*The Midas Paradox*

by on October 27, 2015 at 2:27 pm in Books, Economics, History | Permalink

The author is Scott Sumner and the subtitle is Financial Markets, Government Policy Shocks, and the Great Depression.  Here is part of the Amazon summary:

Economic historians have made great progress in unraveling the causes of the Great Depression, but not until Scott Sumner came along has anyone explained the multitude of twists and turns the economy took. In The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, Sumner offers his magnum opus—the first book to comprehensively explain both monetary and non-monetary causes of that cataclysm.

Drawing on financial market data and contemporaneous news stories, Sumner shows that the Great Depression is ultimately a story of incredibly bad policymaking—by central bankers, legislators, and two presidents—especially mistakes related to monetary policy and wage rates. He also shows that macroeconomic thought has long been captive to a false narrative that continues to misguide policymakers in their quixotic quest to promote robust and sustainable economic growth.

Self-recommending!

1 rayward October 27, 2015 at 3:32 pm

Of course, the paradox is that Republicans (conservatives) deliver the financial crises, learn nothing from them, and pursue more of the same policies that brought the crises in the first place; Democrats, God love em, try to correct the mess but Republicans do their best to resist, even accusing the Democrats of being traitors or worse, Muslims; and then voters re-elect the Republicans who repeat the exercise. I understand that Einstein said that doing something over and over again and expecting a different result is insanity. Maybe not, maybe Sumner is right, it’s just a paradox.

2 Cliff October 27, 2015 at 4:54 pm

Probably your ideological enemies are to blame for everything. You must be pretty busy reviewing every book on Amazon with the quote “It was the Republicans!”

3 Anon October 27, 2015 at 5:08 pm

Well they are the ones generally driving us off the cliff !

4 E. Harding October 27, 2015 at 7:53 pm

Sigh, Anon. The only two-term Dem Presidents after FDR were Clinton and Obama. And the Congress was firmly Dem during the Great Recession. And yet, it still happened.

5 John L. October 27, 2015 at 11:32 pm

From the end of WW I to 1931, that is, the run-up to the Depression, Congress was Republican. After Hoover was ousted, USA GDP experienced strong growth after shrinking one-fourth under a Republican president. The GOP surely claimed responsability for tge economic growth in the 20’s.

6 Cliff October 27, 2015 at 11:46 pm

Probably if another Republican president had been elected after Hoover GDP would have continued to decline until ti reached zero. I am enjoying this scientific discussion. Lets do some entrail-reading next

7 John L. October 28, 2015 at 1:38 am

It is more scientific than pretending that a Republican Congress was Democratic and that Republicans can be responsible for a boom on their watch, but not for the bust on their watch. Again, under a Republican president and a Republican Congress, economic meltdown, but under a Democratic president and a Democratic Congress, there were recover and robust GDP growth. Maybe, under a Republican Congress and a Republican president after Hoover, GDP growth would approach ten times infinity…
“Lets do some entrail-reading next.”
I would be pleased enough if some people were capable and willing to do good old, normal reading to learn who was in charge in 1929. Hint: it was not Democrats.

8 Cliff October 28, 2015 at 1:42 am

John,

I think it is you who needs to learn how to do “good old, normal reading” since E. Harding did not say anything about who controlled Congress in 1929, nor does it matter

9 prior_approval October 28, 2015 at 3:29 am

‘Lets do some entrail-reading next’

Actually, I thought prayer was the preferred form of Republican policy making these days.

10 John L. October 28, 2015 at 4:58 am

Cliff,
To someone saying Republicans drive us of the cliff, he replied that Congress was Democratic during the Great Depression. Again, there was a economic meltdown under a Republican president and a Republican Congress for three straight years (maybe it was bad luck!) before robust recovery could take place– under a Democratic president and a Democratic Congress.

11 E. Harding October 28, 2015 at 7:45 am

Yup, John L. can’t read. This proves it.

12 John L. October 28, 2015 at 2:44 pm

Oh, those stubborn facts keep bullying Mr. Harding…

13 E. Harding October 28, 2015 at 4:52 pm

Fag

14 msgkings October 28, 2015 at 5:18 pm

That’s the second time E. Harding has used that one word post to, I dunno, somehow signal that the debate is over and he won? When of course it signals the opposite. Also interesting the particular word choice for the empty ad hominem. Maybe that’s the worst thing you can be called in Russia.

