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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

Trust, but verify

5 days ago

Yes, that’s a sort of oxymoron.  So let me put it this way.  Put more weight on an expert’s opinion than a non-expert’s opinion.  But also evaluate the soundness of the arguments used by experts; don’t accept them uncritically.
A recent article at Yahoo followed a predictable path, pointing out how a low income Florida county is full of lots of obese people who refuse to get vaccinated.  The reporter has great sympathy for the overworked health care workers in their underfunded medical facilities.  Then the article took a surprising turn:
On Wednesday morning, chief nurse Paige Tolley received a call from the clinic across the street, where Davis works, about rising COVID-19 cases.
“Are y’all seeing multiple daily, too?” Tolley said on the phone. “Keep sending them

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Yglesias on military spending

7 days ago

Matt Yglesias has a post discussing the new cold war with China. In the end, he’s skeptical of calls for more military spending to counter China, but along the way I think he concedes too much to the other side:
But when defense spending went down in Obama’s second term, that was part of an across-the-board austerity agenda that was economically harmful. Under Trump, Congress cut deals to lift the sequester, and both military and non-military spending went up. That, it seems to me, was good.
We should not let concern about China deprive us of funds for useful domestic spending. But whether or military spending actually crowds out or crowds in domestic spending depends on the situation.
I strongly disagree with the first paragraph, and the second is also somewhat

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Is restaurant productivity booming? (Probably not)

9 days ago

This tweet caught my eye:

Notice that sales have recently increased much faster than employment.  A bit of that might be inflation, but surely that cannot explain such a massive divergence occurring over just a few months.  Another part of the increase might reflect a make-up rise in productivity after the recent recession.  But even that cannot explain the size of the increase.
More likely, the productivity numbers seem higher because restaurants are understaffed.  I base that claim on three facts:
1. Personal observation.  In recent weeks I’ve experienced some of the worst restaurant service in my entire life, most notably long waits in line at times of day when there would normally be no line at all.
2. News reports.  There are many stories in the media

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How Should We Think About 'Transient Inflation'?

11 days ago

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Big fruit and low-hanging fruit

15 days ago

Tyler Cowen recently linked to a George M. Constantinides study of the welfare costs of unstable consumption:
I estimate welfare benefits of eliminating idiosyncratic consumption shocks unrelated to the business cycle as 47.3% of household utility and benefits of eliminating idiosyncratic shocks related to the business cycle as 3.4% of utility. Estimates of the former substantially exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are 7.7% of utility. Policy should focus on insuring idiosyncratic shocks unrelated to the

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Is inflation always a monetary phenomenon?

17 days ago

Here’s Megan McArdle, stating a famous old monetarist maxim:

I think McArdle is 75% correct, in the sense that 3 of the 4 plausible interpretations of this ambiguous statement are true.  Here are the 4:
1.  Inflation is always a fall in the value of money.  (Tautologically true, but uninteresting.)
2.  Inflation is always caused by an increase in the money supply. (False)
3.  Periods of sustained and high rates of inflation are always caused by rapid money growth. (Probably true)
4.  Inappropriately high inflation is caused by bad monetary policy.  (True)
Don Patinkin assumed that Milton Friedman had the first interpretation in mind, and criticized the claim for being tautological.  Actually, Friedman had the third interpretation in mind.
In my view, policy

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What can we infer from the Swedish Covid policy?

19 days ago

There’s been a great deal of discussion of what we can learn from the Covid policy adopted by Sweden.  One side suggests that the Swedish outcome shows that lockdowns don’t have much impact on Covid infection rates, while the other side reaches the opposite conclusion.  I’m rather skeptical about the effectiveness of lockdown policies, but I don’t entirely agree with either side of the debate over Swedish policy.  (This article in The Economist is also mildly skeptical of the cost efficiency of lockdowns, accounting for both the impact on the economy and on human freedom.)  At the same time, I’ve long suspected that the Swedish government didn’t handle the epidemic very well.  That requires some explanation.
Scott Alexander has a very long and thoughtful article on

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Meaning and connotation

21 days ago

In response to my previous post, commenter BC asked:
When you say that you don’t expect Bezos to give away almost all his wealth and that you’re “fine” with that, do you mean that you don’t expect Bezos to act morally and that you’re fine with some immorality?
I responded:
This is almost a textbook example of the connotation of words getting in the way of clear thinking.  “Immorality” has a literal meaning, and also a (quite different) connotation.
Suppose I park somewhere and put a quarter in the parking meter.  Then I overstay the hour I’ve purchased.  I’ve broken the law, and should be punished by the meter maid if I’m caught.  Is my action “wrong”?  Yes, obviously.  Am I behaving in an “immoral” way?  It depends whether you use ‘immorality’ in a literal sense

