Belated write-up of AEA/AFA meeting, Part I
Update: I accidentally posted an earlier draft of this post rather than the intended final draft. I’ve restored the intended final draft. Changes are listed at the end of the post.
Two weeks ago I had great fun in Denver spending three-days attending seminars and lectures given by the great and good of academic economics. Since then, I’ve been holding it all in my head precariously, until I write some things up. (Writing is the process whereby I permit myself the pleasure of forgetting.) I expect that what follows these words will be long, sprawling, and disorganized. But for what it’s worth.
A note — The AFA gave me a $1500 grant to attend. That was kind of them. Thanks.
This was the first time I’d attended an economics conference. But in my early adolescence, I did frequent another sort of hotel-bound gathering, and the resemblance was uncanny. The AEA is basically a Star Trek convention in suits. It’s a gathering of the same sort of geeks. The same combination of earnestness and awkwardness marks off and distinguishes the attendees from normal business travelers. Star Trek conventions have their celebrities, here’s George Takei, there’s Nichelle Nichols. The AEA has its celebrities as well: the Nobelists, the famous economists from Chicago, Harvard, and MIT whose papers you have read (or you pretend to have read). Like a kid at a Star Trek convention, I had great fun at the meetings. Still, there were undercurrents that made this affair feel less innocent — so many PhD students nervously interviewing for jobs; the networking and earnest introductions; the faint, polite stench of status competition. At a Star Trek convention, everyone wants to meet George Takei. No one is trying to become him.
For me, the highlight of the meeting by far was lunch with Scott Sumner and Scott Wentland. We had a grand conversation. Readers of both blogs might imagine the authors of The Money Illusion and interfluidity to be on opposite sides of a great divide, but it didn’t feel like that at all. The quality of mind I value in other people and strive for in myself is a kind of nimbleness, a fluidity of mind. The world is too complex for any particular narrative to be perfect. Good judgment, I think, comes from the ability to slip between and among stories, to understand the ways different accounts might be true, to marshall evidence and reasoning on both sides and then assign weights to a superposition of competing, sometimes contradictory ideas, all of which play a role in ones choices. Sumner and I understood our different perspectives very quickly, and took one another seriously, though we’d probably weight accounts very differently. Further, though I suspect he will bristle a bit at the characterization, within the economics profession I view Sumner as an ideologue in the very best sense. There’s both a moral and a methodological component to that. Sumner is driven, scandalized even, by what he sees as a profound and preventable failure of monetary policy. He’s shocked that the rest of his profession (which he’d previously considered himself to be in the middle of) has shrugged this off, that economists don’t get in their guts how awful an abdication of policy has occurred. So Sumner has made it his full-time preoccupation for two years to communicate and persuade, working to change his colleagues’ intuitions about what is acceptable and what is not. He has a reasonable (though not unassailable) model of how the economy works, and a coherent vision of a policy regime that would be wise under that model. Recent experience suggests that implementing Sumner’s policy regime, under which the monetary authority both commits to and is able to target NGDP, would be eased by tools that are institutionally or politically unavailable under current arrangements (e.g. NGDP futures markets, negative interest on reserves, perhaps more flexibility with respect to asset purchases). Rather than working within existing constraints, he has made lobbying to alter them part and parcel of his campaign to shift the intuitions of his colleagues with respect to the conduct and duties of monetary policy.
I’m not entirely on board with Sumner’s project. I have longstanding concerns about status quo monetary policy. I’m not sure NGDP is a sufficient statistic for a decent economy. I share some of Arnold Kling’s concerns that monetary policy may be unable to solve information problems with respect to patterns of production, consumption, and income, along with old Austrian-ish concerns that monetary expansion can lead to counterproductive distortions towards “dumb” interest-rate sensitive investment. I’m not sure that the Fed credibly could target NGDP, even with the expanded toolkit Sumner proposes, and I worry about the fiscal costs and economic consequences if markets test and manage to break a drifting NGDP peg. Sumner offered some interesting rejoinders. He pointed out that the worst distributional effects of crisis policy — the various bailouts and subsidies intended to put a floor under outcomes for “systematically important” financial institutions, the panicked money-flows post-Lehman — might have been avoided if NGDP-targeting monetary policy were sufficiently credible. If the path of NGDP is certain, it is possible that no institution would be too big to fail. The idea is that, whatever micro-level complications and litigations and reorganizations the failure of a major bank might provoke, if at a macro-level real GDP and employment remain sufficiently OK, nonintervention would become politically and morally thinkable. (Of course, you can argue this is wrong, that big bank failures cascade so disruptively that pegging NGDP would be insufficient to prevent a collapse of real production, so policymakers would continue to intervene. But note the congruence of Sumner’s view and Rajiv Sethi’s.) Sumner dislikes and generally opposed bank rescues, but he pointed out that one way to look at the subsidies to banks is government undoing costs inflicted by bad policy. Nominal debt is contracted around expectations about nominal growth, and by failing in its duty to ratify those expectations, monetary policy failure was responsible for the increased debt burdens and reduced asset values that harmed banks. Therefore, some compensation might be justified. That’s an interesting argument, but it turns on what expectations we deem reasonable ex ante. The Fed has never committed to NGDP level-targeting, so perhaps banks ought to have been expected to manage leverage cautiously and to be tolerant of fluctuations. Moreover, the argument can’t explain or justify the distribution of intervention during the crisis. If government is responsible for changes in the real debt burden associated with failure to stabilize NGDP, then there ought to have been compensation for indebted households and nonfinancial firms. But subsidies and interventions went disproportionately to banks, and disproportionately to just a few banks.
