Let’s start with the Noah Smith bashing:
For example, take the recent row over the year 2013, in which we saw the Sequester and QE3. Did the events of 2013 disprove Market Monetarism? Paul Krugman at one point said the year would be a test of that (fuzzily defined) theory. Mike Konczal said much the same thing. Now Scott Sumner and David Beckworth are saying (surprise surprise) that 2013 demonstrates considerable empirical support for Market Monetarism. Sumner also lays into me for tweeting Konczal’s article (though when I tweet things with question marks, it means I’m skeptical of the thing I’m tweeting; Sumner probably doesn’t know that).
First of all, Noah completely misses the point. Krugman now denies that 2013 was a test. That’s because he lost. That’s what this is all about. But Noah Smith doesn’t mention that embarrassing fact just as Brad DeLong didn’t mention that fact. Hmmm, I wonder why? I never thought 2013 was a particularly effective test, although I certainly think it tells us something. Which is true, it’s not that good a test, but does tell us something. But somehow I come off worse than Krugman in the paragraph. I wonder why?
BTW, Noah Smith is in no position to know what he meant by the question mark. I say he meant the question was not whether Konczal was right about there being a test, but rather that this was about whether Konczal was right about MM failing the test. That’s the way 99% of readers would have read the tweet. If Noah doesn’t see that it’s because he lacks “self-awareness.” In the future no one should ask Noah what he really meant, come to me if you want to know.
A second problem is that the theories themselves, as presented on the blogs, are fuzzy and not well-defined. What does “Market Monetarism” say? Does it say that fiscal policy doesn’t affect the real economy, and that only monetary policy has an effect? Or does it say that monetary policy and fiscal policy both have an effect? Does “Keynesianism” say QE works at the Zero Lower Bound, or not?
There is nothing fuzzy about the MM view of fiscal stimulus. Monetary offset—how complicated is that? The only think fuzzy is the image of MM in the minds of people who have not taken the time to read our views.
And speaking of which, here’s Arnold Kling:
This is uncharitable, but I think of market monetarism as a theory that can only be confirmed, never rejected.*
Look, I have no objection to people not understanding MM. Paul Krugman says he doesn’t read conservative blogs, and based on Brad DeLong’s recent description of MM that seems to be true of him as well. That’s fine. But then don’t talk about us! If Kling wants to say that MM cannot be refuted then he clearly doesn’t know what MM is. We make all sorts of statements, here are a few:
1. The Swiss could depreciate and then peg their currency to the euro. Paul Krugman was skeptical (didn’t say it was impossible, but what skeptical–and if Krugman’s as Bayesian as he says that counts for something.) But the Swiss succeeded.
2. MMs said QE would impact a wide range of asset prices. Liquidity trap Keynesians said it would not. Even DeLong concedes we were right on that point. OK, I take back all the bad things I said about DeLong.
3. MMs said the Japanese could depreciate the yen as a way of raising prices. Krugman was skeptical. Even Smith seems to agree the BOJ did depreciate the yen.
4. MMs predict that NGDPLT will reduce the severity of the business cycle. Not easy to test, but certainly testable over a period of time.
5. MMs say that falling NGDP will tend to lead to financial crises, even compared to severe recessions where NGDP does not fall (say a supply side recession like 1974.) In 2010 the US and eurozone were in a similar position. The eurozone did a tight money policy in 2011 (by almost everyone’s definition–they raised short term rates with the avowed goal of reducing inflation.) NGDP plunged relative to the US. The debt crisis in Europe got worse relative to the US.
6. MMs say a policy of stabilizing NGDP growth forecasts will also tend to stabilize actual NGDP (much more than current policy).
7. Back in 2009 when the Austrians and old style monetarists said inflation and higher interest rates were on the way, we said both would probably stay low. And we were right.
It’s true that far fewer things are testable than we’d like. The plain truth is that most monetary indicators (interest rates, the base, etc) are ambiguous. Never reason for a price or quantity change. We can’t help that fact, but it really has nothing to do with MM per se. Are there any theories out there that claim you CAN reason from a price change?
Kling continues:
Is there anyone I haven’t offended yet?
Exactly my thought. 🙂
PS. The “self-awareness” comment is a private joke.