15 TallDave November 1, 2015 at 1:17 am

Hoover expanded government enormously. FDR took the expansion much further, and imposed massive wage and price controls, along with gigantic makework programs.

WW II rationing and conscription lowered living standards, a lot, afterwards the economy grew despite demobilization.

16 TallDave November 1, 2015 at 1:31 am

John L — the Great Depression wasn’t a bust, it was the period of prolonged high unemployment following the bust.

17 T. Shaw October 27, 2015 at 5:12 pm

I will read the book.

Most notably, God doesn’t love a democrat because she doesn’t love God.

What facts, data do you have? Are you implying that crown princess Hillary and Clinton, Inc. don’t get collect of their bribe money, er, campaign contributions from Wall Street bankers?

I dun’no. Were pre-1913 financial panics as deep, widespread, and long-lasting as those since 1913?

Harding acted as if implementing 21st century democrat party platform stuff and the Fed contracted money supply after the October 1929 Crash, which made matters worse.

This is now. That was then. It was very different in the 1920’s from that which you fantasize. The Fed (from 1913) existed and nearly everything it did made monetary matters worse. The GOP couldn’t have caused the recent financial crises without the Federal government’s failed (they exacerbated the S&L and subprime crises), massive market-altering schemes: CRA, FDIC, FHA, FHLB, FHLMC, FNMA, HMDA, HUD, etc.

18 Peter Schaeffer October 27, 2015 at 7:22 pm

T. Shaw,

“I dun’no. Were pre-1913 financial panics as deep, widespread, and long-lasting as those since 1913?”

In a word, yes.

19 Peter Schaeffer October 27, 2015 at 7:21 pm

rayward,

Republicans deserve plenty of blame for the Crash of 2008. However, Democrats were deeply involved as well. Shall we forget that it was Clinton who repealed Glass–Steagall? The repeal of Glass–Steagall is actually a fascinating of how the U.S. went off the rails from the 1990s to the late 2000s. Wikipedia has a great history of how GLB (the repeal of Glass–Steagall) went through Congress. It was the Republicans who pushed for GLB, not the Democrats. Indeed, the Democrats blocked GLB for a while. They abandoned their opposition to GLB in exchange for expansions of the CRA. Of course, the relentless pressure on the financial community played a definite role in sub-prime lending, NINJA loans, No Doc loans, etc.

America got the worst of both worlds. Financial deregulation unleashing the worst elements of Wall Street and relentlessly greater political pressure for unsound lending. The consequences were (and are) dire. A good book on how the Democrats helped push the U.S. over the edge is “Reckless Endangerment”. Of course, for those with less time, there is the quote from Barney Frank (a Democrat),

“I want to roll the dice a little bit more in this situation toward subsidized housing”

It is certainly true that Wall Street, the Republicans, and Bush all played a major roll in causing the Crisis of 2008. However, leaving the Democrats out is at best naive, and more genuinely misleading. See “Hey, Barney Frank: The Government Did Cause the Housing Crisis” for an (overstated) exposition of how the Democrats caused the Crisis of 2008.

20 jorgensen October 27, 2015 at 7:31 pm

Blaming the CRA is ridiculous. There was a housing bubble across the price spectrum and not just at the low end or in housing owned by minorities. The CRA had been in place for a long time before the bubble without causing problems.

The problem was made possible by the fact that lenders all up the chain mis-represented the quality of the mortgages they were re-selling. Without that misrepresentation they would not have been able to sell the MBS and would not have been able to fund new loans. Lehman ran into trouble when the market started to realize that the CDOs were garbage and left Lehman holding the worst tranches of the toxic sludge they were churning out.

21 E. Harding October 27, 2015 at 7:50 pm

Bubble? Kevin Eerdman would like a word with you.

And the CRA was correlated with the start of the homeownership boom. Remember, according to the “bubble” theory which you’re proposing, it is the boom which inevitably results in the bust.

22 Peter Schaeffer October 28, 2015 at 3:28 am

j,

“Blaming the CRA is ridiculous.”

