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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

If you are not taxing consumption . . .

1 day ago

. . . then you are not taxing who you think you are taxing. I was reminded of this point by a recent tweet I saw:

Progressives tend to favor higher income tax rates on the rich.  I prefer a progressive consumption tax.  It might be worth noting that if the top rate of income tax were increased, President Trump still would have paid roughly $750 in income taxes in 2016.  In contrast, he probably would have paid much more in taxes with a progressive consumption tax, at least if his lifestyle is as lavish as has been reported.
Just to be clear, I don’t believe that tax policy decisions should depend on how it impacts Trump—that would be absurd.  My point is that when people get outraged about what they see as a gross inequity, it’s important not to just lash out

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Are rational people weird?

2 days ago

This poll of college students caught my eye:

Let’s take the abortion question first.  I strongly support my campus allowing speakers to advocate banning abortion.  Does that mean my views coincide with 18% of college students?  I doubt that.  I suspect that either far more than 18% of students agree with me, or far fewer.  Let’s start with the “far fewer” hypothesis.
One thing I notice is that very few people say they strongly support allowing controversial speakers of any sort, whether advocating right wing racial theories of intelligence or left wing claims that all whites are racist.  College students just don’t seem to like controversial speakers.  Now let’s think about those 18% that are completely OK with pro-life speakers.  I suspect that this group is

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All ideologies eventually (seem to) fail

3 days ago

All ideologies reach a point where they are perceived to have failed. What can we learn from that fact? I’d argue that there are almost no lessons to be learned.
Capitalism was widely seen to have failed in the early 1930s.
Authoritarian nationalism was widely seen to have failed in 1945.
Liberalism was widely seen to have failed in the 1970s.
Communism was widely seen to have failed in 1989.
Neoliberalism was seen to have failed in the 2010s.
Prediction: Islamic fundamentalism will be seen to have failed in the 2020s.
Just to be clear, I’m a neoliberal.  So I don’t believe either capitalism or neoliberalism actually failed, while I do believe that authoritarian nationalism, (1960s) liberalism, communism and Islamic fundamentalism actually did fail. But that’s not

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Do politicians listen to economists?

8 days ago

Congratulations to Paul Milgram and Robert Wilson for their recent award. Tyler Cowen noted that Milgram was a coauthor of this essay:

That’s an impressive group of economists.  And here’s the abstract:
The ability of groups of people to make predictions is a potent research tool that should be freed of unnecessary government restrictions.
Unfortunately, it’s unlikely that this will happen, despite that powerhouse line-up of expert opinion.  Nor is it likely that the government will remove rent controls, or allow the sale of kidneys, or legalize drugs, or eliminate tax loopholes, or impose a “Cadillac tax” on health insurance, or enact a carbon tax, or eliminate tariffs on imports, or open up the aviation market to foreign competition, or let car companies sell

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Just how expansionary has the Fed actually been?

10 days ago

In my view, Fed policy during 2020 has been contractionary, as both NGDP and price level forecasts have declined. Many people prefer to look at monetary policy in a different way, focusing on the money that the Fed injects into the banking system. And by that measure, policy has indeed been expansionary.
But perhaps not as expansionary as you might assume. Six years ago, total commercial bank reserves balances at the Fed totaled $2.8 trillion. The most recent data indicates that total reserve balances at the Fed are $2.8 trillion. That’s no growth in 6 years, even in nominal terms.  (Reserves have obviously declined as a share of GDP.)

Again, both the overall monetary base and the part of the base held as bank reserves at the Fed have increased sharply this year,

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How soon we forget

11 days ago

This Bloomberg headline caught my eye:

Have people already forgotten the 1970s?  From 1973 to 1981, inflation fluctuated between 6% and 13%.  Even if you (wrongly) believe that inflation was caused by supply-side factors, the ultra-dovish Fed was not even trying to reduce inflation during that period.  Both inflation and NGDP growth were quite high, and the Fed set the real fed funds rate at a negative level throughout most of 1974-81. On numerous occasions, they actually reduced interest rates sharply despite extremely high inflation rates.  At the time that the target interest rate was cut to 9% in July 1980, the inflation rate was still over 13%!

The subhead is also questionable:
The central bank’s new policy framework tolerates above-target price increases.

