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Scott Sumner

Scott Sumner

Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

Articles by Scott Sumner

Political issues of the 2020s

19 hours ago

Politics is always in a state of flux, with old coalitions dissolving and new coalitions forming. Urban planning is likely to be one of the hot issues of the next decade, which will help to shape this realignment.
Consider the case of Plano, a large affluent suburb of 288,000, north of Dallas.  The city government put together a plan to add high density housing near transit corridors, which is an increasingly popular trend in urban planning.  Texas is known as a pro-development state, and has much lower housing prices than many other major population centers, due to lenient zoning rules. Texas is also a politically conservative state.  Nonetheless, the plan to add to Plano’s housing stock attracted intense opposition.  This 2018 article provides some background

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Health care subsidies are almost impossible to reform

3 days ago

Imagine if the government gave people a subsidy of $5000 each time they bought a new car. That would be inefficient, encouraging the excessive purchase of new cars. Now imagine that the subsidy was 40% of the price of the car, up to a price of $25000. That would be even more inefficient, encouraging the excessive purchase of cars, and also encouraging the purchase of cars of excessively high quality. Now imagine a 40% car subsidy that had no upper limit. That would be extremely inefficient.
That last option, a “Cadillac subsidy”, is a good description of our health care system. The government effectively pays roughly 40% of the cost of private health insurance, via tax subsidies. That means if you buy a health care plan that costs $20,000/year, it actually only

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Why both liberals and conservatives will lose on health care (in the short run)

3 days ago

Our current health care system fails at almost every level. Because the health care for most people is paid for by third parties (mostly the government), costs have exploded to levels far high than optimal. This has reduced real wages for millions of Americans. And yet tens of millions of lower and moderate-income people have no health insurance at all.
Liberals want to remedy this situation with some form of universal health care, while conservatives would like to the system to adopt more free market mechanisms to hold down costs. Both will likely fail.
The basic problem here is that health care has grown to 17% of GDP, a level where the industry is simply too powerful to reform. Washington state recent adopted a public option, allowing its citizens to buy into a

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Good intentions are not enough

5 days ago

In the past, I’ve made three arguments about utilitarianism:
1. It’s the correct moral system.2. It’s the way the world is trending.3. It’s consistent with classical liberalism.
I used examples such as the prohibition on the sale of kidneys, an anti-utilitarian policy that is likely to be repealed at some point. I predict something similar will eventually happen in the sex industry, for similar reasons.
The New York Review of Books has an excellent essay on the regulation of the sex industry, entitled “It’s Not About Sex.” Of course what the authors are actually suggesting is that it should not be about sex. Currently, laws in the US and elsewhere treat sex very differently from other transactions; it very much is about sex. As with the sale of kidneys, many people

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Public opinion regarding cash for kidneys

7 days ago

In a previous post, I argued that public opinion was a slippery concept, not well measured by opinion polls. One of my examples was kidney markets:
Rather than being a stable parameter, public opinion is very fragile. Polls might show that most people believe X, but as soon as the issue rises to prominence and more information comes out, their views might shift radically. I often talk to people about the importance of allowing a market for kidneys. The first reaction is often negative, as people wonder if this approach would be biased against the poor. Some even fear the theft of kidneys from unwilling donors. It only takes me two minutes to convince them otherwise. The theft of kidneys occurs when there is a black market created by shortages. A market would

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Do longer expansions store up trouble for the future?

9 days ago

A recent FT article criticizes the view that we should try to eliminate the business cycle:
All this begs the question of whether longer really is better when it comes to business cycles. Recessions are a natural and normal part of capitalism, not something to be avoided at all costs. Indeed, the Deutsche Bank economists argue that productivity would be higher and American entrepreneurial zeal stronger if the US business cycle had not been artificially prolonged by monetary policy. . . .
Long periods of expansion invariably result in too much leverage, followed by a correction, and usually a recession. . . .
Maybe a tech productivity surge will eventually come along and turn this market-driven recovery cycle into something that spreads prosperity more widely. More

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An epic example of wealth destruction

10 days ago

The San Francisco Bay area is one of the most productive regions in the world, particularly the Silicon Valley area near San Jose. Unfortunately, many workers are priced out of moving there due to extremely high real estate prices. But what if we could build a brand new city from scratch, for a million people. The city would be near San Jose and would be much less dense than San Francisco. A developer could create sensible transit, bike paths, parks, etc. Sort of like Irvine, California, but much larger.  The rolling countryside would allow for quite attractive residential neighborhoods:
You might say that it would be impossible to put together a piece of land near San Jose that is large enough to house more people than San Francisco, and at a much lower density.

