Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 10 January 2015

Faith based macroeconomics

When you just know something is true, like fiscal policy never matters much and NGDP targeting would have avoided the Great Recession, everything becomes about proclaiming your faith in the most effective way possible. It becomes a debating contest. The best example I know of someone like this is Scott Sumner. Here is what he had to say about something I wrote recently.

“Simon Wren-Lewis also gets the GDP growth data wrong, in a way that makes austerity look worse. He claims that RGDP growth was 2.3% in 2012 and 2.2% in 2013 (the year of austerity in the US.) But that’s annual y-o-y data, and since the austerity began on January 1st 2013, you need Q4 over Q4 data. In fact, RGDP growth in 2012, Q4 over Q4, was only 1.67%, whereas growth in the austerity year of 2013 nearly doubled to 3.13%.”

The italics are mine. When you read that someone got the data wrong, or that they claim the data is whatever, you expect to find that they made an excel error, or used old data. But Sumner is not using ‘wrong’ and ‘claim’ in their ordinary sense. He is in debating mode. What he means is that by choosing to use the (correct) annual data, I’m (accidentally, deliberately?) hiding something important. He then quotes two figures that supposedly prove his case. No analysis, no graphs – it’s a debate.

Well here is a graph of US real government consumption expenditure and gross investment, taken from FRED.

According to Sumner “austerity began on January 1st 2013”. Now look at the graph.

It gets worse. Tyler Cowan quotes from Scott’s post with approval, I guess because the guy shares the faith.

Now do you really want to follow those whose macroeconomics is so faith based that they do not even need to check the numbers? Do you want to follow someone who says (earlier in the post) “it would be useful to do a more systematic study of fiscal austerity”. What about the many studies that have already been done (e.g. here, here or here). Do they not count because they generally find that fiscal policy can matter a lot, and so fail to accord with the faith? Do you want your macroeconomics derived from faith or from careful academic analysis?  


  1. I like this post. You should let your inner Robert Waldmann out more often.

    Personally I'd never "follow" Sumner or Cowen, in the sense of regarding them as reliable guides to anything. They find a nut now and then. And in Cowen's case especially, it's not at all easy to see where he's going. He says: "the regenerative powers of a market economy are stronger than most Keynesians are willing to let on." Well, just how are we supposed to test that proposition? Where do we find Woodford's prior for the Market Economy Regeneration Coefficient and where do we find Cowen's?

    1. On the "inner Robert Waldman":

    2. The problem with that supposed economic blog and Scott Sumner is that it’s ideologically extreme and seems primarily propagandistic, however it’s couched.

      The cited post is argumentative and not particularly factual, in particular as to how one fact relates to another. Sumner refers to you here.

      “(SWL’s) second claim is to deny that austerity occurred in 2013. This claim boggles the mind, as the budget deficit fell by $500 billion in calendar 2013, from a bit over $1 trillion to a bit over $500 billion. (You need to use calendar year data because the austerity began January 1st, and the fiscal year begins October 1st.) Of course there's also that letter signed by 350 Keynesians warning that the 2013 austerity could lead to recession.”

      Sumner is claiming growth improved as a result as a result of austerity as indicated by the reduced deficit. SWL suggests fiscal policy could have made things better. I can see where SWL’s numbers come from, not so with Sumner.

      Sumner using the falling deficit as both an indication of austerity and the scope of austerity. You can’t do it as he has. I don’t think you can validly use the first quarter of a new fiscal year. You have to use FY2013 from CBO - where the numbers make his impossible.

      “The federal government incurred a budget deficit of $680 billion in fiscal year 2013, which was $409 billion less than the deficit in fiscal year 2012. The fiscal year that just ended marked the first since 2008 that the deficit was under $1 trillion.”

      FY2014’s deficit was $486 Billion. Sumner is pulling the numbers out of the air.

      Any rational economist would argue that Sequestration and austerity slowed the recovery.

