Sunday , September 26 2021
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It’s never too late

Summary:
There have been lots of books written on the Great Recession.  So why do we need a new one at this late date? Because in my view the other books are wrong. And note that Friedman and Schwartz’s book on the Great Contraction came out 30 years after the event, whereas my new book (entitled The Money Illusion) was delayed by a mere decade. Furthermore, the recent Covid recession has few lessons for monetary policy going forward, whereas the Great Recession has lots of important lessons. Future recessions are likely to be more like the (demand side) Great Recession than the (supply-side) Covid recession. Nonetheless, there’s no question that my new book is poorly timed. I wrote hundreds of pages arguing that American recessions are almost always caused by tight money,

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There have been lots of books written on the Great Recession.  So why do we need a new one at this late date? Because in my view the other books are wrong. And note that Friedman and Schwartz’s book on the Great Contraction came out 30 years after the event, whereas my new book (entitled The Money Illusion) was delayed by a mere decade. Furthermore, the recent Covid recession has few lessons for monetary policy going forward, whereas the Great Recession has lots of important lessons. Future recessions are likely to be more like the (demand side) Great Recession than the (supply-side) Covid recession.

Nonetheless, there’s no question that my new book is poorly timed. I wrote hundreds of pages arguing that American recessions are almost always caused by tight money, right after we experience a once in a hundred year recession that was caused by a real shock—Covid-19. (The book was written years ago, long before Covid.  For reasons that I fail to understand there is a long lag in publishing new books.)

My book would have greatly benefited from either of the following two scenarios:

1. Continued stable growth in NGDP after 2020, leading to a soft landing and proving that stable NGDP growth is best.
2. Another recession caused by a sharp drop in NGDP growth (or high inflation caused by excessive NGDP growth), proving that stable NGDP growth is best.

I was 99% likely to get one of those two outcomes, but got neither. Oh well . . .

And yet I prefer to focus on the bright side. Lots of claims that I made in the early drafts look much better today than in the late 2010s.  For instance:

1. I argued that bubbles don’t exist, pointing to the fact that what was once viewed as a tech bubble (in 2000) and a housing bubble (in 2006), now look much less like bubbles. Over the past few years both tech stocks and housing prices have skyrocketed, so my bubble skepticism looks far more persuasive today that in 2018. Can anyone with a straight face still claim that house prices were obviously overvalued in 2006? Or the NASDAQ in 2000?

2. I called myself a “supply and demand side economist”, viewing both sides of the AS/AD model as being important. I argued that the Great Recession was primarily caused by a negative demand shock, but bad supply side policies contributed to the slow recovery.  I specifically pointed to the fact that the removal of the extended unemployment benefits at the beginning of 2014 spurred rapid growth in employment. Today, the impact of bad labor market policies is even more obvious, as we have both a labor shortage and high unemployment.  Both sides of the economy are important.

3. I argued that the Fed should have tried to get NGDP (or prices) back up to the original trend line after the 2008 recession, and that doing so would have made the recession much milder. In 2020, the Fed adopted a watered down version of that idea (average inflation targeting), and did succeed in getting both prices and NGDP back pretty close to the pre-recession trend line. And low and behold, the recession was much milder than the previous recession, despite forecasts in the spring of 2020 that we faced a major depression.

So I still feel pretty good about what I wrote before Covid, despite the abysmal timing of the publication.

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.

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