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The market is the dog; the Fed is the tail

11 days ago

The Economist has an interesting article discussing the interaction between markets and central banks:
Discerning this signal becomes trickier the more the Fed appears to respond to the market. To see why, suppose that the Fed ignores market movements completely, and instead sets policy in an entirely predictable way, responding only to hard data on growth and inflation. Any change in market expectations about Fed policy would then reflect only changes in investors’ perception of the outlook for those variables. “If Fed policy is clear and systematic,” says Charles Calomiris of Columbia University, “policymakers can glean useful information from markets.” The more the Fed responds to the market, however, the more it is “looking in the mirror”, as Alan Greenspan, a

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Scott Sumner’s Questions for Fed Chairman Powell

11 days ago

During the annual Humphrey-Hawkins testimony, members of the House and Senate often ask for explanations of previous Fed actions, or lack of action, in areas of interest to Congress. When discussing the details of monetary policy, however, Representatives are at a distinct disadvantage, as Fed officials often have much more expertise than people outside the world of central banking. In that environment, the most effective questions will be those that central bankers will welcome, rather than skillfully deflect.  
In the 21st century, one of the most important issues facing central banks is how to conduct monetary policy at near-zero interest rates. Central banks such as the Fed have traditionally provided monetary stimulus via interest rate cuts. Because Fed officials have indicated that

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Appointing justices “such as Gorsuch and Kavanaugh”

12 days ago

People often point to the fact that President Trump appoints Supreme Court justices “such as” Neil Gorsuch and Brett Kavanaugh. But do these two actually represent a distinct type? Maybe, but an article on “538” suggests that it’s too soon to know for sure:
Using SCOTUSBlog’s final statistics, I looked at the justices’ votes throughout the term. In these pairings, Kavanaugh closely aligned with Roberts and Alito, voting with Roberts 94 percent of the time and with Alito 91 percent of the time. But he only voted with Gorsuch 70 percent of the time — which meant that he voted with his fellow Trump appointee as often as he voted with liberal justices Elena Kagan and Stephen Breyer. Gorsuch, by contrast, voted most frequently with Thomas.

Two quick points:

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Don’t ask the citizenship question

14 days ago

Tyler Cowen has a recent column that advocates asking a citizenship question on the 2020 census. I don’t find his argument to be persuasive, for several reasons.
Tyler does acknowledge that asking this question will make the census less accurate in estimating total population, but sees even bigger costs from not asking the question:
Not asking about citizenship seems to signify an attitude toward immigrants something like this: Get them in and across the border, their status may be mixed and their existence may be furtive, and let’s not talk too openly about what is going on, and later we will try to get all of them citizenship. Given the current disagreement between the two parties on immigration questions, that may well be the only way of getting more immigrants

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Two more widely held views

14 days ago

In a recent post, I discussed two widely held views that seem inconsistent. I am indebted to Ryan Bourne for pointing to another example.
Unemployment in Western Europe was quite low during the 1960s. During the 1980s, unemployment rose to very high levels, and never fell back again, even after their economies had recovered from the two oil shock recessions. This led to theories of “hysteresis”, the idea that a severe slump could cause permanently high unemployment, as workers who were unemployed for long periods became less employable. The policy implication is that it is especially important to have demand stimulus during recessions, to prevent a permanent rise in unemployment.
This argument was used for aggressive stimulus during the Great Recession. Today, we