  2. Nice blog. Austerity seems to have limits for advanced economies is the real message, as can be found below, due to constraints in borrowing capacity. But the bearded blog author is right in that Sumner and Cowen will sometimes slant the news one way or another to make a point. I follow Cowen since, as a member of the 1%, I like to keep my money. If I was a net debtor of course it would be different. - RL
    World Economic outlook April 2013 (page 33) Figure 1.1.2. Government Expenditures during Global Recessions and Recoveries 1 (Years from global recession on x-axis; indices = 100 in the year before the global recession) With regard to fiscal policy, the current and projected paths of government expenditures in the advanced economies are quite different than during past recoveries, when policy was decisively expansion- ary, with increases in real primary government expen- ditures. In some advanced economies, especially in the United States, the fiscal stimulus introduced at the outset of the financial crisis was far larger than during earlier recessions. However, the stimulus was unwound early in the ensuing recovery. Specifically, expenditures fell during the first two years of this global recovery and are projected to continue to decline modestly in the coming years (Figure 1.1.2). This pattern also holds across the major advanced economies, with the euro area and the United King- dom showing sharp departures from the typical paths of government expenditures in the past. 3 In contrast, in the emerging market economies the ongoing recov- ery has been accompanied by a more expansionary fiscal policy stance than during past episodes. This was possible because these economies had stronger fiscal positions this time around than in the past.

    1. Surely if you want to keep your money you should just follow whoever has a good track record of getting things right, regardless of their political leanings?

      Considering the size of the recent depression and the fact that the Fed felt like it couldn't lower rates any further an appropriate fiscal policy would have meant a far larger stimulus than normal, which we didn't get. As SWL has pointed out, outside of the eurozone there hasn't been any visible constraint on countries' borrowing capacity. The difference seems to be due to having the support of an independent central bank. Note that the UK and US have worse public debt burdens than for example Spain and yet (until the ECB finally acted to help member countries) they had far lower real interest rates. In fact there doesn't seem to be any example of a rich country (outside the eurozone) that has found constraints on it's borrowing capacity.

      About the bearded author, anyone who knows anything about economics has a beard, just ask Dilbert :-)

    2. When it comes to the one percent, that bracket keeps moving up, even more so at the .01 percent compared the relatively poor 1 percent.

      According to wikipedia, the entry level for the 1 percent in 2009 was $343k. Today it’s $385k. The graphic here gives a good sense of the entry level spread in 2012.

      The real eyepopper on income distribution is the data sets from the source for that chart, i.e.

      Some of the data covers 1920-2012, a chart illustration covers income from 1917 to 2012.

      Some of it is simply mind-boggling.

      I would be relatively be much better off in another state.

      Don’t know if anyone has done anything thorough for the UK or the EU. Some of the data is obviously based on IRS data, but also on Piketty and Saez (2012) on Income inequality in the United States.

  3. Obviously the guys believe in the 'grin of the cat' though the cat didn't even vanish because it was never there.

  4. I think faith is more central and widespread than this--I'm thinking about the necessity for homo economicus for so mich of the math to work. (Gary Becker struck me as one of these types of faith-based economists.) Your point is taken, and I agree, but there's a LOT more faith underpinning economics than just this.

  5. It is wrong to deride the fact that people need faith to move an economy forward, because government also relies on faith that the money will be in its coffers to to the job it wants to do.

  6. Also, when you use the word faith as a slap at anyone, you may as well accept the fact that you have already moved economic concepts well beyond simple statistics and numbers.

  7. There's more to it than selecting the location of the end points. Using only end points increases the error over using all of the data. I did it two ways here

  8. I follow Sumner because he is right to suggest that central banks could do more if they wanted to. (BTW you never see Cowen advocating for more monetary policy). But Sumner has an irriational antipathy towards Keynes, Keynesians and government spending as is the case with most rightwingers. The market monetarists want the central bank to maintain the NGDP path level target because recessions give the government an excuse to spend more.

  9. Doesn't that graph exclude transfer payments? Certainly it says nothing about tax rates. Why is that a sensible indicator of austerity?

