I am Scott Sumner: monetary economist, blogger at The Money Illusion, and author of The Midas Paradox, a book advancing a bold new explanation of what caused the Great Depression. AMA!

Hi Prof. Sumner! Thanks for taking the time to do this AMA--you have some big fans around these parts.

1. /u/Integralds tells me you spent a decade reading each day's Wall Street Journal and New York Times from the 1930s in order to understand the Depression as people experienced it. What's your favorite article or op-ed from that time?

2. Do approaches like the Cleveland Fed's inflation expectations, which attempt to account for determinants of breakeven inflation other than expected inflation (i.e. risk and liquidity premia), give us better or worse information about expectations than the raw TIPS spread?

3. A group of prominent economists (e.g. Hansen, Lucas, Prescott) recently published a statement endorsing an instrument rule for the Fed. In particular, they support legislation that would require the Fed to detail a policy rule (not necessarily a Taylor-style rule) and explain their reasoning whenever they choose to deviate from it. Would this be better or worse than the current state of affairs?

1. The one's I enjoyed most were the off topic articles, like the NYT assuring us not to worry too much about Hitler, as he would have to moderate his outlandish views as he got closer to power. Where else do we hear that? Others I liked would be too long to summarize here. I also loved the sophistication of the market analysis, which often anticipated rational expectations (and EMH) thinking.

2. I don't know enough to comment, but I find Kocherlakota's discussion of TIPS spreads to be persuasive---even if they are falling due to a change in the risk premium, that's bearish for growth.

3. I think there should be a clearly defined policy rule, perhaps an instrument rule. But I prefer using NGDP futures prices to a Taylor Rule approach.

Thank you so much for your time today Mr. Sumner. I have to say personally you've had a big influence me as someone with a BA in economics and a passion for macroeconomics. My question:

While you fight hard on the internet to push NGDPLT and Market Monetarism in general, there are a lack of models and academic papers associated with a Market Monetarism - a group that is about 7 years old now. When will the Market Monetarist DSGE model be published? Are there economists pursuing your ideas in an academic fashion? While you have obviously pushed people towards NGDPLT, do you think that developing a model would get more academic support behind NGDPLT?

I'm not a fan of mathematical macro models, except perhaps to establish a few key implications of theory. I don't think we know enough about the microfoundations to establish which models are the most useful. In my view there are many factors involved, and each model tends to isolate just one or two. Thus there might be 10 different types of price stickiness, each with different implications.

I prefer an eclectic approach, combining theory, history and market responses to policy shocks. What I did with my Depression book, or Friedman and Schwartz.

But people are building formal models with NGDP targeting implications, Bullard recently did one, and there are numerous others.

Thank you for your response! What does your personal approach bring to the table that is better than DSGE models? I'm assuming predictive ability?

Not predictive ability, except in the sense that my model relies on market forecasts, which are less bad than other forecasts. The term I like is coherence, do all the components fit together in a persuasive fashion. I'm a methodological pragmatist, and I reject any single "scientific" approach to economics. To me, Friedman and Schwartz is the model of macroeconomic analysis, and it's primitive in a technical sense.

Models should be collections of paragraphs combined with lots of data and charts, not collections of equations.

so a dynamic systems model or a equilibrium model?

I'm not sure I know what those terms mean. I guess I favor models with labor market disequilibrium (sticky wages) and money market equilibrium combined with efficient markets and rational expectations.

Hi Professor Sumner,

Thanks for doing this AMA!

Recently, 4 former CEAs from Democratic administrations wrote an open letter to Senator Sanders expressing their concerns about the credibility of some of the estimates of the impact of his fiscal policy.

On the other hand, most of the candidates for the Republican nomination have advocated for policies with similar problems - for example, assuming that we are on the right side of the Laffer curve, or supporting the "Audit the Fed" movement.

However, we have not seen a similar push back from right leaning economists - there's no open letter from Bernanke, Mankiw, and Feldstein about the problems with these approaches.

Why do you think that is the case?

People like Mankiw and I have certainly been highly critical of Trump, who in terms of economic irrationality is the closest to Sanders. Audit the Fed is mostly harmless. I do agree that the so-called mainstream Republicans have very unrealistic tax plans. But Sanders is at an entirely different level of unrealistic. Indeed the Democratic economists greatly underestimated the problems with his policies, as we know that European welfare states have GDP/person 25% lower than the US, if not more. So the problem is not Sander's unrealistic claim that growth would speed up to 5.3%, it's that GDP would plunge massively lower if his plans were implemented. That's a disaster on an entirely different scale from the GOP plans, (or the Reagan/W. Bush tax cuts)

Just to be fair, I think the GOP has huge problems in other areas, such as nationalism, militarism, etc. I'd support Sanders over Trump. But their tax cut plans are the least of my concerns right now.

Hi Scott,

I have a question about communication strategy under an NGDP futures target.

Currently the Fed targets inflation and unemployment using an interest rate instrument. The communication strategy during recessions is pretty Old Keynesian: the Fed "cuts nominal rates, which reduces real rates, which spurs real activity." it's a simple message, but works well enough when the nominal rate is well away from the zlb.

Suppose the Fed implemented NGDP futures targeting. What would the communication strategy look like? How would the Fed explain monetary policy to the public? And what advantages would it have over current communication strategy - especially at the zero lower bound?