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When doves fly

16 days ago

I’ve consistently argued that shifts in fashion are far more important than personnel in setting the direction of monetary policy. And in a recent post, I suggested that the monetary policy zeitgeist was likely to shift in a dovish direction. Yesterday provided a couple of good examples. Start with the Financial Times:
The global bond market enjoyed a powerful rally on Wednesday as investors bet that Christine Lagarde’s nomination to be the next president of the European Central Bank will extend an era of ultra-loose monetary policy in the eurozone. . . .
“Markets are unfamiliar with her academic monetary leanings,” said Seema Shah, chief strategist at Principal Global Investors. “Yet, going by her previous support of Draghi’s decisions to introduce innovative

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Two areas where I am out of step

18 days ago

I read a lot of material from experts on politics, economics and international affairs. As a result, I think I have a pretty good idea of the consensus views of respected pundits, which are sometimes called the “Very Serious People.” Here I’d like to discuss two views that seem increasing popular, which I view as extremely misguided. Feel free to correct me if I’ve misjudged the zeitgeist; if these are not two widely held views.
The first consensus view is that neoliberalism is passé. Tyler Cowen recently linked to a Wall Street Journal article that made this claim:
“The zeitgeist of globalization and liberalization is over,” said Ralf Stegner, vice chairman of the 130-year-old Social Democratic Party, the junior partner in Chancellor Angela Merkel’s government

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The greatness of Milton Friedman

21 days ago

I normally try to avoid responding to the monetary “analysis” in Forbes magazine. But since potential Fed nominee Judy Shelton once tweeted approval of a particularly weak example by Nathan Lewis (calling it “brilliant”), I need to set the record straight.  Here is Lewis (in 2016):
However, after World War II, conservatives have tended to be split between Stable Money gold-standard advocates, and some form of conservative-flavored “soft money.” Before 1985, this was dominated by Milton Friedman’s “monetarism,” which postulated a fixed rate of expansion of the monetary base (to be enshrined in a Constitutional Amendment), and later focused on measures of M2 and similar statistics. The first notion didn’t get much traction, perhaps because it was obvious to more than

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Against political art

23 days ago

Tyler Cowen recently linked to a New Yorker interview of Liu Cixin, author of the acclaimed sci-fi trilogy “The Three Body Problem.” These books are of very high quality, and rely heavily on ideas from the social sciences, particularly game theory. So you’d think that if any artist would be good at politics, it would be Liu Cixin. Just the opposite is true:
I decided to inch the conversation toward politics, a topic he prefers to avoid. His views turned out to be staunch and unequivocal. The infamous one-child policy, he said, had been vital: “Or else how could the country have combatted its exploding population growth?” . . .
Liu took a similarly pragmatic view of a controversial funeral-reform law, which mandates cremation, even though the tradition of “returning

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War by any other means

25 days ago

Pierre Lemieux has an excellent post discussing President Trump’s decision to call off the military strike on Iran.  Like Pierre, I welcome this decision.  However, I’d like to point out that there is a sense in which we are already at war with Iran.
Trump’s decision to place increasingly tight economic sanctions on Iran, and also to punish any third country that trades with Iran, is effectively an act of economic warfare.  It is intended to severely damage the Iranian economy.  And economic sanctions don’t just have economic effects, they kill.
Early studies of the impact of previous American sanctions on Iraq estimated excess deaths at as high as 1 million.  It turns out that these initial estimates were probably too high, but even later estimates were quite

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Macro theory for all times and all places

27 days ago

In 1936, John Maynard Keynes came up with a macro model that was a product of its time. That’s the wrong way to do macro. Models should be based on the empirical facts of all countries and all time periods.
If your macro model cannot explain why the US experienced a major deflation (with NGDP falling nearly 30%) from mid-1920 to mid-1921, the model is useless. If it cannot explain why industrial production suddenly fell by 30% after mid-1920, the model is useless. If your model cannot explain why the 1921 depression was followed by a very quick recovery, whereas the 1929-33 depression was followed by a long 8-year recovery, the model is useless. You need a truly “General Theory”, applicable to all times and all places.