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Trade deficit whack-a-mole

13 days ago

In recent years, the US government has imposed tariffs on a number of nations, notably China. The administration argued that these policies would reduce our trade deficit. Many economists pointed out that the trade balance is basically domestic saving minus domestic investment, and that our highly expansionary fiscal policy would actually make the trade deficit larger. (Budget deficits tend to reduce domestic saving.) And this is exactly what seems to have happened since 2016:

Some of the products that were formerly exported from Chinese factories are now being produced in Vietnam.  With a growing Vietnamese trade surplus, the US government has now accused Vietnam of currency manipulation.  Here’s the FT:
Vietnam had been one of the rare beneficiaries of Trump’s

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Tim Duy on fiscal stimulus

15 days ago

David Beckworth directed me to an interesting post by Tim Duy:
Most likely, net job growth will continue even if at a slower pace. That job growth will be sufficient to drive income growth, and income growth will support consumption. But what about the missing fiscal stimulus, you say? I know this will be widely hated, but the decline in spending in nominal and real terms at this point pretty much matches the decline in income excluding current transfer payments . . .
The fall in consumption exceeded the fall in incomes early in the cycle while, on net, transfer payments are ending up as forced saving. The virus is the key impediment to growth at this point; there are certain sectors of the economy, leisure and hospitality in particular, with limited prospects

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Identifying monetary shocks

16 days ago

This post is a follow-up to my recent post on the “masquerading problem”. Recall that changes in interest rates are not a reliable indicator of changes in the stance of monetary policy. A new paper by Marek Jarociński and Peter Karadi discusses an interesting method of identifying monetary shocks:
Central bank announcements simultaneously convey information about monetary policy and the central bank’s assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency co-movement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock

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Special treatment for the powerful?

19 days ago

Should powerful people be treated differently? Should they get special treatment? Should their bad behavior be more easily excused? It seems to me that there are two arguments to consider:
1. Decisions made by powerful people are more consequential for all of us.2. Societies operate more effectively if there is an egalitarian sense of solidarity.
With the first argument, one might want to excuse occasional bad behavior, as there could be a great cost to replacing a powerful person with someone less skilled. Here you might think of the famous case of General Patton slapping a soldier suffering from shell shock, or General McArthur’s attempt to undercut Truman’s authority in Korea. Neither is a perfect example of this dilemma, but in both cases these two issues come

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This isn’t a Keynesian business cycle

20 days ago

In the standard Keynesian business cycle model, consumption is driven by changes in disposable income. This underlies the famous “multiplier” concept. But the Keynesian model doesn’t fit this particular business cycle (nor does the monetarist model.)
The current condition of the US economy is very weird. Housing is booming and many retailers are doing OK. Meanwhile, many services that involve human interaction are still deeply depressed, and likely to remain so until there is a vaccine or cure (or herd immunity.) Fiscal stimulus can’t fix that, although I believe their is a humanitarian argument for additional unemployment compensation during an unusual crisis like this one.
This graph shows the unusual and “unKeynesian” nature of the current business cycle:

Those

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The masquerading problem

22 days ago

For the past four decades, I’ve been complaining about the way the profession does empirical work on monetary policy. The studies often use “vector autoregressions” to estimate the impact of changes in the policy interest rate. Unfortunately, interest rates are not monetary policy. You can try to estimate the part of interest rate movements that are “exogenous” and hence reflective of monetary policy, but in practice this is almost impossible.
So after four decades of VAR studies by the best and the brightest in the economics profession, where are we? Here’s the abstract to a promising new paper by Christian Wolf of Princeton University:
I argue that the seemingly disparate findings of the recent empirical literature on monetary policy transmission are in fact all

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Stephen Williamson on NGDP level targeting

23 days ago

Over at TheMoneyIllusion I did a post discussing Steve Ambler’s presentation on NGDP targeting, and Nick Rowe’s subsequent discussion. Now I’d like to address some concerns expressed by Stephen Williamson.
One concern is that NGDPLT (or average inflation targeting) might be rather complicated to communicate. I believe that’s true of average inflation targeting, but not NGDPLT. Williamson mentioned that each year there would be a different NGDP target growth rate, depending on whether current NGDP was above or below the target path. But I believe it’s a mistake to think in terms of growth rates when evaluating a level targeting regime.
Consider the analogy of exchange rates under the Bretton Woods regime. The British pound was targeted at $2.80, plus or minus 1%. In

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Congress >>> economics profession

27 days ago

The Joint Economic Committee in Congress put out its annual report on the economy, written by Alan Cole. My overall impression is that the JEC has a better grasp of real world macroeconomics than many people at top 10 econ departments.
Let’s start with their diagnosis of the Great Recession:
Unfortunately, Federal Reserve policy from 2007-2018 erred too far towards curbing the growth of nominal spending—a stance known colloquially as “too tight” monetary policy. The result was a long, persistent “output gap,” or shortfall in GDP relative to what the economy could have produced with more ample nominal spending. While not the only policy problem of the time period, the output gap was a clear consequence of the Federal Reserve’s choice of policy anchor and its level