Thanks,

Integral

Ideally they'd use NGDP futures prices as both a target and a communications device. If not, I think the monetary base is best if there is danger of a zero bound. The fed funds target seems to work fine when we are away from the zero bound, but you must always count on being away from it because as we've seen it's hard to change communications strategies in mid-stream.

I would add that communication would be far easier with level targeting, so that's an important consideration.

Small countries like Singapore seem to do fine with the exchange rate. Most people think that would not work for the US.

Hello Prof. Sumner! Thank you very much for doing this, I am a big fan.

1. Was IOR/IOER a big deal during the recession? What were the magnitudes, in your mind, of having IOR/IOER during the recession? Did it really hold back the economy a lot, or are you simply trying to highlight bad monetary policy?

2. With regard to QE, we see some economists criticizing it, calling it ineffective, instead advocating for things like looser fiscal policy. My question is, besides expectations, in your opinion, in what way does QE work to boost Aggregate Demand? If people expected QE to not change much, would it, with enough effort be able to stimulate Aggregate Demand alone, or would it need some help from fiscal policy?(Assuming the central bank refuses to do something like a helicopter drop or negative rates.)

Thank you very much for your time.

1. I think it was a negative, but it is literally impossible to answer that question more specifically without a counterfactual. If no IOR, what else would the Fed have done differently? BTW, it is very similar to the mistake the Fed made in 1937.

2. QE was mildly effective, but would have been far more effective under level targeting, Indeed it might not have even been needed. I oppose fiscal stimulus. If QE isn't enough, then do more and more, until you own the entire world. Then think about fiscal stimulus. Seriously, you would never need to do fiscal stimulus if the central bank was more aggressive. Notice the Fed raised rates in December, which shows that our current low inflation rate has nothing to do with the Fed being out of ammo---the rate increase was designed to reduce inflation. There's a reason we are where we are.

What questions would you want the IGM Economic Experts Panel to answer?

Is that the one with 50 prominent economists? I'm not a fan of that approach.

Hi Scott, in the past you've advocated something to the effect of nuking the New Keynesian model from orbit. Specifically with respect to Eggertsson and the NIRA, why shouldn't we consider attempts to inflate wages as expansionary if they can credibly boost inflation expectations?

What matters is NGDP growth expectations, not inflationary expectations. And the empirical evidence overwhelmingly suggests that the NIRA wage policy was contractionary. It did not boost NGDP expectations, and so any boost to inflation reduced growth.

My new Depression book has lots of evidence. By the way, I'm a big fan of Eggertsson's monetary analysis, so I don't want to nuke the entire NK model, just things like the paradox of thrift and the paradox of toil.

Hey Prof. Sumner, 2 questions:

1. Which country's monetary policy has been closest to what you would consider "ideal" or "optimal" since the global financial crisis?

2. Which country's current monetary policy institutions (e.g. central banks) do you think are the most optimally designed?

1. Maybe Australia.

2. Hard to say. I think the ECB is by far the worst design, otherwise I think design is overrated, it's ideas that matter. Central banking is really easy if you have the right approach, as the Aussies have shown.

How do Gabe Newell and other donators feels about the past year of NGDP prediction markets?

What do you think we learned from the past year of NGDP prediction markets?

(I was one of the top NGDP traders on Hypermind, not that it's relevant.)

I have not spoken with him, but I've been frustrated by the slow progress. I'm still working on it. The Hypermind project was just a demonstration of the concept, we would need far more funding to get the sort of trading volume that I would like to see. I think it gave reasonable forecasts, but did not respond quickly enough to news shocks to be useful in event studies.

What is the most common misconception that fellow economists have about your views?

There are many:

Some assume I think everything is demand side, that I'm an old style Keynesian.

Some people think I want monetary policy to solve problems, I actually want it to refrain from creating problems.

Some think I'm a dove. I was a hawk in the 1970s, and my views have not changed; the problem has changed.

Some think I support the Fed in some sense, whereas I'd like a very different policy regime (with or without the Fed.)

Some associate me with NGDP targeting, whereas I think my more distinctive ideas are elsewhere. Such as how to think about easy and tight money. How to use markets in monetary policy, etc. NGDP targeting is not my idea, it's been around for a while.

Some think I'm a huge fan of QE and negative rates, whereas I favor policy regimes where those tools would not be needed. It's central bankers who disagree with me who adopt policies that lead to a need for QE and negative rates.

Who is your favorite economist? And which economists have influenced you the most?

Friedman is my favorite. I really like Coase, but since I'm a macro guy I'd say I've also been influenced by Lucas, McCallum, Hall, Irving Fisher, Hetzel. I've left out many names here. On NGDP specifically it's been McCallum and Selgin.

I suppose even Krugman to some extent, since I read his blog so much. Not so much by his specific views, but his way of thinking, which is really sharp when he stays away from politics.

If you are thinking more broadly about influence, then people like McCloskey and Cowen have influenced how I approach intellectual issues in general.

Wikipedia mentions you bought your first cell phone in 2011. Why did you resist buying one before then and what phone did you buy? Has it improved your life or is just a basic communication tool to you?

I actually bought my first one a month ago, I had hand me downs for a few years, which my wife would give me. They kept changing, so I couldn't keep the numbers straight. I don't like computer technology in general, and I don't like the sound of the phone ringing. I don't like being tethered to a phone.

What are the most important sequences of classes for undergrads to take to move on into a good graduate program in economics?

What track should undergrads follow?