Actually, it is quite factual, if not politically correct. See below.

“There was a housing bubble across the price spectrum and not just at the low end or in housing owned by minorities”

The housing bubble was deep and wide. However, the defaults were not. See “Riverside-San Bernardino posts nation’s highest foreclosure rate”. Why exactly would Riverside-San Bernadino” be a national leader in foreclosures? Care to guess? See also “Foreclosures by Race and Ethnicity: The Demographics of a Crisis” and “Patterns of homeownership, delinquency, and foreclosure among youngest baby boomers” (BLS).

Do I need to remind you that the words “subprime lending” were rather common a few years ago? Were subprime loans concentrated in the middle of the income spectrum, or at the top? Not exactly.

“The CRA had been in place for a long time before the bubble without causing problems”

Lots on flaws in one sentence. First, there are serious papers linking the CRA to the crisis. For one, see “Did the Community Reinvestment Act (CRA) Lead to Risky Lending?”. The abstract will suffice.

“Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming. ”

Ignoring the academic paper, you have made two other major errors. First, the CRA didn’t stand still. The law was passed in 1977, it was revised in 1989, 1991, 1992, 1994, 1999, and 2008. There were regulatory changes in 1995, 2005, 2007. The 1999 CRA changes are worthy of note. Quote from Wikipedia.

“In the fall of 1999, Senators Dodd and Schumer prevented another impasse by securing a compromise between Sen. Gramm and the Clinton Administration by agreeing to amend the Federal Deposit Insurance Act (12 U.S.C. ch. 16) to allow banks to merge or expand into other types of financial institutions. The FDIC related provisions of the new Gramm-Leach-Bliley Act, along with the addition of sub-section § 2903(c) directly to Title 12, insured any bank holding institution wishing to be re-designated as a financial holding institution by the Board of Governors of the Federal Reserve System would also have to follow Community Reinvestment Act compliance guidelines before any merger or expansion could take effect.”

In other words, kowtowing to the CRA became a condition of any merger.

However, the CRA itself was just the tip of the “diversity” iceberg. it’s quite true that many financial institutions were not directly subject to the CRA. However, they were all impacted by CRA mandates. From “Hey, Barney Frank: The Government Did Cause the Housing Crisis”. Quote

“For most of his career, Barney Frank was the principal advocate in Congress for using the government’s authority to force lower underwriting standards in the business of housing finance. Although he claims to have tried to reverse course as early as 2003, that was the year he made the oft-quoted remark, “I want to roll the dice a little bit more in this situation toward subsidized housing.” Rather than reversing course, he was pressing on when others were beginning to have doubts.

His most successful effort was to impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy–in other words, prime mortgages–but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007. Despite Frank’s effort to make this seem like a partisan issue, it isn’t. The Bush administration was just as guilty of this error as the Clinton administration. And Frank is right to say that he eventually saw his error and corrected it when he got the power to do so in 2007, but by then it was too late.”

and

“It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit.”

From Steve Sailer back on December 10, 2012

“In 1994, the Clinton Administration threatened to extend the CRA, with its onerous paperwork requirements, to Countrywide and other nonbank mortgage lenders, unless they started lending to lower income and minority borrowers like they were covered by the CRA. Angelo Mozilo of Countrywide flew to Washington and signed an agreement to do that with Clinton’s HUD secretary Henry Cisneros.”

and

“The biggest effect of the CRA is on bank mergers & acquisitions. When reviewing potential mergers, the government takes CRA compliance into account, and asks for input from the late ACORN and its more professional counterparts such as the Greenlining Institute.

This process put a thumb on the scale of what kind of executives flourished in home lending. If you were pessimistic about the ability to repay mortgages of the government’s favored kinds of borrowers, well, you didn’t have a big future in this industry, so it would behoove you to move into a different segment of the financial world. This filter effect helped leave mortgage lending full of optimists about minority and lower income borrowers, such as Kerry Killinger of WaMu and Angelo Mozilo of Countrywide.”

Was there large scale malfeasance in the private sector in the post-2000 period? Of course, there was. AIGFS was never a charitable enterprise and the greed, rapacity, and incompetence of the principals was manifest. Was Howie Hubler (of Morgan Stanley infamy) trying to help anyone other than himself? Of course not. Were his bosses really trying to assist low-income, minority homeowners? That’s a joke. They are cared about their bonuses, the rest of the world be dammed.

