There’s a reason why Scott Sumner is one of the most influential economists in the post-crisis era. Actually, there are many reasons, as his must-read blog posts in recent years demonstrate. No one does a better job of explaining monetary policy, or pointing out how so many otherwise intelligent folks stumble on this crucial subject. He has a knack for explaining what should be clear but isn’t. He soon remedies any confusion, and he pulls it off by making his observations appear like revelations. But often he’s simply telling it like it is. But sometimes the clear, unvarnished truth can be revolutionary and more than slightly refreshing. Judge for yourself. Here’s his latest… yet another classic:
Here’s a typical AP story:
The boldest move left would be a third round of large-scale purchases of Treasurys. But critics say this would raise the risk of future inflation. And many doubt it would help much, because Treasury yields are already near historic lows.
Let’s play around with this story. How else could we convey the information:
The boldest move left would be a third round of large-scale purchases of Treasurys. But critics say this would raise aggregate demand. And many doubt it would raise aggregate demand, because Treasury yields are already near historic lows.
But then the conjunction “and” would be bad grammar. You’d want to say “on the other hand.” How about this:
The boldest move left would be a third round of large-scale purchases of Treasurys. Supporters say this would raise expectations of future inflation, and lower real interest rates. And many doubt it would help much, because Treasury yields are already near historic lows.
Again the “and” is wrong, because if it does raise inflation expectations then the liquidity trap argument is bogus. And how about fiscal policy:
The boldest move left for Congress would be a payroll tax cut. But critics say this would raise the risk of future inflation. And many doubt it would help much, because workers would simply save the tax cuts.
Of course one never sees reporters talk this way. Never. Not once. One never sees reporters discuss both monetary and fiscal policy from the perspective of the standard AS/AD model, where monetary and fiscal stimulus are just two ways of boosting AD. No, they seem to have some other model in their minds. What is that model? Your guess is as good as mine. It’s not new or old Keynesian. It’s not new classical or RBC. It’s not Austrian or monetarist or MMT. But it has become the standard model for talking about stimulus.
Am I being picky here? Surely a bit of confused reasoning in the press would not actually impact important policy decisions involving $100s of billions of dollars. OK, so some reporters don’t understand that fiscal stimulus is just as inflationary as monetary stimulus. It’s not like you see the GOP leadership bashing the Fed for even thinking about providing additional monetary stimulus at zero cost to the budget, and then weeks later turning around and signalling an intention to massively cut payroll taxes.
Oh wait . . .