Practical answer--lots of math and stats

My real view--lots of applied economics, history, philosophy, etc.

What blogs or podcasts do you like?

I respect Krugman and DeLong's blogs. But they can be annoying. I both like and respect many blogs. The GMU bloggers are some of my favorites, along with Nick Rowe and other market monetarists. I also like Scott Alexander. Too many to mention here.

Thank you for doing the AMA. I really enjoy your blog and agree on most of your views.

How do you feel about the recent backlash on a significant amount of economists from Bernie Sanders' supporters, in particular their belief that economists who do not agree with his policies are establishment corporate shills?

Do you think there is a way that these economists can communicate their concerns more effectively to get their message across without being labeled as the establishment? If so, how?

Economists need to do a better job with policy, and not worry so much about public opinion. Economists as a group caused the Great Recession, with their lack of awareness about what a determined central bank could do to offset the financial crisis. Bad times produce demagogues. So we have lots of socialist and nationalist demagoguery due to the bad times we've been through.

Germany had much worse times in the early 1930s, and that boosted the two extremes. Fortunately our situation is nowhere near as bad, but that's the direction politics moves when the technocrats don't do their job. Without excusing foolish voters, policymakers need to do a better job.

Professor Sumner,

Thank you for doing this AMA. Reading your views on monetary policy following the Great Recession, how they ran counter to typical narratives while offering considerable predictive value on indicators like comparative GDP growth (e.g. US vs Eurozone) and inflation, convinced me that the “market monetarist” view provides the best framework for future policy. I have two observations/questions:

1. It seems to me that the benefits of NGDP targeting are largely psychological, that having a little bit more in your paycheck (on average) at least generates the perception of economic well-being. What would you say to this assertion, and have economists found any empirical evidence for this in different periods of NGDP vs RGDP growth?
2. Under the right monetary and fiscal policy regime, what would be your ideal mechanism for a “helicopter drop”, i.e. direct dollar transfers to people as opposed to banks?

Thank you again. I look forward to your answers.

1. The benefits are not really psychological, they derive from the fact that wages and debt contracts are sticky in nominal terms. So unexpected declines in NGDP lead to high unemployment and financial crises.

2. I oppose helicopter drops, they are a waste of fiscal resources. The central bank should keep buying assets until they hit their target. I'd rather they create a sovereign wealth fund than do a helicopter drop.

The banks issue is misleading. Even if the Fed buys assets from non-banks, the money almost immediately flows into banks. QE does not help banks in the way that people assume (i.e. Cantillon effects). If it helps banks it does so by improving the macroeconomy.

Thanks for doing this AMA, I'm an avid reader of Econlog, and sometimes venture over to TheMoneyIllusion as well.

I just have one quick question, which you've touched on in the past, but I would like a more straightforward answer. What are your explicit agreements and disagreements with the work of Free Bankers such as George Selgin or Larry White, and what role do you think Free Banking plays in your ideally managed money supply?

I think the differences are often subtle and nuanced, hard to explain here. Perhaps I'm a bit more skeptical of the gold standard, and the likely macroeconomic outcome of completely free banking, with no Fed. But those differences are at the margin, I am sympathetic to many of their arguments.

Hey Scott, on your blog you've advocated a minimum wage of $0. What is your view on the recent literature on the subject, particularly research by people like Dube?

Thank you, and thanks for answering my questions at the Liberty Forum.

I think the effects of the minimum wage is still an open question. It is difficult to measure and the evidence is mixed. On the whole, I agree with the NYT (of 1987) that a zero minimum wage is safest. I prefer a wage subsidy for low wage workers.

You often state that perhaps nominal wage compensation targeting would be superior to NGDP targeting.

But as far as I can tell, the two targets are justifiable on very different grounds:

1. Nominal wage targeting is preferable if wages are the stickiest price.

2. NGDP targeting is preferable if sticky debt prices ('non-state contingent nominal contracts' a la Koenig/Sheedy/Bullard) are most important; or is preferable on Yeager/Selgin monetary disequilibrium grounds.

But the two are quite different animals, are they not? I don't think we should casually conflate the two as being all that similar, when the two proposed policies have quite different justifications.

Thanks!

Good points. I have doubts about nominal wage targeting even though in theory it might be best, and prefer an intermediate compromise---targeting total nominal labor compensation. Like NGDP, but unlike wages, that variable picks up demand shocks quite quickly. Even though the two policies have different justifications, as you say, the two series tend to move in tandem in the short run. And in the long run money is neutral in any case. So as a practical matter, for the US I think NGDP and total labor comp do about equally well. For big commodity exporters like Kuwait I'd focus on total wage comp., not NGDP.

Milton Friedman or your family, which one do you love the most?

In percentage terms, how much of Italy's decline do you think is due to the Euro+ECB, and how much to structural problems? If you were the Italian Prime Minister right now, and couldn't get the Germans to adopt the monetary policies you want, or at least to agree to some forms of fiscal redistribution, would you prefer to go back to the lira in spite of the risk of a bank run, rising interest rates on the national debt, et cetera?

Italian classic liberals are so desperate that they view the EU and the ECB as the ensigns of laissez-faire, and hate their own govt and cb so much that they would rather be ruled from Brussels and Frankfurt. Would you care to gently explain to them how dumb their reasoning is?

Finally, if you were a Brit, would you vote for Remaining in the EU or to Leave in June?

There's only one possible answer to your first question.

