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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".

Articles by Scott Sumner

Believe whatever you like

5 days ago

Lindsey Graham has certainly raised some eyebrows since the death of his friend John McCain, by radically shifting his approach to politics. But give Graham credit for being honest about what’s going on, in this remark from 2018:

“I would imagine in a Democratic administration, I would be all over them for being in the pocket of Saudi Arabia,” Graham said of Mattis and Pompeo. “But since I have such respect for them, I’m going to assume they are being good soldiers.

In politics, people obviously believe what they wish to believe. Some Trump supporters would like to believe that Trump shares their opposition to the Fed’s recent “lowflation” policies. But does Trump actually oppose tight money? Or is he a secret NeoFisherian, who favors low interest rates because they

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Don’t ease monetary policy; cut rates instead

6 days ago

David Beckworth directed me to a new piece by Jeffrey Frankel:

A Trade War is No Reason to Ease Monetary Policy
A trade war is a negative supply shock, and central banks cannot counteract the negative effects of current policies on real incomes in the United States, the United Kingdom, and many other countries. Only voters can do that

He’s right.  A supply shock does not provide a reason to ease monetary policy, as it’s an adverse supply shock.  The Fed should not boost AD to offset a supply shock.  Rather, it should prevent AD growth from changing by keeping interest rates at the Wicksellian equilibrium rate.  Because a trade war will generally reduce the equilibrium interest rate, the Fed should cut rates to avoid changing monetary policy.
PS.  Some (most?) economists

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The risks for Trump

8 days ago

I’m on record predicting that Trump will be re-elected. But the events of the last month give me a bit of pause. Here I’d like to present some of the risks facing Trump. In my view, there’s a likelihood that Trump will fail to achieve six of his primary objectives, to a greater extent than recognized by even his critics. Indeed, some of his critics say, “I hate the guy, but you’ve got to admit he’s doing what he promised.” But is he? Here are 6 key promises:

1. Raise trend RGDP growth (his biggest win, so far.)

2. Bring back manufacturing

3. Cut the trade deficit

4. Build a wall and reduce illegal immigration.

5. Build infrastructure

6. Repeal Obamacare

Some would add conservative judges (a Trump win), but here I’m focusing on the so-called

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FedListens

12 days ago

I am currently at a Fed conference called “FedListens”, which is evaluating options for improving monetary policy. One focus of the conference is the question of how best to address the zero bound problem. Here I’ll present a few initial impressions, based on the first paper (by Janice Eberly, James Stock and Jonathan Wright) and the following discussion. I should warn you that I may be misinterpreting the paper, but FWIW I’ll give you my impression of where I think it goes off course.

The authors argue that a negative 5% nominal interest rate would have been appropriate during the Great Recession, and then look at various counterfactual strategies for improving monetary policy, given the zero bound constraint. These counterfactuals include asset purchases, forward

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What would Japan have to do to achieve a 10% inflation target?

13 days ago

I do not expect Japan to adopt a 10% inflation target, nor do I think it’s a good idea. Nonetheless, it’s a useful thought experiment, which helps to illuminate some difficult to grasp ideas.
Let’s think about what Japanese interest rates and base money demand would look like with a 10% inflation target, assuming no IOR. Here are some plausible guesses:
1. Japanese interest rates would be roughly 10%, plus or minus 2%.

2. The Japanese monetary base would be roughly 5% to 10% of GDP.
I base the first estimate on the fact that real interest rates in Japan are currently close to zero, or perhaps slightly negative. With 10% inflation, real rates might fall slightly (due to the zero bound being lifted), or rise slightly (due to the taxation of nominal interest.) But history

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Is China actually growing rapidly?

13 days ago

There continues to be a great deal of skepticism about whether China is actually growing at 6.5%/year. Here is China expert Michael Pettis, in a blog post from January of this year:

The Chinese economy is not growing at 6.5 percent. It is probably growing by less than half of that. Not everyone agrees that the rate is that low, of course, but there is nonetheless a running debate about what is really happening in the Chinese economy and whether or not the country’s reported GDP growth is accurate.
The reason for the widespread skepticism is the disconnect between the official data and perceptions on the ground. According to the National Bureau of Statistics, China’s economic growth in every quarter last year exceeded 6.5 percent. While that is much lower than the heady growth

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The short time horizon president

16 days ago

[As usual, read my Econlog post if you only have time for one today.]
Today offers another example of a theme I’ve been pushing for several years. Trump is president with a short time horizon, eager to take actions that look good today at a cost to future generations. Examples include:
1. Ramping up moral hazard in the financial system.