    Also, I think Sumner uses the word "austerity", rather reasonably, to refer to the onset of a new policy. So the end of the 2009 stimulus, which was built into the law when it was written, doesn't count (not new); nor does the bump in inflation (but not core inflation) above target in 2011-2012 (not policy). Your graph makes both of those look like austerity.

    1. In what kind of world do actual changes in G not count in influencing aggregate demand?

    2. Perhaps a world in which the change is to the deflator, rather than to nominal spending... I'm actually not sure about that,kind of interesting.. also, one with an inflation-targeting central bank not at the zero bound, but of course the latter is not relevant here.

      I didn't make any such bold claim as "no influence on AD". I just question the use of a single component of the fiscal stance to characterize when austerity started. If you look at the federal deficit per potential GDP in half years and quarters, for example, Sumner's characterization looks pretty reasonable (FRED M318501Q027NBEA / NGDPPOT). Is that not, at least, a reasonable alternative?

      That's all I'm saying -- not that changes in G are stupid to look at, but that many alternatives are reasonable, and you bloggers -- of pretty much every stripe -- are way too quick to accuse one another of ignoring the data, when in reality you making distinct choices in that reasonable range. You should all read the epilogue to McCloskey's Rhetoric each weekend!

    3. No, you cannot get away with 'you are all at it' here. I do not say other people get the data wrong when they have not. I do not say it would be useful to do some studies when there are already plenty out there. And I do not say austerity began when it clearly did not.

    4. Are we looking at the same data? Checking your chart and zooming on the period 2007-2014 it looks very similar to the chart used by SWL. Government expenditures have decreased in a fairly straight line since Q2 2010. 2013 does not stand out as a year with more than usual austerity.

      If anything, Sumner's comparison smacks of gaming the data since Q4 2012 was a quarter with above trend government expenditures and Q4 2013 had below trend expenditures.

    5. Hugo, we may not be looking at the same data. The ratio I mentioned stays around -0.02 from the 2009 until the last half of 2012, then gets cut in half in the year surrounding 1/1/2013. If you look in quarters, it is actually positive in 2013:1. That is rather too much an artifact of the annual rhythm of tax receipts to take at face value -- however, it did not happen in 2012, 2011, 2010, or 2009.

      I actually agree it is not at all clear from the data that the start of 2013 was the onset of austerity. However, I think it is basically true: you just need to have been following American politics to see it. As late as November 2012, the President was saying decisively, "The sequester won't happen." Then it did. January 2013 is unique in recent American fiscal history as a moment of tightening that was not well anticipated.

      Simon, as to "I do not say other people get the data wrong when they have not," -- I think you just did! Sumner's post made pretty clear that when he said you got the data "wrong", he meant you were stressing the wrong statistics. He has a different model in mind. (I should say, I am not convinced about his claim regarding the timing of cause and effect here, but that's a different issue.) Your graph rather more strongly left the impression that he was just not looking at facts. It is a false impression.

    6. If I think someone is using the wrong measure, I say exactly that. I would not say someone "gets the GDP growth data wrong". I would also not say that "He claims that RGDP growth was 2.3% in 2012" when that is what the data actually says. He said I was using the wrong data "since the austerity began on January 1st 2013". So I just looked again at the data, and the statement is wrong. Now put yourself in my shoes, and tell me why I'm being unreasonable here.

    7. I wouldn't call you unreasonable -- maybe a little prickly. It seemed to me that Sumner's follow-up sentences made clear that he was saying you were using the wrong measure, so that "gets the GDP growth data wrong" was as worst clumsy writing.

      But more seriously -- it is far from obvious to me why Q4-Q4 data seems right to Sumner and, year-on-year seems right to you. Do you agree that if austerity happened on Jan 1, 2013, then the comparison of fourth quarters is what matters? Why? If so, there is a point here about sticky-price dynamics that I just don't see at all.

    8. I would say "at best" clumsy, not "at worst". At worst he is trying to give the impression that I'm making elementary errors, which is his style. It is a style I do not like, because I do not think it leads to constructive discussion. If I'm prickly it is because so many of his followers think it is the right way to do economics.

      But you are absolutely right about Q4-Q4 data not being obviously better if austerity had just started in 2013 Q1.

