By Bryan Caplan
Every economist alive should read Scott Sumner’s FAQ on macroeconomics. You give him ten minutes; he’ll give you a fresh, incisive perspective on the world. Highlights:
6. Isn’t the real problem . . . ?
No, the real problem right now is not a “real” problem. The real
problem is a nominal problem. When the growth rate of nominal GDP
falls sharply there is always a severe recession. We have a severe
nominal shock, a problem which has been understood by economists at
least as far back as Hume. At the time, it always looks like the “real
problem” was some symptom of the monetary shock, such as financial
panic. Thus in the 1930s people thought the collapsing financial
system caused the Great Depression, only later did we discover it was
too little money.
9. How can the solution for this mess be the same thing that got us into this mess in the first place?
The solution is stable NGDP growth at about 5% a year, which is not
what got us into this mess. It would be slightly more accurate to say
that it is what kept us out of this mess between 1982 and 2007. We got
into this mess when we stopped providing enough money for modest growth
12. Isn’t monetary stimulus ineffective in a liquidity trap.
No. Temporary monetary injections are never very effective.
Monetary injections expected to be permanent are always effective-even
in a liquidity trap (according to well-known Keynesian Paul Krugman.)
What we need is an explicit NGDP or inflation trajectory, including a
promise to make up for any short term undershoots. This will increase
the credibility of monetary policy.
13. Don’t we need both monetary and fiscal stimulus?
No. Monetary stimulus can make NGDP grow as fast as you like, as we
saw in Zimbabwe. Once the Fed has set monetary policy at the level
expected to produce on target growth, then there is no role for fiscal
stimulus, it can only make things worse.
16. How can I defend the EMH, when so many studies show people are irrational and markets are inefficient?
Market anomaly studies are products of data mining. At some level
this is known by economists, but the problem is far worse than even
most economists realize. These tests are not reliable. People are
often irrational, but it’s not clear that irrationality has much impact
on sophisticated financial and commodity markets. The anti-EMH
position has yet to come up with useful public policy advice, or useful
19. Aren’t you just a monetary crank trying to solve all the world’s problems by printing money?
Yes, but like a broken clock the monetary cranks are right twice a
century; 1933, and today. The other 98 years I am a Chicago-trained,
libertarian, inflation-hawk. Twice a century I put on my Irving Fisher
super-hero suit, and emerge from my deep underground bunker.
Scott still hasn’t answered all my questions to my satisfaction. But who else is even trying?