Scott Sumner  

Is Larry Summers reasoning from a price change?

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Michael Darda pointed me to the following statement from Larry Summers (in reply to Ben Bernanke):

Successful policy approaches to a global tendency towards excess saving and stagnation will involve not only stimulating public and private investment but will also involve encouraging countries with excess saving to reduce their saving or increase their investment. Policies that seek to stimulate demand through exchange rate changes are a zero-sum game, as demand gained in one place will be lost in another. Secular stagnation and excess foreign saving are best seen alternative ways of describing the same phenomenon.
The middle sentence sure looks like reasoning from a price change. Whether currency depreciation is a zero sum game depends entirely on the reason why the currency depreciated. In fairness to Summers, he probably had in mind currency depreciation caused by non-monetary factors. In that case, it may well be a zero sum game.

Nonetheless, I'm not willing to entirely overlook the problem here, for two reasons:

1. The examples of currency depreciation that are currently on everyone's mind are the recent sharp declines in the yen and the euro. In both cases, expansionary monetary policy almost certainly played a major role. One reason we know this is that the respective exchange rates tended to depreciate on statements made by monetary policy officials, and were often accompanied by new policies such as aggressive QE. All you have to do is look at the reaction of global equity markets to realize that monetary stimulus by major economic powers is very much a positive sum game, at least when the global economy is depressed.

2. Summers referred to "policies that seek to stimulate demand through exchange rate changes," which almost all readers would naturally assume applies to monetary policy. Furthermore, this claim occurs in a post that insists that fiscal stimulus is the only solution to "secular stagnation." And of course (like most progressives) when Summers talks about fiscal stimulus, he doesn't have in mind tax cuts to generate growth in the private sector.

When viewed in context, I would guess that about 99% of readers would have assumed that Summers claim applied not just to non-monetary currency depreciation (say due to more government saving) but also to the recent currency depreciation that occurred in Japan and the Eurozone.

Either Larry Summers is mistakenly reasoning from a price change, or he is not doing a very good job in communicating his actual views.

PS. What if Summers claimed monetary stimulus was ineffective due to the zero interest rate bound? In that case monetary stimulus would also fail to depreciate a currency. And that's pretty clearly not the case with the yen and the euro.

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COMMENTS (13 to date)
Nick Bradley writes:

yeah I think that's what he's saying, with the caveat that it needs to result in a "high pressure economy", which is what he's calling full employment these days.

It's unclear to me at what point it's better to do fiscal policy instead of monetary policy.

...would the Fed have needed to purchase the entire national debt and all MBS to end the Great Recession without fiscal stimulus? I have no idea.

foosion writes:

tax cuts to generate growth in the private sector

I'd imagine most progressives would support tax cuts which appear to generate growth, such as the recent payroll tax cut, while opposing tax cuts that do not appear to generate much if any growth, such as eliminating the estate tax or cutting top rates.

Nick bradley writes:

Most would foosion, as long as they're pro growth.

For example, suspending payroll taxes would generate a lot of demand. Cutting rates for people with a low marginal propensity to consume (the wealthy) does not

Scott Sumner writes:

Nick, You asked:

"It's unclear to me at what point it's better to do fiscal policy instead of monetary policy."

Not doing monetary policy means doing barter. I know what you mean, but there is no such thing as not doing monetary policy. It's just a question of which monetary policy is best. Refraining from QE is not "not doing monetary policy." It's not even less monetary policy, just different.

Here's why this is important. The Fed could have prevented the Great Recession without doing any QE, keeping the monetary base at only 6% of GDP. The huge QE purchases occurred because the Fed's implicit NGDP target was too low.

Foosion, Cutting the top rate would be even more effective at producing growth than cutting employee side payroll taxes (which was completely ineffective.)

Nick bradley writes:

Right, semantics.

Something I've not understood about NGDPLT is that for the Fed to make good on it, they'd have to purchase a ton of assets.

Nick bradley writes:

I think Brad Delong once said that to defend the 6% NGDP target in 2009 would have required "quantitative easing on a pan-galactic scale"

Brian Donohue writes:

@Nick, I never understand what people who argue that we should 'do fiscal policy' mean.

It's 2015, and the deficit this year is still almost $500 billion. In what way have we not been 'doing' fiscal policy on a grand scale all century?

ThomasH writes:

Summers was very clear about what he thinks "expansionary policy" is: governments undertaking activities with positive NPV. I begrudge him talking about it as if it were (or ought to be) some extraordinary, quasi socialistic, "Keynesian" policy where in reality it is just normal investment theory that is NOT spooked by deficit fears. True the US and even more Europe ARE sooked by deficit fears, but that's no reason for Summers to pander to that mentality.

Gabe Newell writes:
Nick bradley writes: I think Brad Delong once said that to defend the 6% NGDP target in 2009 would have required "quantitative easing on a pan-galactic scale"

The more committed the FOMC is to NGDP level targeting, the less work they actually have to do.

Also, quantitative easing on a pan-galactic scale would have had less of a negative impact on the real economy than what the Fed actually did, or what people imagine pan-galactic scale quantitative easing might have done.

Once people believe that nominal GDP expectations are not anchored, bad things ensue.

Nick bradley writes:

You know what I mean: fiscal and monetary stimulus to address the output gap.

Kevin Erdmann writes:


2Q to 2Q NGDP growth was under 3%, inflation expectations were collapsing, home prices were off 25% and delinquencies were rising, and a major investment bank was the latest in a series of failures, and in Sept. 2008, the Fed decided to hold rates at 2% even though forward markets expected a decrease, followed by paying interest on reserves shortly after.

The idea that any QE would have been necessary before these fateful decisions is highly questionable. It was necessary after these decisions.

Scott Sumner writes:

Nick, It would not have required any QE. Check out Australia, where the base is 4% of GDP, and they had no recession in 2008-09. You don't need QE when you have a sound policy. QE is done when money has been too tight. If the Fed had targeted NGDP at 5% growth then rates would not have fallen to zero and no QE would have been needed.

Thomas, You said:

"Summers was very clear about what he thinks "expansionary policy" is: governments undertaking activities with positive NPV."

I don't think anyone opposes programs with positive NPVs, it's just that people disagree as to what those programs are. I am much more skeptical than Summers about the government's ability to build infrastructure efficiently.

Gabe, Exactly.

Nick, You said:

"You know what I mean:"

Yes, and that's why I tried to correct you. You think the monetary policymakers did too little, and hence fiscal stimulus was needed. I think they did the wrong policy, and hence fiscal stimulus would not have helped.

When a captain steers a ship off course it's not because he did too little, it's that he steered in the wrong direction. Adding more fuel won't help.

Kevin, Good point. The Fed was not at zero during ANY of the key policy errors of 2008. The "not enough QE" claim is a myth, they steered us in the wrong direction.

charlie writes:

does Larry define "excess savings"?

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