Scott Sumner has a number of posts about 2013 being a banner year for Market Monetarism (here, here, here and here (at least)). I agree that 2013 has provided great results in testing the theory of monetary offset of changes in fiscal policy, or the Sumner Critique that posits a near-zero fiscal multiplier when the central bank is targeting a nominal variable such as the 2% inflation rate adopted by the Federal Reserve.
This post isn’t about the particulars of the test or trying to prove anything, however. There is more than enough such evidence from Japan over the last 20 years to convince this blogger that the Sumner Critique has merit.
Rather, this post is about the other work Professor Sumner is on the verge of accomplishing – helping to cure the rest of the profession of mad-economist disease, generally associated with a like bovine disease that eats brain and spinal cord tissue, but somehow ended up infecting the entire economics profession when they should have been functioning at 100% efficiency. And so instead of an engineered recovery to a crisis that shouldn’t have happened, we were all instead subjected to arguments about which flavor of dogma between two political extremes is the best medicine, with the choices ranging from bad to much worse, as many of were left with the extra-personal fight of our financial lives.
I believe that many in Congress on both sides of the isle genuinely wanted to do the right thing by the people who found themselves completely destroyed. But economists on both sides, having learned nothing from Japan, were telling them that the Fed is irrelevant at the ZLB and fiscal policy is the only game in town. So they passed a mega-spending package even though the markets were sending the signal loud and clear that it wouldn’t work. I remember watching two televisions the day Obama signed the recovery act into law, one on C-SAPN and the other on Fox Business watching the DOW crash. I had no idea then just how difficult life would become in the coming years. The bad advice meant something profound to millions of people just like me as things went from bad to worse beyond previously imaginable.
But I would be lying if I said I expected some form of mea culpa, and for truth to prevail while we all get together and sing Kumbayah. It doesn’t matter how many times the Sumner Critique proves consistent with reality. Because it posits that nearly the entire foundation of the nationalist philosophy is archaic and died with the gold standard, it will go ignored. It’s just the way people are. I don’t know of a non-cynical way to put this. I learned the hard way that when it comes to politics, no good deed ever goes unpunished.
It doesn’t mean I think that Sumner shouldn’t declare victory. He should. But he shouldn’t lose sight that the Sumner Critique was put to the test, not the foundation of Market Monetarism; and we still need that piece to be put into practice. I won’t settle for sloppy seconds, and that might just be how this shakes out with the people who were wrong making excuses at the expense of the real prize. They said monetarism was tried and failed – and that isn’t true. But they did it to discredit Friedman because they didn’t like his politics. And I have to say that the Sumner Critique, regardless of merit, will be viewed exactly as politics.
And so how important is this particular theory in the whole collection of theories that constitute the Market Monetarism body of thought? Compared to getting NGDPLT going, I would say ‘not so much.’ It was very much a good year for MM; but please – don’t fall into Krugman’s political trap that is designed for one thing only – to provide ammunition to besmirch and discredit politically anything that comes between politicians and their largess at public expense. Declare the victory for this one, small piece of MM, then move on to fight the larger war.