I was doing some research for a post about how the Trump presidential candidacy exposes the political biases of economists. But then I came across the blog of Scott Sumner. Professor Sumner has been teaching economics for over 25 years. Mr. Sumner is an advocate for a monetary policy called NGDP targeting. He also hates Donald Trump.
What I found stunning while reading Dr. Sumner’s articles are not his political views, but rather how poor his understanding of financial economics really is. As an exercise, I recommend that you take a look at these three articles. Can you identify his implicit assumptions and outright false claims?
It is quite ironic that Scott Sumner argues that the monetary policy board of the Federal Reserve (Fed) should only consist of monetary experts1. Most likely, he considers himself to be one of those experts. But as I show below, he is anything but a monetary expert. As Trump would say in his typical Twitter style: Sad!
I am sure there are more, but here are some obvious mistakes:
Viewing monetary and banking policy as separate topics2. Since banks create money, regulation of money and banks can never be completely divorced.
He argues that monetary policy should not be political, only technocratic3. In reality, all monetary decisions are political, because they benefit some group of economic actors above others. For example, when the dollar drops against foreign currencies, this is advantageous to exporters. Importers of foreign products are negatively impacted by a weak dollar.
Trump says that he will make allies pay more for their defense, which would be beneficial for the budget for the USA. Sumner thinks this idea is a joke4. Apparently he has not heard of tribute: the practice of protectorates paying their guardian. The benefit can also be less direct than NATO partners pouring money into the coffers of the US treasury. If Europe (and Japan, South Korea, and others) buy more American made weapons systems, this increases employment in America and tax revenue for Uncle Sam.
As if the above was not bad enough, Sumner goes really overboard by predicting hyperinflation in case the Fed monetizes the debt. As I explained before, when the central bank buys government bonds, the private sector is not richer5. The private sector swaps one asset (a bond) for another (money). Sumner’s mechanism for hyperinflation goes like this: (a) banks get reserves in return for bonds (I have no issue with this); (b) reserves are withdrawn (He does not provide a reason as to why anybody would withdraw money from banks); (c) the ratio of cash dollars to US GDP is currently 8%. By monetizing the debt, this ratio would rise to 95%. As a result, nominal GDP will rise by 1000% according to Sumner.
Steps (b) and especially (c) are bonkers. Scott Sumner apparently believes that the nominal economy somehow grows so that the level of cash is 8% of annual GDP.
This is just magical thinking. Sumner does not give a mechanism by which the cash money would raise prices. Sumner claims that QE and debt monetization are extremely different because of expectations (he writes “Thus QE is only compatible with very low inflation if the public believes there is only an infinitesimal chance that the QE is permanent.”). But as Eric Lonergan and others have pointed out, when the Fed rolls over the bonds it bought during QE indefinitely, this is indistinguishable from monetizing the debt. Furthermore, how would expectations have an impact on prices, when not even monetary experts like professor Sumner have a clue about their area of supposed expertise?
It is tragic that Scott Sumner is viewed as an original thinker in the current macroeconomic debate. It should be clear that many of his ideas are plainly wrong.
- […] I [Scott Sumner]’ve argued that monetary policy decisions should be made by a panel composed of nothing but monetary experts. […] We need to pay a high enough salary to attract the 12 best monetary experts in the world (Source).
- I [Sumner] favor moving away from a “central bank” and toward a “monetary authority”, which is not involved in banking (Source).
- […] my [Sumner’s] vision of a non-political monetary committee (Source).
- “getting Japan, Germany, etc., to pay for their defense,” That’s not revenue (Source).
- Neglecting that bond buying will likely increase their price = lower their effective yield.