Ultimately, this is the real story of the Crash of 2008. It had multiple causes. Did government promotion of minority lending play a role? Of course, it did. Anyone who spends even 10 minutes reading “Reckless Endagerment” knows this. Did deregulation and private sector greed play a role? Of course, they did. The fact that this debate is so polarized shows (in the worst way) the ideological blinkers that dominate public life these days.

23 E. Harding October 27, 2015 at 7:56 pm

Actually, it was Federal Reserve tight money that caused the crash. The financial crisis resulting from the housing bust had only a modest amount to do with it, and was greatly exacerbated by tight money.

24 Cliff October 27, 2015 at 8:37 pm

Glass-Seagull has nothing to do with it. The housing crash was going along fine from 2006 until the Fed decided to crush the economy in 2008.

25 E. Harding October 27, 2015 at 8:53 pm

Not quite the case, Cliff, but close to the truth. It’s the meltdown in the banking sector resulting from the housing crash that would have caused at least half of the Great Recession in the presence of successful NGDP level targeting. But this also means the Great Recession would have been no worse than that of 1974, and the recovery would have been much more dynamic-feeling at first.

26 Peter Schaeffer October 28, 2015 at 2:36 am

Cliff,

Glass-Seagull didn’t play a role. However, Glass-Steagal did. Actually, the repeal of Glass-Steagal did play a role. Two-fold at least. First, GLB (the repeal of Glass-Steagal) contained numerous extensions to the CRA that proved quite toxic over time. Second, Wall Street interpreted GLB as carte blanche to go off the deep end. Both shifts (strengthening the CRA and deregulating Wall Street) ended in sorrow.

27 Peter Schaeffer October 28, 2015 at 2:39 am

Cliff,

Real house prices roughly doubled from 1998 to 2006. That’s what people call a “bubble”. Bubbles burst. The consequences are ugly. Blaming it on the Fed is a diversion at best.

28 Ricardo October 27, 2015 at 11:45 pm

The CRA had nothing to do with anything. First, there were housing bubbles and relaxation of lending standards in Spain and Ireland at the same time — did the CRA cause that, too? Second, the lenders who made the bulk of subprime loans were not regulated banks covered by the CRA. Finally, not even the Republican members of the committee to investigate the financial crisis were willing to sign onto this silly theory and you can easily google their report and read it for a more detailed take-down.

29 Peter Schaeffer October 28, 2015 at 3:35 am

R,

The question is whether the CRA played a material role in relaxing lending standards in the U.S. The answer is yes, it did. If we “CRA” as a shorthand for all “diversity” related lending mandates the impact was huge.

“Second, the lenders who made the bulk of subprime loans were not regulated banks covered by the CRA”

Not exactly. From Steve Sailer back on December 10, 2012

“In 1994, the Clinton Administration threatened to extend the CRA, with its onerous paperwork requirements, to Countrywide and other nonbank mortgage lenders, unless they started lending to lower income and minority borrowers like they were covered by the CRA. Angelo Mozilo of Countrywide flew to Washington and signed an agreement to do that with Clinton’s HUD secretary Henry Cisneros.”

” Finally, not even the Republican members of the committee to investigate the financial crisis were willing to sign onto this silly theory and you can easily google their report and read it for a more detailed take-down.”

Actually, no. From “Hey, Barney Frank: The Government Did Cause the Housing Crisis” by Peter Wallison (who was on the Financial Crisis Inquiry Commission). Quotes

“For most of his career, Barney Frank was the principal advocate in Congress for using the government’s authority to force lower underwriting standards in the business of housing finance. Although he claims to have tried to reverse course as early as 2003, that was the year he made the oft-quoted remark, “I want to roll the dice a little bit more in this situation toward subsidized housing.” Rather than reversing course, he was pressing on when others were beginning to have doubts.