I suspect that Italy has major structural problems, especially in the southern third of the country. In my view monetary stability can prevent sharp increases in the unemployment rate, but not much more. So while the ECB policy has clearly raised Italian unemployment in recent years, the slow trend NGDP growth rate is non-monetary. And even the natural unemployment rate in Italy is quite high, in other words most of Italy's problems are domestic structural problems.

Brexit is a close call. On purely economic reasoning I might vote to exit (Swiss model), but on balance I'd vote to stay in. I see nationalism as a rising problem throughout the world and at times like this all good classical liberals should show solidarity with global cosmopolitanism. In the words, think how Trump would vote, and do the opposite.

What is wrong with the current narrative of the great depression?

The current narrative does not explain the many high frequency fluctuations in industrial production (measured monthly) That's what I try to do with my new book. The standard narrative doesn't even explain why the Depression began in late 1929

Most studies focus on either supply or demand shocks, in my view you need to focus on both.

Many people think the Depression occurred due to macroeconomic imbalances. Actually the macroeconomy was in great shape in mid-1929. More sophisticated observers blame monetary policy, and congratulate the Fed for acting differently this time. But the Fed also cut rates close to zero, and did lots of QE in the 1930s, so that's too simple. The main problem is that people didn't take the time to really think through the implications of the international gold standard. A few did understand the role of gold (Bernanke, Eichengreen, Temin, and especially Glasner, Clark Johnson, etc) but no one took that understanding and turned it into a detailed quantitative analysis of gold supply and demand shocks.

What questions do you have about the world that you haven't yet answered? (Anything from deep to inane, econ or otherwise.)

Why is the crime rate in El Paso so low? Is it because it's a Hispanic city?

You receive a message from the future that says: "Market monetarism has been accepted as the mainstream approach by central banks and economists in general. It has done a better job of smoothing the business cycle. But it has its problems, and now a new approach is gaining acceptance to do even better."

If you had to guess: what problem do you think leads these future economists to decide market monetarism is insufficient, and what sort of next-step do you think is being considered?

Perhaps there is a reduction in the correlation between NGDP stability and labor market stability, due to big swings in the share of income going to capital. In that case you might want to target total labor compensation. I cheated a bit, because MMs have already discussed that idea. But it's hard for me to anticipate problems that I have not yet anticipated.

Hi, I've really enjoyed your blog for a long time now and credit you with curing me of Krugman-fanboyism. One of the things that interests me the most about your writing is your favor for (usually) libertarian policies but justified from utilitarian values. And I was hoping you could answer a question related to that...

As a libertarian, you must believe that the average voter is not very good at choosing the policies that will have the best consequences for themselves. For instance, in this EconLog post you even said there's "no such thing as public opinion".

But when making utilitarian arguments for libertarian policies (such as school choice, minimal regulation, HSAs, etc.), you often put a lot of weight on "revealed preference", where a person's choice in a complex situation reveals what they really want, which you take to indicate that it maximizes their utility.

There seems to be a tension between these two approaches to how we should view a person's ability to make utility-maximizing choices in the face of complex problems. Do you agree? If not, how do you resolve that difference?

Good questions, and I'll do my best:

1. I think voters are individually stupid but collectively wise. However they are collectively wiser the more you decentralize, and the more you separate out each decision. So Switzerland's democracy will be better than India's, and markets for single goods are usually more efficient than political markets, where you vote on a bundle of policies.

2. Your question also relates to behavioral economics, nudges, paternalism, etc. In most cases I think people can make better choices for themselves than bureaucrats. But perhaps not always. The problem is deciding when bureaucrats can improve things. I don't see any reliable procedure for doing so. So with all their flaws, I'd rather take my chances on free choice. Bureaucrats often make horrendous errors, such as the war of drugs and the ban on kidney sales. The consequences of those errors are much greater than the private errors that I am aware of, such as people buying managed mutual funds. I also think it's dangerous to assume you know that other people are making foolish choices, as with smoking.

I don't want to sound closed-minded, I'd guess there are a few paternalistic polices where the gains clearly outweigh the losses, say seatbelt laws. I don't waste time objecting to those. But how do we restrain the government, once they've started down that road?

So, what did cause the Great Depression. And, what got us out of it? How did FDR's programs impact the recession one way or another?

Tight money (higher gold ratio) triggered it, currency hoarding worsened the fall in AD. FDR's dollar devaluation was a massive expansionary shock, which should have ended the Depression relatively quickly, but his 5 wage shocks (artificially higher wages) delayed the recovery by years. Private gold harding was a problem in 1931-32 and again in 1937-38.

Hi Scott,

Which aspiring presidential candidate in the US do you believe will nominate the most effective governors of the Federal Reserve?

Who knows, and no one should let that influence their vote for President.

I’ve read your book The Midas Paradox (well, most of it) and I still don’t get your gold market approach. For the early part of the crisis (until the dollar was floated in 1933) you focus on the gold reserve ratio. But the way I see it is that this approach only makes sense as a proxy for for the quantity of base money. I mean certainly just the fact that the central banks got more gold, with the quantity of money unchanged, doesn’t mean that there will be any deflation (in the short run). And you also talk about central banks “increasing” their demand for gold: but since they are on the gold standard aren’t they supposed to only passively cover for the difference between private supply and demand of gold (as in the Barro’s model, if I understood it correctly). The only way that I see that they can increase their demand for gold in any meaningful sense is if they implement deflationary policies (i.e., reducing the amount of the supply of base money), which make gold worth more in comparison to other goods, which will increase the supply and reduce the private demand of it, so more of the newly mined gold should flow to the central bank. In short, to me it seems that it all boils down to the supply of money. What am I not getting here?

