Jason Smith — Did the ACA decrease unemployment?

It is true that a lot of things went into effect at the same time, but using a typical Keynesian multiplier of 1.5 accounts for about half of the boom in the total number of jobs and the biggest increase in openings was in health care. That's a pretty consistent story.

Information Transfer Economics
Did the ACA decrease unemployment?
Jason Smith

Brian Romanchuk — NGDP Futures Convertibility -- Unworkable?

Wonkish and only interesting if you are aware of the proposals and controversy. But if you are, it's a must-read. Sumner and Woolsey are economists and don’t have a good trip on finance and how it works, as Mike Sankowski has pointed out previously. Brian follows up on the latest proposal.

Bond Economics
NGDP Futures Convertibility -- Unworkable?
Brian Romanchuk

Jason Smith — Does market monetarism exist in reaction to fiscal stimulus?

Wherein Jason Smith figures out what Scott Sumner is up to.

Information Transfer Economics
Does market monetarism exist in reaction to fiscal stimulus?
Jason Smith

Matt Bruenig — Cutting Poverty Is Super Easy: A Response to Sumner

I am not really sure what Scott Sumner is all about these days. Many years ago, he was like “monetary policy should utilize an NGDP target” and people were like “that’s an interesting thought.” But now, he’s kind of gone into mission creep mode where he comments on things that he’s not so knowledgeable on.

One of the more glaring versions of this creep is his armchair commenting on wealth inequality. Again and again, he has called wealth inequality data “nonsense on stilts” because it ignores the fact that wealth inequality is just a life-cycle phenomenon. This is straightforwardly false, but to know it’s false, you have to actually be familiar with the wealth data and ambitious enough to run some age-controlled wealth inequality calculations. Sumner is neither of those things.

More recently, Sumner’s mission creep has him opining rather strangely about poverty in America, with a focus on yours truly. The post is such a complete mess that I will utilize a line-by-line approach to explaining where it has gone wrong.

Cutting Poverty Is Super Easy: A Response to Sumner

Matt Bruenig

Frances Coppola — Sumner on Piketty

Frances schools Scott Sumner. Unlearning Economics also comments.

Coppola Comment
Sumner on Piketty
Frances Coppola

Update:

Explaining Piketty: inequality and the financial crisis

Scott Sumner — The First Fundamental Law of Capitalism

Sumner on Piketty, chapter 2.

Econolog
The First Fundamental Law of Capitalism
Scott Sumner | Professor of Economics, Bentley University

John Carney — Teaching the market monetarists about money

What is money = how does it matter? The pragmatic criterion of truth lies in the difference something makes.

For example, when it is reported that US corporations are holding several "trillion dollars in cash," this doesn't mean cash deposits or physical currency but cash equivalents.

Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet. Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. Another important condition a cash equivalent needs to satisfy is that the investment should have insignificant risk of change in value; thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be. These highly liquid financial instruments that are so near their maturity and that there is significant risk of change in value due to fluctuation of interest rates are known as cash equivalents. Although cash equivalents are not cash, they are generally presented on the statement of financial position together with cash using the title "Cash and Cash Equivalents"— Wikipedia

CNBC NetNet
Teaching the market monetarists about moneyJohn Carney | Senior Editor
((h/t) Stephanie Kelton on FB)

Guest Post: Ralph Musgrave — Scott Sumner, MMT, and irrational expectations

Scott Sumner, MMT, and irrational expectations

Ralph Musgrave

Sumner and MMTers don’t see eye to eye. He criticises MMT on his blog from time to time. And Randall Wray had a go at Sumner recently here and here. Anyway, I want to demolish an idea put by Sumner (and indeed many other economists). It’s that rational expectations / Ricardian nonsense. Bill Mitchell described Ricardianism as an idea from La-la land, and quite right. And Joseph Stiglitz said “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.”

One nonsensical element in “rational” expectations is that economists like Sumner ascribe to households and firms expectation type ideas that are sometimes completely IRRATIONAL. Plus, more often than not, those economists don’t provide any empirical evidence that households and firms actually adhere to those ideas or expectations. A classic example of this is where Sumner claims that helicopter drops will be ineffective because everyone expects the policy to be reversed at some stage via tax increases. As he puts it, “the injections are not expected to be permanent”. Thus the private sector will supposedly hoard it’s helicopter money so that it can pay those taxes. Thus, so Sumner claims, heli-drops have no effect.

