Christensen’s “postmodernist mind fuck”

I have now been blogging since early October last year and I truly enjoy it. Most of my readers seem to be happy about what I write and I believe that most of my readers and commentators are quite Market Monetarist sympathies. However, there is one exception – lefty blogger Mike Sax. Yes, I called him lefty – I don’t think Mike would not disagree with this (if he called me a libertarian that would not make me angry either…). Mike is actually reading the Market Monetarist blogs and I think he pretty much understands what we are talking about. I will readily acknowledge that despite the fact that I probably disagree with 99% of what he has to say about economics and monetary theory.

Today I ran into a comment Mike wrote a couple a days ago about the debate about fiscal policy between on the one side the New Keynesian (Old Keynesians??) and on the other side the Market Monetarists  (and John Cochrane). Even though Mike is extremely critical of  my views I actually had quite a lot of fun reading it.

Here is Mike Sax (and yes, believe it or not the name of his blog is “Diary of a Republican Hater”…):

“If you want to get the endgame of this whole market monetarist phenomenon I say put down Scott Sumner and check out Lars Christensen. His post is called simply Market Monetarist, and indeed the very name of market monetarism is actually his coinage rather than Scott.

During the interminable tangent-a rather amusing three ring circus that Sumner led-Lars wrote a post called “There is no such thing as fiscal policy.” This is a pretty radical attack on fiscal policy. From Cochrane claiming that fiscal policy can’t work-till his bout face today-and Sumner saying it can never be as effective as monetary policy in reviving demand-we have Lars claiming it simply doesn’t exist.

Whoa! I guess if it doesn’t even exist we can’t use it. Ever. It’s another postmodernist mind fuck evidently. What are Cochrane and Christensen going to say to each other now? I will suggest that if you want to make any sense of market monetarism read Lars. You get it much more concisely and to the point if nothing else.

Now here is his point. In a barter economy, he tells us, there can be no fiscal stimulus. Why is this? Because, “As there is no money we can not talk about sticky prices and wages. In a barter economy you have to produce to consume. Hence, there is no such thing as recessions in a barter economy and hence no excess capacity and no unemployment. Therefore there is no need for Keynesian style fiscal policy to “boost” demand.”

Fiscal policy can redistribute income but not effect demand.

“in a barter economy fiscal policy is a purely redistributional exercise, but it will have no impact on “aggregate demand”

http://marketmonetarist.com/2012/01/18/there-is-no-such-thing-as-fiscal-policy/

Ok but maybe the title of this post is wrong. It shouldn’t say there is no such thing as fiscal policy just fiscal stimulus.

The reason we believe that fiscal policy can impact demand is because of money illusion.

“for fiscal policy to influence aggregate demand we need to introduce money and sticky prices and wages in our model. This in my view demonstrates the first problem with the Keynesian thinking about fiscal policy. Keynesians do often not realise that money is completely key to how they make fiscal policy have an impact on aggregate demand.”

What NGDP targeting is meant to do is to take away money illusion by taking away this misleading effect of the velocity of money.

“Under NGDP level targeting M*V will be fixed or grow at a fixed rate. That means that we is basically back in the Arrow-Debreu world and any increase in G must lead to a similar drop in D as M*V is fixed.”

The goal of NGDP targeting therefore as Sumner, Lars, David Glasner, et al, conceive it is a return to in effect a barter economy. Money is therefore for them kind of like the root of all evil or at least original sin. Like for old fashioned philosophers appearance was the veil that led us to misapprehend true existence, so for the market monetarists, money is the veil that makes us misapprehend the truth of the economy.

Yet Lars does admit that fiscal stimulus can work or seem to work due the the Circe of money.

“lets say that the central bank is just an agent for the government and that any increase in G is fully funded by an increase in the money supply (M). Then an increase in G will lead to a similar increase in nominal income M*V. With this monetary policy reaction function “fiscal policy” is highly efficient. There is, however, just one problem. This is not really fiscal policy as the increase in nominal GDP is caused by the increase in M. The impact on nominal income would have been exactly the same if M had been increased and G had been kept constant – then the entire adjustment on the right hand side of (3) would then just have increased D.”

