Monetary economics is a difficult area, for money is both ubiquitous – it is a feature of all transactions that use money – and has roles across time. By the frequency and clarity of his posts, and his willingness to engage with his commenters, Scott Sumner provides, in effect, an ongoing public seminar in monetary policy.
Particularly as one can ask a question and have a very informative answer from some of the excellent other commenters on the blog.
But it is the quality of his posts that is the real value. Sumner has, for some years, been writing a book on the Great Depression of the 1930s. His approach has to been to immerse himself in the data, including the issues of the New York Times of the period. (He has posted an introduction to his analysis of the 1930s here and excerpts from some chapters of his book here, here, here, here; here, here, here, here; here, here, here, here and here with a clarification post here and a useful summary of his views here. He has a lovely takedown of Woodrow Wilson here.) This gives his application of the lessons of the 1930s an empirical depth that is invaluable.
As long as it is applied to an appropriate analytical structure: it is not merely that Sumner is steeped in the empirical data, it is that he applies economic analysis in an open-minded way to the data that gives his posts their value.
He recently published a piece in National Review arguing for his preferred approach to monetary policy – targeting the level of nominal GDP (NGDP: GDP in money terms). NGDP is the money value of the total number of productive (in the sense of incorporated-in-GDP) transactions in a given time period.
On the way through, he provides a very clear analysis of recent economic travails. We suffer from a re-run of Irving Fisher’s analysis (pdf) of the 1930s Great Depression – a combination of the “debt disease” with the “dollar disease”.
Yes, there had been a vast expansion in use of credit/debt and the role of the financial sector in the global (and particularly American) economy. But the crucial problem was a dramatic drop in nominal GDP as the result of the US Federal Reserve’s shift to a “tight money” policy, for:
Since most debts are nominal (i.e. not indexed to inflation), nominal income is the best measure of a person’s ability to repay their debts. In 2009, the U.S. saw the biggest fall in nominal GDP (NGDP) since 1938. It is thus no surprise that we had a debt crisis: Borrowers almost always have trouble repaying debts when nominal income comes in much lower than was expected when the debts were contracted.There was a general expectation about growth in total transactions/economic activity – and so money incomes – which were collectively frustrated. The result was both a dramatic economic contraction AND a dramatic increase in “bad” debts.
Pausing here, this is why I am deeply sceptical about the Austrian economics concept of malinvestment, particular as an explanation of business cycles: a investment which is fine at one level of economic activity is not at a lower one. A business that may well be a perfectly reasonable investment in inner city New York may be a deeply silly one in Port-au-Prince. So, that a drop in the general level of economic activity results in increased bankruptcies is not a sign of “malinvestment”. On the contrary, a business that fails in boom times is much more a sign of malinvestment.
What Sumner wants of a central bank is:
I am asking the Fed to provide a stable policy environment for the negotiation of wage and debt contracts.Something the Federal Reserve in the US failed to do, but the Reserve Bank of Australia has continued to successfully do.
Such widespread frustration of money income expectations due to a drop in nominal income has all sorts of knock-on effects:
Government workers in 2009 were being paid salaries negotiated under the expectation that NGDP would rise at about 5 percent, as it had (on average) for several decades. When actual NGDP fell 8 percent below trend, those wage contracts boosted the share of national income going to the employees still working, at a cost of much higher unemployment for the rest of us.If government employees are systematically shielded from economic circumstances, this may both encourage talent into the government sector and discourage public policy from being sensitive to such things as high or persistent unemployment. Europe is currently providing some object lessons in why that might be a long-term problem.
On the way through, Sumner provides in his National Review piece a very lucid discussion of precisely why the gold standard is not a solution, again based on his understanding of the historical data.
But this informative lucidity is not some unusual aspect of Sumner’s blogging. This post, for example, provides an excellent “in” to the current, parlous, state of macroeconomics. From reading Sumner, and particularly his comparisons of current circumstances with those of the 1930s, one can see how mad concerns about some looming outbreak of inflation are (and how these are yet another re-run of the 1930s, of which he can identify a depressingly large number of parallels).
Do read his entire article, and then start reading his blog.