I would love to know the opinion of Duncan, Chris, Paul and all you other Keynesian-inspired economists about this from Scott Sumner
Suppose your family’s balance sheet has shrunk. How do you rebuild it? I suppose you could consume less and/or work more. Now suppose you are a country and your balance sheet has shrunk, how do you rebuild it? Wouldn’t the answer be the same?
If I faced a depleted balance sheet the last thing I would do is go on vacation, or switch from a full time job to a part time job. If anything, I’d want to start working overtime. But maybe this commonsense view is wrong. Consider the following observation from The Economist:
“And as investors’ panic recedes, so credit markets are beginning to function. This will not be enough to spur a vibrant recovery in America, where households must painfully rebuild their balance-sheets.”
I can’t quite tell what The Economist is saying here. Are they saying a vibrant economy (which I assume means full employment) would make it harder to rebuild balance sheets, or are they saying that one can’t have a vibrant economy at the same time as one tries to rebuild balance sheets? I do see how attempts to rebuild balance sheets could depress velocity, and if the central bank was foolish enough to leave the money supply unchanged then this could depress economic activity.
Does Sumner not realise that in a closed economy if everyone tries to consume less the ones who try to work more don’t have anyone tobuy their services? Surely he must.
I think the clue to his (IMHO) mis-thinking lies in the last sentence above: Sumner has an utterly unshakeable faith in the central bank to increase economic activity. Full stop. It doesn’t matter what the balance sheet distress might be, what structural problems the economy may have, what real shocks and media stress the investing and spending public might be under – no. All that you need is a central bank determined to carry out a ‘sufficient’ amount of open market operations at the highest heights of finance – and economic activity will follow.
You know, like it has followed in the UK, where we have produced £200bn or 15% more monetary base, and economic activity is still . . . falling. The neat clockwork world in which a central bank’s actions are able to shock the real economy into expecting inflation never fails in Sumnerland. No matter than your clients your suppliers your forecasters your bankers are all depressed and expecting order to fall: news that the Central Bank is determined – really determined, I tell you – to hit an NGDP target means that none of this wimpy Keynesian stuff will ever matter.
What a fine world we live in. There need never be a fall in aggregate demand, ever, no matter what gigantic turmoil hits the financial sector. Because central bank actions can always guarantee a sufficient level of aggregate demand. Celebrate.
I think his position is made clear in some of the voluminous comments below*: if you are convinced that money-pushing can produce whatever aggregate demand you want, then sure you won’t believe in Keynesian demand stimulus. Trouble is, in this country we’ve printed about 15% of national output and it has carried on falling. No doubt we could have done it with more conviction.
*You will notice few dissenting voices. This is because they tend to be pre-censored