His most successful effort was to impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy–in other words, prime mortgages–but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

At first, this quota was 30%; that is, of all the loans they bought, 30% had to be made to people at or below the median income in their communities. HUD, however, was given authority to administer these quotas, and between 1992 and 2007, the quotas were raised from 30% to 50% under Clinton in 2000 and to 55% under Bush in 2007. Despite Frank’s effort to make this seem like a partisan issue, it isn’t. The Bush administration was just as guilty of this error as the Clinton administration. And Frank is right to say that he eventually saw his error and corrected it when he got the power to do so in 2007, but by then it was too late.”

and

“It is certainly possible to find prime mortgages among borrowers below the median income, but when half or more of the mortgages the GSEs bought had to be made to people below that income level, it was inevitable that underwriting standards had to decline. And they did. By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit.”

30 The Original D October 28, 2015 at 2:58 pm

Meh. My sister worked at a mortgage bank that went belly up and they didn’t do subprime lending at all. They did do bullshit no-doc loans that they immediately securitized.

31 TallDave November 1, 2015 at 1:22 am

As Peter notes, securitization and no-doc loans were part of the lax lending standards deliberately encouraged by CRA. Which borrowers do you think needed no-doc loans?

32 BFB October 28, 2015 at 12:06 am

GLB wasn’t the problem, it exasperated the problem- similar to a catalyst in a Chemistry experiment.

Glass-Stegall (1933) was unnecessary, and largely the result of Rockefeller interests, aligned with New Dealers, wanting to screw the Morgans for being successful in multiple lines of banking.

FDR’s and Ferdinand Pecora’s partisan played a major role in the attack, as the pair used radio addresses and Congressional hearings, respectively, to blame investment banks (Morgans) for the commercial banking crisis. Information channels being what they were, the public bought it, and Glass-Stegall was passed in the “First 100 Days”

[See: Murray Rothbard, “From Hoover to Roosevelt” in A History of Money and Banking in the US , (Mises Institute, 2002) and George J. Benston, The Separation of Commercial and Investvent Banking (Oxford University Press, 1990)]

33 E. Harding October 27, 2015 at 7:49 pm

Jesus christ, rayward, you’re a fucking idiot in every sense of the word.

34 Cyril Morong October 27, 2015 at 3:32 pm

Just ordered or pre-ordered from Amazon

35 dearieme October 27, 2015 at 4:07 pm

I take it that the two are Hoover and FDR?

36 E. Harding October 27, 2015 at 8:09 pm

Yup.

37 jorgensen October 27, 2015 at 4:50 pm

Since I think NGDP targeting is snake oil, I will not be investing time or money in reading this book. I would not trust Scott’s interpretation of any event.

38 Alain October 27, 2015 at 5:09 pm

And your well considered alternative is …. ?

39 jorgensen October 27, 2015 at 5:41 pm

I am ok with a two percent inflation target since I think that difficulties in definition and measurement have the consequence that two percent is really price stability. I think the Fed should basically sit back and do nothing – in fact, I think they should announce that they are not going to meet for a year.

The financial crisis is seven years ago. We have recovered from the crisis and this is the new normal. I think we should stop trying to find some big parlor trick (e.g., NGDP targeting) to goose the economy and instead worry about little things. Some of that would involve regulatory tweaks to remove barriers to lending – particularly lending to small business. More government investment in science would be useful. The current tax regime is encouraging the drain of profits to tax havens through transfer pricing schemes and the stranded profits are creating a fiscal drag in North America and Europe which needs to be stopped.

I tend to believe that the problems are being driven by two related issues: (1) integration of China into the global economy; and (2) global savings glut.

The best way to address the global savings glut is for China to pour its surplus savings into white elephant projects in Africa and Central Asia. We have no control over that but the indications are that China is co-operating nicely at the moment with, among other things, large investments in Pakistan.

40 E. Harding October 27, 2015 at 8:01 pm

There is no such thing as “doing nothing” in monetary policy. “Doing nothing” to what? And there isn’t much evidence government funding of science is good for growth.

There’s nothing wrong with some accidental fiscal stimulus!

There is no global savings glut. There’s a global investment drought.

41 chuck martel October 27, 2015 at 8:08 pm

” More government investment in science would be useful.”

What office are you running for? That’s just the kind of inane, meaningless statement that politicians love to make.

42 Harun October 27, 2015 at 9:43 pm

Inflation for 2015 has been about 0%.