P.S.: In the book you dismiss, without much consideration, the hypothesis that Hoover’s high wage policy contributed to the crisis. I would just like to know what do you think about research that tries to show that link, in particular Ohanian’s 2009 paper.

Gold and money were dual media of account under the gold standard, so the price level can be modeled either way. The advantage of gold over money is that the latter is endogenous under a gold standard, so it's difficult to isolate the impact of any single central bank. The gold ratio allows you to see the impact of each central bank.

Regarding the money supply, the base fell in the first year of the depression, whereas the problem after that was rising demand for base money, which created an increased derived demand for gold. But that rising demand for base money was itself a function of the previous tight money policy.

I agree that Hoover's high wage policy was a problem, but the 50% fall in NGDP was a sufficient condition for a pretty deep depression, even without that policy. And of course the policy would not have mattered had NGDP not collapsed, nor would Hoover have sharply raised tax rates.

You're saying that money supply isn't endogenous anymore, and that the fed controls the amount?

The question of endogeniety is complex, it actually depends on what you are assuming about the policy regime. If they target something other than M, then money becomes endogenous. But under floating rates the central bank can adjust M if they want to, and you might want to think about things like changes in the fed funds target as backdoor ways of adjusting M as needed to hit an inflation target.

For example does debt add money to the GDP, or is money only added via the printing press.

The question of how to define "money" is uninteresting, as long as you are clear what you are talking about. I prefer to define it as the base. In that case any non-money supply factor impacts NGDP through base velocity. More debt might boost base velocity.

Which means a deflation of the debt can decrease base velocity of the money supply.

Yes, but in theory that should only be a problem under the gold standard. It's sad that central banks under fiat money regimes have not offset these effects.

Thanks for answering, Scott. I'm not sure what you mean by "dual media of account", I mean all the prices were listed in dollars and most people probably had no idea about the relative value of gold. You say that money was endogenous, but I think this does not hold for the short run (or even medium run, as in France for example). Can a change in the gold ratio that is purely a consequence of a change in the central bank's holdings of gold (if we assume sterilizations of gold flows) and not of a change in the base money supply have any effect on the price level?

Prices were in both paper money and gold terms. Both were "dollars". More importantly, you are right that sterilization would prevent any impact, but we know that central banks cared about their gold reserve ratios, and hence often did not sterilize. In some cases attempting to do so would have exhausted their gold reserves. Take a look at the huge plunge in the monetary base in Canada between 1929 and 1932, and try to explain it with regard to Canadian monetary policy, without any consideration of the international gold standard. You can't. Ultimately the question of whether cash or money is more useful is an empirical question. There has been lots of work on money, so if they are even equally important, then a book of gold policy was needed. That's why I wrote it.

BTW, markets cared a lot about gold market shocks, such as waves of private gold hoarding--under your assumption markets should not have cared.

Orange juice: pulp or no pulp?

Pulp

Hey Scott. As a self-described utilitarian, what is your view on the welfare state? Would you oppose a generous welfare system if it could be enacted with limited (or even positive) impact on labor force participation? Could workfare and wage subsidies be useful for monetary policy -- not just as "automatic stabilizers," but also to minimize hysteresis and allow wage flexibility? How can we persuade libertarians to take their eyes off welfare and onto other aspects of big government?

I'm a moderate on the welfare state. I don't buy the "just deserts" critique of Mankiw and others. Mankiw was really lucky to be born with so much talent and work ethic and personality. But I fear the supply-side downsides are bigger than many liberals envision. Thus I'm a big fan of wage subsidies, but not so much a fan of welfare for the unemployed.

Maybe they could be used as automatic stabilizers, but I don't think we should expect much in that regard. I think automatic stabilizers are overrated in a demand side sense, but may work from the supply side, as with employer side changes in labor costs (taxes subsidies)

On your last question, I try to encourage libertarians to switch from a natural rights approach to a utilitarian approach. In an uncertain world all we really know is that pain is bad an happiness is good.

Hi Scott ... I know you advocate unsterilized intervention here ... What would be the top three or four assets you would like to see central banks buy? There seems to be a gentlemen's agreement not to buy bonds of other major economies, so I guess that's out.

Additionally, what percentage odds would you put on NIRP working as planned in Japan? Do the mechanics work in such a way that NIRP would "get the reserves created by QE MOVING" or is that not the right way to think about it? Thanks ... Kgaard

They should buy the safest assets possible (Treasury securities), and then when they run out of T-bonds they can buy progressively less safe assets. But I'd rather they set a NGDP growth target high enough to keep nominal interest rates above zero. Then the base would be less than 10% of GDP, and not much QE would be needed.

From the beginning of Abenomincs I've predicted it would have some positive effect, but fail to hit 2% inflation. I still believe that. But they've created more inflation so far than I anticipated. Still, they need a major policy shift, perhaps to level targeting.

Hi Prof. Sumner! Your views about the Fed tightening policy during the recession have gradually come to more acceptance over the past few years in economics circles, but they have not yet entered the mainstream. Many still believe the Fed did far too much, as can be seen by some politicians tapping into this.

Have you considered divulging your views on this (and other of your staple proposals like NGDPLT) through other means to reach a mainstream audience? Through a Ted Talk perhaps?