2. Reckless “tax and spend” fiscal policy.
3. Moving away from the rule of law, toward authoritarianism.
4. Ignoring global warming.
5. Politicizing monetary policy
In each case, Trump has a lot of “capital” to spend, as the US has traditionally been a pretty well run country. As Adam Smith pointed out, there’s a great deal of ruin in a nation. Even with Trump’s reckless actions, we are unlikely to face a fiscal crisis, a banking crisis, a

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Monetary policy is becoming too tight

24 days ago

The escalating trade war seems to be sharply depressing the Wicksellian equilibrium interest rate. Here are some recent headlines, from Bloomberg:

The 5-year bond yield is down to 2.10%, a pretty clear indication that significantly lower interest rates lie ahead. Trump may or may not have been right that lower interest rates were called for in 2018 (I doubt it, as NGDP growth has been quite strong), but if the trade war keeps escalating then he will almost certainly be right about the need for lower rates in 2019.

[Yes, a determined President can “force” the Fed to cut rates, if he’s willing to wreck the economy.]

Just a month ago, the main argument for lower rates was that trend inflation was a few tenths of a percent below the Fed’s target; now the

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There’s something wrong with my car

26 days ago

Last week, I brought my new car back to the dealer. It’s not working properly. Here’s how I explained the problem to the dealer:

When I merge onto the freeway, I have trouble getting the car up to 65mph. I tapped on the brake pedal 9 times, and still no luck. The car doesn’t accelerate to 65mph. There must be something wrong with my car.

The dealer gave me a funny look, and made up some phony excuse about how tapping the brake pedal might have prevented the car from reaching the desired speed.

I continue to receive comments telling me that the Fed lacks the ability to get inflation up to 2%. The Fed has raised interest rates 9 times since 2015, each time with the goal of reducing inflation. And now, in 2019, they still haven’t got inflation up to 2%. There

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What does it mean to “finance government spending by purchasing bonds”?

26 days ago

Here’s the Financial Times:
Torsten Sløk, a Deutsche Bank economist, pointed out the US central bank is not only under pressure from the White House, but also from progressive economists and lawmakers, where there is a growing belief that central banks can help finance extra public spending by purchasing government bonds, without triggering dangerous levels of inflation.
I see this sort of thing quite often.  It’s not exactly wrong, but it’s so misleading as to be the moral equivalent of wrong.
Debt can be monetized in two ways, by using newly printed currency to purchase T-bonds and by creating zero interest reserve accounts at the Fed and exchanging them for Treasury bonds in an environment where market interest rates are positive.  In contrast, creating positive interest

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How can the world best gang up on America?

26 days ago

The US has many fine qualities, but in the field of international relations the US is becoming one of the single worst nations on Earth.  Here is just one example:

President Donald Trump’s administration announced Monday that buyers of Iranian oil must stop purchases by May 1 or face sanctions. 

The move, which took many market participants by surprise, ends six months of waivers which had allowed Iran’s eight biggest buyers of crude to continue to import limited volumes.

It’s bad enough that the US refuses to buy oil from Iran; we insist that every other country in the world follow our lead. And in this case we cannot even cite support from allies such as the UK, France and Germany, all of which oppose this move.

Of course there are numerous other examples I

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Bad news for Dems

28 days ago

In 2015, the UK Conservatives did better than predicted by the polls. In 2016, Brexit did better than expected. At the time, I did a post pointing out that the surprise Brexit vote was bad news for Dems (although I later botched the election itself.)
Yesterday, (conservative) Liberals won a surprise victory in Australia. This is also bad news for Dems. It’s becoming increasingly clear that polls consistently underreport support for the more “politically incorrect” political party in Anglo-Saxon countries.
One glimmer of good news is that Democratic voters seem to be leaning toward more “electable” candidates such as Biden. Even though Biden is not particularly popular among progressives on the two coasts, all that matters is the “Obama/Trump” voters in the Rust Belt. NOTHING

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Tariffs can be deflationary

May 15, 2019

Tariffs are generally assumed to have an inflationary effect on the economy. I imagine that’s true in most cases, say a developing country with a newly elected populist government. But is it always true?
In my (still underrated) book on the Great Depression, I explained how the Smoot-Hawley tariff had a deflationary impact on the US economy. Stock and commodity prices fell sharply in April-June 1930, as the bill moved toward passage. The biggest stock market crash of 1930 occurred right after Hoover announced that he would sign the bill.
The same appears to be true of the recent trade war with China, which triggered a narrowing of the 5-year TIPS spread, down .08% to 1.73%:

In both 1930 and today, the Fed could have prevented a contractionary impact by an aggressive easing

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Does Trump actually want lower rates?

