The Courtiers

Brad DeLong and Lawrence Summers’s new paper is garnering quite a bit of attention in the econblogosphere. In the paper Drs. DeLong and Summers make the case for fiscal stimulus “only as long as the monetary authority cannot or will not—but in any case does not—carry out the government’s stabilization policy all by itself”. Marc Nunes retorts:

I would think the first best solution is not to bring in a different policy strategy, and one that has much against it, but instead “battle” for the Fed to carry out the stabilization mission.

at the conclusion of a lengthy post in which he documents Dr. Summers’s advocacy for austerity when the Democratic administration he served advocated austerity and fiscal stimulus when the Democratic administration he served advocated fiscal stimulus, arguing that it would pay for itself in either case.

Scott Sumner reacts to the paper with a post of his own, noting that “No fiat money central bank ever tried to inflate and failed”. Here’s his peroration:

If we are going to teach our students how to “do the right thing,” we need to start by eliminating “depression economics” from the curriculum. Start with the fact that what Krugman calls “depression economics” should actually be called “expected depression economics.” That’s because fiscal stimulus acts with a lag that is just as long as monetary stimulus. (Here and here I argued monetary lags are surprisingly short.) So it doesn’t matter where the economy is right now, but rather where it will be in 12 months. Monetary policy should always be set in such a way as to produce on-target expected NGDP growth. That’s the Lars Svensson principle. If you do that, there’s no room for fiscal stimulus, even if the economy is currently depressed. With a central bank that targets expected NGDP growth along a 5% growth path, you are in a classical world. Spending has opportunity costs. Unemployment compensation discourages work. Saving boosts investment. Protectionism is destructive. And so on. That’s the policy we should be teaching our grad students. The optimal monetary policy. Not a policy mix that only has a prayer of making sense in countries where the central bank is even more stupid and corrupt than the Congress. As far as I can tell, those countries don’t exist.

You’ve got to hand it to him. Dr. Summers is the perfect courtier. Sort of the varsity version of Ezra Klein.

3 comments… add one
  • Ben Wolf Link

    “No fiat money central bank ever tried to inflate and failed”.

    Get. The. Fuck. Out. How in the seven hells can Sumner write that with a straight face? I’d challenge him to demonstrate when monetary policy has ever successfully inflated if I thought it would do any good. In fact I have and found him quite unresponsive when confronted with data like this:

    Forget Larry Summers, who is clearly a nitwit. It’s Market Monetarists like Sumner himself who are now out there pushing useless myths about the supposed power of the Fed to stimulate demand. Yes Scott, lets waste more time and effort on a system structurally incapable of behaving in the way you advocate.

  • Drew Link

    Shorter Nunes : just because the doctor won’t act, don’t call in the witch doctor and start with the chanting to the sky and shaking of beads.

  • I’d challenge him to demonstrate when monetary policy has ever successfully inflated…

    Mid 1930’s when the U.S. finally went off the gold standard.

    And did you read the rest of the paragraph? Namely this part,

    The Fed doesn’t want to do this, or any of the million other methods that would work. So their entire paper boils down to what is the fiscal multiplier if the Fed chooses to “do the wrong thing.”

    In other words, the Fed, according to Sumner, isn’t engaging in an inflationary policy.

    And why worry…we have a printing press. All else fails, we’ll just print money until the problem goes away.


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