Tuesday, April 3, 2012

Sumner and Glasner on Beckworth on Taylor on Hetzel

      Mouthful of a title, huh? I read Sumner's piece first-my title is kind of inspired by his,  "Beckworth on  Taylor on Hetzel" where Sumner was pleased with comments Beckworth quotes Taylor of saying about Robert Hetzel's new book.

       Hetzel's new book is meant to argue that 2008 was, yes, a "government failure" rather than a market failure. Sumner basically buys Taylor's argument here hook, line and sinker:

        "I was glad to see that John Taylor likes Hetzel’s book. That suggests my views on monetary policy have not diverged from Taylor’s views as much as I had feared. I recently did a post pointing to a 2008 Taylor article that seemed to suggest money was too easy in 2008."

      Taylor has mostly sounded pretty conservative lately and Sumner had commented that it seems that many like him and Anna Schwartz seem to have gotten a lot more conservative since Obama was elected. Sumner said he found this curious as he himself hasn't gotten more conservative. Now however he's ready to completely gloss over any difference. This is why I always think that the tea party extraordinaire commentator over at Money Illusion, Morgan Warstler may be right-that Sumner'/s a very clever Trojan Horse. To be sure in saying this it's always possible I'm giving him too much credit. In any case he deserves some-whether true or not-for being a pretty smart guy though one I never wholly trust.

     He does seem ready to paper over differences with Right wing guys much quicker. During this whole crisis the obvious barrier to getting what he says is needed-NGDP targeting or anything like it, was Right wingers committed to austerity. Yet notice how he spends a lot more time hammering the Left by name because of his quibbling about fiscal stimulus.

    Anyway here is the passage that wins Sumner back over to Taylor:

     "In this regard Scott Sumner recently raised some good questions about the part of my analysis on the crisis, where I wrote that one possible unintended consequence of the Fed’s large unanticipated interest rate cut in early 2008 was the decline in the dollar and associated jump in oil and gasoline prices (which were clearly a factor in accelerating the downturn). There were many discretionary moves during this period, but in the part of my analysis Sumner refers to I was discussing interest rates. Recall that on January 22, 2008 the FOMC cut the federal funds rate by 75 basis points in one day, which was most unusual and certainly unanticipated. It was not on an FOMC meeting day, which made it particularly unusual."

     "The Fed was apparently concerned about stock market turbulence which was later associated with a large trading loss and panic selling incident caused by a single trader Jérôme Kerviel at Société Générale. I was concerned that such a discretionary move tied to stock prices could have adversely affected the Fed’s credibility regarding the dollar and thereby affect oil prices. It was one of many discretionary moves I wrote about, emphasizing that “It is difficult to assess the full impact of this extra sharp easing, and more research is needed” Given that more than four years have transpired, more research is still needed, and I appreciate Scott Sumner raising the issue. In my view the issue is best viewed as only one part of a massive switch away from rules and toward discretion over a number of years, and, as Hetzel’s emphasizes in his book, this is the kind of monetary policy that generally leads to poor economic performance."

     At this point it must be said that Taylor is certainly parsing things pretty tightly. He wants to argue that the problem is discretion-Fed policy got off the reservation in following his own Taylor Rule first in 2003-2005 in lowering the Fed rate to 1%. This in itself is not implausible that you can argue that they were too easy in that time and too tight in 2008. But to even argue that they were too tight in 2008 is tough to square with the idea that he and Sumner have been of one accord-Sumner and the MMers in general have always said Fed policy was too tight during this time.

   Taylor now is really trying to have his cake and eat it too by saying it was too loose in 2008-not too tight as he seemed to be saying-yet the Fed was wrong to drop rates as fast as it did in January 2008 because this caused the huge rise in oil and other commodity prices at the start of 2008.  So he tries to pin it all on "discretion." In any case, Bernanke, the man who was too discretionary in Taylor's mind has stated-years ago in a book he wrote about inflation targeting, that all monetary policy is by definition discretionary-the idea of wholly rule bound policy is a chimera.

   Sumner's fellow MMer, David Glasner provides something of a reality check by being a little less credulous. Glasner often is a reality check even on Sumner who gets carried away with himself a lot of times.

    As he pointed out Taylor was quite clearly not having it back in November when NKers like Krugman, Delong, and Romer gave it a nod:

     "A more fundamental problem is that, as I said in 1985, “The actual instrument adjustments necessary to make a nominal GNP rule operational are not usually specified in the various proposals for nominal GNP targeting. This lack of specification makes the policies difficult to evaluate because the instrument adjustments affect the dynamics and thereby the influence of a nominal GNP rule on business-cycle fluctuations.” The same lack of specificity is found in recent proposals. It may be why those who propose the idea have been reluctant to show how it actually would work over a range of empirical models of the economy as I have been urging here. Christina Romer’s article, for instance, leaves the instrument decision completely unspecified, in a do-whatever-it-takes approach. More quantitative easing, promising low rates for longer periods, and depreciating the dollar are all on her list. NGDP targeting may seem like a policy rule, but it does not give much quantitative operational guidance about what the central bank should do with the instruments. It is highly discretionary. Like the wolf dressed up as a sheep, it is discretion in rules clothing."

     Ah. NGDP a wolf in sheep's clothing.

    Further, Glasner points out that Taylor's "flack", Amith Shales the yellow journalist of economics- who smeared FDR in "FDR's Folly" a few years back-also got her two cents in:

  "For this reason, as Amity Shale's argues in her recent Bloomberg piece, NGDP targeting is not the kind of policy that Milton Friedman would advocate. In Capitalism and Freedom, he argued that this type of targeting procedure is stated in terms of “objectives that the monetary authorities do not have the clear and direct power to achieve by their own actions.” That is why he preferred instrument rules like keeping constant the growth rate of the money supply. It is also why I have preferred instrument rules, either for the money supply, or for the short term interest rate."

    So there you go, Ms. Shales herself is divining What Milton Would Have Thought. However, here is Glasner's reality check:

    "Taylor does not indicate whether, after reading Hetzel’s book, he is now willing to reassess either his view that monetary policy should be tightened or his negative view of NGDP. However, following Taylor post on Saturday, David Beckworth wrote an optimistic post suggesting that Taylor was coming round to Market Monetarism and NGDP targeting. Scott Sumner followed up Beckworth’s post with an optimistic one of his own, more or less welcoming Taylor to ranks of Market Monetarists. However, Marcus Nunes in his comment on Taylor’s post about Hetzel may have the more realistic view of what Taylor is thinking, observing that Taylor may have mischaracterized Hetzel’s view about the 2003-04 period, thereby allowing himself to continue to identify Fed easing in 2003 as the source of everything bad that happened subsequently. And Bill Woolsey also seems to think that Marcus’s take on Taylor is the right one."

     See that my buddy, the MMer Marcus Nunes, who I'm grateful is a regular reader hear at Diary is clearly skeptical as is another major MMer, Bill Woolsley. I'm glad I'm not the only one who thought Sumner was laying it on a little thick here.

     Please read Marcus' take here

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