May 7, 2019

Oh, I know that Trump wants the Fed to cut its target rate ASAP. But that’s not my question. My question is whether Trump actually wants lower interest rates over an extended period of time.
Here’s Yahoo:

Well, President Donald Trump got his interest rate cut… sorta.
Trump warned on Twitter over the weekend that tariffs on $200 billion in Chinese goods could rise to 25% on Friday. He added that a 25% tariff will soon be assigned to a selection of $325 billion in presently untaxed goods.
The proclamation uprooted the latest push higher in stocks globally, with the bellwether Dow Jones Industrial Average losing more than 400 points early on in Monday’s session. But, the yield on the 10-year Treasury note dropped to 2.48% as investors flocked to the government-backed safe-haven.

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Why fly?

May 7, 2019

I hate flying. There’s driving to the airport, then looking for a parking space, then airport security, (some tickets even require you to get a boarding pass at the airport), then waiting in a slow moving line to board the plane, then sitting in a tiny seat for 20 minutes before the plane actually takes off, then a bumpy ride, then waiting a long time to get off the plane. You might even have been forced to put your carry on bag in the luggage section at the last minute, requiring you to wait at baggage claim.  
I love trains. They are smooth and spacious and comfortable, at least if you live outside the US.  So will someone explain the following to me:

Moritz Leiner, a representative of the Association of Ethical Shareholders Germany, urged Lufthansa to reconsider its

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Fracking drives manufacturing

May 3, 2019

[Before starting, let me recommend a new Sebastian Edwards paper discussing the effectiveness of MMT-style policies in Latin America. I have a new post at Econlog.]
Last year, I did a post over at Econlog speculating that cycles in the price of oil led to cycles in fracking activity, which led to cycles in manufacturing employment growth.
Seven months later, the fracking/manufacturing part of the hypothesis is looking increasingly plausible. For various reasons, fracking activity has slowed in recent months. In this case, however, the slowdown is not due to weak oil prices, and experts predict a pickup later in the year:

Schlumberger CEO Paul Kibsgaard told analysts and investors last week that his company is seeing a slowing-down of activity in the U.S. shale plays over

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Inching toward NGDP targeting

May 3, 2019

An increasing number of important people recognize that NGDP level targeting is superior to inflation targeting. Nonetheless, the Fed is unlikely to suddenly switch to NGDP targeting. Rather, the change will occur gradually over time, in stages.

Let’s think about a policy of price level targeting. In what situations would that move us closer to NGDP level targeting, and when would it be inappropriate?

1. Suppose a supply shock suddenly hits the economy, such as a surge in imported oil prices caused by a shutoff of oil from an important exporter. This shock might push inflation higher and output lower. The effect on NGDP would be small.

If the Fed were targeting the price level, and the oil shock pushed inflation up to 4%, then they would be required to aim for

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What qualities does Trump look for when staffing his administration?

May 3, 2019

(actual post at end)
Here’s Ross Douthat:

Not so Trump: All instinct and solipsism, he simply doesn’t care enough about Trumpism to find people who might carry his impulses forward once he’s gone. And so he’s bidding to do for monetary policy what he’s done in domestic policy and foreign policy already: Pursue a somewhat heterodox and populist agenda, but leave its implementation — and therefore to some extent its future — in the hands of men like Moore or John Bolton or Mick Mulvaney who represent the consensus that he once campaigned against.

Trump wants smart people. And Trump understands that this means they will view him in a negative light. Thus here’s Mulvaney:

Mick Mulvaney, President Trump’s pick to be acting White House chief of staff, described Mr. Trump in

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What should we make of current market signals?

