Month: January 2025

Here is the audio, video, and transcript.  Here is the episode summary:

Scott joins Tyler to discuss what reading Depression-era newspapers revealed about Hitler’s rise, when fiat currency became viable, why Sweden escaped the worst of the 1930s crash, whether bimetallism ever made sense, where he’d time-travel to witness economic history, what 1920s Hollywood movies get wrong about their era, how he developed his famous maxim “never reason from a price change,” whether the Fed can ever truly follow policy rules like NGDP targeting, if Congress shapes monetary policy more than we think, the relationship between real and nominal shocks, his favorite Hitchcock movies, why Taiwan’s 90s cinema was so special, how Ozu gets better with age, whether we’ll ever see another Bach or Beethoven, how he ended up at the University of Chicago, what it means to be a late bloomer in academia, and more.

And an excerpt:

COWEN: If the Fed had listened to you during the great financial crisis, what would have been the rate of price inflation in 2009, roughly?

SUMNER: I think it would have been a little bit higher than the Fed’s target, but not a lot higher.

COWEN: Say real GDP was going to fall by 2 percent.

SUMNER: You see, that’s what I don’t accept. See, I believe that the fall in real GDP was mostly due to the fall in nominal GDP. We know that the trend rate of growth in nominal GDP had been 5 percent a year going into the slump, and it fell to -3. It’s like an eight-point decline in the growth rate. Now, in a counterfactual where they keep nominal GDP growing at 5 percent a year, let’s say, most of the difference shows up in stronger real growth, and only a small part of the difference shows up in higher inflation. The inflation rate in 2009 was actually around zero. It might have been no more than 2 percent or 3 percent, if nominal growth had been that much higher. Real growth might have been 5 percent higher.

COWEN: This is a point where I think I disagree with you, even though I agree with much of what you’ve said up until now. I worry that by attributing the decline in real GDP to a decline in nominal GDP, that it’s on the verge of being tautologous. Not a literal tautology, given prices don’t move that much — that you’re explaining a thing by itself, and I think it would have been quite possible for real GDP to fall by a few percent.

If we had stabilized the growth path of nominal GDP, we would have had price inflation of, say, 5 percent, which I would have greatly preferred to what we did, to be clear. I think it’s one reason why central banks are reluctant to institute your kind of advice, because they know they’ll be blamed for a price inflation rate of 5 percent. Do you see what I’m saying?

SUMNER: I see what you’re saying, but I think that, in a way, your instincts that it’s almost tautological reflect the fact that you sort of buy into what I’m saying about the interrelationship between real and nominal shocks. We both know that they’re not necessarily at all closely correlated, right? In 2008 and 2009, Zimbabwe had a recession and a hyperinflation at the same time. Their nominal and real economies are going in dramatically different directions. We also know that real and nominal variables are radically different variables.

When our instincts tell us that there’s something tautological about the correlation between real and nominal GDP in the United States, it’s because our instincts have recognized the fact that, in fact, most of the US business cycle is due to nominal shocks interacting with sticky wages. If that hypothesis is true, that model of the business cycle is true for the United States but not for Zimbabwe, then what it’s telling us is that if we can control nominal GDP growth, probably the path of real GDP will also be more stable.

Now, it’s possible that we do succeed in stabilizing nominal GDP growth, and we find out it doesn’t help. But there’s an awful lot of circumstantial evidence to support my claim, because we observe, for instance, in the United States that when nominal GDP is more volatile, so is real GDP. That’s one thing we know. We also know that some of the volatility of nominal GDP comes from very clear monetary policy mistakes that have been made at various periods of time that can be clearly identified.

When we see this show up in similar movements in real output, there’s just a strong presumption that there’s a causal relationship there. Financial markets also seem to treat it like there’s a causal relationship. Financial market responses to Federal Reserve policy shocks seem to reflect a view in the financial markets that these things are important for the real economy.

COWEN: I think my view would be, when you get a very bad recession, it’s typically the combination of negative nominal shocks and significant negative real shocks, often to credit markets. The negative real shocks are not just an epiphenomenon or result of the nominal problem mixed with sticky wages. You have both happening, and the credit market problems don’t just go away if you do your nominal job. Then you get back to these situations where you’ll need a fairly high rate of price inflation to stabilize the growth path of nominal GDP.

You just think credit market shocks are not that important? Like what Charles Kindleberger wrote, you wouldn’t really agree with that economic history? Or how should I frame your view here?

And on cinema and the arts:

SUMNER: Well, there was — I can’t get the quote right exactly, but Susan Sontag said something to the effect of, “Are artistic masterpieces still possible?” Then she said, “Or are we not receptive to the possibility of future masterpieces?” Is the problem they’re not being produced, or that we’re no longer receptive to them? I think it is somewhat of an open question. You can consume so much of any art form, or multiple art forms, that you become a bit jaded.

I don’t know, it would be interesting to think about what younger viewers that are very talented at the arts think of directors like, say, Kubrick as compared to how I view Kubrick. I saw the Kubrick films when they first came out, but he has been very much imitated. So maybe younger viewers would be less impressed by some of his films because they would think, “Well, I’ve seen that before.” Of course, what they saw before was actually after he created that innovative style.

We just have so much material flooding our senses that it may be more difficult. Like, could you imagine someone coming along like Bach or Beethoven in classical music in the next decade and having that impact? Wouldn’t you agree it’s unlikely we’ll get something like that?

Self-recommending, I also liked the part at the very end.

Addendum: Here is commentary from Scott on the CWT.