    9. Rest assured, not all who follow the Money Illusion are "followers" in that sense. I, for one, never thought you had made a basic error.

      At least a few of us follow Mainly Macro, too (and Krugman, when "wonkish", etc.) and we learn, and we appreciate the struggle and we hope this is how humanity makes progress.

    10. Sumner is inflammatory. Here is an example, he is taking issue with me for calling "Long-run AS/AD" as "Long term AS/AD" by using a drunk in a bar room analogy. No other serious public intellectual would stoop so low IMO. Imagine for example the host of this blog going toe-to-toe with me over some disagreement. Granted the English are more polite than Americans, and Sumner and I have had a on-going flame war on his blog, still, Sumner is quite unique in his combative style, even by US standards. - (SUMNER: Ray, You said: “I read Sumner’s op-ed, and it’s not persuasive. Sumner drinks the Kool-Aid that monetary policy can affect long-term AD/AS” Like Charlie, you spew out words that have no coherent meaning, and assume you’ve said something intelligible. There is no such thing in economics as “long term AS-AD.” You are like a drunk in a bar, confident that he is saying something profound, but no one else knows what you are talking about.)

  10. 1. When we look at what was achieved in Terms of real GDP per capita (IMF data), and not taking arbitrary end or calibrations points for reference, as Jasaon above suggests as well,

    I do not find the US and UK particular attractive examples for the EuroArea.
    The US performances matches Japan and the EuroArea, and the UK is clearly worse.

    Germany performs consistently significantly better

    2. And page 3 shows, that the barely keeping up in the US & UK was bought by very substantial increases in government debt

    3. page 2 also shows, that the conservative turn around in Sweden after 1990, with sinking debt (page 3) did not lead to any kind of persistent performance damage as that was falsely claimed in the so called "Geneva report"

  11. Simon W L. When you say "heterodox" have you got any particular school in mind? For instance, what does a New Keynesian find wrong with a Post Keynesian explanation as in this link.

    As Mr Osborne, by now, should have been nearing his "zero deficit" condition; we find the private sector holding on to £80 - 90 billion of his "net spending" (deficit) and not inclined to give it back in taxes.

    Do you agree with the Post Keynesian School, that a sovereign fiat currency issuing economy, does not have to "borrow" money in the household understanding of the word?

    Do you agree that government (Treasury AND Central Bank as one and the same) can be described as vertical money that comes from thin air when the government spends it into the private sector. AND; goes back into thin air when the government takes it back as taxes. Government vertical money, is not convertible into anything except more government money.

    Do you agree that Commercial Bank "money" can be described as horizontal money? That loans create deposits and deposits create the need for "reserves" at the Central Bank, (not the other way around). AND; that all horizontal money nets to zero. That is, for every deposit (a bank liability) created out of thin air, there is a loan (a bank asset). And that horizontal commercial bank money (credit) can be converted to vertical government money, either as "reserves" inside the Central Bank; or, bits of paper with a picture of the Queen on them.

    Just checking the fundamental identities at this stage you understand. Fiscally yours Acorn ;-)

  12. You are unfair on Sumner, and missing the point in your haste to make a rejoinder in the debate. "What was US GDP growth in 2013?" is a big question. Q4/Q4 seems more reasonable as a record when the question is: what impact will austerity starting in early 2013 have on growth? Average GDP in 2012 vs average GDP in 2013 doesn't feel the right way to answer this.

    A commenter on Econlib helps out with a handy link to a referee, written before your debate:

    The fall in the savings ratio is, surely, more likely to follow a recovery and then help it further, than cause one? When the recovery is into its third year and people feel more secure in their jobs and more confident of getting another they will save less. And is corroborated by the falling unemployment and rising numbers in work.

    1. 'my haste to make a rejoinder' - there you go, same old style. And you say I'm being unfair on Sumner. But Sumner said I had used the wrong data, that I 'claimed' growth was what it actually was, and that I should have used a different measure because austerity started in 2013Q1, which is didn't. What exactly is unfair?