Now if government behaves in a rational manner, it won’t withdraw those “injections” at any old random point in time: the injections will be left in place as long as they’re needed. In fact the only reason to withdraw the injections, i.e. run a surplus, is when the private sector gets too confident, and inflation looks like becoming excessive. Put another way, if government behaves rationally, it will withdraw surplus monetary base from the economy only when that withdrawal controls inflation rather than actually reduces demand in real terms, or reduces incomes in real terms. So the typical private sector agent, if they’re 100% rational, and 100% clued up on central bank operations, deficits, etc will not hoard helicopter money. Quite the reverse: they’ll up their spending.

Of course the idea that the typical household or small firm is “100% clued up on central bank operations, deficits, etc is straight out of cloud cuckoo land. But it’s something of that sort that pro-Ricardian economists presumably have in mind when they refer to “rational expectations”. So let’s run with this cloud cuckoo land idea for bit. (I’ll abandon the idea shortly.)

Another point that 100% clued up private sector agents will understand is that it’s impossible for the private sector in the aggregate to get rid of monetary base until the government / central bank machine decides to withdraw it from the private sector. Thus the average or typical private sector entity will realise that when they do up their spending, they won’t actually lose their stock of monetary base because everyone else will be upping their spending as well, so the net effect is that the typical private sector entity’s stock of base remains constant.

Conclusion so far: 100% rational households and firms will not hoard their stock of helicopter money to such an extent that heli-drops are ineffective.

Of course, and to repeat, the idea that the typical household or firm is 100% clued up on central bank operations, deficits, fiscal stimulus, etc is straight out of La-la land, to use Bill’s phrase. And the empirical evidence seems to be pretty much in line with common sense, namely that when households and firms notice an increase in their incomes, they immediately up their spending by a significant amount. Certainly the evidence in relation to tax rebates is that households spend a significant proportion within a year. E.g. see here, here and here.

Of course tax rebates are not exactly the same as distributing helicopter money. But they’re FAIRLY SIMILAR. Plus at least I’ve provided SOME SORT OF evidence to back my points, which is more than most Ricardian enthusiasts do.

And finally there’s a technical point on monetary base I’d better address, as follows. I referred above to non-bank private sector’s stock of base, which conflicts with the popular belief that non-bank private sector entities don’t have access to monetary base. The reality is that if I get helicopter money in the form of a check for $X, I deposit that at my commercial bank, which in turn has it’s account at the Fed credited. And I can do whatever I want with that money. So in effect I do have access to monetary base: it’s just that some commercial bank acts as agent for me when I want my stock of base paid to someone, or if I want to withdraw it in the form of physical cash.

Scott Sumner mentions Warren Mosler

Mike Sax points us to a Scott Sumner post commenting on Warren Mosler today.

Diary of a Republican Hater
Sumner and Warren Mosler on Forward Guidance
evilsax

L. Randall Wray — The Circular Logic Behind Scott Sumner’s Claim That the Fed’s Policy is Contractionary

I came across, and commented on, a piece by Scott Sumner a few days ago. (DID SCOTT SUMNER FIND MMT’S ACHILLES’ HEEL? ) He claimed he had proof MMT is wrong: if the Fed doubles the base then ipso facto nominal GDP must double and ipso facto MMT is wrong. Well, the Fed tripled the base and nominal GDP didn’t budge. In any case, even if that had worked, it is not evidence against MMT. All Sumner did was to string together a series of non-sequiturs.

Sumner’s also behind an inane proposal that the Fed ought to use its demonstrated impotence to target nominal GDP. Right. I wish the Chairman would reduce the earth’s wobble instead.

A reader thought I’d been too hard on him. But in his latest piece, he’s removed all doubt. What puzzles me is that some people seem to take this seriously. I don’t get it.

New Economic Perspectives
The Circular Logic Behind Scott Sumner’s Claim That the Fed’s Policy is Contractionary
L. Randall Wray | Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri–Kansas City

Mike Sax — Sumner is at it Again After Latest Job Numbers

I guess it falls to me to have to respond as no other Keynesians of any stripe seem to want to take a whack. He's clearly all but begging for a response.

