Scott Sumner on Past Mistakes

I wish more people in government would read Scott Sumner’s blog:

I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They new that monetary policy could reflate.  And yet . . .

Weeks went by, then months, then years.  Somehow they never connected the dots.

“Monetary policy is already highly stimulative.”

“There’s a danger we’d overshoot toward too much inflation.”

“Maybe the problems are structural.”

“There are green shoots, things are getting worse at a slower pace.  The economy needs to heal itself.”

“Consumer demand is saturated.  Even workingmen can now afford iceboxes and automobiles.  We produced too much stuff in the 1920s.”

And the worst part was the way political news kept slipping into the financial section.  Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc.  In the 1930s the readers didn’t know what came next—but I did. 

Thankfully we can learn from their mistakes.

Yes, but can we act on the lessons we draw from them?

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13 thoughts on “Scott Sumner on Past Mistakes

  1. Back then, too, there were people who knew better and who were trying to raise hell over it. But those with power who defend the status quo never bend until the status quo has become broken or untenable, unfortunately. I don’t imagine this time will be any different, though I hope it will.

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  2. The changes we need to make will most likely be forced on us from external realities we can no longer ignore. The rest of the world will start putting pressure on us to change and develope smart economics rather than smart power, even when they don’t practice smart economics — they will demand we do it, though — there’s too much to lose if America crashes.

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  3. The lesson is more monetary stimulus will help, or giant fiscal stimulus.

    Maybe the best lesson would be to raise the price of gold. But since gold doesn’t exist as a standard, now we just need to have the Federal Reserve create inflation.

    That is the lesson. Don’t be timid.

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    • And associated with that is that inflation isn’t as effective for us given our fiscal profile. Ie, it’s not just a matter of how much we’ve borrowed but also how much we intend to borrow in the future. We can inflate our way out of past debts but not future ones.

      That’s a very important angle that libs don’t seem to get. In fact, a fair bit of the problem is libs’ misperception of the time frame angles inherent in this issue.

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      • I don’t think liberals misperceive the problem. They would argue that loosening monetary policy (and fiscal policy), and the increased inflation that would bring, would help jump start growth, raising revenues and making the long term debt problem easier to handle.

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  4. Between the summer of 1929 and the spring of 1933, prices in this country declined by 27%, or about 8.5% per annum; there has in the last 3 years been no deflation, but small year to year increases in prices. In the previous era, the Federal Reserve refrained from open market operations until March of 1932; in our own, the Federal Reserve has done two large sets of open market operations and may do a third. The economy ceased contracting two years ago; the economy contracted at a mean rate of 10% per year during the previous era.

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    • I don’t think Scott (or anyone) is arguing that this mini-depression is as big at the great depression or that the Fed’s response has been as bad. He’s arguing that its similar in nature and so has been the Fed’s response.

      Scott is actually an advocate of a specific monetary policy innovation that would make monetary stimulus more effective and less inflationary, but that’s sort of beside the point here that what we have done is clearly neither effective nor inflationary and yet every single regional Fed governor is still voting against doing more. Why is that?

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      • It is not similar in nature and Sumner has hurled all sorts of accusations at Dr. Bernanke (that he ‘threw away the macroeconomics text book’, that Fed policy is dedicated only to increasing the profits of banks, &c). The guy is doing a jim dandy job of making himself look like an attention seeking policy entrepreneur.

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          • Do you realize how implausible is the thesis that Dr. Bernanke is unfamiliar with or disregards the implications of his own academic work?

            We had a 4% decline in domestic product over a the space of a year, not a 27% decline over 4 years; we have had a 4% increase in prices since 2008, with no period of deflation lasting longer than a quarter or two; we did not have a 25% decline in prices over 4 years. The Federal Reserve allowed in 1929-32 a slight decline in the size of the monetary base; Dr. Bernanke’s Federal Reserve has increased the size of its balance sheet 2.5 fold. There has been a 44% increase in the supply of M1 since May of 2008, not a decline in M1, as there was in the previous period. How are these ‘similar’ policy responses?

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