      When will MM accept that we have tons of evidence that fiscal policy can matter a lot? And if you are honest you will say never, because its an article of faith that it does not.

    2. Maybe you and I are too distant from US political and fiscal process. As I understand it, every year there is a debate about the fiscal budget. For 2013 PK said the austerity in that budget for that year would test the monetary offset theory of Market Monetarism, a good scientific test. The result: monetary policy offset the austerity. Growth was good, but not great.

      Perhaps what we are really arguing about is whether fiscal policy is a good thing. Your conception that economics is about Market Failure, but Sumner's (not all Market Monetarists, by any means) that economics is about wealth creation. In your blog on heterodox economics you appear to think as something to do on day one of an undergraduate course only. I am still shocked by that.

      Remember, the "Market" in MM is not a view on free markets, but on using market expectations to guide, in fact make, monetary policy. Perhaps there is some confusion. Sorry for that.

    3. James:
      "For 2013 PK said the austerity in that budget for that year would test the monetary offset theory of Market Monetarism, a good scientific test.
      **The result: monetary policy offset the austerity. Growth was good, but not great.**"
      Now, turning to PKs blog on this, unsuprisingly the opposite is in fact true:

      PK: "as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens. And the results ***aren’t looking good for the monetarists***: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll...the Fed – while it should be doing more – ****can’t make up for contractionary fiscal policy**** in the face of a depressed economy."
      And GDP growth in 2013 can hardly be described as "good" (at 2.2%), which was lower than the previous year, and lower than 2010. Details, if you can stomach it, are here:
      But more importantly, the rate of GDP growth in isolation cannot be used as the conclusive indicator of this 'test of the monetary theory offset', as numerous other factors impact on a country's growth rate - not just monetary (or fiscal) policy of course. Even if annual GDP figures are positive, as the above linked report highlights (remembering the Fed's aggressive monetary expansion at the same time), then as they point out: "If there'd been no change in government spending over the last six months (of 2013), GDP growth would have averaged a respectable 2.55 percent, not the current soft 1.45 percent."
      ie. Positive actual GDP growth rate of 1.45%, which would have been 2.55% without austerity. Had the ongoing monetary policy in fact "offset the austerity" as you (falsely, with no evidence) claimed above, then of course the actual GDP growth rate would have been 2.55% of course, so making up for the 1.1% reduction in GDP caused by austerity.
      So as the PK blog you directly referred to states unequivocally, monetary policy failed to offset the fiscal contraction. Surely this is what you read also? So why write the opposite??
      (Mike Konczal, linked in the same PK blog, elaborates much further on this 'experiment')

  13. Also your debating point about "the austerity that began on 1 jan 2013" is about the test that PK set Market Monetarism. Your chart showing austerity had been running for longer is beside the point. We all know that.

    See here for the IMF chart:

    1. My debating point! I didn't say austerity started in 2013 - Sumner did, which was his basis for telling me I was using the wrong data. So how can that be beside the point. Good grief!

  14. Don't you think rational choice is faith based economics? Of course it might fit the data. All faiths can. But is it telling the truth?

    Many seem more interested in defending rational expectations and rational choice than actually finding out the truth..

    (Oh, and of course, then we hear that all models are wrong.)

    Tear up your model, and just try and start for once to find out what actually goes on.

  15. Dear Simon,

    You are in debating mode, too, apparently, and making a good point.

    On the more general issue:
    What's wrong with faith (trust in previously arrived at conclusions) in macro-economics (and in arts & sciences more generally)?
    Isn't that unavoidable and essential to be able to progressively build theory?
    To prevent having to do all analysis over and over again every time ceteris is not fully paribus any more?

    Wouldn't be good for every economist to recognize, acknowledge and own her/his own faith in her/his chosen paradigm and previously arrived at conclusions within that paradigm?

    1. "Wouldn't be good for every economist to recognize, acknowledge and own her/his own faith in her/his chosen paradigm and previously arrived at conclusions within that paradigm?"

      Thanks Wim. Would a mainstream economist PLEASE answer this.