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Two types of utilitarianism

22 days ago

Here’s Bryan Caplan:
I say utilitarianism is utterly crazy.  After all, as Huemer previously told us:
It’s worth taking a moment to appreciate how extreme the demands of utilitarianism really are. If you have a reasonably comfortable life, the utilitarian would say that you’re obligated to give away most of your money. Not so much that you would starve, of course (because if you literally starve, that’ll prevent you from giving away any more!). But you should give up any non-necessary goods that you’re buying, so you can donate the money to help people whose basic needs are not met. There are always plenty of such people. To a first approximation, you have to give until there is no one who needs your money more than you do.
If that’s not crazy, what is?
It seems to

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First impressions

26 days ago

Three years ago, the Atlanta Hawks traded Luka Doncic to Dallas in exchange for Trae Young and the right to draft Cam Reddish. Over the next three years, there was an almost universal view among NBA basketball fans that the trade was very lopsided, with Atlanta losing badly.
Last night, Atlanta was eliminated from the playoffs. Nonetheless, one TV commentator suggested that the trade now looks much more even. Young was spectacular in the playoffs before getting hurt a week ago, and while it’s too soon to fully judge Reddish, he looked very good in a couple playoff games after coming off an injury. Atlanta went much further in the playoffs than Dallas.
This example demonstrates something I’ve noticed quite often. People are far too quick to make judgments. Pundits

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The stories we tell

29 days ago

The field of economics is a set of stories that we tell to better understand the economy. I thought of this when reading a new post by Matthew Klein:
If I had to pick one chart to tell the story of the U.S. economy since the end of WWII, it would be this:

Indeed Klein views the post-2006 slowdown in RGDP per capita as being so important that his Substack is entitled ‘The Overshoot”, an indication that we need to work on reversing the recent undershoot.
Of course literary theorists know that stories can have many interpretations.  What is Kafka’s Metamorphosis actually about?
If I were to tell a story about this a graph, the year 2006 would be of no importance at all.  I would begin my story by focusing on productivity, not output per capita.  Doesn’t real GDP per

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The “good old days” that never were

29 days ago

Will Wilkinson has a post discussing how residential zoning laws were originally instituted to exclude certain minority groups:
In 1926, the Supreme Court ruled that zoning was cool in Euclid v. Ambler Realty. However, despite the fact that Euclid’s lawyers insisted that their law had nothing to do with race, the district court judge whose decision the high court reversed didn’t see much difference between the law in Euclid Township, Ohio (a suburb of Cleveland) and the Louisville law declared an unconstitutional encroachment on property rights and freedom of contract in Buchanan. He wrote, “The blighting of property values and the congesting of the population, whenever the colored or certain foreign races invade a residential section, are so well known as to be

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Teaching the Fed as the hero

June 29, 2021

Many people would regard my approach to teaching monetary policy during my final years at Bentley to be hopelessly “out of date”. Marginal Revolution University has a new video out that discusses new ways of teaching Fed policy in light of changes made during and after the Great Recession.  Here I’d like to push back against this new view.
Early in the video, Tyler suggests that the Fed traditionally relied mostly on open market operations, and then during the Great Recession it discovered that it needed new tools to achieve its goals. Tyler mentioned quantitative easing, interest on bank reserves, and repurchase agreements (as well as reverse repurchase agreements).
But is there actually any evidence that the Fed needed new policy tools?
Tyler mentions that the

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Strange moral calculations

June 26, 2021

The Economist has an interesting article discussing regulatory changes regarding child safety seats:
During the Reagan era, only the truly wee—tots aged under three—had normally to be secured in child-safety seats. But states’ governments have, since then, gradually ramped up the requirements. Today, most places in America make children sit in safety seats until their eighth birthdays. That concern for youngsters’ safety has had the unintended consequence, Dr Nickerson and Dr Solomon suggest, of fewer three-child families. . . .
They discovered that tightening those laws had no detectable effects on the rates of births of first and second children, but was accompanied by a drop, on average, of 0.73 percentage points in the number of women giving birth to a third

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TV prices and British queens

June 24, 2021

According to the BLS, TV prices (olive green line) fell by 94.5% between 1997 and 2015:

A TV set that cost $200 in 1997 cost $11 in 2015.  Today the price would presumably be even lower.  Try to imagine visiting your local BestBuy and asking to look at their $11 TV sets.
Of course, what’s actually going on here isn’t so much that people are spending less money of TV sets, rather that they are getting better TV sets when they spend $200 at the local retailer.  But how much better?  The BLS estimate suggests that a $200 TV set purchased in 2015 was 18.2 times better than a $200 set purchased in 1997.  But what does that mean?
Does it mean the screen is 18 times larger?  Does it mean that George’s foibles on Seinfeld are 18 times funnier on the 2015 TV set?  Is a 9th

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Temporary insanity (learning from mistakes)