Unfortunately, most macro models cannot

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Does the Fed set monetary policy in Hong Kong?

28 days ago

David Beckworth recently conducted an excellent interview of Mike Bird, which is full of fascinating observations. At one point they were discussing the Hong Kong currency board, which since 1983 has fixed the exchange rate between the Hong Kong and US dollars.  This exchange caught my eye:
Beckworth: Yeah. So, interestingly, the Fed sets monetary policy for Hong Kong effectively, right?
Bird: Yup. Absolutely, which is very noticeable in the Hong Kong housing market over the past 10 years or so.
I think that’s right.  But this doesn’t necessarily mean what you think it means.  While the US is setting the monetary policy in Hong Kong, that policy is nothing like monetary policy it sets in the US.
Because of arbitrage, interest rates tend to be roughly the same in

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The Trump administration’s advice to Malaysia

29 days ago

In a recent post I discussed John Cochrane’s reaction to the Treasury department’s criteria for “currency manipulation”. John’s post included a link to the report, which contains some quite odd recommendations that raise additional question marks. Consider the following:
Malaysia’s external rebalancing in recent years is welcome, and the authorities should pursue appropriate policies to support a continuation of this trend, including by encouraging high-quality and transparent investment and ensuring sufficient social spending, which can help minimize precautionary saving.
This is bizarre on multiple levels:
1. What business is it of the US government to give Malaysia advice on its economic policy regime?  Did they ask for advice?  How would our Congress feel if

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Poke out one of my eyes

June 18, 2019

The news is becoming increasing surreal. This morning I saw the following story in the Financial Times:
The euro sank by about 0.5 per cent against the dollar, reaching a low of just under $1.12, while European equities rose – Germany’s Dax index was up by 2 per cent on the day.
In response, Mr Trump suggested that Europe was engaging in currency manipulation.
“Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA,” the US president wrote on Twitter. “They have been getting away with this for years, along with China and others.”
He also commented on the rise in European share prices, by Tweeting: “German DAX way up due to stimulus remarks from Mario

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Freedom to travel

June 17, 2019

I’m always a bit skeptical when I hear talk about a recent trend toward “deregulation”. There is no doubt that regulations in a few areas have been relaxed, particularly environmental rules (such as burning coal). Banks are again being allowed to take greater risks with taxpayer insured funds. But I see many more examples of growing restrictions on freedoms.
The most obvious examples are international trade, international investment, and immigration. And now, travel is another area where the federal government is cracking down. Business travelers are increasingly being turned down for visas.
Charlotte Slocombe, a partner at London-based immigration law firm Fragomen, said she was seeing “one or two business travellers per week having difficulty getting into the

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What is the optimal NGDP growth rate?

June 16, 2019

I often get commenters asking my opinion on the optimal NGDP growth rate. This is a difficult question, which can be addressed from a number of perspectives.
Josh Hendrickson has a new policy brief at Mercatus, which advocates the “Friedman rule” for NGDP targeting.  This would involve setting the growth rate for NGDP at a point where risk free short term interest rates would be close to zero and there would be no opportunity cost of holding currency. Because currency can be produced at near zero cost, economic efficiency suggests that nominal interest rates should be low enough that the public doesn’t waste resources trying to economize on the use of currency, which doesn’t pay interest.
I’d encourage people to look at Hendrickson’s policy brief, which is very

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Should the government step in?

June 15, 2019

Here’s a recent New York Times story:

11,000 Will Die Waiting For Transplants This Year

The actual figure may be closer to 43,000.  These deaths are caused by a government law that prevents monetary compensation for kidney donors.  And this makes the following subhead a bit hard to swallow:
People on the organ wait list say it’s time for the government to step in
It would be as if the New York Times thought the government should “step in” to deal with the housing problems in New York City.  Oh wait:

Behind New York’s HousingCrisis: Weakened Lawsand Fragmented Regulation
Affordable housing is vanishing as landlords exploit a broken system, pushingout rent-regulated tenants and catapulting apartments into the free market.