Yeah let’s say that. Actually I think this accurately describes the actual historical record of the Fed between the time of Marriner Eccles and the 1970 when Milton Friedman started whispering sweet nothings in Nixon’s ear.

To be sure Christensen claims that this effect is still misleading as it’s the printed money-monetary policy-that does the real heavy lifting. It would have been exactly the same had the supply of money been increased and government spending been kept constant.

In a way these claims by Lars actually straddles the line with MMTers who do actually argue that it makes no difference whether the Fed or Treasury prints the money but where they go from here is obviously more or less diametrically opposed to what the MMers do with it. The Market Monetarists vs. The Modern Monetary Theorists… Talk about a battle royale.

Again though Lars should call this “There is no such thing as fiscal stimulus.” It seems to me though that even if you believe that fiscal stimulus is a fiction it may nevertheless have proved to be as the belief in God once was.

For what’s curious is during the time we believed fiscal stimulus we had the Keynesian era. Since we gave it up we have had an anti-Keynesian era. During this anti-K ear we have seen the wages of median Americans stagnate. Is this all coincidence? What do you think?

In any case Sumner’s oft repeated argument that the fiscal multiplier is roughly zero because any fiscal stimulus will be followed by monetary tightening according to Lars depends on the policy of the Fed. It wasn’t true during the Keynesian ear. However in this anti inflation era, post Volcker and of the Taylor Rule-the much lauded Great Moderation-it is true of how the Fed has in fact acted. This doesn’t prove that fiscal stimulus doesn’t work but rather the Fed is off the rails and probably could use the kind of reforms Barney Frank wanted for it. Namely not ending the Fed as Ron Paul says but rather ending its “independence.””

Frankly speaking, Mike of course have no clue about economics, but he is 100% right – I should of course have said that there is no such thing as fiscal stimulus (and not policy), but then he would have had nothing to write about. Mike don’t know this, but I hate everything “postmodernist” so he succeed with his low blow.

Anyway, let me say it again fiscal policy is not important. People like Paul Krugman (and Mike Sax) think that we need massive fiscal stimulus to take us out of the slump in Europe and the US and some think (for example European policy makers) think that the only solution is fiscal austerity. I think both parties are wrong – lets fix monetary policy and then we don’t have to worry (too much) about fiscal policy (other than balancing the government budgets in the medium to long run…). This is why I find it so utterly borrowing to discuss fiscal policy…

PS Mike mentions Battle Royal…he is unaware that that is my favourite Japanese movie.

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15 Comments

  1. Well be still my beating heart! I am suitably humbled and honored Lars. Serioulsy.

    ” Even though Mike is extremely critical of my views I actually had quite a lot of fun reading it.” I’m critical of it but that doesn’t mean I don’t enjoy it I should say and that I don’t feell I’ve learned from it and even Sumner-his attitude pisses me off and takes me away from any sympathy with him

    You however sir, had my sympathy before this comment,

    ” Mike of course have no clue about economics, but he is 100% right – I should of course have said that there is no such thing as fiscal stimulus (and not policy), but then he would have had nothing to write about. Mike don’t know this, but I hate everything “postmodernist” so he succeed with his low blow.”

    The postemodernist mindfuck line was a quip I don’t know about low blow exactly-I was certianly gratified by today’s title! But really your claim that I have “no clue about econonics” I consider a far lower blow. I mean you had admitted that,

    ” Mike is actually reading the Market Monetarist blogs and I think he pretty much understands what we are talking about. I will readily acknowledge that despite the fact that I probably disagree with 99% of what he has to say about economics and monetary theory.”

    If you ackowedge I do read your blogs which I do-and Sumner as well and some of the others-and you admit I pretty much know what you are talking about in what way is it fair to say I have “no clue about economics?”

    See I was liking you Lars till that last line. But that makes you sound so Sumner-like. You know condenscending, dismissive of anyone outside the (Chicago) Groves of Academe.

