listening to Cochrane it's hard to know where he gets some of this stuff. Keynes hated investment?! This was a guy who had a pretty decent record of personal investing and certainly did know the part that business investment plays in a healthy economy.
It is true however that 70% of economic activity is driven by the demand side. In the recent endless debate that Sumner was having with Simon Wren-Lewis-though Wren-Lewis was not especially having it with him-Sumner had attempted to come up with this novel definition of savings: spending on capital goods. (This he did by misuing the idea of the identity S=I). Nearly no one could make any sense of it not even his fellow MMers like Lars and David Glasner over at Easy Money. I would argue that Sumner's definition of saving if the most confused we have heard since Hayek tried to debate Keynes on the meaning of savings and investment in the early 30s.
One of the more impressive aspects of Cochrane's revisionist history quoted above is his claim that,
"Keynes disdained investment, where we now all realize that saving and investment are vital to long-run growth. Keynes did not think at all about the incentives effects of taxes. He favored planning, and wrote before Hayek reminded us how modern economies cannot function without price signals."
Yeah, Hayek really schooled Keynes-LOL. By the early 40s Hayek only had a job out of Keynes' pity for him and in the early 50s Miltion Friedman over at the Universtiy of Chicago wouldn't let him near the economics department. Now Cochrane would have us believe that Hayek was anything more than wholly embarrassing in his attempt to debate Keynes and Sraffa in the early 30s.
What the freshwater school can't get is that sure in the early 80s it was assumed Keynes had been beaten. However as Sumner himself admits, by the end of the 80s traditional Monetarism was a spent force itself. Friedman himself had changed his tune. This was the basis for the development of the current New Keynesian school which along with Real Business Cycle theory has given us the dominant, mainstream paradigm of DGSE. Don't get me wrong, I'm not saying that if you are a Keynesian you should accept NK hook, line and sinker.
Sumner is always trying to convince us that somehow Krugman is being out of order because he is saying things that are at odds with what Greg Mankiw wrote in 1991 in his groundbreaking paper on NK. As if anyone needs to treat that paper as a strait jacket. Cochrane:
"Some economists tell me, “Yes, all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude. How can a scientist “believe” something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn’t put much weight on such “beliefs,” since they explicitly don’t represent expert scientific inquiry."
Cochrane may find this "astonishing" but why? In his world a scientist should do what? Stick to the model no matter how much the real world deviates from it? A real problem of the entire freshwater school is making a fetish out of their own models. These models-Sumner is a great example of this-often run the risk of being unfalsifiable. Anyone can set up an irrefutable model. Of course that's the definition of a tautology.
As I understand it this is the reason for being of Sumner's blogger career. With the implosion of the world economy in 2008 he felt the freshwater ideas under attack in ways unparalleled since the 30s. Somehow he has to convince us that is was "all nominal" that is to say a "mental recession" in reality. Because if it's all about monetary policy then it is really "mental" as for Monetarists-and Lars and company agreed with me in his look at my post the other day-then it's sort of like saying that the economy's problem is psychosomatic. This is actually a quite comforting view, it's quite seductive. It is this seduction he hopes to succeed in.