I'm working on a book. I suppose a Ted talk is possible, but it's hard to explain in limited time.

What public perception of economics do you feel is misunderstood or misrepresented most commonly?

People think economics is about business, and that business people have more knowledge of economics than plumbers. Reporters ask business people about the economy, but they don't ask plumbers. Why?

People think economists are supposed to be able to predict the future course of the economy.

With the amount of money currently held in reserves, is there anyway to end or wind down IoR without a massive devaluation of money?

Yes, I believe the Fed could easily get policy back to "normal" without a surge in inflation. But it might require a massive reversal of QE, i.e. the sale of much of the Fed's stock of bonds.

Hello Scott,

I have a question about your theory on monetary policy concerning emerging markets and smaller developed economies. You've stated an alternative to your NGDP targeting would be "total nominal labor compensation" targeting. You say this is because large supply side shocks in an NGDP regime could lead to unproductive choices (one of your examples was Kuwait reducing production of oil if the price doubled).

My question is do you support this in developing countries like Brazil with diverse and varied inner-economies too? Wouldn't this lead to unsustainable distortions across the different states? Or is this just an idea for your NZ/gulf oil states? And if so, since you don't support NGDP targeting for Brazil, what policy would you recommend for their central bank?

Thanks.

I'm not sure I know enough about Brazil to comment, but my sense is that it might be diversified to make NGDP targeting work OK. But I'm not certain. If not, then total labor compensation.

I suspect Brazil's main problems are structural. Why isn't it growing at 6%, like China?

Prof Summer:

First, I have a short question on central banks that requires a long explanation. I'm a long time student who just got my master's degree and wrote about monetary policy / central banking as for my thesis. Financial panics are what got me into my current field of study. Anyway, the short version of my thesis is that the idea of central bank independence (CBI), originally conceived as a way to keep meddling short-term-horizon politicians from creating inflation, has actually become the cover that allows today's central banks to pursue the many "unconventional" policies they've pursued since 2008. I also argued that we are in the midst of the creation of a new norm on the governance of central banks, away from the limited, monetarist CBI-influenced mindset in which the ideal central bank does nothing but control inflation, toward a new paradigm in which central banks are more assertive, more responsive to political pressures and flexible in how they respond to them, and more involved in fiscal policy. These arguments held well for the ECB, which I examined, but I wonder if you agree with that for other central banks around the world. Do you agree that we're seeing a paradigm shift in how central banks function and what their ideal role is in the economy?

Second, What would you say the differences are between your approach and that of Eichengreen's "House of Mirrors" which also argues that there are similarities between 1929 and 2008? He was more interested in collective institutional memory (or more accurately, collective institutional forgetting) and how that influences policy choices. How does your work compare to that badly oversimplified version of Eichengreen's book?

I apologize if either of my questions are too broad or vague to answer.

I think much of this is simply a response to the zero bound in interest rates. But given that the zero bound may be around for a while, I suppose it might become the new normal.

Regarding the Depression, there are almost as many macro models as there are macroeconomists. These models are superficially quite similar, so when things go well (1985-2007) it seems like macroeconomists agree, and there is one model. But when things go poorly then lots of hidden fault lines are exposed. I agree with Eichengreen on many issues, but disagree on a few, such as fiscal policy.

What aspect of business cycles is nGDP targetting (or aggregate income targetting) supposed to smooth, other than nGDP obviously? Unemployment? rGDP? Long term interest rates?

Say it's 2040, and all central banks have adopted nGDP level targets already... what do the business cycles of this future look like?

It is supposed to smooth employment and unemployment.

It should also smooth the rate of debt defaults.

You have said before NGDP targeting would lead to something very simnilar to the free banking outcome, could you elaborate?

It is compatible with free banking. But that would depend on how banking regulations changed. It would also reduce pressure for bank bailouts, as banking crises would no longer threaten NGDP growth. NGDP grew very fast after March 1933, despite 1000s of banks being closed during a major crisis. This was because of sound monetary policy.

Which comes first, the debt or the monetary policy? Or does the monetary policy promote unsafe lending?

What do you think about technocratic control of the money supply.

Debt is mostly unrelated to monetary policy, at least in the way that people assume. The Fed has less control over real rates than most people assume. The main way they impact debt is by affecting the business cycle.

Absent using NGDP futures, what do you think the next-best approach is to monetary policy? I'd expect you to say "NGDP level targeting by other means"–but what means?

I suppose you ask the Fed to come up with the best model they can, using market indicators where possible. Soon I will discuss an intermediate proposal, which uses NGDP futures merely to prevent extreme outcomes, and gives the Fed discretion within those extremes.

What do you think of the limits-of-arbitrage critique of the efficient market hypothesis?

I love the EMH, and indeed view it as an under-appreciated theory. It still has not been properly integrated into macroeconomics. But I've always seen it as being truish, an approximation of reality. It is very useful for academics, policymakers, and ordinary investors. Perhaps there are some small weaknesses that a few sophisticated investors might be able to exploit, but I'm even a bit skeptical of that argument.