43 derek October 27, 2015 at 9:11 pm

The business cycle.

44 Srini October 27, 2015 at 5:25 pm

Well said! And Scott Sumner’s analysis is generally glib and suspect. I find Tyler’s admiration of Sumner utterly puzzling.

45 E. Harding October 27, 2015 at 8:03 pm

Scott Sumner is God, or at least, the closest living person in resemblance to the conventional Western portrayal of Him. I don’t believe in God, and neither does Sumner, but of all the people I know, only Sumner would be qualified for the position of God. His analysis is true and generally fantastic.

46 SG October 27, 2015 at 5:28 pm

Thanks for the warning! And to think we were almost let astray by Sumner and the other rubes who support NGDPLT like Mike Woodford, Christy Romer, Jan Hatzius, Paul Krugman, etc….

47 jorgensen October 27, 2015 at 5:44 pm

“we were almost let astray”

Speak for yourself. I have never understood the mystical belief that Krugman and others have in the magical power of inflation to make things better.

48 John Hamilton October 27, 2015 at 7:38 pm

Sticky wages?

49 jorgensen October 28, 2015 at 1:16 am

To believe that sticky wages are a problem requiring inflation you have to believe: (1) there is a large pool of people (2) who are overpaid to such a degree that (3) reducing their real wages through inflation will stimulate the broader economy in a significant way but (4) who achieved their current excess real wages without having the bargaining leverage to protect themselves from inflation.

So: Who is this large group of overpaid but powerless people whose real wages you think should be reduced through inflation for the greater good? 🙂

50 E. Harding October 28, 2015 at 7:42 am

Simple:

http://www.themoneyillusion.com/?p=10518

Sure, sometimes even high NGDP growth can’t prevent mass unemployment due to the strong bargaining power of workers (e.g., 1970s). But that doesn’t mean nominal rigidity doesn’t matter.

51 jorgensen October 28, 2015 at 10:45 am

E Harding

Sumner’s blog post is badly written.

Sumner asserts: “If all employed workers accepted a 5% pay cut (or if the government ordered such a cut) and the Fed kept targeting inflation, we’d experience rapid economic growth.” a proposition I disagree with.

I looked quickly at the underlying paper and it seems to have the following deficits as “proof” of downward stickiness:

First – it is based on people who had jobs at the beginning of the period under investigation so there is a selection bias going on
Second – it focuses on data from March 1996 to February 2000 – a period of strong employment so of course wage changes are skewed to increases.
Third – it focuses on the experiences of individual workers but it is common that an individual’s wages will rise with experience (they certainly do in the non-union service sector business that I work in) again skewing these statistics to the upside.

52 E. Harding October 28, 2015 at 4:54 pm

Jorgensen, to quote the Great Man himself,

“There is no possible New Classical explanation for this graph. None.”.

You can’t have anything other than nominal rigidity skewing the data to the upside that much.

53 jorgensen October 29, 2015 at 11:47 am

“There is no possible New Classical explanation for this graph. None.”.

I don’t agree. I have already pointed out that there is selection bias in the data and the data reflects a period of rising employment. This is tracking individuals. In my firm, in the event of financial distress we might push out a high income staff person or cut benefits but it is unlikely that we would seek to negotiate a lower pay scale. However we have a certain amount of natural churn and in times of distress our salary offers to new hires will be lower than the pay scale of the departing person. The graph will not fully capture that.

Look at the graph. The largest bin is not the smallest increase. You can see some sign of “stickiness” right around the zero increase point. If the market was saying that there should be a small real decrease in an individuals wages, the employer and the employee might rationally both decide that negotiating a 1 or 2 per cent cut is more trouble than it is worth. Transaction costs can explain some downward stickiness.

What I do not see coming from Sumners is an explanation how cutting the real wages of all workers will cause the economy to boom.

54 TallDave November 1, 2015 at 1:27 am

jorgensen: To think about it another way, suppose inflation was negative 10% next year, purely for monetary policy reasons.

Yay for workers’ purchasing power, right? But the firms that employ them have a problem, because their revenue is falling.

And when a firm goes out of business, the jobs go with them.

The Great Depression wasn’t too bad, if you had a job.