Despite some misgivings, I think Sumner’s project is serious and interesting, and we could do a lot worse. It’s not exactly what I would push, but there’s plenty of overlap and I wish him well. At a high level of abstraction, I find Sumner’s “center right” views to resemble the “far left” post-Keynesian Chartalists, or “MMT-ers”. Both Sumner and the MMT-ers choose a macro target and a policy instrument, and suggest that micro problems will work themselves out if the consolidated government/central-bank is vigilant about supporting the target. MMT-ers choose (net) fiscal spending as their instrument, while Sumner chooses monetary policy under an unconventionally expansive definition. Some MMT-ers would target unemployment (often at zero, via a direct government jobs guarantee). But others argue that the government should deficit-spend at the level that supports GDP without provoking inflation, which is not too different from Sumner’s NGDP target. (Sumner argues that, at reasonable growth rates, NGDP targets are likely to be met by sustaining real GDP rather than by inflation.) Am I alone in seeing the similarities?
Like Andy Harless (but see Sumner’s rejoinder), I think the distinction between fiscal and monetary policy has grown very blurry. Monetary reserves are now interest-bearing obligations, ultimately paid for by the state. Some Fed “liquidity facilities” involved issuing interest-bearing obligations to buy up private sector assets (at prices above those offered in private markets). That sounds like fiscal policy to me. While it can be argued that conventional open-market operations only transform the maturity of government obligations, by anchoring the yield curve and increasing the fraction of debt that can be used directly as a medium of exchange, conventional monetary policy may increase the willingness of private agents to hold US debt, reducing constraints on spending and enabling expansionary fiscal policy. Fiscal policy and monetary policy are intertwined, and it’s not clear to me that either dominates the other. (There’s an aphorism, I think Tyler Cowen’s originally, that “the monetary authority moves last”. That doesn’t persuade me. Timing of endogenous phenomena tells one very little about causality. Timing of moves in a game tells us very little about which player has the advantage.) Ultimately, I’ve come to think that the main differences between fiscal and monetary policy are institutional. Decisions about what we call “fiscal” and “monetary” policy decisions are made in different ways by dissimilar entities. Those decisions can reinforce one another, or they can offset and check one another. Some people prefer to emphasize the role of fiscal authorities for “democratic legitimacy”, while others champion action by an “independent central bank”, on the theory that isolation from overt politics will yield technocratically superior choices. You can accept these preferences on face, or more cynically argue that some groups expect one or the other decisionmaking body to execute policy in ways that that favor preferred interests. Regardless, at a macro level, Sumner’s NGDP targeting monetary policy and MMT-ers’ GDP-supporting fiscal policy look similar to me. Both perspectives arouse my sympathies but provoke misgivings. First, I’m not sure either instrument is up to the task of stabilizing the target over a long horizon, and worry that attempting but failing to stabilize may prove riskier than conventional muddling through. Second, I think the micro-level stuff really does matter. In order to ensure both high quality resource allocation and distributional legitimacy, I think it matters very much what is paid for with fiscal expansion, and precisely how monetary policy is to be conducted. (I offered a proposal a while back that now looks like a bizarre hybrid of Sumnerism and Chartalism, which tries to address micro-level concerns.)
I’ve been remiss in not saying much about Scott Wentland, who was actively engaged in our conversation but is less clearly identifiable with a position. Wentland describes himself as a devil’s advocate, but I’d characterize him more as a satanic Socrates — he’d listen, carefully reinterpret a comment, then politely punctuate his review with a challenging question. Still, for all the finance and economics I encountered at the conference, Wentland is the only person whose work suggested a way to actually turn a profit. Wentland presented a paper at the conference. I missed the presentation, but read the paper after the fact. It is empirical work very nicely done, and it tweaked the antennae of my inner, amoral arbitrageur. I now think of registered sex offenders as roving Groupons for home flippers. Wentland and his coauthors provide strong evidence that you could make a lot of money persuading an ex-cellmate to move near a nice, four bedroom home in rural Virginia, and then to move away after you’ve bought the home.
[Update: Wentland et al simply documented the effect on home prices and liquidity of nearby registered sex offenders, in a careful and empirically sophisticated way. The "arbitrage" is my poor attempt to say something clever about it. However, commenters inform me that the scheme I'm implying mirrors an old and well-known strategy with racial overtones, a parallel which I did not intend to draw. Thanks to commenters Kindred Winecoff and TGGP for pointing this out.]
Anyway, those are my musings on lunch. I’ll take a breather and leave my comments on the lectures and seminars I attended to future posts.
- 23-January-2011, 6:50 p.m. EST: Restored intended final draft — somehow I mistakenly posted an earlier draft! This draft differs from the previously posted draft:
- The current draft makes clear that Scott Sumner generally opposes bank resucues, despite the argument that some bank subsidies can be viewed as compensation for bad policy
- The current draft adds a line re Scott W’s “devil’s advocacy”
- The current draft omits a gratuitous joke re fraud at banks;
- The current draft adds a comparison between Sumner’s views and those of Rajiv Sethi
- The current draft includes more links in general
- Probably some other minor differences
- 23-January-2011, 7:20 p.m. EST: Added update re “blockbusting”, Thanks to commenters Kindred Winecoff and TGGP.
- 25-January-2011, 7:10 p.m. EST: Corrected mssplling of “Chartalists”, many thanks to supercommenter JKH for pointing out the error!