Scott Sumner: evaluation

Transcript context

…Let me give you an alternative hypothesis, and tell me what you think of it. This is for China. Their banking system is radically undercapitalized. They keep on shoveling money into it. A lot of their credit channels are broken. They believe a more activist monetary policy won’t work through credit channels. They do in fact know they could get higher price inflation by doing something like printing up currency, but they don’t feel they can control that process because they don’t have a good theory of how their own monetary base relates to their own price level. And they’re afraid to do that, somewhat justifiably, and that’s why they keep on suffering under deflation. Okay. Good question. I think you could have made a similar argument about Japan, say, 12 years ago, right before Abe took office, and Japan had suffered a long period of deflation. There were problems in the banking system and so on, so it was easy to view the Japanese situation in some sense as structural and to blame it on whatever demographics or whatever you want to point to. Abe ran for office on a platform of inflation. He promised higher inflation, and by the way, that’s worth thinking about because of all the recent discussion about how unpopular inflation is. Roosevelt in the 1930s also ran on higher inflation and was very popular on that platform. Abe runs for office in 2012 on a platform of high inflation — sorry, not high, but say up to 3 percent a year — and things do improve in Japan under his changes in monetary policy. I think that that’s a piece of evidence in favor of the view that these problems that look structural actually have a deeper cause, and that is a failure of monetary policy to achieve the desired objective. A lot of times — I know that the mistake theory is unpopular among intellectuals — certain policy is in effect because policymakers just don’t understand things. It’s much more fashionable to view dysfunctional policies like tariffs as reflecting, say, special interest politics of one sort or another, but I think monetary policy is different. I think monetary policy is one area where mistakes actually do occur fairly often, and you get outcomes that governments actually don’t want because they’re not thinking about the situation in the correct way. And even the policymakers themselves have often failed to really understand the nature of the problem. It’s sort of an Alice in Wonderland world where things look one way but are very different. Like, high interest rates look like tight money and low interest rates look like easy money, but often, low interest rates are actually reflective of a previous tight money policy that’s created deflation. In that upside-down world where it’s hard to really understand the meaning of policy indicators, it’s easy to make mistakes. As you know, there’s currently a debate now between Keynesians and what are called Neo-Fisherians about whether low interest rates are easy money or tight money. You’d think a basic question like that would have been settled decades ago in the field of economics. If it’s that confusing to even high-level theorists, why should we expect policymakers at central banks to always get these decisions right? I have a very different question, and this is from a reader. I’m paraphrasing: Scott Sumner’s mantra “Never reason from a price change” is perhaps his best contribution to economic thinking. Are you the one who came up with this, and when did you first use it?…

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