      (This is not coming from a heterodox economist.)

    2. I am not using faith in that sense. I am using it in the impervious to evidence sense.

    3. What counts as 'evidence' depends on the paradigmatic 'glasses' one looks through.
      'Impervious to evidence (within my paradigm)' IS the same sense in which I use 'taith'.

    4. OK, given the data shown in my post, what paradigmatic glasses allows you to say austerity started in 2013.

    5. I have no issue with the point you make on austerity and its effects.
      I have an issue with the idea that any economic theory can be free of faith/value and derived solely from (own) "careful academic analysis".

    6. Simon, the mere fact that you even posted a graph like this shows that it is you who is faith-based. The question of whether austerity increased in 2013 is far more complex than this graph can address. We need many more NET numbers.

  16. This comment has been removed by the author.

  17. Something else that seems to be going around a lot:

    OK New Keynesian (mainstream) has theory nothing to do with Keynes, but so what?"

    This is also dangerous stuff. It is no exaggeration to say that the General Theory is one of the most important works in the history of human achievement, not just in economics. Its ideas played a crucial role in lifting much of the world out of the Great Depression. It remains for that reason an authoritative work that underpins the authority of the macro-economics profession itself. If it is misrepresented or trivialised, it does no service at all to the profession or what it is trying to really achieve. Almost certainly we will need to refer to the General Theory in the future, and it is important we understand it accurately.

  18. This is an embarrassing graph to display to try to support your point about the beginning of austerity. Real government consumption expenditure and gross investment? How about including transfers, changes in taxes, changes in deficit spending, etc.? Wow.

    1. I think you are completely right.

      Prof. Wren-Lewis has ignored the tax increases of Jan 2013. He also ignored that the sequester had a large effect on transfers.

      Scott Sumner mentionned this on his blog as well:

      Wow indeed.

    2. Unfortunately this was not what Sumner said. He did not say I was wrong because I ignored these things. Perhaps that is because, if you look at a summary measure of fiscal stance that includes all spending and taxes like the underlying primary balance, you will see that this also says austerity began in 2011 not 2013. But that would have involved you looking at some data, which you clearly didn't attempt to do. Oh dear.

    3. Funny thing.

      In April 2013, Paul Krugman and Mike Konczal both clearly expressed that very damaging austerity had began earlier that year and that this would be a test for Market Monetarism.

      A year later, Sumner responds that Q4/Q4 growth for 2013 was much stronger than in 2012.

      So what was it? Were Krugman's and Konczal's statements about 2013 being the "year of austerity" wrong in April 2013? Or was there some degree of monetary offset in 2013?

      "He did not say I was wrong because I ignored these things."
      Here, he states (

      "I pointed out that the “year of austerity” in the US began on January 1st, 2013, and hence that you would want to look at Q4 over Q4 figures growth figures. He responds with government output data. Very convenient, given that the austerity that began on January 1st took the form of increases in both income and payroll tax rates. Sequester came later in the year, and even that included cuts in transfers (which are not output). Wren-Lewis never even addressed my other two criticisms."

    4. As you well know, the Sumner piece you link to was written after this post. So I repeat, he did not originally say I was wrong because I was only looking at government spending at the time. Only now is he trying to cover his tracks with this distraction. But it is a distraction, because data for the underlying primary deficit also shows austerity beginning in 2011.

      This is typical Sumner. He is interested in winning a debate, so he will never admit error. I have been here before, when he claimed incredulously that an increase in saving would always lead to an equal increase in investment. He never admitted his schoolboy error then either. If you like your economics faith based, then I can see the attractions of infallibility.

