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Update: Let me strongly recommend these two excellent posts on Switzerland, by Lars Christensen and Simon Cox.

Here is Kevin Drum:

Via James Pethokoukis, Scott Sumner claims that Market Monetarists got things right during the aftermath of the Great Recession when others didn’t: It must be a major embarrassment to the profession that us lowly MMs turned out to be more correct during the crisis than any other major group (New Keynesians, New Classical, RBC-types, etc.) and indeed more accurate than other groups on the fringes (old Keynesians, old monetarists, Austrians, MMTers, etc.): 1. It’s now obvious that Fed, ECB, and BOJ policy was far too tight in late 2008 and early 2009, but MMs were just about the only people saying so at the time. 2. We correctly pointed out that fiscal austerity in 2013 would not slow growth in the US because of monetary offset, whereas in a poll of 50 elite economists by the University of Chicago, all but one gave answers implying it would slow growth. 3. We pointed out that massive QE would not lead to high inflation, while many other economists on the right said it would. 4. We correctly predicted that the BOJ and Swiss National Bank could depreciate their currency at the zero bound, while many on the left said monetary policy was pushing on a string at the zero bound. 5. We pointed out that the ECB’s tightening of policy in 2011 was a huge mistake, which now almost everyone recognizes. I’m a little puzzled by this. Unless I’m misremembering badly, prominent lefty economists like Paul Krugman and Brad DeLong have been saying most of these things all along. And while I’m not really quite sure if these guys think of themselves as New Keynesians or Neo-Paleo Keynesians or modified Old Keynesians or what, they’re basically Keynesians. The only one of Sumner’s five points where there’s disagreement, I think, is #2, and I’d argue that this is a very difficult point to prove one way or the other. My own read of the evidence is that the modest austerity of 2013 might very well have had a modest effect on growth, but frankly, a single year of data is all but impossible to draw any firm conclusions from. However, it’s certainly true that there were no huge changes in the trend growth rate.

Let’s take these one at a time. There’s really only one reason why Kevin Drum and others even pay attention to market monetarists. People like David Beckworth and I became well known in the blogging community for a very contrarian point of view in late 2008 and early 2009. We argued that monetary policy was way too tight and that this was making the recession much worse. Almost no one outside the market monetarist community was making that claim (with a handful of exceptions like Robert Hetzel at the Richmond Fed (in a much more polite fashion).)

In one of my early blog posts I wrote an open letter to Krugman asking him to support QE, NGDP targeting, etc., and he shot me down with a sarcastic reply, mocking the notion that monetary stimulus could help at the zero bound. Yes, much later he supported QE, and even at that time he was not really opposed, but the Keynesian community was strongly pushing the “monetary policy is ineffective at the zero bound” viewpoint in late 2008 and early 2009. Even more shockingly, so was almost everyone else.

If you don’t believe me, consider how Ryan Avent describes the impact of market monetarism in 2011:

Once upon a time, the Fed was viewed as having near-absolute power over the path of the economy. Then crisis struck and many argued that the Fed had run out of ammunition and fiscal policy was required. Eventually people began arguing that the Fed could do more and should do more, thanks largely to the efforts of Mr Sumner himself.

Or this from September 2012:

