2012-10-05

The Cult Of Sumner

Economist Scott Sumner rose to fame over the last few years by arguing for NGDP level targeting as a monetary policy guide. Sumner admits that there is no existing method to achieve this. He muses that an "NGDP futures market" would be the best way to achieve this, but this is a bit of hand-waving, considering that no such market actually exists.

As Robert Murphy has pointed out recently, NGDP itself is more of an economic indicator than it is a direct cause of business cycles. Believing that a patient's heart rate is the sole measurement of physical health would lead to insane (Murphy's word, follow the link) medical treatments.

A useful way to think about this is to consider your own household. Let's say you find yourself in a situation where you are unemployed, have very little spending money, and are trying to get back on your feet. Let's also say that you have total amnesia and can't remember how you found yourself in this position. You decide to look at your own household economic data to try to figure out what happened and what you should do about it:
  • You could say that your problem is low employment, so other people need to spend money on you (hire you) so that your economy can recover. This is Keynesianism.
  • You could say that your previous market expectations failed to correctly account for the fact that you would be low on employment and spending money in a prior time period, so someone really just needs to fly over your neighborhood with a helicopter and drop bags of money all over everywhere. This would get people spending more money, including yourself, and hopefully a business would hire you. This is classic Monetarism.
  • You could say that the government, having already engaged in the previous two explanations/policy applications, duped you into believing that your previous job was profitable, but it really wasn't, so you lost it. To recover, you have to tighten your belt and start producing something valuable. Until you do, your situation will never improve. This is Austrianism.
Alternatively, you could say that the problem is that your own, personal spending levels decreased, and that this is the real problem. The real problem, say people like Scott Sumner, is that you don't currently expect to be employed in the immediate future, so you have tightened your belt and resigned yourself into believing that you will be poor and unemployed for a protracted period of time. To fix this, says Sumner, you merely need to believe that your situation is about to improve.

Therefore, the solution to your problem, according to Market Monetarism, is for policy-makers to do everything in their power to make you believe that you are about to get a job. This will cause you to spend more money, and spending more money is the one and only goal. According to Market Monetarism, you shouldn't really even care whether or not you have a job: As long as you continue to spend the same amount of money you were spending when you were employed, you will not experience any kind of personal recession. You will feel equally as rich and employed as you used to.

The worse your situation gets, the more you should continue to spend according to your prior spending growth trajectory. No matter how bad it gets, you will never feel that things are so bad as long as you believe things are just about to pick up again. Don't change your spending pattern, and you don't have to experience a recession. Why even look at employment? Why consider inflation or changes to costs of living or living standards or purchasing power?

So long as you buy as much stuff as you were buying in the past, the recession doesn't exist. It's all in your head.

Problem solved.

This sounds like some horrible combination of The Power of Positive Thinking and The Ant and the Grasshopper. Only, the way Scott Sumner tells it, the only flaw in the Grasshopper's reasoning was that he eventually stopped partying. According to Market Monetarism, Winter never would have come, had the Grasshopper merely believed that it wasn't coming.

So, in reality, Market Monetarism is more like The Power of Positive Thinking meets Zen Buddhism. It's a religion, a cult. As in my previous examples of faith (see here and here), Market Monetarism rests on a person's willingness to surrender all logic and reason, to replace what one knows absolutely to be true with what one merely wishes to be true. In this case, the economist who buys into Market Monetarism surrenders the knowledge that economic recovery requires increased production (as in real and actual new production of new things) and replaces it with mere faith that everything is going to be okay (a faith controlled by The Fed's willingness to drench the economy in liquidity).

This is perfectly evident because Scott Sumner has pre-emptively accused his opponents of religious dogma:
I’m often taunted by RBC-types: “Where’s your model.”  ”That’s not scientific.”  We now have hard science showing money illusion exists.  In contrast, the RBC belief in the non-existence of money illusion is akin to religious faith.  ”Our models say it shouldn’t exist, so it can’t.”
But only a religious zealot can think this way. Notice that even in Sumner's example, his critics are the ones saying that it is Sumner who lacks a scientific model. Sumner is the one saying, "It just exists, okay guys? I don't have a model, I just know that it happens, okay?"

Sumner is the one insisting on the existence of a thing that has yet to be satisfactorily demonstrated in the context of a model. He's the irrationally religious one here. Everyone else is using science, reason, and models to attempt to explain the economy.

As is always the case in scientific inquiry, the models fall short of a perfect explanation and continue to be improved. As always, the religious dogmatists insist that they have a perfect explanation for the as-yet unexplained, which we must take on faith, without evidence, simply because the dogmatists say it's a perfect explanation.

Members of a cult always demand that you take their word for it. They muddle the questions up and use rhetorical tricks to deflect a direct, rational inquiry. Scott Sumner and the Market Monetarists aren't any different in this regard. It could be that, at some point, scientific analysis validates their beliefs. But until that day, their beliefs should be treated as the unmodeled, unsubstantiated wishful thinking and religious faith that they are.