Scott Sumner’s latest post sums up the application of the “Sumner Critique”
The “Sumner Critique” doesn’t just apply to fiscal policy. It applies to the entire General Theory, including its dark side (the paradox of thrift, neo-mercantilism, etc.)
I made a comment on a post by Marcus Nunes a couple of days ago stating that I violently agree with those who say that more QE won’t help, being of the opinion that because of the explicit PCE ceiling of 2%, it would be an exercise in futility. The ceiling is the reason the previous QE rounds have been delineated by size and time frame instead of based on economic goals; the FOMC didn’t want to end up having to counteract its own expansion – but it did anyway. Perhaps it might be able to shave another percentage point off unemployment in a year with QE3, but it won’t last, just like a portion of effects of QE2 have been eaten up in further disinflation. I was unknowingly invoking the Sumner Critique.
As long as that PCE ceiling is there and is strictly enforced nothing will solve the unemployment problem within a reasonable time frame. More QE won’t do it. Cutting public debt and spending won’t do it. Doing everything imaginable on the supply side won’t do it. Cutting taxes won’t do it. Bringing back manufacturing won’t do it. Having the government spend hand over fist won’t do it. All of these are nothing but folly amounting to rearranging the deck chairs on the Titanic.
None of these will work because as soon as demand starts to revive, PCE core will start to accelerate and the Nervous Nellies at the Fed will tighten making it all for not. Inflation isn’t just about extra dollars floating around as so many like to make it seem. People getting back to work will create more demand as they start making up for past deprivations and demand will have an effect on the price level even in the absence of extra dollars floating around the system. The likelihood that we find ourselves back where we started, no matter what actions public policymakers take is high because the chosen inflation target is too low for an economy that needs a path to recovery. It would possibly be more appropriate after recovery, but that is likely a discussion for another time.
My opinion is that there will be no meaningful recovery from this Great Recession until Congress steps in and removes that ghastly inflation targeting regime with legislation that is not easily skirted around like the poorly worded amendment that came with the Full Employment and Balanced Growth Act. It needs to remove all mandates and replace them with one – NGDP level targeting. In addition, it needs to provide automatic triggers that remove FOMC officials if given economic goals are not met, helping to ensure that this awful nightmare of hubris does not repeat itself; and if it does, it won’t last long.
PS: Yes, I ended up lying about taking a break. I saw the Sumner post and couldn’t resist embellishing it with my own flare.