55 TallDave November 1, 2015 at 1:34 am

Or, to put it another way, inflation doesn’t create growth, but certain levels of inflation can reduce the impact of recession on RGDP and employment.

Note that under NDGPLT, inflation will often be lower than under inflation targeting.

56 Peter Schaeffer October 28, 2015 at 3:38 am

j,

I am not generally a fan of Scott Summer. However, I have watched a video where he reviews the monetary and policy history of the Great Depression. It is excellent. NGDP targeting may be snake oil in 2015. However, his analysis of the 1930s is impressive. Keep an open mind.

57 jorgensen October 28, 2015 at 12:06 pm

I find that once I have caught a person talking nonsense once it is best to assume that everything he says is nonsense. .

58 Peter Schaeffer October 29, 2015 at 4:51 pm

j,

Without a lot of effort I can find you examples of nonsense from almost everyone. If you want, I will find you Krugman nosense, Friedman nonsense, Cowen nonsense, etc. Nonsense is non-partisan and non-ideological (as in spanning the ideological spectrum).

59 rayward October 27, 2015 at 5:41 pm

Mr. Jefferson said: when two or more physicians gather, the buzzards can’t be far. I say: when two or more economists gather, a financial crisis can’t be far.

60 Dzhaughn October 27, 2015 at 8:40 pm

Sure. But if there weren’t bad economic policies, we wouldn’t need good economists.

Karl Marx would disagree. But see above.

61 msgkings October 28, 2015 at 5:20 pm

So, you want a cigarette?

62 TallDave October 27, 2015 at 5:43 pm

Looking forward to it.

63 jorod October 27, 2015 at 7:45 pm

Or read Rothbard’s America’s Great Depression. Available in any library of worth.

64 E. Harding October 27, 2015 at 8:05 pm

Sumner’s book is going to be far better. He’s just as knowledgeable as Rothbard, and has firmer data and business cycle theory on his side.

65 Greg October 27, 2015 at 8:43 pm

I think E. Harding’s participation in the comments is a net negative, and that he should be banned, if nothing else to make him come up with another alias. Unlike the other MR trolls, he’s not even particularly interesting.

66 E. Harding October 27, 2015 at 8:50 pm

I am five times more interesting than mulp, rayward, and prior combined. I was linked to by Tyler Cowen once, which proves this.

67 JWatts October 27, 2015 at 10:19 pm

E. Harding is hardly a troll and asking to ban somebody because you don’t agree with their comments comes across as pretty desperate.

68 Cliff October 27, 2015 at 11:48 pm

Honestly I think he is pretty close to CBBB territory if not there already. Not exactly a traditional troll, but just way too many comments

69 msgkings October 28, 2015 at 5:21 pm

CBBB went away though. E. Harding will be here until Putin stops paying him.

70 Ray Lopez October 27, 2015 at 11:07 pm

I will not pre-order or order from Amazon.com. Not that anybody should care, but people upstream have said the opposite.

Of interest is that a study (I believe it was published on the St. Louis Fed website), which came out after the book went to press, found that Benjamin Strong’s death had no effect on US Fed policy (as Sumner acknowledged on his blog he had not read this study) and further, Sumner says on his blog he refuses to read the Ben S. Bernanke et al. 2003 FAVAR paper, available online, that shows using econometrics the Fed has between 3.2% to 13.2% effect on a variety of economic variables (including GDP) in response to Fed policy shocks, not more, in the period from 1959 to 2001, which, while statistically significant, is close enough to zero for most people. Money is neutral, except perhaps in the extremes.

Insofar as gold and going off the gold standard goes, only two countries (admittedly big countries), namely the UK and the USA, benefited in the 1930s going off of gold. Other countries stayed on the gold standard, or went off it, and nothing good or bad happened. Source: see the Wikipedia chart on GDP/capita and going off the gold standard under the entry “Gold Standard”. As one political scientist wrote, countries all over the world recovered from the Great Depression at around the same time (later 1930s) with widely different economic regimes (capitalist UK/US, autocratic Nazi Germany) so it can’t just be “Keynesian economics” or “better monetarism” that were the keys to recovery (aside from the fact the degree of Keynesian economics practiced at that time was too small to matter). My pet theory is the Great Depression was a routine recession that was made worse by contagion, and was in fact a necessary step in going from a horse-powered, steam powered age to a fossil fuel, electric motor generated age. In some ways not unlike what we have now (transition from an old order into something else).

