Sumner: An Embarassment of Riches
I could devote a dozen posts to Scott Sumner’s latest essay-length entry. But I’ll limit myself to the highlights:
Stop worrying about inflation.
…Laffer is too good an economist to say anything blatantly false, but the entire tone of his WSJ piece is that high inflation is just around the corner…
One reason that I was so discouraged by this piece is that Laffer
was one of the “new monetary economists” of the early 1980s who
understood that traditional monetarism had important defects. Rather
than focusing on the money supply, Laffer suggested that we needed to
look at forward-looking market indicators such as the price of gold.
Today we have an even better forward-looking indicator–TIPS spreads.
And it is very clear that investors are not worried about high
inflation. Not now, not in 10 years, and not in 20 years.
Krugman doesn’t really believe in the liquidity trap.
Many Keynesians assume that monetary stimulus is ineffective during a
liquidity trap. Krugman definitely does not believe that, indeed he
specifically argues that only conventional monetary policy tools are
ineffective in a liquidity trap. He acknowledges that unconventional
tools (such as an inflation target) might be highly effective, but also
that they might be politically unacceptable.
Krugman, ants, and central banks.
As I read Krugman, his attitude seems to be something like the following (which is my interpretation, not his words):
“Ah, what a pity it is that these conservative central banks aren’t
willing to commit to a modest amount of inflation. That would be the
easiest way to boost AD, and the least costly. But as they aren’t
willing to adopt effective policies, we can assume that monetary policy
is ineffective. Now let’s move right along and look at fiscal policy.”
At this point Krugman directs his moral outrage at the conservative
knuckleheads in Congress who won’t accept anything bigger than a measly
$800,000,000,000 stimulus package, which he thinks is woefully
In my view Krugman is mixing science and advocacy in a very
misleading and inappropriate way. When he evaluates central banks, he
seems to take a deterministic, scientific, and clinical attitude, as if
studying a colony of ants… Central banks are
assumed to be impervious to public pressure. On the other hand his
stance toward fiscal policy is much more normative. Now he is an
advocate, he’s part of the game, passionately calling for more
stimulus. But I don’t see how this makes any sense. If we are going
to take a deterministic view of things, it seems likely that Congress
is also far too conservative to implement the sort of spending that
Krugman advocates. Indeed, hasn’t that already been shown? Couldn’t
one just as reasonably say: “Since Congress clearly won’t do what it
takes, we must fall back on the Fed as our only hope for the sort of
stimulus that the economy needs.”
Krugman’s not shrill enough.
Krugman is 100 times more influential than I am. With his NYT column,
and his ideological allies in the White House, he is arguably the most
influential economic pundit in the world. And he is also known (for
better or worse) for his moral outrage over perceived injustices. In
many cases I think he goes a bit over the top. But here it is just the
opposite. I am outraged over Krugman’s lack of outrage over current
Laffer is under-rated.
When I was at the University of Chicago during the late 1970s most
economists seemed to think Laffer was a bit of a crackpot. I recall
one famous macroeconomist disproving the Laffer curve using a Keynesian
model. I can only imagine the contempt in which he was held at salt
water universities. But guess what happened next…
Every single developed economy adopted Laffer’s ideas. They all cut
marginal tax rates for the rich. Most cut rates very sharply. Even
Sweden cut its top rate from 87% in 1980 to 50% in 1995, before
bouncing back up to 56%. Did Laffer get any credit? No, and I think
this shows how the economics profession as a whole is still in deep
denial about what occurred.
Why even economists under-estimate the dangers of high taxes.
[H]igh MTRs have a much more powerful effect on efficiency than most
economists imagine, but the supply-siders are up against three problems:
1. Tax cuts for the rich seem unfair.
2. The supply-side effects are counter-intuitive (most people with
40 hour/week jobs can’t envision changing their hours worked because of
tax rates.) Another counter-intuitive (and long run) effect of high
MTRs is to make our health care system much more costly.
3. Many of the most important incentive effects are very long term
(such as the impact on the incentive to acquire more human capital.)
Tax cuts: Reagan and Thatcher were only the messengers.
I don’t know if liberals are even aware of the fact that all countries,
including Sweden, were doing the same thing at the same time. This
revolution would have occurred even if Reagan and Thatcher had never
been elected. Rather they reflected a change in the intellectual
atmosphere surrounding public policy formation. A change in what you
might call the zeitgeist. Pragmatic policymakers all over
the world (on both the left and right) looked at the evidence and
reached a consensus that high tax rates for the rich were
There’s so much thought-provoking content in this post, I really have
to wonder if Sumner is on the wrong side of the pedagogical Laffer
curve: Sometimes readers learn less when you teach more. Then again,
I’ve always preferred profs who teach to the top of the class…