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Taiwan’s surprising boom

28 days ago

This caught my eye:
Taiwan kept borrowing costs unchanged and raised its growth forecast for the year in a rare display of optimism in a world grappling with the economic effects of the pandemic.
The central bank’s decision to hold the interest rate reflects confidence in an economy where the stock market is near a record high, exports are booming and the Covid-19 pandemic is being held at bay.
The economy is now expected to grow by 1.6% this year — up from June’s 1.5% forecast — driven by government spending and private investment as supply chains get relocated from China, central bank Governor Yang Chin-long told reporters Thursday.
You might argue that 1.6% RGDP growth is not a boom. But consider that Taiwan’s population growth rate is only 0.2%. A growth rate

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The problem with court packing

September 22, 2020

Between March and July 1933, FDR’s policy of devaluing the dollar pushed industrial production up by an incredible 57% in just 4 months. Then FDR’s National Recovery Administration instituted a policy of mandating sharply higher wages. Hourly wage rates rose by roughly 20% in just two months. This immediately ended the robust economic recovery then underway.
When the Supreme Court ruled the NIRA to be unconstitutional in May 1935, there had been no growth in industrial production for 22 months. Immediately after the NIRA was declared unconstitutional, industrial production once again took off like a rocket, until this second recovery was derailed by tight money and another wage shock in 1937.
You’d think that FDR would have thanked the Supreme Court for rejecting

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The lessons of Abenomics

September 21, 2020

With the recent resignation of Shinzo Abe, there have been a number of articles analyzing the record of Abenomics. There seems to be pretty general agreement on two points:
1. Japan’s economy improved after Abe took office at the beginning of 2013. Deflation came to an end, nominal GDP began rising, the public debt was brought under control, and unemployment fell to just over 2%.
2. The policy was not completely successful. Most notably, inflation continued to run well below the 2% target set by the Bank of Japan.
I believe that summary is correct. Where I part company with other pundits is in the lessons that Abenomics offers for monetary and fiscal policy. The Economist is fairly typical:
The first lesson is that central banks are not as powerful as hoped. Before

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What do models tell us?

September 18, 2020

Josh Hendrickson has a new post that defends the use of models that might in some respects be viewed as “unrealistic”. I agree with his general point about models, and also his specific defense of models that assume perfect competition. But I have a few reservations about some of his examples:
Ricardian Equivalence holds that governments should be indifferent between generating revenue from taxes or new debt issuances. This is a benchmark. The Modigliani-Miller Theorem states that the value of the firm does not depend on whether it is financing with debt or equity. Again, this is a benchmark. Regardless of what one thinks about the empirical validity of these claims, they provide useful benchmarks in the sense that they give us an understanding of when these claims

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The Fed can create money

September 16, 2020

Here’s the Financial Times:
The Fed also has acknowledged it lacks the tools to solve all the problems in the economy, since it can only lend money, but not spend it to help businesses or households. And the Fed is acutely aware that its policies have done plenty to save financial markets from distress, but cannot deliver benefits as easily to low-income families and the unemployed.
That’s entirely false.  The Fed doesn’t just lend money; it can and does create money and also spend the new money on assets in order to boost NGDP and help businesses and households.  This policy delivers benefits to unemployed workers by reducing the unemployment rate.
The Fed is worried that the lack of a fiscal agreement will threaten the recovery and make its job harder. The US

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Friends in high places

September 15, 2020

A number of experts on technology have expressed concern about the national security implications of allowing Chinese companies/products like Huawei, TikTok and WeChat to have access to the US market. I’ve been skeptical of their arguments, although I concede that I am not well informed on technology issues. On the other hand, I wonder if tech experts have sufficient awareness of the “public choice” aspects of giving the government the power to run an industrial policy.
Previously I noted that the US government’s original intention to protect US consumers from possible spying by Huawei has morphed into a crusade to destroy the Chinese company. Political considerations also seem to be showing up in the TikTok case. Oracle has offered to purchase a portion of TikTok

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The headline should match the article

September 13, 2020

Headlines are typically not written by the same person that pens the article. Nonetheless, the headline should at least match the content of the article. Bloomberg failed with this headline:

I was surprised by this headline, as the Fed obviously can drive inflation higher.  Perhaps they meant that Powell cannot convince the FOMC to drive inflation higher, but that would be an odd way of phrasing that claim.
The article itself is excellent:
The Treasury market has set a high bar for the Federal Reserve to jump in order to recharge inflation expectations and upend a bullish tone that has surfaced since Chair Jerome Powell laid out a new plan to allow consumer prices to run hot.
Bond-market gauges of inflation expectations have declined for the past two weeks,

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Misinformation and foreign policy

September 11, 2020

A few weeks back I did a post that discussed the first of Philippe Lemoine’s four essays on China’s response to the Covid-19 epidemic. Now I’ve had a chance to read all four of what will likely become the definitive account of China’s role in the pandemic. I cannot recommend them highly enough.  Over at MoneyIllusion I discuss the second essay, and here I’d like to discuss the concluding paragraphs of the fourth essay:
I have examined in detail the accusations made against China in connection with the COVID-19 pandemic. I have concluded that there is a grain of truth to some of them—mistakes were certainly made in the early days of the crisis and the Chinese authorities have not always been forthcoming with information about the epidemic. Nevertheless, a careful

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All Hail Lars Christensen!