Yet even as this [QE] was taking place, the conventional wisdom across the economics wires was that monetary policy had largely done all it could do, or perhaps all it should do. The most straightforward argument on this score was that with interest rates at zero, the Fed was powerless to create more demand. QE could prop up banks, many suggested, but it could not influence the real economy. What was necessary instead was fiscal expansion, which could bypass a limping banking system and plow money directly into the economy. A more sophisticated critique emerged from people like Paul Krugman, who diagnosed the economy has having sunk into a liquidity trap. With interest rates near zero, he argued, balance-sheet policy””swapping one zero-yield asset for another””was unlikely to prove effective. The only way the central bank could further stimulate the economy would be to slash the expected real return on bonds below zero by promising high inflation in the future. But this was hopeless; to do this, the Fed would have to credibly promise to “be irresponsible”: to tolerate inflation in some future in which the economy was no longer at the zero bound. Since no one would believe that the Fed would do such a thing, no one would expect high future inflation. The only solution to the problem is fiscal stimulus. . . . As these debates were playing out, a dissenting voice emerged in a tiny corner of the economics blogosphere. On February 2nd, 2009, Scott Sumner launched his blog with a flurry of posts assailing the conventional wisdom on monetary policy. But almost no one knew who Mr Sumner was, and so no one read those posts. Then on February 25th, Tyler Cowen linked to his blog, and readers and comments began trickling in. Mr Cowen’s status within the economics blogosphere signaled to the rest of us that these were ideas worth engaging. The result was a long and detailed conversation on Mr Sumner’s key ideas, the heart of which was a call to refocus monetary policy on nominal GDP rather than inflation. As Mr Sumner is quick to admit, this is not an idea original to him. Rather, he argues (compellingly, in my view) it is one that follows directly from Milton Friedman’s monetarist revolution but which lost out to inflation targeting during the early years of the Great Moderation. The insight is that the central bank’s provenance isn’t the money supply or interest rates or inflation but simply demand, best captured in nominal output or income: the total amount of money spent each year. If one accepts, as most macroeconomists do, that nominal shocks can have real consequences, and if one then accepts, as is common, that central banks ought to try to smooth out nominal shocks, then it makes the most sense to just stabilise the biggest nominal aggregate. Alternatively, the best way to insure against a damaging fall in demand is to make sure that demand doesn’t fall, or at least to promise to quickly rectify any demand drop that does occur, by maintaining a stable path for nominal output growth. . . . The notion that the central bank should focus on raising NGDP and that inflation is largely a sideshow has taken a while to catch on. But caught on it has. That is down partly to the effectiveness of the idea itself and the argument developed by Mr Sumner. And it is down partly to the fact that Mr Sumner’s framework has done a good job explaining the ups and downs of recovery. Blogs helped his idea find an audience. As the audience grew, Mr Sumner was able to find print outlets for his views. And through blogs, economists advancing the idea were able to communicate and deepen their arguments, eventually forming what has been called the first school of economics to emerge online: the market monetarists. This school now has a book out, edited by David Beckworth. As the blogosphere cottoned on to the idea, it seemed to trickle up. This newspaper covered the idea in a column in August of last year. In October of 2011 Goldman Sachs’ Jan Hatzius endorsed the idea in a research note, and Christina Romer, a former head of Barack Obama’s Council of Economic Advisers, signed on in a column at the New York Times. In November of last year, Mr Bernanke was asked about NGDP targeting at a post-meeting press conference. And at this year’s Fed convocation in Jackson Hole, renowned monetary economist Michael Woodford presented a paper to an audience of central bankers which came down in support of the concept. . . . As the market monetarist community is now pointing out, the Fed’s new policy is a step in the right direction, but it is a long way from what they would actually recommend implementing. And they’re right. Fairly or not, however, the policy will be judged as a test of market monetarist ideas. Yesterday’s market moves suggest that nominal output growth should accelerate in coming quarters. How much acceleration is likely to occur will depend on how much room the Fed is willing to give the economy to run. If the rise in inflation expectations leads the Fed to begin walking back its new language a month from now, the gain will be small. . . . It is unfortunate for the school’s adherents that both the victory and the test are so incomplete. But they should be glad and proud all the same. And for the sake of the unemployed, let’s all hope they’re right.

In early 2013 Keynesians like Mike Konczal and Paul Krugman predicted that fiscal austerity would slow growth. Indeed they were so confident that this would occur that they suggested 2013 would be a “test” of the market monetarist proposition that monetary stimulus would offset the effect of fiscal austerity. If GDP in 2013 kept growing as fast as in 2012, the Keynesians would be proved wrong. It didn’t grow as fast, it grew considerably faster. Keynesians tend to cite real GDP growth, which accelerated from 1.60% in 2012 to 3.13% in 2013 (Q4 over Q4.) Nominal GDP growth (the variable Keynesians should use to analyze austerity) rose from 3.47% to 4.57%.

Ryan Avent was right that what people really care about is jobs, and in the period since December 2012 the unemployment rate has fallen considerably faster than during the previous three years. Of course after market monetarism passed Krugman’s “test” with flying colors, he denied that any test had taken place. But you can be sure that if there had a been a recession in 2013, Keynesians would not now be saying that the increase in income taxes, payroll taxes and budget sequester of 2013 weren’t really all that important. Here’s how Krugman characterized the austerity in April 2013:

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.

As far as point 4, if you want to see Keynesian skepticism about the ability of central banks to depreciate their currency at the zero bound, then check out this Krugman post.

Kevin Drum also mentions Brad DeLong. Here’s DeLong in early 2009:

The fact that monetary policy has shot its bolt and has no more room for action is what has driven a lot of people like me who think that monetary policy is a much better stabilization policy tool to endorse the Obama fiscal boost plan. The fact that Gary Becker does not know that monetary policy has shot its bolt makes me think that the state of economics at the University of Chicago is worse than I expected–but I already knew that, or rather I had thought I already knew that.

Just like Krugman, he mocks those who suggest that much more monetary stimulus is possible. In fairness, both Krugman and DeLong have become more supportive of monetary stimulus in recent years, but I specifically mentioned late 2008 and early 2009.

PS. I think Ryan Avent overstates my influence on others. But the important point here is that people like Beckworth and I were getting so much attention because we were saying things that other people were ignoring. If Kevin Drum wants to argue that we all believe those things today (“we” meaning both Keynesians and MMs), that’s great. That means we were even more influential than I imagined.

HT: Simon

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