I believe you are on record stating a preference for a progressive consumption tax in lieu of our current income tax. I think you make a compelling case. A supposed drawback of our current system is it provides a disincentive to savings. A move to a consumption tax would supposedly rectify that. Let’s take a moment and think about how that change would affect the macro-economy under the current Fed policy regime. Holding all other things equal, the wicksellian interest rate will be lower under a consumption tax vs. our income tax. (Due to the change to saving incentives mentioned above). Do you agree? The lower the wicksellian interest rate, the more likely we will end up with a natural rate below zero. The more the wicksellian rate goes below zero, the more likely we end up against the zero lower bound, and a Fed that thinks it’s “out of ammo”. My concern is unless we move to a NGDP targeting regime, a move to a consumption tax will indirectly make our monetary policy worse, and more prone to recessions. What we gain in Harberger’s triangles, we will lose in okun's gap. So, do you agree with the premise that we have put ourselves in a position where policies that would otherwise be efficient, become dangerous due to the way the fed currently manages the macro-economy?

Yes, that might be a problem. Fixing monetary policy would make it easier to get better policy in other areas.

You've advocated getting rid of capital gains taxes. Marco Rubio has put forward a tax plan that does just this, but he has come under attack from those on the left such as Matt yglesias and from the center from people like josh barro. Their main argument is that people like mark zuckerburg would essentially pay zero tax and that this is an unfair and extreme position. How can you advocate a tax policy that would so highly favor the rich and let them get away with paying no income tax?

I have no objection to taxing the rich more than today, but the tax should hit the high consumption rich, like Larry Ellison, not the rich who give away almost all of their money to charity, like Zuckerberg, Gates and Buffett. If you are not taxing the consumption of the rich, you are not taxing the rich at all, you are just creating the illusion of taxing the rich.

I applaud Rubio for proposing the abolition of taxes on capital, but he needs to propose higher tax rates on consumption by the rich. (Didn't Ellison donate to Rubio?) He should consider an extremely high top rate.

From his previous writings on this: it's all about consumption.

Right but the Rubio plan isn't taxing the billionaires consumption either. For that you'd have to do what they do in Hong Kong and simply tax capital gains if they are a form of renumeration. I haven't seen any indication Rubio plans on doing this

I agree that capital income earned in a company you manage is actually labor income, and should be taxed as such.

You're blog has greatly improved my understanding of macro. How has blogging impacted your career? I would guess that you're much more influential through your blog than you were before it..

I am much busier, that's the main way it impacted me. And I stopped teaching about 2 years earlier than I intended.

Hi Prof. Sumner, thank you for doing this. I have a few short questions : what do you think of interest rates as being a transmission mechanism for monetary policy? Can you say that the increases in the monetary base since 08 hasn’t really been inflationary only because of the IOR? Do you think velocity will ever recover under these circumstances (Fed under Yellen, passive, discretionary monetary policy)?

I don't see interest rates as an important transmission mechanism, I think the hot potato effect is the key mechanism.

No, IOR is not the only problem, the other problem is that the increase is viewed as temporary, as there is no level targeting.

Velocity may recover somewhat, but with IOR it's harder to predict.

Hello Prof. Sumner! Thank you for taking our questions. Back in 2010, you offered some suggestions on using ones own money to set up some NGDP contracts on Intrade. You stress that in the absence of a subsidy from the Fed an NGDP Futures market, will be very low volume. 6 years later, do you still believe a Fed subsidy is necessary to the functioning of an NGDP Futures market? Or Has your view changed? (and if so, in what way).

Yes, I still see a subsidy as needed.

What's the decision-making process in determining the final title and cover design for your book? Are there any economic principles or lessons you apply towards that process?

I preferred "The Midas Curse" and was overruled by the publisher.

The lesson is that it's better to be born an alpha male than a beta male.

Seriously, I can't comment on the best procedure.

Assuming that the Fed doesn't adopt NGDP level targeting, do you think that negative rates can have a strong effect if rates are low enough? How much of hurdle are cash, and zero rate alternatives like paying taxes earlier?

I would hate to see us rely on things like negative rates. Once we've reached that point the chances for success are small. Better to have more expansionary policy targets so that the equilibrium rate is well above zero.

Open heart surgery might help, but it's better to maintain a lifestyle that avoids heart disease.

Scott, I recall that you criticized Obama for taking so long to fill vacancies on the Fed. Do you think that that was bad in itself (i.e., that a Fed with fewer members is less effective), or just a signal that Obama didn't take monetary policy as seriously as he should have?

The latter.

Professor Sumner! I loved your book.

Given that most developed-world central banks are now paying (sometimes negative) interest on excess reserves, shouldn't market monetarists start talking about policy in terms of interest rates instead of quantity theory?

My thinking is:

1. If the CB pays interest on excess reserves equal to the target rate then OMOs have no direct effect even away from the ZLB. (They may have an effect on expectations.)
2. If the CB is committed to permanently maintain this IOR policy and committed to not buy other assets like stocks then OMOs should have no effect even through expectations about the future path of the base money supply (since OMOs will continue to be impotent through the end of time).
3. But the CB should still be able to control nominal values (NGDP or price level) over the long term through the policy rate, even at ZLB, a la Krugman 1998.

I don't think we've seen much appetite for using purchases of risky assets to control the price level, but we have seen vast improvements in the forward guidance (on interest rates) central banks have been willing to provide.

I certainly agree that talking about the quantity of money is far from optimal. But rates are also a misleading indicator, I'd prefer we talk about NGDP expectations (ideally futures prices).

It's not clear whether low rates mean easy money or tight money--it depends.

Hi Professor, I enjoy your posts at econlog, but I can often find your monetary and macro discussions a bit advanced despite holding a BA in economics and an MA in applied econ.