September 9, 2020

We are in the midst of a real business cycle. So this should be a feather in the cap for real business cycle theory, right? Actually, it’s looking more like the death knell of RBC theory. That’s because when we finally have an honest to God real business cycle, it looks utterly unlike anything we’ve ever seen before.
For example, consider the unemployment rate, which increased from 3.5% in February to 14.7% in April. The entire 2020 recession lasted for only two months, far less than any previous recession in US history. But the weirdness doesn’t stop there. In the next 4 months the unemployment rate fell by 6.3 percentage points, down to 8.4%.
For comparison, during the recovery from the 2008-09 recession it took an entire decade for the unemployment rate to fall

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Fiscal stimulus also boosts inflation

September 7, 2020

When at the zero bound for interest rates, the central bank can lower the real interest rate by raising the inflation target. Some have argued that this is politically unacceptable, and hence central banks may get stuck in what Paul Krugman called an “expectations trap”, an inability to convince markets that it intended to be “irresponsible”, i.e. unwilling to allow higher inflation.
Some advocates of this view advocate fiscal stimulus as an alternative method of boosting aggregate demand. But why would a central bank that is unwilling to raise its inflation target allow fiscal stimulus to boost the inflation rate? One answer is that perhaps they are willing to tolerate higher inflation, but not willing to announce a policy of higher inflation. In that case, fiscal

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Japan’s new leader

September 5, 2020

I’ve long held the view that pundits pay far too much attention to American elections and not enough attention to elections in foreign countries. It’s not that US elections are unimportant—we are the world’s dominant power—rather the relative importance of the US is generally exaggerated. The US is more important than the world’s 3rd largest economy, but surely it’s not 100 times more important.
How many people know that Japan just picked Yoshihide Suga as its new leader?  How many know that his policy preferences differ somewhat from those of Prime Minister Abe?
After graduating, he became secretary to a Yokohama politician, where his real education began. His boss was minister of transport in the early 1980s, heavily involved in the privatisation of Japan

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Something there is that doesn’t love a wall

September 4, 2020

The Economist has an article that discusses the proposed US shutdown of WeChat. This caught my eye:
Foreigners in China have long relied on virtual private networks (vpns) to jump the great firewall. Now, Oscar Li, a postgraduate in Colorado, plans to do the reverse. After his mother in China heard the news about a possible WeChat ban, she called him, frantic with worry. He reassured her that he would download a vpn to circumvent the new great firewall of America.
A sign of the times.
Readers interested in China should also checkout a longer article in the same issue of The Economist, which provides an excellent discussion of recent changes in Chinese economic policy.
PS.  Here’s a bit more from that famous Robert Frost poem:

Before I built a wall I’d ask to know

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Sweden and Taiwan revisited

September 2, 2020

On April 15, I did a post arguing that Sweden is not the right Covid-19 model for libertarians, rather Taiwan is the model. Now that we are in September, it’s time to revisit some of the arguments.
One argument is that countries trying to control Covid-19 were merely delaying the inevitable. You hear people saying “we’re all going to get it eventually”.
But are we? Russia and China are already beginning to roll out vaccines, and Western countries are expected to begin doing so relatively soon. Back in mid-April, Taiwan had suffered 6 deaths in a population of 24 million—today its death toll is 7. Sweden has suffered 5813 deaths in a country of only 10 million. It’s not obvious to me that everyone in Taiwan will get Covid-19 before vaccines are available.
Sweden’s

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More men on the moon?

September 1, 2020

The federal government seems to have an almost inexhaustible willingness to waste money. At the same time we are experiencing a pandemic with a completely inadequate testing system, the government is contemplating spending many billions to send men back to the moon in 2024—55 years after the first moon landing. That would be about as exciting as flying a crude airplane a few hundred yards along a North Carolina beach in 1958.
Boeing Co.’s Space Launch System, the largest rocket in NASA’s history, will carry a price tag of at least $9.1 billion — or 30% more than the previous estimate for a key element in the agency’s plan to return to the moon.
Additionally, the costs for new ground infrastructure at Florida’s Kennedy Space Center to support the deep-space

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