Scott Sumner  

Four things I believe

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Here are four things I strongly believe to be true:

1. The Great Recession was caused by tight money at the Fed, and other major central banks. Period. End of Story.

2. Fed policy almost never strays far from the consensus view of professional economists.

3. To prevent the Great Recession, Fed policy would have had to stray far from the consensus view of professional economists.

4. Ergo, professional economists (as a group) caused the Great Recession.

I won't try to justify the first couple of assertions here; I've provided lots of evidence in hundreds of other posts, here and at TheMoneyIllusion.

A recent survey of 257 business economists showed:

A majority of respondents (53%) indicated they believe monetary policy is on the right track, but 39% felt that monetary policy was too stimulative.
The first thing that struck me is that they didn't even report the third choice, money is too tight. I had to go to the raw data to find out that 6.6% supported that view, while 2.1% had no opinion. Of course now that we are this far along in the recovery, it's not obvious that more stimulus is needed. So let's go back to the bottom of the recession, mid-2009, when any idiot could have told you that more monetary stimulus was desirable. What did economists think back then?
Nearly 70 percent of business economists believe that monetary policy is "about right," up from 63 percent in March and 56 percent a year earlier. Another 25 percent view the Federal Reserve's current policy stance as too stimulative, up slightly from March. Respondents are split on whether policy should remain on hold (49 percent) or become more restrictive (45 percent) over the next six months.
Again, no discussion of how many favored easier money. At most 5%, and probably closer to 3% (assuming 2% undecided.) In contrast, in mid-2009 100% of market monetarists believed that money was too tight, and of course in retrospect we were right.

So there are basically two groups of economists, those who agreed with the Fed, and those who thought Fed policy was too stimulative. If the Fed had done what was necessary to prevent the Great Recession, they would have had to move far out of the mainstream. As it was, their views were already better than average. It is simply unrealistic to expect a major conservative institution to take radical positions on important public policy questions. I'm not even sure it's desirable for powerful institutions to make radical decisions. Instead, we need to fix the economic profession, so that economists as a group favor monetary policy regimes that provide slow and steady growth in nominal spending.

Which reminds me of Bertolt Brecht:

Had leaflets distributed in the Stalinallee

Which said that the people

Had forfeited the government's confidence

And could only win it back

By redoubled labour. Wouldn't it

Be simpler in that case if the government

Dissolved the people and

Elected another?

OK, so my belief in the "wisdom of crowds" is hereby suspended for one blog post, while I temporarily become a Stalinist.

Comments and Sharing

COMMENTS (11 to date)
Lorenzo from Oz writes:

I am not entirely sure professional economists constitute a "crowd" in the requisite sense, as there are strong professional placement issues operating, acting so as to shape responses.

Kevin Erdmann writes:

I'm with Lorenzo. Revealed preference. If there was a question about the housing market, just as with Fed policy, I bet they wouldn't even bother to publish the number of economists who would say that houses are underpriced. Yet most would own a house.

A committee is much different than a group of forecasters is much different than a market.

Rajat writes:

Lorenzo +1

vikingvista writes:

But the Fed, as currently structured, would have to have taken positive action to prevent the money supply from becoming too tight. In other words, the Fed would have to have responded to an event. Surely that event goes beyond your "end of story", and is worthy of economists' considerations.

dlr writes:

Your argument here seems inconsistent with your previous post that defined causation pragmatically; i.e. of the myriad of things that would produce a different result, which could most easily be changed? Changing the consensus of mainstream economists? Sounds like a Sisyphean task. Things that seem easier:

(1) Creating a single but viral sunspot in markets, such that the existing (flawed) Fed reaction function happens to produce a good monetary result. This is "stop inflation now!" or Bush telling people it is their duty to spend after 9/11. Therefore, the cause of the recession was not tight money but insufficient pep talking.

(2) Enacting (perhaps costly) Fiscal Policy that isn't subject to monetary offset, given the imperfect existing monetary policy views of professional economists and thus the Fed, who will passively accept but not proactively create nominal stimulus in a crisis. Therefore, Congress caused the recession.

(3) Creating a financial system with a large enough (and perhaps costly) capital/flexibility buffer such that it is highly unlikely to spark an initial flight toward safe savings, which then risks entering the unfortunate portion of professional economists' monetary policy reaction functions. Therefore, the Basel committee and other regulators caused the recession.

If it's not clear, my real critique is with the argument you embed in #2. It may be true that central banks rarely stray from mainstream consensus, but (1) this is a polluted sample (mainstream consensus during a crises is often difficult to pin down and can amorphously follow the central bank rather than lead); (2) Even if "rare," a rogue central banker is still a much more likely to happen than a rapid, technocratic change in an entire profession. I think you have switched your definition of causation from pragmatism to extreme optimism.

Is Draghi following economists' consensus right now? Consensus in which country? Is it obvious where consensus was on backstopping the entire money market and commercial paper industry or protecting AIG lenders and counterparties (it doesn't matter whether you support these actual moves)?