[Scott Sumner:] "Yesterday I reported that RGDP growth in 2013 was running ahead of the pace for 2012, using either the official figures or the new Philly Fed GDPplus estimates.

Today we received another strong jobs number, which means that employment gains in the first ten months of 2013 are running at over 186,000/month, versus less than 183,000/month last year and 175,000/month in 2011."

"Given the predictions of the Keynesian model, anything even close to 2012 results would have been a win for MM. The Keynesian model predicted a sharp slowdown from the higher income/cap gains/dividends taxes, payrolls taxes, sequester, government shutdown, etc, etc. But we are running ahead of 2012, and even if the last two months are weak we will be essentially even."

"And yet on the Keynesian side of the aisle I hear a deafening silence. Where is the discussion of this great “experiment?” Could it be that academics and pundits only like to discuss experiments that validate their priors?

Dairy of a Republican Hater
Sumner is at it Again After Latest Job Numbers
evilsax

Warren Mosler to me via email:

Yoy takes out seasonals

 http://www.moslereconomics.com/wp-content/graphs/2013/11/real-gdp-yoy.gif

Mike Sax — Wray vs. Sumner on Interest Rates, the Monetary Base, Prices, and NGDP a Case of People Talking Past Each Other

Mike Sax intermediates Randy Wray and Scott Sumner "debate."

Dairy of a Republican Hater
Wray vs. Sumner on Interest Rates, the Monetary Base, Prices, and NGDP a Case of People Talking Past Each Other
evilsax

Would be nice to have a serious debate between the MM and MMT cohorts as leading contenders in non-conventional policy. But they would have to understand each others' positions to avoid talking past each other.

Randy Wray — Did Scott Sumner Find MMT’s Achilles’ Heel?

Randy explains why not.

New Economic Perspectives

Did Scott Sumner Find MMTt’s Achilles’ Heel?

L. Randall Wray | Professor of Economics and Research Director of the Center for Full Employment and Price Stability, University of Missouri–Kansas City

Mike Sax — Sumner on the Achilles Heel of MMT

What Scott Sumner doesn't seem to want to understand is that MMT favors fiscal policy based on functional finance over monetary policy involving interest rate setting. His scenario depends on interest rates only and doesn't take into account what MMT actually is about, namely, the replacement of monetary policy run by the central bank ("monetarism") with fiscal policy under the direction of the political authority ("fiscalism"). Instead, Sumner only argues within his own paradigm, the assumptions of which MMT rejects.

In the US, fiscal policy is the constitutional responsibility of Congress, with appropriations originating in the House, subject to the veto power of the president. The president gets to submit a budget, which Congress is under no obligation to accept.

There are political reasons for preferring a fiscal approach to a monetary approach as being more in consonance with democratic governance. Moreover, interest rate setting by the central bank at the apex of financial system smacks of a command economy.

Warren Mosler recommends setting the interest rate at zero and issuing Treasury securities of no longer than 3 mo duration. This obviously means that MMT is unconcerned by the size of the monetary base.

Why? Because the amount of reserve don't affect bank lending, which is influenced by demand from creditworthy borrowers. Banks will charge a competitive risk-weighted rate.

If the cb sets the interest rate at zero, then banks will have a lower cost of lending and can lend less expensively, which they will tend to do in a competitive market. This will favor investment, e.g., permanently low long term rates for residential RE.

MMT regards monetary policy as ineffective in controlling inflation, which result either from supply shortages, e.g., the Arab oil embargo, or demand outstripping the capacity of an economy to meet it. If the government deficit spends to the degree this creates or contributes to excess demand at full employment, then inflation will result. The obvious answer is to cut spending and increase taxes to reduce demand.

MMT is fiscalist, holding that demand is the key fundamental and the chief objectives are full employment along with optimal output and relative price stability.

MMT is anti-monetarist, holding that the size of the monetary base is essentially irrelevant, as QE has shown, the quantity theory has been discredited and interest rates are at best a shotgun, whereas fiscal policy can be tightly targeted. In addition, interest rate setting involves picking winners and losers.