    5. I do not read much Sumner, but what I have read teaches me something about rhetoric, not economics. Recall the sequence.
      1) I wrote a criticism of Sachs where I used annual government consumption and investment (G) data
      2) He wrote a response which contained the paragraph I quoted in this post. At no point does he object to using just using G data. What he does say is that the austerity [no quotes] began in 2013.
      3) So I responded in my post by showing the complete data for G to show that austerity did not begin in 2013, so there appeared to be no case for not using year on year data. As you would.
      4) Now he writes
      "I pointed out that the “year of austerity” in the US began on January 1st, 2013, and hence that you would want to look at Q4 over Q4 figures growth figures. He responds with government output data. Very convenient, given that the austerity that began on January 1st took the form of increases in both income and payroll tax rates."
      Note quotes have suddenly appeared around year of austerity. He suggests I responded (note responded) by showing G data even though I had used it all along! I used this terrible measure (which he only now bothers to mention is terrible) because it conveniently ignored various things, based on a criticism that he had yet to make! Amazing stuff - I couldn't do this even if I tried hard.

    6. Macroeconomics as Theology

      Prof. Wren-Lewis:

      You are perfectly right to point out the importance of blind faith in macroeconomics.

      Unfortunately, this also applies to you.

      Your belief in the virtues of inflation in the Euro zone is faith-based - indeed a "sacrificium intellectus". You consistently ignore its disadvantages for its victims - welfare recipients, pensioners and people with low to middling salaries, indeed everybody whose income is revised upwards, if at all, with considerable timelags.

      At the same time, you continually level moral accusations against people who do not agree with you on that point.

      Of course, you are not alone. Your friend Jonathan Portes claims to have published a blog discussing the disadvantages and trade-offs of your kind of macroeconomics - which of course includes inflation.

      referring to

      When you look it up you see that he does not say one word on the subject.

      No wonder some people consider macroeconomics as a collection of fairy tales written by people with little knowledge of real life


      More than anything else, it resembles theology. It treats subjects that are of importance for many people, and because of its connections to moral questions, it can also seem important to others who do not share its basic tenets. And when sharp minds apply themselves to it for a longer period of time, they can come up with interesting concepts and insights as side products. Nice people like the pope or Simon Wren-Lewis can sometimes utter pronouncements that appeal to many people that have no knowledge of the fatal flaws behind them.

      As in all theologies, there are different temperaments: ravers like Ambrose Evans-Pritchard; people who like disputation above everything like Paul Krugman; one-track minds with blinders like Paul de Grauwe; "liberation" economists like Joseph Stiglitz; one issue hobby-horse riders ("helicopter money"); ecumenical harmonizers etc.etc.

      So let's take macroeconomics and theology as intellectual entertainment.

      What we really need is a serious moral debate. And since morals require actions, the question is what actions would lead to moral effects in real liife. What is needed is a comprehensive weighing of the effectiveness and the advantages and disadvantages of different actions. Since tradeoffs are the subject of economics the economic view can lead to important insights.

      But what is important is the comprehensiveness of the weighing. And there, Prof. Wren-Lewis, is where I have found you lacking - even if less so than others. That gives me hope that you, at least, might widen your perspectives.

      May I hope?

    7. James, the really sad thing about this is not the way Sumner debates, but the way that his followers copy him and think they are being clever.

    8. More seriously, do you not believe monetary policy cannot work at the ZLB because you don't admit expectations into your macro models, like one of the commenters on your site keeps hinting at? Is that the key I ssue between you and MM/Sumner? If it is, I've missed it. Sorry.

    9. I think I've told you this before, I do not assume QE does nothing. The key point is that we have very little idea what a given amount of QE will do. So, given the usual lags, it is a very unreliable instrument. That is all you need to show the ZLB matters.

    10. SWL: Don't waste you time on idealogues. As Sumner shows, and a number of other commenters on here similarly demonstrate, they do not discuss (or debate) in a logical, coherent manner. Misrepresentation, ascribing false positions to their 'opponents' (for this is a battle to be won for them at all costs), and as you note being inconsistent both with their data/evidence usage, and most shamelessly, jumbling up who claimed what, and when they said it.
      Often if they do engage and use evidence/data to 'support' their veiw, it is hopelessly inappropriate or the incorrect data to use, or grossly distorted so to fit their ideology. As you said yourself, 'winning' the debate is the aim of the game. It is not about trying to establish 'truth' (which of course isn't always possible) or attempting to be as accurate as possible in identifying what really is going on.
      As the saying goes: "Don’t ever wrestle with a pig. You’ll both get dirty, but the pig will enjoy it".

