Often when I or others who question some jibe Sumner takes at Keynesianism or claiming that the supply side is in the driver's seat if the Fed follows what he sees as optimal policy or why he says that 'savings equal spending on capital goods' Sumner gets impatient and just says that he has no time to explain such elementary facts and if you don't get it just read a first year undergraduate textbook.
Nick Rowe, while generally much more polite-he is Canadian-and with a much better bedside manner, still urges those of us without higher training in economics to read a textbook first before we ask any silly questions.
I know that when Sumner calls yet again for the end of all corporate, individual, and capital gains taxes and replacing them with a consumption tax his answer to anyone who would question why he would favor such a regressive tax code is that they need to "take public finance" and that he has no time for such elementary questions.
I do agree that those who question the orthodox econ guys-I know the Market Monetarists hat the designation as they like to think of themselves as the most unorthodox school around; however they are still Neoclassical economists-should also know the literature of those they question; if you're a heterodox econ guy you should know a little bit about what you're criticizing or they will easily dismiss what you're saying even if it is valid.
As I've argued before, Unlearning Econ is a great guy to read as he has a background in Neoclassical Econ and so can give us a better clue about where the real problems lie.
Still, I just can't help it: as Sumner has this level of knowledge and training that we lack and shouldn't waste his time, how is it that in all his training he never learned what stagflation is? I mean he's done it once, he's done it twice, it's been pointed out to him, yet he keeps doing it.
He maintains that if the Fed had maintained his vaunted metric-trend NGDP-at an appropriate number-4.5%, 5%, etc. we would not have had a Great Recession, but merely "stagflation." Again, he has done this repeatedly.
He seems to think that stagflation is high inflation and low GDP. Of course, it's high inflation and unemployment at the same time-which in the 70s was very surprising as it contradicted the rather bastardized notion they had of the Phillips Curve back then: the assumption was that there was a very simple tradeoff between inflation and unemployment. If you were willing to tolerated more of the one, you'd have to tolerate much less of the other so you could choose your preference.
Sumner is doing more counterfactuals now on the question of what could have been done to slowdown/prevent the housing bubble.
You should read Ryan Avent’s very good response to this, but I will offer a slightly different take. Just one day after criticizing Krugman’s “Keynesian counterintuitive cleverness” I’m going to engage in the market monetarist equivalent. But first a bit of history. When I was younger the recovery from recessions was quite rapid. Both RGDP and NGDP grew far more rapidly in the initial recoveries from recessions of the 1920s through the 1980s, than during the recoveries from 1991 and especially 2001. Indeed if you’d like the Fed to be cautious, if you’d like for a slow rate of demand growth during the recovery, so that the recovery can last longer, then 2001-07 is your model. It was one of the slowest recoveries I’ve ever seen. So slow that the unemployment rate in early 2003 was still going up, despite the fact that the recession trough was in November 2001.
If we use the Bernanke/Sumner benchmark for the stance of monetary policy (NGDP growth and inflation) then monetary policy was unusually contractionary during these last two recoveries. So if you want a slow recovery to prevent the buildup of bubbles, then 2001-07 is close to an ideal.
What about the low interest rates? The low nominal interest rates reflected the slow recovery in NGDP. Interest rates are mostly endogenous. However other factors also reduced rates during this period, particularly the high rates of saving in Asia.
Sumner's point on bubbles is always a little different to tease out. He often seems to be saying any number of things at once:
1.) They don't exist. As Tom Brown suggested he sometimes appeals to EMH to argue that the market wouldn't let them happen.
2.) They do exist, but they're not that important. Only in the U.S. did the bubble pop. In other countries like Australia, Canada, Britain, etc. prices never collapsed. So a bubble may never pop. ) Of course to the extent that the bubble hasn't popped in Britain it's making life even tougher for the Brit in the Street.
3.) What matters anyway is that the Fed maintain trend NGDP. Nothing else matters very much and bubbles are just a blip on the screen which may or may not pop.
4.) If the Fed had maintained NGDP we might have had a pop but the fallout wouldn't have been too bad: maybe just a little "stagflation."
I'd be curious what Woj thinks of Sumner's gloss on bubbles-obviously as the writer of Bubbles and Busts he has a little to say about them!
Does Woj or anyone else have any theory of what the optimal policy should have been in say 2004-2006 at the height of the bubble? Maybe it will be argued that Greenspan was very irresponsible in lowering rates to 1%. However, this was in part because the economy was in such trouble. Sumner is right that the recovery was very shallow and there's something to the his point that it literally went on for 6 years.
So Sumner is right there: that was a very poor recovery, although, Stiglitz-who Sumner would never agree with-is right about the nature of that recovery.
The recession of 2001 is often referred to as "shallow and short" yet as Sumner suggests the recovery from it went on for 6 years, that's not really true is it? Part of the problem was what Stiglitz talked about: a lot of skilled, white collar jobs were lost to the Internet boom-which led to a 10 year productivity boom (1995-2005).
I see that Krugman is also correcting some Urban Legends about the 1970s stagflation: that it was all the fault of Keynesianism. He shows a couple of charts that showed that we actually had very low debt in the 70s and a much lower deficit. When Reagan came in with his talk of huge tax cuts, it was said that it would blowup the deficit and give us even higher inflation. The first claim was true, the second, entirely false.
Sumner argues correctly that we always fight the last war. Right now I agree that people are being very premature in seeing bubbles bubbling up everywhere.
The main last war that has held up progress during this recession was the spectre of the staglfationary70s, the only prolonged peacetime inflation in U.S. history. It's ironic that while Sumner holds up its specter of how much better things could have been had we done NGDP targeting-we would have just had the 70s for a few years-the Very Serious People have worried that we will in fact have the 70s.
Sumner thinks that would be an improvement, they think it's the worst possible outcome. Yet those who worry that we're on the way to the 70s point to our debt levels and our deficits, ignoring that in the actual 70s, we had much lower of both.