April 29, 2019

For those foolish enough to pay attention to my predictions, here are a few thoughts on the current condition of the economy. First the data:

1. Stocks hitting all-time record levels.

2. The yield curve un-inverting, back to a normal slope.

3. But 2-year yields remain below 3-month yields.

4. Five-year TIPS spreads at 1.87% (implying PCE inflation closer to 1.62%.)

The TIPS spreads might be slightly biased by risk premia, etc., but overall I suspect that inflation expectations actually are below 2%, say in the 1.7% to 1.8% range, over the next 5 years.

The most interesting data point is:

5. A roughly 88% chance of a rate cut by January 2020, according to the fed funds futures.

Update: That seems to be an error on my part. CME Fedwatch lists a

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The Swiss still have plenty of ammo

April 29, 2019

During the Great Recession, the Fed’s target interest rate never fell below 0.25%. The various QE programs pushed the monetary base up to a peak of just over 20% of GDP.

In contrast, the Swiss have reduced their target interest rate to negative 0.75%, and their monetary base has been increased to roughly 100% of GDP. So you might wonder if the Swiss are out of ammo. Far from it:

The Swiss National Bank can lower its subzero interest rates even further, President Thomas Jordan told newspaper Blick.In the interview, Jordan affirmed the ongoing need for a deposit rate of minus 0.75 percent plus a pledge to intervene in currency markets, if necessary, adding the franc remains highly valued. . . . “We always have the possibility of lowering rates further. We have already

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Steve Moore’s peculiar logic

April 29, 2019

This caught my eye:

Moore said on “This Week” that one of the most compelling reasons he should be on the Fed Board is because he was “one of the first economists” to criticize the Fed for raising interest rates in December.
“I got very angry about it and I said this was economic malpractice. It was a terrible decision by the Fed. The stock market fell by 2,500 points in the subsequent weeks of that,” he said. “And then, of course, the Fed had to reverse course, put its tail between its legs and admit that people like Donald Trump and I were right and that they were wrong.

Where to begin.  The Fed has not “admitted” that Trump was right.  Nor has it reversed the interest rate increase that Steve Moore thought was going to have a disastrous effect on the economy.  So how has

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Tyler Cowen on Fed nominees.

April 27, 2019

Tyler Cowen has a Bloomberg post that discusses what type of person should be nominated for a position on the Board of Governors at the Fed. It’s a good piece and I don’t see anything with which to to disagree. The essay clearly explains why people like Herman Cain, Steve Moore and Scott Sumner should never get near the Board. But there are a couple of omissions that I’d like to discuss:
1. Tyler omits one of the most important criteria—personal integrity.
2.  The Fed’s structure should be changed.  As with the Bank of England, there should be a committee composed entirely of experts on monetary policy, and another committee of experts on bank regulation.  We don’t ask a single agency to do both securities industry and environmental regulations, so why have one committee do

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NGDP growth and interest rates

April 27, 2019

NGDP growth in Q1 came in at 3.8%, a bit less than expected. As a result, bond yields declined. Indeed NGDP growth has been slowing ever since hitting a peak of 7.6% in 2018:Q2.

One word of caution. Due to the government shutdown this data is likely to be revised—statisticians were missing some trade data. The 0.6% GDP inflation rate seems a bit odd, perhaps it will also be revised. Year-over-year data is probably more reliable.

The media focuses on RGDP, which came in higher than expected, but it’s NGDP that drives interest rates in the long run.

Commenters keep telling me that money is too tight, but I see 5.1% NGDP growth over the past 4 quarters. Don’t assume that rising interest rates imply tight money.

The RGDP growth was strong, which is good news

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Three questions

April 23, 2019

I haven’t studied philosophy, but from the outside it mostly seems to revolve around three basic issues:

Reality (ontology)

Values (ethics and aesthetics)

Knowledge (epistemology)

Here are three basic questions, one from each field:

A. Why is there something rather than nothing?

B. Is it better that there is something rather than nothing?

C. Can we answer questions #1 and #2? If so, how?

I don’t think we can answer any of these questions with any degree of confidence, which is why it’s so hard to make progress in philosophy. If we had answers to these three basic questions it would provide a framework for answering many smaller questions. Perhaps everything else would sort of fall into place.

Some would argue that the answer to the second

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Do Donald Trump and Bryan Caplan have the same goal (for immigration)?

