"Because Raghu Rajan’s posts on macroeconomics tend to drive me nuts."
However he does say he will offer up a few ways he partially agrees with him against Keynesians-nothing new in Sumner disagreeing with Keynesians!
"1. It’s probably not a good idea to set a 4% inflation target. (In my view targeting NGDP would be a much better idea. If we must target prices, let’s level target the CPI on a 2% trend line from July 2008. We are currently well below that trend line.)"
"2. I don’t think Keynesians should be arguing that lower real interest rates are the key to recovery. A bold and credible monetary stimulus that was expected to produce much faster NGDP growth might well raise long term risk-free interest rates."
"3. At times Keynesians overstate the extent to which all our problems are demand-side, and ignore the structural problems in the economy."
After this Sumner gets to Rajans' shortcomings:
"Having said all that, Rajan grossly underestimates the demand-side problem that we still face. Here’s one example:
Second, household over-indebtedness in the US, as well as the fall in demand, is localized, as my colleague Amir Sufi and his co-author, Atif Mian, have shown.* Hairdressers in Las Vegas lost their jobs because households there have too much debt stemming from the housing boom. Even if we can coerce traditional debt-free savers to spend, it is unlikely that there are enough of them in Las Vegas."This is the wrong way to think about macro issues. Start from the fact that the Fed controls aggregate demand, or NGDP, whether they want to or not. The least bad policy is one that provides macro stability and low inflation (NGDP targeting, in my view.) When the least bad policy is in effect, policy will necessarily be a bit too expansionary for 50% of cities, and a bit too contractionary for the other half. There’s no way of avoiding the one-size-fits-all problem in a common currency area. Right now most cities have way too little demand."
If these debt-free savers are in New York City, which did not experience as much of a boom and a bust, cutting real interest rates will encourage spending on haircuts in New York City, which already has plenty of demand, but not in Las Vegas, which has too little. Put differently, real interest rates are too blunt a stimulus tool, even if they work.
See this is the sense in which Steve Waldman can credibly call Market Monetarists and MMTers "frenemies." The Market Monetarists and Keynesians seem to be on the same side at least as for as the idea that what are main problem is a lack of demand. There are important differences as well, but here there is agreement. The first difference of course is how to achieve sufficient demand.
Sumner finished off Rajans:
"My bigger problem with Rajan’s entire approach to macro is that he’s always talking about finance, credit, lending, saving, etc. The problem is much more basic. We have far too little NGDP to employ everyone who wants to work at the current salary levels. We need either much more NGDP or the same NGDP and much lower salaries. You know which one I favor. (Hint: it’s the only solution that has a prayer of actually being implemented in the near term.) If the Fed provides the right amount of NGDP, all those finance issues will take care of themselves. Real interest rates will find their Wicksellian equilibrium. Saving, lending, borrowing, etc, will be determined by the public."
As I noted in my last post when you compare Sumner with someone like Brooks they are like three elevenths correct.
Brooks is mostly wrong, certainly wrong both that demand is not a major problem and that there's little that can be done to restore it. He's not wholly wrong though that there are structural problems in the economy though he's wrong that its somehow the fault of "the welfare state model"-I use quotes as there is barely any welfare state to speak of in American post-1996. But he is right that between the rise of computer and Internet technology and globalization millions of American workers have been displaced. And the assumption of many mainstream Macro guys-including people like Sumner, Rowe, and Ryan Avent, that any job losses from some industries can't increase overall unemployment as the displaced workers will go elsewhere ignores the fact that since the 2001 recession many workers did move to new industries but mostly the low paying no benefit service sector. In some ways the structural part of Brooks argument is similar to Stiglitz's Rolling Stones piece that Sumner, Rowe, Avent, etc. killed him for. Of course, unlike Brooks, Stiglitz knows we have a demand shortfall.
Sumner though is wrong in trying to explain monetary failures of the Fed as being the sole reason for the crisis. The idea that recessions are always and everywhere are a monetary phenomenon is wrongheaded. There there is the fact that when all is said and done, Sumner does actually support the same supply-side "structural reforms" that Brooks wants-and Rajans wants. The main difference is that Sumner does believe the demand problems are the key reason for the trouble. Sumner thinks the structural problems are needed too-that in the long run things are unsustainable whereas for Brooks-and his heroes Paul Ryan and Mitt Romney, he thinks that even in the short term it is unsustainable.
Rajans-and Brooks for that matter- don't disagree as much as this critical post makes it sound.
For more on this please see this
Mike Konczal also offers a recent take down of Rajans-and Brooks as well though we're looking at Rajans here:
"There's been a ton of situations where these structural unemployment arguments came charging down the runway only to hit a cement wall of data. One "oops" moment was Raghuram Rajan citing Erik Hurst in claiming that unemployment would be three points lower if it wasn't for "structural" reasons, and Hurst having to publicly point out his preliminary research said nothing of the sort"
This was Rajan's argument:
"It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. Hurst estimates that this "structural" unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today."
This was quoted by Greg Mankiw However Mankiw received an email from Hurst clarifying what Rajan had spun. He made it clear that the results were not yet ready for public consumption. Most importantly:
"While we are definitely finding results that structural forces are at play, we are not finding that 3 percentage points of the current total U.S. unemployment rate is due to structural forces. As the research evolves, however , our conclusions may change."