Where's a good place to catch up, either blog series or a book/text?

Others might be able to give you a better answer. Read as much monetary history as possible, so you see the field discussed from multiple perspectives (Keynesian, Monetarist, Mundellian, etc)

Do you think the decline in interest rates over the past 30 years or so poses any problems for monetary policy?

It does if they are targeting interest rates.

How do you envision revisions to NGDP figures working in context of NGDP futures? Does our apparent inability to capture economic variables correctly worry you?

No, because I envision them targeting the forecast. With level targeting revisions might be a problem, but I'd allow base drift if the revisions were due to changed definitions of NGDP.

Why is inflation so low despite super low federal reserve interest rates? Is there a text book I can read that explains how the modern monetary and central bank driven economic system actually works?

Try Mishkin's textbook. Maybe low inflation is the cause of the low interest rates.

My understanding is that NGDP targeting is better than inflation targeting because NGDP tracks wages/prices better than inflation does, and sticky wages/prices are what cause recessions.

However, if income inequality becomes bad enough, the movements of the average wage and median wage may become totally out of step.

Do you think that median wage targeting would be a better policy than NGDP targeting, if it was possible?

Inequality doesn't change enough on a year to year basis to cause much problem for NGDP targeting. Long run changes are bigger, but are less of a problem because money is roughly neutral in the long run.

Are there any of the current presidential candidates you prefer? I know you absolutely hate Trump, but do you have any preferences otherwise?

Last time around I liked Gary Johnson, is he running again? I suppose Rand Paul was the lesser of evils, but he's out. I dislike the various candidates in different ways, so it's hard for me to say which I like best.

Top 3 policies you'd suggest to a benevolent dictator (of the U.S.)?

1. Rely heavily on prediction markets.

2. Libertarianism plus redistribution of consumption plus carbon taxes.

3. Decentralize decision-making.

In other words, combine the best of Denmark, Singapore and Switzerland.

How have you changed over the past 30 years of life?

Life no longer seems like an adventure into the unknown. Meaning seems to gradually drain away from things. When I was young even dry statistics seemed to pulse with meaning, so did maps, landscapes, art, etc. That's still occasionally true, but much less often.

I'm more liberal on non-economic issues than when I was younger.

I'm more disgusted with politics, and I no longer see myself as part of the right wing tribe.

If you could change one thing about how economics is taught at the undergraduate level, what would it be?

Emphasize the importance of "not reasoning from a price change" with lots of examples using changes in prices, interest rates, exchange rates, etc.

Have fewer students take economics. It's too hard for most people.

Hi Mr Sumner. Economics novice here. I've generally heard that free trade is good for all the parties involved but I hear a lot of experts showing reservations about the IP part of TTP. What is your take on it?

I have additional one on my home country India. There is a new change in the ruling party here that is marginally pro markets. Which is the sector you'd advocate opening up in India in the context of 7% GDP growth? There have been talks of privatization of railways here. Would this be an ideal time for it?

On the monetary side, our central bank governor Raghuram Rajan has mentioned that inflation in India is largely structural. He has long pursued a inflation targeting approach here. What approach would be ideal on the monetary front in India?

NGDP targeting would probably work for India, unless the agricultural sector is still large and influenced by monsoons. I don't agree that inflation is a structural issue, it's monetary.

Modi has been disappointing on market reforms, based on what I've read.

India needs a massive amount of reform in all sorts of areas, I wouldn't even know where to start. Someone is currently promoting a new constitution for India, in a more classical liberal direction; that's the way to go. (I believe his surname is Jain) The Indian public should be out in the streets marching, demanding neoliberalism.

Hi Prof. Sumner,

Since the financial crisis of 2008, there has been a malaise affecting a variety of people in the western world in particular millennials (see r/lostgeneration ) and people living in rural regions, groups that have been disproportionately affected by unemployment or underemployment. This could be driving polarization of the political landscape as desperate people are looking for solutions on the fringes.

As you and others have pointed out, it seems like the root causes of some these problems could lie in complex and technical macro economic forces rather than in the more typical political issues people like to point at.

As an economist, do you have any advice to help non economists understand the source of their ills better so that they can be in a position to ask for better solutions from their representatives?

I think it's really hard for non-economists to understand the causes of this malaise, given that economists can't agree. Unfortunately we need to experiment to see what works. If you live in Europe you should be asking your leaders why places like Germany and Switzerland are more successful than your country, and then start adopting those successful policies.

Hi Professor Sumner, how would you respond to the observation that NGDP-advocates often engage in the "no true Scotsman" fallacy.

• First, we heard that central banks can control NGDP if they truly try.
• Then, in addition to the forecasts and the communications they took actions to try to bring it about (QE, etc.)
• But, over past 4 years most central banks repeatedly missed their nominal goals.
• Then, rather than refine the view, the response is simply: "well, they must not have truly tried"?

Hasn't the difficulty of the world's central banks in achieving inflation goals over the past 4 years demonstrated that it can be very difficult for central banks to control nominal variables with any precision?

That's a misunderstanding of what we've been saying. Ask yourself this---if central banks were unable to hit their inflation goals, then why did the Fed recently raise interest rates with the avowed aim of preventing inflation from exceeding their target?

One could say the same about fiscal stimulus, but the difference is that monetary stimulus is costless and fiscal stimulus is costly. So it makes more sense to ask the monetary authority to do whatever it takes.