    11. I know what you mean. And I really do dislike their debating style. However when they are so obviously silly, and in their refusal to admit their mistakes become even more silly, I think exposing this as much as possible might stop some who are not committed from taking them too seriously.


      was another recent occasion, where Mark Sadowski dug the biggest hole for himself you could possibly imagine - but never had the grace to think of apologising of course - he wrote a subsequent post which tried to tell me what my own research was about! By that time I could not imagine any reasonable person taking him seriously, so I took your advice.

      If only most MM were more like Nick Rowe.

    12. You are right - exposing them as much as possible is important, though is often an unpleasant undertaking. I hardly practice what I preach on this matter, particularly when it comes to others spreading such riduculous and easily disprovable falsehoods, as my very recent reply to James half way up this page (the 'my haste to make a rejoinder' point with you) illustrates! (I noticed you didn't pull him up on this one!)
      Keep up the fantastic work, it really is much needed and appreciated.

    13. Ridiculously i misspelt 'ridiculous' in writing 'riduculous' above.

    14. Sorry to be such a pain, and probably because I am a bit thick, but my question was about the role of expectations in your models. What is it?

  19. Dear Simon & Simon,

    Wouldn't it be wise to recognize that 'establishing truth' is inherently elusive since Thomas Kuhn?
    ALL theory is (partly) founded in faith and every theorist is (partly) an ideologue.
    Debates as clashes of 'truths' bring us nowhere without mutual recognition and collective analysis of our (everyone's) inherent subjectivity (political biases & scientific community social dynamics & Western cultural biases etc.).
    It is no shame to be biased, but not to admit it.
    Only those who do can help each other to take specks, splinters, chips, motes, planks, beams, logs etc. out of other peoples eyes.

    1. No, I'm sorry, there is no equivalence here. If you cannot see that from these exchanges, that is a shame.

  20. Dear Simon,

    Specks and logs are not equivalent, but both need to be taken out by others.

  21. Simon
    It's pretty clear why Scott Sumner prefers Q4 on Q4. The 1.8ppt negative contribution from inventories and the 1.1ppt negative contribution from defence spending made Q4 2012 a rubbish quarter for growth, making his preferred Q4/Q4 measure look a whole lot better. Sumner loves to cherry pick.
    Never reason from data that contradicts Sumners’ point of view.

  22. Reading how austerity started in 2013, I understood that, for Sumner, the fiscal policy variable is the deficit or the structural deficit. You are a new Keynesian, so you use G really wishing to have G minus balanced growth G (or G minus the rate of time preference times expected discounted future G). Not that my opinion matters, but I can vouch for your integrity. When proposing stimulus, you always have proposed a temporary increase in G and often stressed that it should work even if tax financed.

    I am a paleo Keynesian, but at least I admit that 2013q1 is a problem for me (as it isn't a problem for you). I also stress that it is one data point

  23. Sequestration did not cause a marked drop in nominal government expenditures (that is G + transfers). I don't think it affected transfers much at all (recall it was half reductions in defence spending and all on discretionary spending). In any case a brief visit to FRED shows that the pattern -- nothing much new on the spending side -- holds for nominal as well as real andfor G + transfers as well as G.

    Again, to many New Keynesians, most definitely including our host, the fiscal variable of interest is G not G + transfers - taxes. G minus trend G is the variable which matters in work horse New Keynesian models.

    1. I would also note that if you look at the OECD's measure of underlying primary surplus, austerity started in 2011.

  24. Tyler Cowen is Holbert L. Harris Chair of Economics at George Mason University and chairman and general director of the Mercatus Center at George Mason University. Cohen recently brought Sumner aboard as director of the Program on Monetary Policy at the Mercatus Center.

    The economics department of George Mason and the Mercatus Center are funded by right wing Libertarian US oligarchs like the Koch Bros. This is not just "faith-based" economics. It has the look and feel of paid for propaganda. Of course these people believe what they write and say, but as they say, "follow the money," too.


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