I think you were to begin with. The actual Fed and the process of electing FOMC members is the most movable fulcrum, here.

JoeMac writes:


Concerning your sentence "1. The Great Recession was caused by tight money at the Fed, and other major central banks. Period. End of Story."

I think you should spend more time explaining how to prove this or falsify this.

For example, let's say you were given a research grant to allow you to devote all your time for the next 5 years to study your theory of the recession.

What research would you conduct? You rarely make this clear. What research would you engage in to prove that the "subprime mortgage housing crisis" did not cause the recession.

Don Geddis writes:

@JoeMac: Sumner already has thousands of posts over at, covering the evidence in favor of tight money from the central bank being the primary factor in the recent recession. He was already blogging in real time, as various natural experiments (e.g. fiscal austerity from the sequester at the start of 2013) allowed for concrete predictions and comparisons of different macro theories.

Sumner has also already done extensive study and research about the Great Depression in the 1930's. Following Friedman's Monetary History, once you understand the money supply causes of the GD, the explanation for the Great Recession follows almost immediately.

If you're asking for details of why "the cause" was tight money and not subprime mortgages, you probably need to get caught up on all the work that Market Monetarists have already done, explaining how nominal shocks can have real effects. (And maybe also, "monetary offset", aka "the Sumner critique".)

Or perhaps you'll prefer this answer instead: it is not just the data from the last few years that proves tight money (instead of mortgages) caused the recession. Instead, you start with ALL macro data from the last few centuries (or more), and you develop an overall macroeconomic theory for how the different pieces of the macroeconomy interact. And you validate that with many different historical economic episodes (Great Depression, stagflation in the 70's, Great Moderation 1980-2005, stock market crash in 1987, dot-com crash in 2000, Japan's lost decade[s] with huge fiscal deficits, the ECB/Eurozone vs. the Fed/US during the GR, etc.). And only after you have a well-established macro theory, do you then look at the specific example of 2008. It is the overall theory (including possible counterfactuals) that explains why "the cause" of the GR was tight money, not mortgages.

Jeff writes:

Scott, I think you're underestimating how much influence the Fed, and particulary Bernanke, had. If he had come out strongly for easier money, and particularly for an NGDP level target, the conversation would have changed immediately. Economists both inside and outside the Fed would have produced papers examining the idea, and many of them would have been supportive.

I think what we witnessed is a profession that has no confidence in its own analysis. As you have pointed out many times, most of what you say about money being too tight is what most macroeconomists claimed to believe before the financial crisis. But as we saw, they didn't really believe what their models told them. I submit that they really didn't know what to do, so they fell back on that old time Keynesian religion. What was needed was a strong leader making the case that money was too tight. Even though I think you were right in 2008 and still are, in 2008 you just did not have the stature within the profession to command a big audience. Milton Friedman could have, if he were still alive, and Bernanke could have by virtue of his position. I don't think there's anyone else who could have moved the profession quickly enough to have made a difference.

Scott Sumner writes:

Lorenzo, Yes, they certainly fall far short of the crowd that composes the "market."

vikingvista, It depends how you define "action."

dlr, You said;

"Your argument here seems inconsistent with your previous post that defined causation pragmatically; i.e. of the myriad of things that would produce a different result, which could most easily be changed? Changing the consensus of mainstream economists? Sounds like a Sisyphean task."

Actually this seems far easier than the other options that you suggest. The profession has already evolved a bit since 2009. But I accept your point that it is merely one way of thinking about causation.

You said:

"Is Draghi following economists' consensus right now?"

My claim is that he is not straying far outside the eurozone consensus.

Joemac, See Don's response.

Jeff, You said:

"I think what we witnessed is a profession that has no confidence in its own analysis."

I'm not sure about that, but even if true you need to consider the fact that Fed officials are often drawn from that profession. So that makes their ignorance a problem, doesn't it?

J.V. Dubois writes:

I think that the main problem here is a category mistake. Terms like "monetary policy" or "tight" and "stimulative" are just artificial category and I believe that nowadays they have negative usefulness. Instead the questions should be something like this:

1) What do you think are inflation expectations?
2) What do you think are nominal income expectations?
3) Given current stance of central bank do you think they will meet their goal?

If put this way there is no chance anybody could do category error. They may be ignorant about some facts - like what are market expectations of certain economic parameters - but it should never occur that for somebody monetary policy stance means level of interest rates while for somebody else it is inflation, wage growth, NGDP growth etc.

ThomasH writes:

Possibly correct about the "causes" of the recession (2008) but less so about the response to it. It was not professional economists who opposed more and sooner QE. (Remember House Republicans who opposed the "bailout" of banks?) Gov. Rick Perry is not a professional economist. Very few professional economists have been among the inflation hawks.

And, to be somewhat fair to the Fed, it was not unreasonable in 2009 to expect a larger combined federal and state deficit that would have made the actual, inadequate, QE less inadequate.

You may be on stronger grounds regarding the ECB's response to the Recession, but even there it seems to be politicians not economists who have opposed more monetary stimulus from the ECB.

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