How might the New York government step

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Health care prices and quantities

June 12, 2019

A couple of years ago, Mark Perry did an excellent post about prices in the health care industry. He presented a table that suggests the price of plastic surgery has risen much less rapidly than other medical costs:
I’m surprised by these results.  To see why, consider the two big distortions in health care:
1. The government imposes onerous regulations on health care, which one would expect to sharply boost prices.
2.  The government massively subsidizes health care, which one would expect to sharply boost quantity.
Because expenditure equals price times quantity, these distortions would be expected to dramatically boost total spending on health care.  Perhaps they do.  So why am I surprised by the plastic surgery data?
As far as I know, plastic surgery is heavily

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Annette Vissing-Jorgensen on Fed policy and interest rates

June 11, 2019

I attended a recent Fed conference in Chicago, which was charged with the task of re-evaluating the monetary policy regime. I had very mixed feelings about the conference. On the plus side:
1. It’s a very good thing that the Fed is taking seriously the need to re-think policy in light of the zero bound problem.
2. The quality of the presentations and discussion was almost uniformly high.
Thus in an objective sense I had a very positive reaction. Subjectively, I was less pleased. Listening to the discussion reminded me of the heterodox nature of my own views:
1.  Monetary policy was mostly evaluated through the lens of interest rate control, which I view as a big mistake.
2. There seemed to be an assumption (either implicit or explicit) that the economy was often

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John Cochrane on currency manipulation in Germany and Italy

June 9, 2019

Several people directed me to a John Cochrane post that has an amusing critique of the US government’s recent attempt to label Germany and Italy as “currency manipulators”. The most obvious objection raised by Cochrane is that neither Germany nor Italy has a national currency to manipulate—both use the euro.
I will end up showing that this US government initiative is every bit as absurd as John claims, but I will first try to explain the logic of the currency manipulation argument, before criticizing it on other grounds.
When I began investigating the issue of currency manipulation, I discovered that the concern isn’t actually about currencies at all. Rather what people object to is better described as saving manipulation.  Policies that boost the current account

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Is the Fed inflating asset prices?

June 7, 2019

I recently spoke with some very smart people who work in the financial industry, and encountered a widely held view that asset bubbles are created by easy money policies. I think that view is wrong, but first let me acknowledge that there is a great deal of evidence in favor of that hypothesis:
1. In recent years, asset prices have often been unusually high by historical standards.
2. In recent years, the Fed has often adopted a low interest rate policy, with QE.
3.  Event studies show that monetary easing announcements often increase asset prices.
4.  Fed officials have cited asset prices as one of the ways that monetary stimulus can help during a depressed economy.
Put all that together and it sure looks like easy money is artificially inflating asset bubbles.

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Advice to libertarians and progressives

June 6, 2019

In this post I’ll offer a couple of suggestions to two groups that seem to be hurting their own cause. Let’s start with the progressives.
The mainstream parties in much of Europe have recently presided over some very ineffective economic policies. Perhaps as a result, some right-wing, nativist, authoritarian parties have risen in the polls. One of the most successful is Italy’s Northern League, which is now proposing a “fiscal shock” including a 15% flat rate income tax, as a way to stimulate the economy:
Italy’s deputy prime minister and leader of the anti-immigration League party said that Italy “must lower taxes”.
“We need a Trump cure, an Orban cure, a positive fiscal shock to restart the country,” Mr Salvini said in a radio interview on Tuesday. “Not

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Five monetary policies

June 4, 2019

I recently did an Econlog post trying to explain why it’s misleading to speak of the Fed “controlling” interest rates. I’m not entirely satisfied with that post, so today I’ll make another attempt, from a different angle. I’ll present 5 hypothetical monetary policies, and in each case ask you to consider whether the Fed is controlling interest rates:
1. The FOMC meets every six weeks, and sets an interest rate target to the closest 1/4%.  They instruct their NYC desk to do open market operations as needed to keep interest rates close to the target, although modest intraday fluctuations in the fed funds rate are allowed.  Each six weeks, the FOMC selects an interest rate target that its research staff believes is most likely to lead to 4% NGDP growth.
2. The FOMC

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