    Ah well. I appreciate that you ” Even though Mike is extremely critical of my views I actually had quite a lot of fun reading it.”

    I’m glad you enjoyed it. I enjoyed your enjoyment and enjoyed this post. I will continue to read you and urge others to do the same.

    What you have to understand is that if I disagree with you that doesn’t mean I have no regard for you. You Market Monetarsits do provide a lot of education I’ll say that for you.

    By the way since this post I wrote a few more on the subject of MMT vs Market MOnetarism. Ultimately I’m a guy who seeks more than a guy with all the answers.

    http://diaryofarepublicanhater.blogspot.com/2012/01/its-on-tiime-for-market-monetarist-mmt.html

    http://diaryofarepublicanhater.blogspot.com/2012/01/market-monetarist-mmt-smackdown-20.html

    Of course you have given me another post topic! Bless you Lars Christensen!

    Reply
  2. Alex Salter

     /  January 31, 2012

    “Money is therefore for them kind of like the root of all evil or at least original sin. ” Editorializing aside, he’s not far off the mark. From the standpoint of business cycle theory, money IS the “root of all evil.” Mises, Hayek, Yeager, Selgin, and White all emphasize that money is the loose joint in the economy. When the money market has a cold, every other market sneezes. Scott Sumner realizes this too, which is why he advocates an NGDP target –it effectively neutralizes the possibility of nominal fluctuations to lead to real misallocations.

    Reply
  3. Lars I tried to respond to your-in my mind-very generous article. Yet I see it was not posted. Any reason for that?

    Reply
  4. No Mike, I was just reading your comment. I don’t know what happened, but let me try to restore it.

    Reply
  5. Its there now…see above…

    And ok, I take it back – you have a bit of a clue about economics…

    Reply
  6. Axel, yes Mike understood that we think that “money is therefore for them kind of like the root of all evil or at least original sin.” – and I know that I don’t have to convince you about that. After all you have the best professors for that anywhere in the world;-)

    Reply
  7. Here is the new post. Thanks Lars

    Could not have done it without you

    Lars Christensen writes a post about me http://diaryofarepublicanhater.blogspot.com/2012/01/lars-chistensen-writes-post-about-me.html

    Reply
  8. @Mike Sax: I have to congratulate you on picking out those two articles. I was an ABCTer until Scott Sumner made me doubt in his interview with Russ Roberts, but it was Lars who pretty much effected my conversion with those two articles. That said, I think you’re being a bit harsh on Scott. Perhaps it’s easier because I agree with him in general, but I’ve usually understood his attacks on others as being quips rather than actual attacks.

    Reply
  9. PrometheeFeu, I am happy to have helped convert you fro ABCT and I also think Mike is far to harsh on Scott. He is a nice gentleman.

    Reply
  10. I do get a little harsh on Scott but that’s because he always treats me with so little sympathy at Money Illusion-it’s my way of getting back at him-LOL.

    I will say I have learned from reading him but you Lars do have a way of boiling it down so we get to the point. Scott sometimes gets stuck on arguments that are tangential and don’t advance his cause as much as he thinks.

    Reply
  11. Mike, I think the difference is that Scott have had to make these arguments much longer than me. Scott started out in the 1980s – I got my master degree in 1995. Furthermore, working in the financial sector – where economists are required to have a view on everything all the time – makes it easy to let out some steam.

    Reply
  12. Actually now that i think about it what I hold against him is his claim that he wasn’t interested in my blog. If he could leave a comment on it maybe that might mend some fences between us-LOL

    Reply
  13. Ok one more post-LOL Lars Christensen admits I know something about economics http://diaryofarepublicanhater.blogspot.com/2012/01/lars-christensen-admits-i-know.html

    Reply
  14. Alex Salter

     /  February 2, 2012

    <=====Still an ABCTer :-)

    Reply
  15. Mark, Lars, I owe you my applause! You both are amazing, I’ve been stalkering your blogs for quite a while and can’t stop admiring your writing! Keep posting things as often as you can and please the readers with your witty thoughts!
    Walter, mp3 ringtone maker

    Reply

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