June 22, 2021

One of the most interesting passages in Edward Nelson’s new book on Milton Friedman concerns wage and price controls as a tool for reducing inflation. Throughout history, economists have generally opposed price controls. Then around 1970, many prominent Keynesian economists suddenly began supporting the policy. Why?
Here’s Ed Nelson (Vol. 2, p. 258):
Indeed, what is remarkable about events during 1970 is the extent to which mainstream US macroeconomic thinking on inflation moved toward the position on inflation previously associated with Galbraith and with economists in the United Kingdom.  In the course of that year, pure cost-push views became prevalent among major US economists and policy makers.  Increasingly, major Keynesian academic economists, economists in

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Friedman’s smashing success

June 17, 2021

In the late 1940s, Milton Friedman was considered an important economist who had made significant technical contributions. At the beginning of the 1950s, however, he moved away from Keynesian economics and as a result was increasingly viewed as a bit of a nut. Two decades later, however, Friedman had become far and away the most important macroeconomist in the world. Much of the ongoing macro debate revolved around economists addressing Friedman’s ideas, pro or con. How did this happen?
Edward Nelson’s outstanding two volume study of Friedman provides the most complete answer that I have seen. During the 1960s, Friedman rejected 4 key tenets of Keynesian economics. And within less than a decade, all four of his critiques were shown to be correct. As a result,

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The pointless debate over inflation

June 15, 2021

In the past, I’ve frequently argued that inflation is an almost meaningless and useless concept. I’m not even aware of any coherent definitions of the concept. Unfortunately, the Fed has decided to target PCE inflation, and thus we are forced to pay attention to the issue, and even forecast its future path.
Here are two problems with the inflation debate:
1. If the claim is that high inflation is an indicator of excessive aggregate demand, then why not focus on NGDP? If the claim is that high inflation is hurting living standards, then why not focus on real GDP? Inflation can be affected by both supply and demand shocks.
If people say inflation is too high or two low, there’s usually some sort of public policy implication to their claim. It’s not merely like saying

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In praise of “death panels”

June 12, 2021

As far as I know, neither political party has ever advocated “death panels”, that is, panels of experts that would deny Medicare coverage to FDA-approved treatments that don’t pass a cost/benefit test. But maybe they should.
Biogen’s new drug to treat Alzheimer’s was recently evaluated by the FDA.  Here is Rachel Sachs in Health Affairs:
In March 2019, both trials were stopped halfway through, when “a planned interim analysis met prespecified futility criteria.” But Biogen went further into the data, analyzing the results and arguing that the high-dose patient population in the second trial had in fact experienced a statistically significant clinical benefit when measured against the placebo (a 22 percent reduction of clinical decline as measured on a chosen

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Is a ban on corporate ransom payments feasible?

June 10, 2021

In some recent posts, I threw out the idea of banning corporations from paying ransomware. I expected the idea to be shot down in the comment section, but I didn’t see any persuasive arguments against the proposal.  In fairness to my commenters, however, most of their arguments were far superior to those offered in a recent Bloomberg article:
Consider a simple example. Suppose a state legislature, sick and tired of the number of people being robbed on the street, decides to make it a crime to give money to a mugger. The legislation might well reduce the supply of muggings, but only by imposing the cost of this public good — fewer robberies — on the victims. Yet handing my wallet to the mugger who is pointing a gun at my head is completely rational. Punishing me to

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When should NGDP be unstable?

June 9, 2021

Over time, the labor force (employed plus unemployed) usually tends to grow at a pretty stable rate. In addition, hourly wage rates are sticky, or slow to adjust to shocks. As a result, a healthy economy requires a relatively slow but steady growth in nominal labor compensation. One way to do that is to have the central bank target NGDP growth at 4% or 5%/year.
In a recent post, I suggested that the Covid recession was one case where NGDP targeting might not have worked very well. That’s because the labor force plunged much lower in March and April 2020. Given the slow adjustment in nominal wages, it was appropriate to have some slowdown in NGDP growth. For the same reason, it’s probably appropriate that French NGDP dips a bit each year in August.  Thus central

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Friedman as a critic of Keynesian economics

June 8, 2021

I’ve finished reading the first volume of Edward Nelson’s impressive new study of Milton Friedman, and highly recommend the book to anyone interested in macroeconomics. This remark on page 380 caught my eye:
In the half century or more after 1951, Friedman would receive a lot of criticism from monetary researchers and practitioners for his alleged neglect of interest rates and his supposed reluctance, or outright unwillingness, to describe monetary policy actions or their effects in terms of interest rates.  However, it was concluded in chapter 5 that the record of Friedman’s statements is more nuanced than this criticism suggests.
[As an aside, that criticism would be valid for my own views on money and interest rates, which are not nuanced.  I have a recent paper