Rather than using interest rates to conduct policy, MMT would use fiscal policy in accordance with the sectoral balance approach and functional finance, along with the MMT JG as a price anchor.

It is important to note that the fiscal balance is different from the budget balance due to variability of tax receipts and automatic stabilization across the cycle. Thus the fiscal balance is set endogenously. Therefore, automatic stabilization and tax rates become the focus in allowing relatively automatic adjustment of the fiscal balance across the cycle.

Diary of a Republican Hater
Sumner on the Achilles Heel of MMT
evilsax

Maybe the Modern Money Network could arrange a debate between Scott Sumner and Warren Mosler or one of the MMT economists.

Steve Randy Waldman — Why Scott Sumner should love the debt ceiling

I think Scott Sumner is the Svengali behind all of Ted Cruz’s antics. He must be. It’s the only sensible explanation.

Interfuidity

Why Scott Sumner should love the debt ceiling

Steve Randy Waldman

See also evilsax, Scott Sumner on the GOP's Cunning Plan

First, Scott Sumner is an ideological economist that doesn't have a clue about business, finance, money and banking, central bank and Treasury operations, or how the world actually works. Like all Austrian-based ideologues including Paul Ryan and ted Cruz Scott Sumner lives in his own fantasy world. That anyone takes him seriously is a joke and shows the low level of collective consciousness. Read Mike Sax's post on this.

I am also surprised that SRW plays along with Sumner's proposal and comes up with a (remote possibility) of how a default could work. To some extent Peter Radford does too.

People don't seem to understand that there aren't thousands of gnome that write Treasury and the Fed by hand and can be directed how to prioritize payments. The payments system is automated and reconfiguring it would take time. In that time, some government obligations — interest payments, invoices that are due, and transfer payments — would not be made on time. That is a technical default. The bankers have already explained this. 

This is fooling around with the USD, the world's preferred reserve currency. Sixty-two percent of trade uses the USD. This has global implications that are not lost on US competitors. I was just listening to a Chinese newscaster on NPR yesterday explain how China is a very competitive nation and to them winning means that the opponent must fail. It's zero-sum as far as their way of thinking goes. Another article I read was about how the GOP is accomplishing what Osama bin Laden set out to do but could not.

Even the kerfuffle so far, after the same drill i 2011, is undermining confidence in the leadership of role of the United States and the US government as a functioning institution. There is already widespread sentiment in the world that the US is a rogue nation. Now the perception is rising that the US is also going crazy. US soft power is crumbling, which means that to reassert itself in the world, the US is likely to resort to hard power to prove a point. That will just prove the point that the US is rogue nation whose leadership is crazy.

Ralph Musgrave — Scott Sumner and Jeffrey Frankel worry about the national debt.

Scott Sumner and Jeffrey Frankel worry about the national debt.

At the end of this recent article Scott says “Attempts to jump-start the economy with demand-side fiscal stimulus merely cause the government to pile up more debt, with any growth effects being offset by the Fed.

And Jeffrey Frankel, also in a recent article, has similar worries about national debts. Frankel (surprise surprise) teaches at Harvard. I use the word “teach” advisedly: it’s debatable as to whether those who “teach” at Harvard impart knowledge or ignorance. After all, the roll-call of those with – er – a less than profound understanding of economics at Harvard is a long one: Rogoff, Reinhart, Niall Ferguson, etc.

Anyway, for the billionth time I’ll try to explain why refusing to let the debt expand is futile – a point that is obvious to MMTers, I think.

Private sector net financial assets (PSNFA).

Fiscal stimulus involves government borrowing $Xbn, spending it into the private sector and giving those it has borrowed from in the private sector $Xbn of bonds. The Fed may then print money and buy some or all of those bonds. Either way, the net effect is that PSNFA rises by $Xbn.

That gives rise to the well known “hot potato” effect: that is, the larger is PSNFA, all else equal, the more the private sector will try to dispose of it, or “spend” it. But the private sector can’t dispose of PSNFA because one person disposing of cash or debt means there must be a recipient. Net effect: demand rises.

The alleged problems with PSNFA.

Alleged problem No1. The bigger the stock of PSNFA, the more likely the private sector is to go on a spending spree and cause excess inflation.