April 20, 2019

I’ve recently been wracking my brain trying to figure out what Trump is trying to do with immigration policy. Last year he was close to a deal on funding the border wall (combined with DACA reforms), and then suddenly walked away from the deal. His government shutdown to force construction of the wall was doomed from the start. He’s cut aid to Central American that was intended to reduce immigration from that area. (Yes, the wall and the foreign aid may not be that effective, but that’s true of EVERYTHING the government does. You think the war on drugs is “effective”? Does that stop the government from attempting it?)

Here’s Janan Ganesh in the Financial Times:

It is in Mr Trump’s interest to major on immigration in 2020, and perhaps even run a single-issue

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Impeach him

April 20, 2019

When Mueller concluded his report, many of my commenters seemed to believe Trump’s claim that the report “totally exonerated” him. They claimed I was refusing to accept reality when I suggested that, while the report was clearly good news for Trump, I’d reserve final judgment until the details were made public.
Then when the NYT reported that Mueller officials hinted that report was far more negative than implied by Barr, they said it was “fake news”.
Now the report has been released and its clear that Trump lied and Barr exaggerated. Indeed the report is far worse than even I expected. The report specifically states that it does not exonerate Trump, and lists 11 examples of possible obstruction of justice. You can quibble about a few of these, but there’s more than enough

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Now is the time to reform the Fed (don’t blow it)

April 18, 2019

In today’s political environment it is very difficult to get reform measures through Congress. The Democrats control the House, while the GOP controls the Senate and the Presidency. And yet, today is a perfect time for Congress to reform monetary policy.
During the Great Recession, we learned that the current monetary regime is highly flawed and that reforms are desperately needed. Unfortunately, there was no political consensus in favor of reform at that time, as the GOP and Democrats were deeply split on monetary policy. The GOP thought the Fed was doing too much, whereas the Democrats opposed any attempt to restrain the Fed from further stimulus.
Today is very different, as there is no longer a large gap between the views of the two parties. Both parties seem to favor

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Those indefatigable Trump defenders

April 18, 2019

Here’s an imaginary conversation, which will be completed in the comments section:
Me: Trump is obviously an ignorant buffoon.
Trumpistas: But look, he’s picking distinguished people for the Fed, such as Powell, Quarles and Clarida.

Me. That’s true.
One year later:
Me: Now Trump’s picking unqualified people for the Fed.
Trumpistas: It doesn’t matter if they are qualified, all that matters is whether they vote the right way.
Me: But these are super hawks who have praised the gold standard.
Trumpistias: Yes, but they are loyal to Trump, so while they were hawkish in the past, today they’ll do whatever it takes to help the President.
Me: But they are appointed for 14 years, and Trump’s term ends in less than 2 years. Will Trump want the Fed to help the next president? After

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What smart people think, and where to start

April 16, 2019

Suppose you are a bright young student who wants to get up to speed with the best of the blogosphere. I could encourage you to read Marginal Revolution, Slate Star Codex, Robin Hanson, Eliezer Yudkowsky, Scott Aaronson, Paul Krugman, Brad DeLong, Econlog, Crooked Timber, Razib Khan, Nick Rowe, David Beckworth and many other bloggers.
But you might prefer to start with this mega blog post by David Siegel, in which he offers opinions on a wide range of topics. You will be quickly brought up to speed on what smart people think about all sorts of issues. Here’s a brief excerpt, which leads into section 2:

BELOW ARE 150 QUESTIONS AND SHORT DISCUSSIONS WITH LINKS TO RESEARCH. They are not meant as short-cuts or my “opinion,” but rather as launching points for your own research. The

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Lessons from Greece

April 15, 2019

Over the past 4 years, I’ve been questioning the conventional wisdom that Greece’s debts were unpayable. In May 2017, after a sharp decline in Greek bond yields, I did a post at Econlog entitled:
Is the Greek public debt actually “unpayable”?
At the time, yields on Greek 10-year bonds had plunged to 7.4%. Today they are down below 3.3%:

Who knows, Greek bond yields might eventually fall below the yield on US Treasury bonds.

My argument was not that Greece was not at some risk of defaulting, rather that their national debt (roughly 180% of GDP) was certainly not “unpayable”. Whether bondholders actually got paid depended on whether the Greek public was willing to service the debt, or (as in 2012) whether they were unwilling to do so. Today it looks like the Greeks

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