Meet the Blogger Who May Have Just Saved the American Economy

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Courtesy Scott SumnerBy Joe Weisenthal


The Fed's announcement of QE Unlimited was a clear departure from past strategy: Rather than seeing asset purchases as an amount of money injected into the financial system, the Fed is now aggressively using the power of future guidance.

It's a step in the direction of Nominal GDP targeting, the hot idea endorsed recently by Michael Woodford at the Jackson Hole conference.

But while Woodford is one of the most respected monetary academics in the world, the economist who deserves the most credit for taking a wonky idea and making it mainstream is Bentley economics Professor Scott Sumner who writes the blog The Money Illusion.

Tyler Cown of Marginal Revolution writes:

I haven't seen anyone else say it yet, so I will. The Fed's policy move today might not have happened - probably would not have happened - if not for the heroic blogging efforts of Scott Sumner. Numerous other bloggers, including the market monetarists and some Keynesians and neo Keynesians have been important too, plus Michael Woodford and some others, but Scott is really the guy who got the ball rolling and persuaded us all that there is something here and wouldn't let us forget about it.

And Matt Yglesias writes:

Professors at Bentley University who've never published a famous book don't normally shift the public debate. But Sumner's vigorous and relentless blogging throughout the crisis on the potential of expectations-focused monetary policy really broke through. It all began with some links from Tyler Cowen and perhaps a tiff with Paul Krugman. I became a regular reader and his ideas have done a lot to influence me, and you can clearly see the influence on Ryan Avent at the Economist, Matt O'Brien at the Atlantic, Ramesh Ponnuru at National Review, Josh Barro at Bloomberg, and a few of the Wonkblog contributors. Outside the exciting world of online economics punditry, NGDP targeting hasn't (yet!) caught fire as rapidly but it gained explicit allegiance from Christina Romer, Krugman, the economics team at Goldman Sachs, and eventually Chicago Federal Reserve President Charles Evans who started out with a different but similar-in-spirit program.

That really is the key here: Not only has he been incredibly influential, but he really has done it almost entirely through his blog. Also, the bi-partisan swath of his adherents is remarkably rare for an economic pundit.

It's also rare for ideas to simultaneously gain currency among academics and Wall Street economists like Goldman's Jan Hatzius, who endorsed the idea about a year ago in a much buzzed-about note.

The jury, obviously, is still out on the Fed's actions, but the folks we like to listen to, like Bill McBride at Calculated Risk, are very hopeful that this can accelerate the economy.

And if it does, then Sumner's blogging and promotion of the idea that the Fed should signal its unwillingness to let off the gas pedal, until the economy has more than recovered, will deserve major credit. Bloggers have accomplished some remarkable things, and this one will be one of the biggest.

On the FAQ section of Sumner's blog, he explains Nominal GDP targeting in the simplest means possible:

1. OK, if you're so smart what should we do?

It is not about being smart, it's about setting specific goals and promising to do whatever one can to meet those goals.

I'd like to see the Fed set an explicit target path for nominal GDP. But at this point even a price level or inflation target would be better than nothing.

Do "level targeting," which means you commit to a specified path for NGDP or prices, and commit to make up for any deviations from the target path. Thus if you target NGDP to grow at 5% a year, and it grows 4% one year, you shoot for 6% the next.

Let market expectations guide Fed policy. Ideally this would involve the sort of NGDP futures targeting regime that I have proposed in this blog. Right now they could focus on the yield spread between inflation-indexed and conventional bonds. The spread is currently than 1/2% on two year bonds, which means inflation expectations are far too low for a vigorous recovery. It should be closer to 2%.

The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system.

If they did these things it would be easy to get inflation expectations up to 2%. But if I am wrong, they should do aggressive quantitative easing (QE), something they have not yet done (despite misleading news reports to the contrary.) They should buy Treasury bills and notes, with Treasury bonds and agency debt available as a backup.

The full FAQ has lots more, so read it all if you're interested in the topic.

For more Sumner, see this lecture on how it was the Fed's lack of easing that caused the crisis.



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Frankenstein Gov

I am having a tough time figuring out just how this dude thinks he has saved the economy. I didn't see anything in this piece that actually supported that headline. bleh.