Answer: that possibility is an INEVITABLE RESULT of giving households freedom of choice as regards what they spend per month. I.e. even if PSNFA were a quarter its present level, it’s still possible the private sector suddenly has a fit of irrational exuberance and causes excess inflation.

Alleged problem No2. Where a country has a large debt and interest rates rise, the country has a big problem.

Answer: no it doesn’t. The increased interest does not apply to EXISTING DEBT. It only applies to debt reaching maturity. Now what do you do if someone will only lend to you at an excessive rate of interest? It’s easy: tell them to bu*ger off.

It’s especially easy when you’re a monetarily sovereign country. That is, if PSNFA looks like being reduced excessively because would be lenders want too much interest, then the relevant country can keep PSNFA up to the required level by printing money. Problem solved.

And for the benefit of Neanderthals who react to the phrase
“print money” with the word “inflation”, excessive inflation will not occur where PSNFA is kept at the right level.

Of course actually keeping PSNFA at the right level is not easy. But then there is a high degree of uncertainty surrounding ALL THE OTHER TOOLS that governments and central banks use for trying to control demand: interest rate adjustments, fiscal measures, etc. And worse still, no one really knows at what level of unemployment inflation takes off (NAIRU or the so called “natural” level of unemployment). So the uncertainties surrounding PSNFA are no worse than all the other uncertainties.

Ralph Musgrave | Guest Post

Data, Indexes and GIGO

Here is comment I put up at Asymptosis that stands alone and is worth consideration here.

***************************************

Inflation can't be measured precisely since there is no observable price level. The price level is an index and an index is an arbitrary figure that could be arrived at through different paths and rationales.

What is important is the rate of change of a constructed price level, so if the index is figured the same way each period, then a rate of change for that index can be computed and used to measure actual changes in purchasing power in contrast to the apparent rate that volatility of some goods suggests. While the price level constructed is an arbitrary figure, it's action is not as long as measurement of the variables over time is reliably accurate.

However, data collection in the case of economic data is not the result of direct observation as in the natural sciences either. Economics is a social science and the data is much looser. Some important economic data is anecdotal rather than observational.

Inflation is a bogus measure when applied beyond the limits of the data, which is most of the time historically and even today in countries without adequate institutional arrangements for data collection and processing. Inflation rates extending back centuries in historical studies are usually presumed to be true. On what basis?

The US is a leader in the field of economic data, and to suggest that its agencies get the data wrong or misconstruct it (Sumner), or manipulate the data for political purposes (Jack Welch) is to suggest that the data upon which macro analysis is founded is garbage. Ergo, macro analysis is GIGO. The question is, How true is that? It's a question I have been pondering for some time. It seems to me that a lot a macro analysis may be GIGO, such as Reinhart & Rogoff turned out to be on critical analysis.

Then there's Robert Eisner's work on national accounting, which also suggests that data is misconstructed and misinterpreted based on the institutional construction and interpretation of national accounting, e.g, in comparison with firm accounting. As a result the reported fiscal balance may not represent the actual fiscal stance, and so politicians are misguided in relying on it to formulate economic policy.

Is there a pernicious tendency to take reported figures for constructs like price index and fiscal balance as exact when they are only estimates or best guesses? Enquiring minds would like to know.

Same goes for medical studies for medications and procedures, as anyone who has had the occasion to question one's physician on specific recommendation and knows what questions to ask comes to realize. Are consumers generally too trusting of physicians recommendations? My conclusion from experience is yes.

There's a lot of flying by the seat of the pants that gets swept under the rug of conscious awareness in the presumption of a degree of exactitude that is non-existent.

John Aziz — Minsky, the Lucas Critique, & the Great Moderation

Looks at Ben Bernanke, Scott Sumner, and J. M. Keynes as well. If you read this, don't overlook the link to Brad DeLong's debunking of misconceptions about Keynes's assert that in the long run we are all dead.

Azizonomics

Minsky, the Lucas Critique, & the Great Moderation

John Aziz

Scott Sumner explains market monetarism

Read it at The Money Illusion
What is market monetarism?
by Scott Sumner
(h/t Mark Thoma)

Still clueless.