Look, Sumner is entertaining, and his NGDPLT framework for the Fed, akin to “print more money until something happens”, is trendy, but this is not a serious academic. Among other things he replies to me in nearly every one of his blog comments section. TC by contrast has only mentioned me about three times. Sumner, unlike TC, is not a Very Serious Person.

71 jorgensen October 28, 2015 at 1:22 am

If you take the view that Germany recovered under Hitler in the mid thirties and that the United States did not recover until the start of the second world war then there was a common aspect to both revivals: the governments in Germany and America engineered significant drops in the standards of living of the still employed middle class and steered the resulting funds to employing the working poor and giving industry contracts that allowed large investments in factory capacity and increases in factory employment.

72 guest October 27, 2015 at 11:37 pm

we are in the future, and the past, and we are trying to give you, something to go on . . .

73 guest October 27, 2015 at 11:56 pm

lil’ f o’s, we don’t talk too much . . . when we do? u best stf up & listen . . .

74 guest October 28, 2015 at 12:52 am

we teach u just by sharing, lil’ poopie fu’s, and we was here a long, long time ago . . .

75 jorgensen October 28, 2015 at 1:22 am

what is your freaking problem?

76 guest October 28, 2015 at 12:53 am

clear the bar material . . .

77 guest October 28, 2015 at 12:54 am

doot doooooo, do doo, doo doo, doo dooo

78 prior_approval October 28, 2015 at 3:33 am

All these comments, and not a single reference to 1873?

‘The Long Depression was a worldwide price recession, beginning in 1873 and running through the spring of 1879. It was the most severe in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. The episode was labeled the “Great Depression” at the time, and it held that designation until the Great Depression of the 1930s. Though a period of general deflation and a general contraction, it did not have the severe economic retrogression of the Great Depression.[1]

It was most notable in Western Europe and North America, at least in part because reliable data from the period are most readily available in those parts of the world. The United Kingdom is often considered to have been the hardest hit; during this period it lost some of its large industrial lead over the economies of Continental Europe.[2] While it was occurring, the view was prominent that the economy of the United Kingdom had been in continuous depression from 1873 to as late as 1896 and some texts refer to the period as the Great Depression of 1873–96.[3]

In the United States, economists typically refer to the Long Depression as the Depression of 1873–79, kicked off by the Panic of 1873, and followed by the Panic of 1893, book-ending the entire period of the wider Long Depression.[4] The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression’s 43 months of contraction.’ https://en.wikipedia.org/wiki/Long_Depression

It would be nice to see how many points are congruent and how many divergent in the book, there having been more than one Great Depression.

79 Peter Schaeffer October 28, 2015 at 3:47 am

PA,

The Crash of 1873 reduced real GDP in just one year (1875) and the decline was trivial. Nominal GDP fell in two years (1874 and 1875). Real GDP fell for four years after 1929 and the decline was massive. No comparison.

80 tedm October 28, 2015 at 9:55 am

The NBER looks at a number of factors for dating and measuring the business cycle, not just real GDP. There were extended periods of above 10% unemployment prior to the Great Depression. See the Depression of the 1890s, for example. Here is a possibly relevant point from an old NBER tract http://www.nber.org/chapters/c10374.pdf.

“The least dependable of the historical estimates under review are probably those for quarterly real GNP.”

81 Saturos October 28, 2015 at 7:50 am

Welp, this is the last time I’m visiting the MR comments section.

82 msgkings October 28, 2015 at 5:23 pm

Ok, buh-bye!

83 E. Harding October 28, 2015 at 7:53 am

Note, I’m saying that the Great Recession would still have mostly happened in the presence of NGDP level targeting, but it wouldn’t have happened in the steep, crash-like pattern after September 08 we actually saw.

84 C. List October 28, 2015 at 3:26 pm

So what is the Midas Paradox? Do I have to buy the book to know?

85 Larry October 28, 2015 at 4:55 pm

Long awaited and welcome.

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