September 22 2012 at 9:18 AM Report abuse rate up rate down Reply
reptec1

I find it hard to believe that the Fed loans money to banks at considerably less than one percent and then borrows the money back from the banks at three percent interest! No wonder the banks don't try hard to lend the money to anyone else! With all the supposedly smart people in the Federal Government, why doesn't someone have enough common sense to stop this ? Earl Roberts, PE

September 18 2012 at 9:14 AM Report abuse rate up rate down Reply
yigal

Bernanke finally did the right thing. Since 2008 I was pointing out to the huge loss of equity the real estate market suffred. These trillions of dollars were the equity of homeowners who are the consumers. Homeowners lost their equity and their buying ability vanished. The money supply lost trillions of dollars, how could you predict inflation with the Fed prints more money that is insignificant to the loss in the housing market? The new plan will supply the money needed to drive the economy, it is a strong psycological boost, Manufacturers feel more optimistic in the future and will feel more confident in expanding their operations which will increase employment and will increase consumer spending a cycle that will feed on itself. Neither Obama nor Romney can help the economy to grow, the Federal reserve can. Thank you Bernankie

September 17 2012 at 9:10 PM Report abuse rate up rate down Reply
mbzmc

Stronger dollar = lower unemployment.
Why doesn’t someone mention that Berneke is a cause of unemployment?
Every time he increase the money supply energy costs go up along with other commodities. That increases the cost of all goods and services.. Increased costs means less money for hiring. If prices to consumers and businesses are raised just because of increased costs then this type of inflation is very very bad.
I own a small business. Each time Berneke increases or talks of increasing money supply my costs go up. When my costs go up I can’t afford people. Here’s a simpler solution. Go back to a strong dollar policy. Increase my bottom line so I can hire more people. My wife and I are now doing 3 jobs each in our company because costs are up and we are not able to raise our prices to our customers so we work more for less money. When I hire more people there are less unemployed people. Employed people pay taxes, they also spend money.
Lower gas and other commodities costs = more money to spend elsewhere.
Lower gas and other commodities costs = more money for companies to hire.
Why is Bernake deliberately destroying America?
How will increasing our cost of energy and food, basic necessities, help fuel our economy? It will destroy jobs, not create them.

September 17 2012 at 9:38 AM Report abuse rate up rate down Reply
alfredschrader

The banks are not the problem. Wall Street is not the problem. These donot build economic success for a nation.
What does, is industry...steel, concrete, rails, manufacturing, industry. And the way to encourage this is to eliminate taxes and fees on industry so they don't leave the US in droves like they have been.

September 17 2012 at 6:50 AM Report abuse rate up rate down Reply
Irrenmann

Anything Krugman supports is something we ought to run from.

September 17 2012 at 4:23 AM Report abuse +1 rate up rate down Reply
harlson

let's NOT cut the crap on banks NOT wanting to loan money!!
banks currentlry are NOT interested in you unless you have failed! If you are ahead on payment NOT twisted sideways, sure they will loan to you FOR thousands for you to pay them and you can 'take that to the bank'..

September 17 2012 at 2:47 AM Report abuse rate up rate down Reply
marcbarc

Money is loaned to the select few not the majority...you're a huge corporation you get anything you want, your small business they slam the door in your face.

September 16 2012 at 11:32 PM Report abuse rate up rate down Reply
spiritdancermita

Banks are STILL conducting mortgage fraud ~ US Attorneys are Still ALLOWING it.
The U.S. Attorney’s Office for the Eastern District of Michigan [ FALSE CLAIMS ] enforces violations of criminal and civil law, including terrorism and national security matters, serious drug trafficking, violent crime, public corruption, civil rights violations, financial fraud, including mortgage fraud, health care fraud, environmental crimes, and a variety of other violations

September 16 2012 at 10:46 PM Report abuse rate up rate down Reply
bret

Let's cut the crap on how banks don't want to lend money. I work for a bank. In order to get people to borrow money we do everything short of parading up and down in front of the bank with picket signs declaring "Free Money!" which, at current interest rates, it almost is! Right now, people don't want to borrow money. They are uncertain of their jobs, their taxes, Obamacare, the elections in general, Global Warming and the price of gas! None of these fears may be worth worrying about but people are worried and until they are resolved, things aren't going to fly very high.

September 16 2012 at 9:31 PM Report abuse rate up rate down Reply