Scott Sumner as a normative philosopher of language

by on December 20, 2010 at 7:25 am in Economics, Political Science | Permalink

Recently Scott Sumner visited us and I pondered the following.

Let's say that at the peak of a financial crisis, the central bank announces a firm intention to target a path or a level of nominal GDP, as Scott suggests.  If everyone is scrambling for liquidity, and panic is present or recent, and M2 is falling, I wonder if the central bank's announcement will be much heeded.  The announcement simply isn't very focal, relative to the panic.  A similar announcement, however, is more likely to work in calmer times, as the recent QEII announcement has boosted equity markets about seventeen percent.  But for the pronoucement to focus people on the more positive path, perhaps their expectations have to be somewhat close to that path, or open to that path, to begin with.

(Aside: there is always a way to commit to a higher NGDP path through currency inflation, a'la Zimbabwe.  But can the central bank get everyone to expect that the broader monetary aggregates will expand?)

The question is when literal talk, from the central bank, will be interpreted literally.

Much of the time, but not always.  Keep in mind that few informed people take the President literally.  Hardly anyone takes Congress literally.  Some people take the Fed literally but not always.  Literal speech, interpreted literally, is hardly the political default.  (One possible implication is that often a Fed cannot do much better than the political system it is embedded in, due to how people understand speech.)  Most people don't take their spouses literally either, or their children.

I view Scott as claiming that the world would be better off if the central bank would talk more literally.  If the central bank talks more literally, they will be (can be?) understood more literally as well.  Scott is a theorist of literality

In general I am sympathetic to this view and not only for the Fed.  I believe people should speak more literally in a wide variety of circumstances.

Since Treasury hardly ever speaks literally, I believe the Fed can speak literally, and be understood literally, only when it is fairly independent of Treasury.  That was not the case in the worst parts of 2008.

Central bankers usually speak with ambiguity.  Doing so conserves their influence, as has been presented in a number of important papers.  It is thus hard for the Fed to switch to a mode of pure literal speech.  Part of the difficulty is institutional, part lies with the audience (aren't you suspicious when a vague person sudden switches to direct, literal speech?), and part of the problem is political, since the Fed is not always independent.  Part of the problem lies in the Fed itself.  The Fed's mental model is often that speaking in a literal manner spends political capital and they are reluctant to do this, even when they ought to.  There is thus a public choice reason why the Fed serves up a suboptimal amount of literal speech.

Scott's views remind me of a concern of Robin Hanson's.  "Why can't those writers just come out and say what they mean?" Robin asked me once about the classic great books.  It was a plea for a more literal discourse.  Yet more literality is not always possible and not always more effective.

At the talk, Scott was superb in responding to questions and criticisms.  I enjoyed how much he gave the questions direct, literal answers.

Addendum: Mark Thoma has a good post on nominal gdp targeting.  Scott replies, Bill Woolsey too; I view Woolsey's reply as illustrating the difficulties with presenting literal speech.  Here is a DeLong reply.

Ken Rhodes December 20, 2010 at 4:25 am

"Central bankers usually speak with ambiguity. Doing so conserves their influence, … It is thus hard for the Fed to switch to a mode of pure literal speech. …etc)"

This may seem like nit-picking, but the post is about language and non-ambiguity, so …

The contrast is not between "literal" and "vague." It is either between "literal" and "figurative" or between "precise" and "vague." I don't think Treasury, the Fed, or bankers in general speak figuratively at all; I think they always speak literally. The problem discussed here is that they speak ambiguously, protecting their six the way the Oracle of Delphi could always retroactively interpret events to demonstrate his omniscience. I think what is being advocated is that the Central Bankers ought to say what they mean in a clear, non-vague, non-ambiguous way.

I definitely agree with that.

Paul Power December 20, 2010 at 5:31 am

The story goes that during the Soros attack on the ERM, the Irish punt came under attack. The Taoiseach (prime minister) or minister finance told the press that the punt would be devalued "neither today not tomorrow" which we locals knew meant an emphatic "never!". However the international press reps, those of mother tongues other than English, took it to mean "we'll devalue the day after tomorrow". Cue more speculative attacks on the punt, which had to exit the ERM.

Lesson: remember the audience!

Andrew December 20, 2010 at 5:58 am

Let me try to paraphrase a recent Paul Krugman missive:

"Shit if we know what money is anymore. Therefore, Ron Paul who longs for monetary solidity is the crazy and scary one."

jsalvati December 20, 2010 at 9:18 am

I think the word 'credible' is a better word here than 'literal'.

dirk December 20, 2010 at 11:48 am

Reminds me of Sopranos creator David Chase saying that one of his ideas was that no character should ever be telling the truth. Made for great dialogue, didn't it?

dirk December 20, 2010 at 12:04 pm

I'm reminded also of Vaclav Havel's claim that honesty doesn't merely mean telling the truth but also being clear about what you mean.

I think what Scott advocates is honesty.

Winton Bates December 20, 2010 at 7:27 pm

I think the person who suggested that credible is a better word than literal is on the right track. It might help to think in terms of what central banks would need to do to make a credible commitment. The response to the signals sent out could be expected to depend as much on them being accompanied by consistent policy actions as on the clarity of meaning of the language that is used.

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