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Regulation can be painful

June 3, 2021

In 2010, there was an growing problem of people abusing painkillers such as OxyContin.  Unfortunately, the steps taken to address the crisis may have made things even worse.  A 2018 NBER study by William N. Evans, Ethan Lieber, and Patrick Power showed that when the pills were reformulated to reduce drug abuse, people switched to other drugs such as heroin, which were even more dangerous:
We attribute the recent quadrupling of heroin death rates to the August, 2010 reformulation of an oft-abused prescription opioid, OxyContin. The new abuse-deterrent formulation led many consumers to substitute to an inexpensive alternative, heroin. Using structural break techniques and variation in substitution risk, we find that opioid consumption stops rising in August, 2010,

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How do deficits matter?

May 31, 2021

Tyler Cowen directed me to a Ross Douthat post on people with intellectual influence:
Scott Sumner/Stephanie Kelton: Because market monetarism and modern monetary theory arguably stand in the same relation to our “no, really, deficits don’t matter” policymaking era as Milton Friedman did to Reagan-Thatcher neoliberalism.
I’m flattered that Douthat believes that I’ve been influential, but I worry that people might misunderstand this claim.  As far as I know, my views on the deficit are almost the opposite of the MMT view:
1. I’ve been strongly opposed to the big budget deficits during the Trump/Biden era because they will require future tax increases, which slows economic growth.  In contrast, many MMTers don’t seem to believe that deficits impose a burden of future

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A new model of the macroeconomy

May 30, 2021

As you will see, the title of this post is half joking and half serious. I’ll try to explain both halves, starting with the joking part.
My brand new model of the macroeconomy is called the NS/RO model, which stands for nominal spending/real output.  The model shows how equilibrium output and the price level are determined.  The key insight is that changes in nominal spending have a short run positive effect on real output, but no long run effect. The following graph illustrates the basic idea:

NS is the nominal spending curve.  It is a rectangular hyperbola, where each point along a given line represents a given amount of nominal spending, aka NGDP.  SRRO is the short run real output function.  LRRO is the long run real output function, reflecting the natural

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That 1970s inflation

May 27, 2021

Patrick Horan directed me to these tweets:

Luther is right.  There are actually three issues that need to be disentangled here:
1.  The cost of high trend inflation
2.  The cost of high inflation volatility
3.  Supply vs. demand-side inflation
High trend inflation increases the real tax rate on saving and investment, which hurts capital formation.  This reduces economic growth, lowering living standards. The negative effects are not offset by gains to borrowers, as the Fisher effect implies that nominal interest rates rise to reflect higher inflation expectations.
As Appelbaum suggests, an unexpected surge in inflation can indeed help borrowers.  However, in the long run there will be just as many years where inflation is less than expected as there are years

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I’m still waiting

May 25, 2021

Steve X

May 25 2021 at 5:42pm

Zoning reform should be given great importance by Libertarians and Classical Liberals. Ed Glaeser’s work calculating the cost of zoning is great. It’s been replicted in many places as well.
In the 1970s the government regulated the price of flights, transport costs and so much more. One of the last areas where the government has similar control is zoning. Albeit with local government.
It’ll be really good when Bryan Caplan’s book about it comes out.
If supply were more elastic it’s unlikely the housing price rise would be so bad. Indeed, it’d be interesting to check what the house price rise is in the American Southwest where there

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It’s alright, Ma, change your lane

May 23, 2021

As I get older, I encounter more and more new phrases that annoy me:
1. Universities need “safe spaces”? I’d say universities are safe spaces.
2. Read the room? No, the room needs to read me.
3. Cultural appropriation?  By all means! Life would hardly be worth living without cultural appropriation.
4. Stay in your lane?  Why would I want to do that?
Here’s The Economist, in a very revealing article on Chinese authoritarianism:

The initial affront that led to the tech crackdown was Jack Ma’s comparison, at a public event in October, of Chinese state lenders to pawn shops. A month later China’s stockmarket regulator suspended the $37bn initial public offering of Ant, which would have been the world’s biggest ever, in Hong Kong and Shanghai. Since then the

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Is digital currency a threat to banking?

May 20, 2021

The Economist has an article on central bank digital currencies (CBDCs):
If citizens can convert bank deposits into central-bank money with a simple swipe, the technology “has the potential to be run-accelerant,” said Lael Brainard, a Federal Reserve governor, in 2019. This could pull deposits out of the banking system and onto the central bank’s balance-sheet, disintermediating the banks. . . .
If CBDCs proved popular, they could suck all deposits out of the banking system. In America this would stretch the central bank’s balance-sheet from $8trn to a whopping $21.5trn. Who, then, would provide the $15trn of loans that banks now extend to the American economy?Perhaps a central bank could simply pass the funds back to the banks by lending at its policy interest

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