Ever since Scott Sumner began blogging, I have been enjoying his posts. They are rich and careful, and they have probably had a big impact on the thinking of many policy-makers. I hope so.
His recent post at Econlog is a four-point comparison of Keynesian macro policy with what has come to be known as Market Monetarism. He begins with a quoted passage from Paul Krugman:
Paul Krugman has a new post that summarizes Keynesian economics:
I would summarize the Keynesian view in terms of four points:1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn't enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by "printing money", using the central bank's power of currency creation to push interest rates down.
4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
This looks pretty much like the Keynesian macro that I learned as an undergraduate and that was mainstream economics still when I was in graduate school despite the emergence of monetarism and the beginnings of rational expectations.
The thing we all need to learn is that point #4 is incorrect. That's where Scott Sumner has done everyone a huge favour. Let us wish him continued success.
His response, using these same four points, describing market monetarism:
If I were to do the equivalent for market monetarism, it might look something like the following:
1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn't enough spending. Such episodes occur because monetary policy is too contractionary, causing NGDP to fall relative to the (sticky) wage level.
[As an aside, economies can also produce too little due to real shocks, such as higher minimum wages. That's also true in the Keynesian model.]
[EE: Sometimes there can be unanticipated major sectoral shifts in demand which, with sticky wages, can cause things that look like supply shocks too].
2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
[Notice this one is identical.]
3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by "printing money", using the central bank's power of currency creation to boost M*V, i.e. NGDP, via the "hot potato effect".
[EE: and paying interest on commercial bank reserves on deposit at the the Fed was a major mistake here since it led to the opposite of printing money]
4. Monetary policy remains highly effective at the zero bound. As a result, demand-side fiscal policy is mostly ineffective in countries with an independent monetary authority---offset by monetary policy. Fiscal actions that shift the aggregate supply curve, however, can be effective.
This last point really needs explication. It is consistent with the older monetarism of Milton Friedman et al. The central bank can affect the money supply and aggregate demand by printing money, by buying things in the marketplace. That is what Quantitative Easing was all about.
And it appears to be working, albeit with a "long and variable lag".